Attached files
file | filename |
---|---|
EX-10.5 - EXHIBIT 10.5 - Morgans Hotel Group Co. | c14419exv10w5.htm |
EX-32.2 - EXHIBIT 32.2 - Morgans Hotel Group Co. | c14419exv32w2.htm |
EX-10.6 - EXHIBIT 10.6 - Morgans Hotel Group Co. | c14419exv10w6.htm |
EX-10.2 - EXHIBIT 10.2 - Morgans Hotel Group Co. | c14419exv10w2.htm |
EX-31.2 - EXHIBIT 31.2 - Morgans Hotel Group Co. | c14419exv31w2.htm |
EX-32.1 - EXHIBIT 32.1 - Morgans Hotel Group Co. | c14419exv32w1.htm |
EX-31.1 - EXHIBIT 31.1 - Morgans Hotel Group Co. | c14419exv31w1.htm |
EX-10.7 - EXHIBIT 10.7 - Morgans Hotel Group Co. | c14419exv10w7.htm |
EX-10.1 - EXHIBIT 10.1 - Morgans Hotel Group Co. | c14419exv10w1.htm |
EX-10.4 - EXHIBIT 10.4 - Morgans Hotel Group Co. | c14419exv10w4.htm |
EX-10.3 - EXHIBIT 10.3 - Morgans Hotel Group Co. | c14419exv10w3.htm |
Table of Contents
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended: March 31, 2011
or
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number: 001-33738
Morgans Hotel Group Co.
(Exact name of registrant as specified in its charter)
Delaware | 16-1736884 | |
(State or other jurisdiction of | (I.R.S. employer | |
incorporation or organization) | identification no.) | |
475 Tenth Avenue | ||
New York, New York | 10018 | |
(Address of principal executive offices) | (Zip Code) |
212-277-4100
(Registrants telephone number, including area code)
(Registrants telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period
that the registrant was required to submit and post such files). Yes þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large
accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the
Exchange Act. (Check one):
Large accelerated filer o | Accelerated filer þ | Non-accelerated filer o | Smaller reporting company o | |||
(Do not check if a smaller reporting company) |
Indicate by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes o No þ
The number of shares outstanding of the registrants common stock, par value $0.01 per share,
as of May 6, 2011 was 30,421,363.
TABLE OF CONTENTS
Page | ||||||||
3 | ||||||||
3 | ||||||||
4 | ||||||||
5 | ||||||||
6 | ||||||||
30 | ||||||||
53 | ||||||||
54 | ||||||||
55 | ||||||||
55 | ||||||||
56 | ||||||||
56 | ||||||||
56 | ||||||||
56 | ||||||||
56 | ||||||||
Exhibit 10.1 | ||||||||
Exhibit 10.2 | ||||||||
Exhibit 10.3 | ||||||||
Exhibit 10.4 | ||||||||
Exhibit 10.5 | ||||||||
Exhibit 10.6 | ||||||||
Exhibit 10.7 | ||||||||
Exhibit 31.1 | ||||||||
Exhibit 31.2 | ||||||||
Exhibit 32.1 | ||||||||
Exhibit 32.2 |
1
Table of Contents
FORWARD LOOKING STATEMENTS
The Private Securities Litigation Reform Act of 1995 provides a safe harbor for
forward-looking statements made by or on behalf of a company. We may from time to time make
written or oral statements that are
forward-looking, including statements contained in this report and other filings with the
Securities and Exchange Commission and in reports to our stockholders. 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 to differ materially
from those expressed in any forward-looking statement. Although we believe that the expectations
reflected in the forward-looking statements are reasonable, we cannot guarantee future results,
levels of activity, performance or achievements. Important risks and factors that could cause our
actual results to differ materially from any forward-looking statements include, but are not
limited to, the risks discussed in the Companys Annual Report on Form 10-K for the fiscal year
ended December 31, 2010 and other documents filed by the Company with the Securities and Exchange
Commission from time to time; downturns in economic and market conditions, particularly levels of
spending in the business, travel and leisure industries; hostilities, including future terrorist
attacks, or fear of hostilities that affect travel; risks related to natural disasters, such as
earthquakes, volcanoes and hurricanes; risks associated with the acquisition, development and
integration of properties; the seasonal nature of the hospitality business; changes in the tastes
of our customers; increases in real property tax rates; increases in interest rates and operating
costs; the impact of any material litigation; the loss of key members of our senior management;
general volatility of the capital markets and our ability to access the capital markets; and
changes in the competitive environment in our industry and the markets where we invest.
We are under no duty to update any of the forward-looking statements after the date of this
report to conform these statements to actual results.
2
Table of Contents
PART I FINANCIAL INFORMATION
ITEM 1. | FINANCIAL STATEMENTS |
Morgans Hotel Group Co.
Consolidated Balance Sheets
(in thousands, except per share data)
(in thousands, except per share data)
March 31, | December 31, | |||||||
2011 | 2010 | |||||||
(unaudited) | ||||||||
ASSETS |
||||||||
Property and equipment, net |
$ | 286,351 | $ | 291,078 | ||||
Goodwill |
53,691 | 53,691 | ||||||
Investments in and advances to unconsolidated joint ventures |
20,328 | 20,450 | ||||||
Assets held for sale, net |
190,481 | 194,964 | ||||||
Investment in property held for non-sale disposition, net |
| 9,775 | ||||||
Cash and cash equivalents |
5,962 | 5,250 | ||||||
Restricted cash |
29,883 | 28,783 | ||||||
Accounts receivable, net |
5,318 | 6,018 | ||||||
Related party receivables |
3,871 | 3,830 | ||||||
Prepaid expenses and other assets |
5,872 | 7,007 | ||||||
Deferred tax asset, net |
79,793 | 80,144 | ||||||
Other, net |
11,210 | 13,786 | ||||||
Total assets |
$ | 692,760 | $ | 714,776 | ||||
LIABILITIES AND STOCKHOLDERS DEFICIT |
||||||||
Debt and capital lease obligations |
$ | 571,471 | $ | 558,779 | ||||
Mortgage debt of property held for non-sale disposition |
| 10,500 | ||||||
Accounts payable and accrued liabilities |
26,572 | 23,604 | ||||||
Debt obligation, accounts payable and accrued liabilities of assets held for sale |
108,297 | 107,161 | ||||||
Accounts payable and accrued liabilities of property held for non-sale
disposition |
| 1,162 | ||||||
Distributions and losses in excess of investment in unconsolidated joint
ventures |
1,728 | 1,509 | ||||||
Other liabilities |
13,866 | 13,866 | ||||||
Total liabilities |
721,934 | 716,581 | ||||||
Commitments and contingencies |
||||||||
Preferred securities, $.01 par value; liquidation preference $1,000 per share,
75,000 shares authorized and issued at March 31, 2011 and December 31, 2010,
respectively |
51,806 | 51,118 | ||||||
Common stock, $.01 par value; 200,000,000 shares authorized; 36,277,495 shares
issued at March 31, 2011 and December 31, 2010, respectively |
363 | 363 | ||||||
Additional paid-in capital |
301,541 | 297,554 | ||||||
Treasury stock, at cost, 5,965,992 and 5,985,045 shares of common stock at March
31, 2011 and December 31, 2010, respectively |
(92,688 | ) | (92,688 | ) | ||||
Accumulated comprehensive loss |
(1,434 | ) | (3,194 | ) | ||||
Accumulated deficit |
(298,601 | ) | (265,874 | ) | ||||
Total Morgans Hotel Group Co. stockholders deficit |
(39,013 | ) | (12,721 | ) | ||||
Noncontrolling interest |
9,839 | 10,916 | ||||||
Total deficit |
(29,174 | ) | (1,805 | ) | ||||
Total liabilities and stockholders deficit |
$ | 692,760 | $ | 714,776 | ||||
See accompanying notes to these consolidated financial statements.
3
Table of Contents
Morgans Hotel Group Co.
Consolidated Statements of Operations and Comprehensive Loss
(in thousands, except per share data)
(unaudited)
(in thousands, except per share data)
(unaudited)
Three Months Ended March 31, | ||||||||
2011 | 2010 | |||||||
Revenues: |
||||||||
Rooms |
$ | 31,034 | $ | 29,250 | ||||
Food and beverage |
18,030 | 17,496 | ||||||
Other hotel |
2,016 | 2,209 | ||||||
Total hotel revenues |
51,080 | 48,955 | ||||||
Management fee-related parties and other income |
3,324 | 4,429 | ||||||
Total revenues |
54,404 | 53,384 | ||||||
Operating Costs and Expenses: |
||||||||
Rooms |
11,174 | 10,025 | ||||||
Food and beverage |
15,102 | 13,916 | ||||||
Other departmental |
1,211 | 1,252 | ||||||
Hotel selling, general and administrative |
12,558 | 11,437 | ||||||
Property taxes, insurance and other |
4,185 | 4,100 | ||||||
Total hotel operating expenses |
44,230 | 40,730 | ||||||
Corporate expenses, including stock compensation of $4.0
million and $3.8 million, respectively |
10,834 | 10,005 | ||||||
Depreciation and amortization |
8,373 | 7,345 | ||||||
Restructuring, development and disposal costs |
4,593 | 677 | ||||||
Total operating costs and expenses |
68,030 | 58,757 | ||||||
Operating loss |
(13,626 | ) | (5,373 | ) | ||||
Interest expense, net |
8,994 | 12,350 | ||||||
Equity in loss of unconsolidated joint ventures |
9,483 | 263 | ||||||
Other non-operating expenses |
1,390 | 15,029 | ||||||
Loss before income tax (benefit) expense |
(33,493 | ) | (33,015 | ) | ||||
Income tax (benefit) expense |
(135 | ) | 294 | |||||
Net loss from continuing operations |
(33,358 | ) | (33,309 | ) | ||||
Income from discontinued operations, net of tax |
490 | 17,202 | ||||||
Net loss |
(32,868 | ) | (16,107 | ) | ||||
Net loss attributable to noncontrolling interest |
825 | 147 | ||||||
Net loss attributable to Morgans Hotel Group |
(32,043 | ) | (15,960 | ) | ||||
Preferred stock dividends and accretion |
(2,187 | ) | (2,078 | ) | ||||
Net loss attributable to common stockholders |
(34,230 | ) | (18,038 | ) | ||||
Other comprehensive loss: |
||||||||
Unrealized gain on valuation of swap/cap agreements, net of tax |
| 4,924 | ||||||
Share of unrealized gain on valuation of swap agreements from
unconsolidated joint venture, net of tax |
1,866 | | ||||||
Realized loss on settlement of swap/cap agreements, net of tax |
| (2,553 | ) | |||||
Foreign currency translation (loss) gain, net of tax |
(106 | ) | 254 | |||||
Comprehensive loss |
$ | (32,470 | ) | $ | (15,413 | ) | ||
Loss per share: |
||||||||
Basic and diluted continuing operations |
(1.12 | ) | (1.18 | ) | ||||
Basic and diluted discontinued operations |
0.02 | 0.58 | ||||||
Basic and diluted attributable to common stockholders |
(1.10 | ) | (0.60 | ) | ||||
Weighted average number of common shares outstanding: |
||||||||
Basic and diluted |
31,103 | 29,849 |
See accompanying notes to these consolidated financial statements.
4
Table of Contents
Morgans Hotel Group Co.
Consolidated Statements of Cash Flows
(in thousands)
(unaudited)
(in thousands)
(unaudited)
Three Months Ended Mar 31, | ||||||||
2011 | 2010 | |||||||
Cash flows from operating activities: |
||||||||
Net loss |
$ | (32,868 | ) | $ | (16,107 | ) | ||
Adjustments to reconcile net loss to net cash used in operating
activities (including discontinued operations): |
||||||||
Depreciation |
7,687 | 7,181 | ||||||
Amortization of other costs |
686 | 164 | ||||||
Amortization of deferred financing costs |
2,298 | 1,529 | ||||||
Amortization of discount on convertible notes |
569 | 569 | ||||||
Stock-based compensation |
3,987 | 3,798 | ||||||
Accretion of interest on capital lease obligation |
473 | 943 | ||||||
Equity in losses from unconsolidated joint ventures |
9,483 | 263 | ||||||
Gain on disposal of property held for sale |
| (17,944 | ) | |||||
Change in value of warrants |
| 14,353 | ||||||
Changes in assets and liabilities: |
||||||||
Accounts receivable, net |
940 | 33 | ||||||
Related party receivables |
(67 | ) | (825 | ) | ||||
Restricted cash |
(1,084 | ) | (5,011 | ) | ||||
Prepaid expenses and other assets |
2,066 | 2,279 | ||||||
Accounts payable and accrued liabilities |
4,106 | 1,274 | ||||||
Other liabilities |
| (203 | ) | |||||
Discontinued operations |
(843 | ) | 665 | |||||
Net cash used in operating activities |
(2,567 | ) | (7,039 | ) | ||||
Cash flows from investing activities: |
||||||||
Additions to property and equipment |
(1,074 | ) | (4,057 | ) | ||||
Deposits to capital improvement escrows, net |
(15 | ) | (632 | ) | ||||
Distributions from unconsolidated joint ventures |
2 | 2 | ||||||
Investments in and settlement related to unconsolidated joint ventures |
(7,032 | ) | (242 | ) | ||||
Net cash used in investing activities |
(8,119 | ) | (4,929 | ) | ||||
Cash flows from financing activities: |
||||||||
Proceeds from debt |
11,650 | | ||||||
Cash paid in connection with vesting of stock based awards |
| (97 | ) | |||||
Cost of issuance of preferred stock |
| (246 | ) | |||||
Distributions to holders of noncontrolling interests in consolidated
subsidiaries |
(252 | ) | (387 | ) | ||||
Net cash provided by (used in) financing activities |
11,398 | (730 | ) | |||||
Net decrease in cash and cash equivalents |
712 | (12,698 | ) | |||||
Cash and cash equivalents, beginning of period |
5,250 | 68,956 | ||||||
Cash and cash equivalents, end of period |
$ | 5,962 | $ | 56,258 | ||||
Supplemental disclosure of cash flow information: |
||||||||
Cash paid for interest |
$ | 5,280 | $ | 9,508 | ||||
Cash paid for taxes |
$ | 149 | $ | 17 | ||||
See accompanying notes to these consolidated financial statements.
5
Table of Contents
Morgans Hotel Group Co.
Notes to Consolidated Financial Statements
(unaudited)
(unaudited)
1. Organization and Formation Transaction
Morgans Hotel Group Co. (the Company) was incorporated on October 19, 2005 as a Delaware
corporation to complete an initial public offering (IPO) that was part of the formation and
structuring transactions described below. The Company operates, owns, acquires and redevelops hotel
properties.
The Morgans Hotel Group Co. predecessor (the Predecessor) comprised the subsidiaries and
ownership interests that were contributed as part of the formation and structuring transactions
from Morgans Hotel Group LLC, now known as Residual Hotel Interest LLC (Former Parent), to
Morgans Group LLC (Morgans Group), the Companys operating company. At the time of the formation
and structuring transactions, the Former Parent was owned approximately 85% by NorthStar
Hospitality, LLC, a subsidiary of NorthStar Capital Investment Corp., and approximately 15% by RSA
Associates, L.P.
In connection with the IPO, the Former Parent contributed the subsidiaries and ownership
interests in nine operating hotels in the United States and the United Kingdom to Morgans Group in
exchange for membership units. Simultaneously, Morgans Group issued additional membership units to
the Predecessor in exchange for cash raised by the Company from the IPO. The Former Parent also
contributed all the membership interests in its hotel management business to Morgans Group in
return for 1,000,000 membership units in Morgans Group exchangeable for shares of the Companys
common stock. The Company is the managing member of Morgans Group, and has full management control.
On April 24, 2008, 45,935 outstanding membership units in Morgans Group were exchanged for 45,935
shares of the Companys common stock. As of March 31, 2011, 954,065 membership units in Morgans
Group remain outstanding.
On February 17, 2006, the Company completed its IPO. The Company issued 15,000,000 shares of
common stock at $20 per share resulting in net proceeds of approximately $272.5 million, after
underwriters discounts and offering expenses.
The Company has one reportable operating segment; it operates, owns, acquires and redevelops
boutique hotels.
Operating Hotels
The Companys operating hotels as of March 31, 2011 are as follows:
Number of | ||||||||||
Hotel Name | Location | Rooms | Ownership | |||||||
Hudson |
New York, NY | 834 | (1 | ) | ||||||
Morgans (10) |
New York, NY | 114 | (2 | ) | ||||||
Royalton (10) |
New York, NY | 168 | (2 | ) | ||||||
Mondrian SoHo |
New York, NY | 270 | (3 | ) | ||||||
Delano South Beach |
Miami Beach, FL | 194 | (2 | ) | ||||||
Mondrian South Beach |
Miami Beach, FL | 328 | (4 | ) | ||||||
Shore Club |
Miami Beach, FL | 309 | (5 | ) | ||||||
Mondrian Los Angeles (10) |
Los Angeles, CA | 237 | (2 | ) | ||||||
Clift |
San Francisco, CA | 372 | (6 | ) | ||||||
Ames |
Boston, MA | 114 | (7 | ) | ||||||
Sanderson |
London, England | 150 | (4 | ) | ||||||
St Martins Lane |
London, England | 204 | (4 | ) | ||||||
Water and Beach Club Hotel |
San Juan, PR | 78 | (8 | ) | ||||||
Hotel Las Palapas |
Playa del Carmen, Mexico | 75 | (9 | ) |
(1) | The Company owns 100% of Hudson, which is part of a property that is structured as a
condominium, in which Hudson constitutes 96% of the square footage of the entire building. |
6
Table of Contents
(2) | Wholly-owned hotel. |
|
(3) | Operated under a management contract and owned through an unconsolidated joint venture in
which the Company held a minority ownership interest of approximately 20% at March 31, 2011
based on cash contributions. See note 4. |
|
(4) | Owned through a 50/50 unconsolidated joint venture. See note 4. |
|
(5) | Operated under a management contract and owned through an unconsolidated joint venture in
which the Company held a minority ownership interest of approximately 7% as of March 31, 2011. |
|
(6) | The hotel is operated under a long-term lease which is accounted for as a financing. See note
6. |
|
(7) | Operated under a management contract and owned through an unconsolidated joint venture in
which the Company held a minority interest ownership of approximately 31% at March 31, 2011
based on cash contributions. See note 4. |
|
(8) | Operated under a management contract, with an unconsolidated minority ownership interest of
approximately 25% at March 31, 2011 based on cash contributions. See note 4. |
|
(9) | Operated under a management contract. |
|
(10) | Assets are classified as held for sale as of March 31, 2011. See note 12. |
Restaurant Joint Venture
The food and beverage operations of certain of the hotels are operated under 50/50 joint
ventures with a third party restaurant operator.
2. Summary of Significant Accounting Policies
Basis of Presentation
The accompanying consolidated financial statements have been prepared in accordance with
accounting principles generally accepted in the United States of America (GAAP). The Company
consolidates all wholly-owned subsidiaries and variable interest entities in which the Company is
determined to be the primary beneficiary. All intercompany balances and transactions have been
eliminated in consolidation. Entities which the Company does not control through voting interest
and entities which are variable interest entities of which the Company is not the primary
beneficiary, are accounted for under the equity method, if the Company can exercise significant
influence.
The consolidated financial statements have been prepared in accordance with GAAP for interim
financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes required by GAAP for complete
financial statements. The information furnished in the accompanying consolidated financial
statements reflects all adjustments that, in the opinion of management, are necessary for a fair
presentation of the aforementioned consolidated financial statements for the interim periods.
The preparation of financial statements in conformity with GAAP requires management to make
estimates and assumptions that affect the amounts reported in the consolidated financial statements
and accompanying notes. Actual results could differ from those estimates. Operating results for the
three months ended March 31, 2011 are not necessarily indicative of the results that may be
expected for the year ending December 31, 2011. For further information, refer to the consolidated
financial statements and accompanying footnotes included in the Companys Annual Report on Form
10-K for the year ended December 31, 2010.
7
Table of Contents
Effective January 1, 2010, the Financial Accounting Standards Board (FASB) amended the
guidance in ASC 810-10, Consolidation (ASC 810-10), for determining whether an entity is a
variable interest entity and requiring the performance of a qualitative rather than a quantitative
analysis to determine the primary beneficiary of a variable interest entity. Under this guidance,
an entity would be required to consolidate a variable interest entity if it has (i) the power to
direct the activities that most significantly impact the entitys economic performance and (ii) the
obligation to absorb losses of the variable interest entity or the right to receive benefits from
the variable interest entity that could be significant to the variable interest entity. Adoption of
this guidance on January 1, 2010 did not have a material impact on the consolidated financial
statements.
The Company has reevaluated its interest in three ventures that provide food and beverage
services in accordance with ASC 810-10. These services include operating restaurants including room
service at three hotels, banquet and catering services at three hotels and a bar at one hotel. No
assets of the Company are collateral for the ventures obligations and creditors of the venture
have no recourse to the Company. Based on the evaluation performed, the Company was determined to
be the primary beneficiary of these three ventures.
Management has also reevaluated the applicability of ASC 810-10 to its investments in
unconsolidated joint ventures and has concluded that most joint ventures do not meet the
requirements of a variable interest entity. As of December 31, 2010, Mondrian South Beach and
Mondrian SoHo were determined to be variable interest entities, but the Company is not its primary
beneficiary and, therefore, consolidations of these joint ventures are not required. Accordingly,
all investments in joint ventures (other than the three food and beverage joint ventures discussed
above) are accounted for using the equity method. In February 2011, the Mondrian SoHo hotel opened
and as such, the Company determined that the joint venture was an operating business. The Company
continues to account for its investment in Mondrian SoHo using the equity method of accounting.
Assets Held for Sale
The Company considers properties to be assets held for sale when management approves and
commits to a formal plan to actively market a property or a group of properties for sale and the
sale is probable. Upon designation as an asset held for sale, the Company records the carrying
value of each property or group of properties at the lower of its carrying value, which includes
allocable goodwill, or its estimated fair value, less estimated costs to sell, and the Company
stops recording depreciation expense. Any gain realized in connection with the sale of the
properties for which the Company has significant continuing involvement, such as through a
long-term management agreement, is deferred and recognized over the initial term of the related
management agreement. The operations of the properties held for sale prior to the sale date are
recorded in discontinued operations unless the Company has continuing involvement, such as through
a management agreement, after the sale.
Investments in and Advances to Unconsolidated Joint Ventures
The Company accounts for its investments in unconsolidated joint ventures using the equity
method as it does not exercise control over significant asset decisions such as buying, selling or
financing nor is it the primary beneficiary under ASC 810-10, as discussed above. Under the equity
method, the Company increases its investment for its proportionate share of net income and
contributions to the joint venture and decreases its investment balance by recording its
proportionate share of net loss and distributions. For investments in which there is recourse or
unfunded commitments to provide additional equity, distributions and losses in excess of the
investment are recorded as a liability.
Income Taxes
The Company accounts for income taxes in accordance with ASC 740-10, Income Taxes, which
requires the recognition of deferred tax assets and liabilities for the expected future tax
consequences of temporary differences between the tax and financial reporting basis of assets and
liabilities and for loss and credit carry forwards. Valuation allowances are provided when it is
more likely than not that the recovery of deferred tax assets will not be realized.
8
Table of Contents
The Companys deferred tax assets are recorded net of a valuation allowance when, based on the
weight of available evidence, it is more likely than not that some portion or all of the recorded
deferred tax assets will not be realized in future periods. Decreases to the valuation allowance
are recorded as reductions to the Companys provision for income taxes and increases to the
valuation allowance result in additional provision for income taxes. The realization of the
Companys deferred tax assets, net of the valuation allowance, is primarily dependent on estimated
future taxable income. A change in the Companys estimate of future taxable income may require an
addition to or reduction from the valuation allowance. The Company has established a reserve on a
portion of its deferred tax assets based on anticipated future taxable income and tax strategies
which may include the sale of property or an interest therein. The Company anticipates it will be
able to use a portion of these deferred tax assets relating to its tax net operating loss
carryforwards in connection with completion of the sale of Royalton, Morgans and Mondrian Los
Angeles, as discussed in note 12.
All of the Companys foreign subsidiaries are subject to local jurisdiction corporate income
taxes. Income tax expense is reported at the applicable rate for the periods presented.
Income taxes for the three months ended March 31, 2011 and 2010, were computed using the
Companys effective tax rate.
Derivative Instruments and Hedging Activities
In accordance with ASC 815-10, Derivatives and Hedging (ASC 815-10) the Company records all
derivatives on the balance sheet at fair value and provides qualitative disclosures about
objectives and strategies for using derivatives, quantitative disclosures about the fair value of
and gains and losses on derivative instruments, and disclosures about credit-risk-related
contingent features in derivative instruments.
The Company is exposed to certain risks arising from both its business operations and economic
conditions. The Company principally manages its exposures to a wide variety of business and
operational risks through management of its core business activities. The Company manages economic
risks, including interest rate, liquidity, and credit risk by managing the amount, sources, and
duration of its debt funding and the use of derivative financial instruments. Specifically, the
Company enters into derivative financial instruments to manage exposures that arise from business
activities that result in the payment of future known and uncertain cash amounts relating to
interest payments on the Companys borrowings. The Companys derivative financial instruments are
used to manage differences in the amount, timing, and duration of the Companys known or expected
cash payments principally related to the Companys borrowings.
The Companys objectives in using interest rate derivatives are to add stability to interest
expense and to manage its exposure to interest rate movements. To accomplish these objectives, the
Company primarily uses interest rate swaps and caps as part of its interest rate risk management
strategy. Interest rate swaps designated as cash flow hedges involve the receipt of variable-rate
amounts from a counterparty in exchange for the Company making fixed-rate payments over the life of
the agreements without exchange of the underlying notional amount. Interest rate caps designated as
cash flow hedges involve the receipt of variable-rate amounts from a counterparty if interest rates
rise above the strike rate on the contract in exchange for an up-front premium.
For derivatives designated as cash flow hedges, and the effective portion of changes in the
fair value of the derivative is initially reported in other comprehensive loss (outside of
earnings) and subsequently reclassified to earnings when the hedged transaction affects earnings,
and the ineffective portion of changes in the fair value of the derivative is recognized directly
in earnings. The Company assesses the effectiveness of each hedging relationship by comparing the
changes in fair value or cash flows of the derivative hedging instrument with the changes in fair
value or cash flows of the designated hedged item or transaction.
As of March 31, 2011, the estimated fair market value of the Companys cash flow hedges is
immaterial.
Credit-risk-related Contingent Features
The Company has entered into agreements with each of its derivative counterparties in
connection with the interest rate swaps and hedging instruments related to the Convertible Notes,
as defined and discussed in note 6,
providing that in the event the Company either defaults or is capable of being declared in
default on any of its indebtedness, then the Company could also be declared in default on its
derivative obligations.
9
Table of Contents
The Company has entered into warrant agreements with Yucaipa, as discussed in note 8,
providing Yucaipa American Alliance Fund II, L.P. and Yucaipa American Alliance (Parallel) Fund II,
L.P. (collectively, the Investors) with consent rights over certain transactions for so long as
they collectively own or have the right to purchase through exercise of the warrants 6,250,000
shares of the Companys common stock.
Fair Value Measurements
ASC 820-10, Fair Value Measurements and Disclosures (ASC 820-10) defines fair value,
establishes a framework for measuring fair value, and expands disclosures about fair value
measurements. ASC 820-10 applies to reported balances that are required or permitted to be measured
at fair value under existing accounting pronouncements; accordingly, the standard does not require
any new fair value measurements of reported balances.
ASC 820-10 emphasizes that fair value is a market-based measurement, not an entity-specific
measurement. Therefore, a fair value measurement should be determined based on the assumptions that
market participants would use in pricing the asset or liability. As a basis for considering market
participant assumptions in fair value measurements, ASC 820-10 establishes a fair value hierarchy
that distinguishes between market participant assumptions based on market data obtained from
sources independent of the reporting entity (observable inputs that are classified within Levels 1
and 2 of the hierarchy) and the reporting entitys own assumptions about market participant
assumptions (unobservable inputs classified within Level 3 of the hierarchy).
Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets or
liabilities that the Company has the ability to access. Level 2 inputs are inputs other than quoted
prices included in Level 1 that are observable for the asset or liability, either directly or
indirectly. Level 2 inputs may include quoted prices for similar assets and liabilities in active
markets, as well as inputs that are observable for the asset or liability (other than quoted
prices), such as interest rates and yield curves that are observable at commonly quoted intervals.
Level 3 inputs are unobservable inputs for the asset or liability, which is typically based on an
entitys own assumptions, as there is little, if any, related market activity. In instances where
the determination of the fair value measurement is based on inputs from different levels of the
fair value hierarchy, the level in the fair value hierarchy within which the entire fair value
measurement falls is based on the lowest level input that is significant to the fair value
measurement in its entirety. The Companys assessment of the significance of a particular input to
the fair value measurement in its entirety requires judgment, and considers factors specific to the
asset or liability.
Currently, the Company uses interest rate caps to manage its interest rate risk. The valuation
of these instruments is determined using widely accepted valuation techniques including discounted
cash flow analysis on the expected cash flows of each derivative. This analysis reflects the
contractual terms of the derivatives, including the period to maturity, and uses observable
market-based inputs, including interest rate curves and implied volatilities. To comply with the
provisions of ASC 820-10, the Company incorporates credit valuation adjustments to appropriately
reflect both its own nonperformance risk and the respective counterpartys nonperformance risk in
the fair value measurements. In adjusting the fair value of its derivative contracts for the effect
of nonperformance risk, the Company has considered the impact of netting and any applicable credit
enhancements, such as collateral postings, thresholds, mutual puts, and guarantees.
Although the Company has determined that the majority of the inputs used to value its
derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments
associated with its derivatives utilize Level 3 inputs, such as estimates of current credit spreads
to evaluate the likelihood of default by itself and its counterparties. However, as of March 31,
2011 the Company has assessed the significance of the impact of the credit valuation adjustments on
the overall valuation of its derivative positions and has determined that the credit valuation
adjustments are not significant to the overall valuation of its derivatives. Accordingly, all
derivatives have been classified as Level 2 fair value measurements.
10
Table of Contents
In connection with the issuance of 75,000 of the Companys Series A Preferred Securities to
the Investors, as discussed in note 8, the Company also issued warrants to purchase 12,500,000
shares of the Companys common
stock at an exercise price of $6.00 per share to the Investors. Until October 15, 2010, the
$6.00 exercise price of the warrants was subject to certain reductions if the Company had issued
shares of common stock below $6.00 per share. The exercise price adjustments were not triggered
prior to the expiration of such right on October 15, 2010. The fair value for each warrant granted
was estimated at the date of grant using the Black-Scholes option pricing model, an allowable
valuation method under ASC 718-10, Compensation, Stock Based Compensation (ASC 718-10). The
estimated fair value per warrant was $1.96 on October 15, 2009.
Although the Company has determined that the majority of the inputs used to value the
outstanding warrants fall within Level 1 of the fair value hierarchy, the Black-Scholes model
utilizes Level 3 inputs, such as estimates of the Companys volatility. Accordingly, the warrant
liability was classified as a Level 3 fair value measure. On October 15, 2010, this liability was
reclassified into equity, per ASC 815-10-15, Derivatives and Hedging, Embedded Derivatives (ASC
815-10-15).
Fair Value of Financial Instruments
As mentioned below and in accordance with ASC 825-10, Financial Instruments, and ASC 270-10,
Presentation, Interim Reporting, the Company provides quarterly fair value disclosures for
financial instruments. Disclosures about fair value of financial instruments are based on pertinent
information available to management as of the valuation date. Considerable judgment is necessary to
interpret market data and develop estimated fair values. Accordingly, the estimates presented are
not necessarily indicative of the amounts at which these instruments could be purchased, sold, or
settled. The use of different market assumptions and/or estimation methodologies may have a
material effect on the estimated fair value amounts.
The Companys financial instruments include cash and cash equivalents, accounts receivable,
restricted cash, accounts payable and accrued liabilities, and fixed and variable rate debt.
Management believes the carrying amount of the aforementioned financial instruments, excluding
fixed-rate debt, is a reasonable estimate of fair value as of March 31, 2011 and December 31, 2010
due to the short-term maturity of these items or variable market interest rates.
The fair market value of the Companys $222.6 million of fixed rate debt, excluding
capitalized lease obligations and including the Convertible Notes at face value, as of March 31,
2011 and December 31, 2010 was approximately $231.0 million and $248.6 million, respectively, using
market interest rates.
Stock-based Compensation
The Company accounts for stock based employee compensation using the fair value method of
accounting described in ASC 718-10. For share grants, total compensation expense is based on the
price of the Companys stock at the grant date. For option grants, the total compensation expense
is based on the estimated fair value using the Black-Scholes option-pricing model. Compensation
expense is recorded ratably over the vesting period, if any. Stock compensation expense recognized
for the three months ended March 31, 2011 and 2010 was $4.0 million and $3.8 million, respectively.
Income (Loss) Per Share
Basic net income (loss) per common share is calculated by dividing net income (loss) available
to common stockholders, less any dividends on unvested restricted common stock, by the
weighted-average number of common stock outstanding during the period. Diluted net income (loss)
per common share is calculated by dividing net income (loss) available to common stockholders, less
dividends on unvested restricted common stock, by the weighted-average number of common stock
outstanding during the period, plus other potentially dilutive securities, such as unvested shares
of restricted common stock and warrants.
Noncontrolling Interest
The Company follows ASC 810-10, when accounting and reporting for noncontrolling interests in
a consolidated subsidiary and the deconsolidation of a subsidiary. Under ASC 810-10, the Company
reports noncontrolling interests in subsidiaries as a separate component of stockholders equity in
the consolidated financial
statements and reflects net income (loss) attributable to the noncontrolling interests and net
income (loss) attributable to the common stockholders on the face of the consolidated statements of
operations and comprehensive loss.
11
Table of Contents
The membership units in Morgans Group, the Companys operating company, owned by the Former
Parent are presented as noncontrolling interest in Morgans Group in the consolidated balance sheets
and were approximately $9.5 million and $10.6 million as of March 31, 2011 and December 31, 2010,
respectively. The noncontrolling interest in Morgans Group is: (i) increased or decreased by the
limited members pro rata share of Morgans Groups net income or net loss, respectively; (ii)
decreased by distributions; (iii) decreased by exchanges of membership units for the Companys
common stock; and (iv) adjusted to equal the net equity of Morgans Group multiplied by the limited
members ownership percentage immediately after each issuance of units of Morgans Group and/or
shares of the Companys common stock and after each purchase of treasury stock through an
adjustment to additional paid-in capital. Net income or net loss allocated to the noncontrolling
interest in Morgans Group is based on the weighted-average percentage ownership throughout the
period.
Additionally, $0.3 million and $0.3 million was recorded as noncontrolling interest as of
March 31, 2011 and December 31, 2010, respectively, which represents the Companys food and
beverage joint venture partners interest in the restaurant ventures at certain of the Companys
hotels.
Reclassifications
Certain prior year financial statement amounts have been reclassified to conform to the
current year presentation, including discontinued operations, discussed in note 9, and assets held
for sale, discussed in note 12.
3. Income (Loss) Per Share
The Company applies the two-class method as required by ASC 260-10, Earnings per Share (ASC
260-10). ASC 260-10 requires the net income per share for each class of stock (common stock and
preferred stock) to be calculated assuming 100% of the Companys net income is distributed as
dividends to each class of stock based on their contractual rights. To the extent the Company has
undistributed earnings in any calendar quarter, the Company will follow the two-class method of
computing earnings per share.
Basic earnings (loss) per share is calculated based on the weighted average number of common
stock outstanding during the period. Diluted earnings (loss) per share include the effect of
potential shares outstanding, including dilutive securities. Potential dilutive securities may
include shares and options granted under the Companys stock incentive plan and membership units in
Morgans Group, which may be exchanged for shares of the Companys common stock under certain
circumstances. The 954,065 Morgans Group membership units (which may be converted to cash, or at
the Companys option, common stock) held by third parties at March 31, 2011, warrants issued to
the Investors, unvested restricted stock units, LTIP Units (as defined in note 7), stock options,
and shares issuable upon conversion of outstanding Convertible Notes (as defined in note 6) have
been excluded from the diluted net income (loss) per common share calculation,
as there would be no effect on reported diluted net income (loss) per common share.
The table below details the components of the basic and diluted loss per share calculations
(in thousands, except for per share data):
Three Months | Three Months | |||||||
Ended | Ended | |||||||
March 31, 2011 | March 31, 2010 | |||||||
Numerator: |
||||||||
Net loss from continuing operations |
$ | (33,358 | ) | $ | (33,309 | ) | ||
Net income from discontinued operations |
490 | 17,202 | ||||||
Net loss |
(32,868 | ) | (16,107 | ) | ||||
Net loss attributable to noncontrolling interest |
825 | 147 | ||||||
Net loss attributable to Morgans Hotel Group Co. |
(32,043 | ) | (15,960 | ) | ||||
Less: preferred stock dividends and accretion |
2,187 | 2,078 | ||||||
Net loss attributable to common shareholders |
$ | (34,230 | ) | $ | (18,038 | ) | ||
Denominator, continuing and discontinued operations: |
||||||||
Weighted average basic common shares outstanding |
31,103 | 29,849 | ||||||
Effect of dilutive securities |
| | ||||||
Weighted average diluted common shares outstanding |
31,103 | 29,849 | ||||||
Basic and diluted loss from continuing operations per share |
$ | (1.12 | ) | $ | (1.18 | ) | ||
Basic and diluted income from discontinued operations per share |
$ | 0.02 | $ | 0.58 | ||||
Basic and diluted loss available to common stockholders per
common share |
$ | (1.10 | ) | $ | (0.60 | ) | ||
12
Table of Contents
4. Investments in and Advances to Unconsolidated Joint Ventures
The Companys investments in and advances to unconsolidated joint ventures and its equity in
earnings (losses) of unconsolidated joint ventures are summarized as follows (in thousands):
Investments
As of | As of | |||||||
March 31, | December 31, | |||||||
Entity | 2011 | 2010 | ||||||
Mondrian South Beach |
$ | 5,318 | $ | 5,817 | ||||
Morgans Hotel Group Europe Ltd. |
2,208 | 1,366 | ||||||
Mondrian SoHo |
| | ||||||
Boston Ames |
10,244 | 10,709 | ||||||
Other |
2,558 | 2,558 | ||||||
Total investments in and advances to unconsolidated joint ventures |
$ | 20,328 | $ | 20,450 | ||||
As of | As of | |||||||
March 31, | December 31, | |||||||
Entity | 2011 | 2010 | ||||||
Restaurant Venture SC London |
$ | (1,728 | ) | $ | (1,509 | ) | ||
Hard Rock Hotel & Casino (1) |
| | ||||||
Total losses from and
distributions in excess of
investment in unconsolidated
joint ventures |
$ | (1,728 | ) | $ | (1,509 | ) | ||
(1) | Until March 1, 2011, the Company had a partial ownership
interest in the Hard Rock and managed the property pursuant to a management agreement that was
terminated in connection with the Hard Rock settlement, discussed below. |
13
Table of Contents
Equity in income (loss) from unconsolidated joint ventures
Three Months | Three Months | |||||||
Ended | Ended | |||||||
March 31, | March 31, | |||||||
2011 | 2010 | |||||||
Morgans Hotel Group Europe Ltd. |
$ | 7 | $ | 812 | ||||
Restaurant Venture SC London |
(220 | ) | (257 | ) | ||||
Mondrian South Beach |
(500 | ) | (423 | ) | ||||
Mondrian SoHo |
(1,932 | ) | | |||||
Hard Rock Hotel & Casino (1) |
(6,376 | ) | | |||||
Ames |
(464 | ) | (397 | ) | ||||
Other |
2 | 2 | ||||||
Total equity in loss from unconsolidated joint ventures |
$ | (9,483 | ) | $ | (263 | ) | ||
(1) | Until March 1, 2011, the Company had a partial ownership interest in the Hard Rock
and managed the property pursuant to a management agreement that was terminated in connection with
the Hard Rock settlement, discussed below. Reflects the period operated in 2011. |
Morgans Hotel Group Europe Limited
As of March 31, 2011, the Company owned interests in two hotels in London, England, St Martins
Lane, a 204-room hotel, and Sanderson, a 150-room hotel, through a 50/50 joint venture known as
Morgans Hotel Group Europe Limited (Morgans Europe) with Walton MG London Investors V, L.L.C
(Walton).
Under the joint venture agreement with Walton, the Company owns indirectly a 50% equity
interest in Morgans Europe and has an equal representation on the Morgans Europe board of
directors. In the event the parties cannot agree on certain specified decisions, such as approving
hotel budgets or acquiring a new hotel property, or beginning any time after February 9, 2010,
either party has the right to buy all the shares of the other party in the joint venture or, if its
offer is rejected, require the other party to buy all of its shares at the same offered price per
share in cash.
Under a management agreement with Morgans Europe, the Company earns management fees and a
reimbursement for allocable chain service and technical service expenses. The Company is also
entitled to an incentive management fee and a capital incentive fee. The Company did not earn any
incentive fees during the three months ended March 31, 2011 and 2010.
On July 15, 2010, the joint venture refinanced in full its then outstanding £99.3 million
mortgage debt with a new £100 million loan maturing in July 2015 that is non-recourse to the
Company and is secured by Sanderson and St Martins Lane. The joint venture also entered into a swap
agreement that effectively fixes the interest rate at 5.22% for the term of the loan, a reduction
in interest rate of approximately 105 basis points, as compared to the previous mortgage loan. As
of March 31, 2011, Morgans Europe had outstanding mortgage debt of £99.6 million, or approximately
$160.4 million at the exchange rate of 1.61 US dollars to GBP at March 31, 2011.
Net income or loss and cash distributions or contributions are allocated to the partners in
accordance with ownership interests. The Company accounts for this investment under the equity
method of accounting.
Mondrian South Beach
On August 8, 2006, the Company entered into a 50/50 joint venture to renovate and convert an
apartment building on Biscayne Bay in South Beach Miami into a condominium hotel, Mondrian South
Beach, which opened in December 2008. The Company operates Mondrian South Beach under a long-term
management contract.
14
Table of Contents
The joint venture acquired the existing building and land for a gross purchase price of $110.0
million. An initial equity investment of $15.0 million from each of the 50/50 joint venture
partners was funded at closing, and
subsequently each member also contributed $8.0 million of additional equity. The Company and
an affiliate of its joint venture partner provided additional mezzanine financing of approximately
$22.5 million in total to the joint venture to fund completion of the construction in 2008.
Additionally, the joint venture initially received non-recourse mortgage loan financing of
approximately $124.0 million at a rate of LIBOR plus 300 basis points. A portion of this mortgage
debt was paid down, prior to the amendments discussed below, with proceeds obtained from
condominium sales. In April 2008, the Mondrian South Beach joint venture obtained a mezzanine loan
from the mortgage lenders of $28.0 million bearing interest at LIBOR, based on the rate set date,
plus 600 basis points. The $28.0 million mezzanine loan provided by the lender and the $22.5
million mezzanine loan provided by the joint venture partners were both amended when the loan
matured in April 2010, as discussed below.
In April 2010, the joint venture amended the non-recourse financing secured by the
property and extended the maturity date for up to seven years through extension options until April
2017, subject to certain conditions. Among other things, the amendment allows the joint venture to
accrue all interest for a period of two years and a portion thereafter and provides the joint
venture the ability to provide seller financing to qualified condominium buyers with up to 80% of
the condominium purchase price. Each of the joint venture partners provided an additional $2.75
million to the joint venture resulting in total mezzanine financing provided by the partners of
$28.0 million. The amendment also provides that this $28.0 million mezzanine financing invested in
the property be elevated in the capital structure to become, in effect, on par with the lenders
mezzanine debt so that the joint venture receives at least 50% of all returns in excess of the
first mortgage.
Morgans Group and affiliates of its joint venture partner have agreed to provide standard
non-recourse carve-out guaranties and provide certain limited indemnifications for the Mondrian
South Beach mortgage and mezzanine loans. In the event of a default, the lenders recourse is
generally limited to the mortgaged property or related equity interests, subject to standard
non-recourse carve-out guaranties for bad boy type acts. Morgans Group and affiliates of its
joint venture partner also agreed to guaranty the joint ventures obligation to reimburse certain
expenses incurred by the lenders and indemnify the lenders in the event such lenders incur
liability as a result of any third-party actions brought against Mondrian South Beach. Morgans
Group and affiliates of its joint venture partner have also guaranteed the joint ventures
liability for the unpaid principal amount of any seller financing note provided for condominium
sales if such financing or related mortgage lien is found unenforceable, provided they shall not
have any liability if the seller financed unit becomes subject again to the lien of the lenders
mortgage or title to the seller financed unit is otherwise transferred to the lender or if such
seller financing note is repurchased by Morgans Group and/or affiliates of its joint venture at the
full amount of unpaid principal balance of such seller financing note. In addition, although
construction is complete and Mondrian South Beach opened on December 1, 2008, Morgans Group and
affiliates of its joint venture partner may have continuing obligations under construction
completion guaranties until all outstanding payables due to construction vendors are paid. As of
March 31, 2011, there are remaining payables outstanding to vendors of approximately $1.5 million.
The Company believes that payment under these guaranties is not probable and the fair value of the
guarantee is not material.
The Company and affiliates of its joint venture partner also have an agreement to purchase
approximately $14 million each of condominium units under certain conditions, including an event of
default. In the event of a default under the mortgage or mezzanine loan, the joint venture partners
are obligated to purchase selected condominium units, at agreed-upon sales prices, having aggregate
sales prices equal to 1/2 of the lesser of $28.0 million, which is the face amount outstanding on
the mezzanine loan, or the then outstanding principal balance of the mezzanine loan. The joint
venture is not currently in an event of default under the mortgage or mezzanine loan. The Company
has not recognized a liability related to the construction completion or the condominium purchase
guarantees.
The joint venture is in the process of selling units as condominiums, subject to market
conditions, and unit buyers will have the opportunity to place their units into the hotels rental
program. In addition to hotel management fees, the Company could also realize fees from the sale of
condominium units.
The Mondrian South Beach joint venture was determined to be a variable interest entity as
during the process of refinancing the ventures mortgage in April 2010, its equity investment at
risk was considered insufficient to permit the entity to finance its own activities. Management
determined that the Company is not the primary beneficiary of this variable interest entity as the
Company does not have a controlling financial interest in the entity. The Companys maximum
exposure to losses as a result of its involvement in the Mondrian South Beach variable interest
entity is limited to its current investment, outstanding management fee receivable and advances in
the form of mezzanine financing. The Company is not committed to providing financial support to
this variable interest entity, other than as contractually required and all future funding is
expected to be provided by the joint venture
partners in accordance with their respective percentage interests in the form of capital
contributions or mezzanine financing, or by third parties.
15
Table of Contents
Hard Rock Hotel & Casino
Formation and Hard Rock Credit Facility
On February 2, 2007, the Company and Morgans Group (together, the Morgans Parties), an
affiliate of DLJ Merchant Banking Partners (DLJMB), and certain other DLJMB affiliates (such
affiliates, together with DLJMB, collectively the DLJMB Parties) completed the acquisition of the
Hard Rock Hotel & Casino (Hard Rock). The acquisition was completed through a joint venture
entity, Hard Rock Hotel Holdings, LLC, funded one-third, or approximately $57.5 million, by the
Morgans Parties, and two-thirds, or approximately $115.0 million, by the DLJMB Parties. In
connection with the joint ventures acquisition of the Hard Rock, certain subsidiaries of the joint
venture entered into a debt financing comprised of a senior mortgage loan and three mezzanine
loans, which provided for a $760.0 million acquisition loan that was used to fund the acquisition,
of which $110.0 million was subsequently repaid according to the terms of the loan, and a
construction loan of up to $620.0 million, which was fully drawn for the expansion project at the
Hard Rock. Morgans Group provided a standard non-recourse, carve-out guaranty for each of the
mortgage and mezzanine loans. On December 24, 2009, the mortgage and mezzanine loans were amended
so that the maturity dates were extendable from February 2011 to February 2014, subject to certain
conditions.
Since the formation of Hard Rock Hotel Holdings, LLC, additional disproportionate cash
contributions had been made by the DLJMB Parties. Prior to the Hard Rock settlement, discussed
below, the DLJMB Parties had contributed an aggregate of $424.8 million in cash and the Morgans
Parties had contributed an aggregate of $75.8 million in cash. In 2009, the Company wrote down the
Companys investment in Hard Rock to zero.
Hard Rock Settlement Agreement
On January 28, 2011, subsidiaries of Hard Rock Hotel Holdings, LLC received a notice of
acceleration from the NRFC HRH Holdings, LLC (the Second Mezzanine Lender) pursuant to the First
Amended and Restated Second Mezzanine Loan Agreement, dated as of December 24, 2009 (the Second
Mezzanine Loan Agreement), between such subsidiaries and the Second Mezzanine Lender, declaring
all unpaid principal and accrued interest under the Second Mezzanine Loan Agreement immediately due
and payable. The amount due and payable under the Second Mezzanine Loan Agreement as of January 20,
2011 was approximately $96 million. The Second Mezzanine Lender also notified the such subsidiaries
that it intended to auction to the public the collateral pledged in connection with the Second
Mezzanine Loan Agreement, including all membership interests in certain subsidiaries of Hard Rock
Hotel Holding, LLC that indirectly owned the Hard Rock and other related assets.
Subsidiaries of Hard Rock Hotel Holdings, LLC, Vegas HR Private Limited (the Mortgage
Lender), Brookfield Financial, LLC-Series B (the First Mezzanine Lender), the Second Mezzanine
Lender, Morgans Group, certain affiliates of DLJMB, and certain other related parties entered into
a Standstill and Forbearance Agreement, dated as of February 6, 2011. Pursuant to the Standstill
and Forbearance Agreement, among other things, until February 28, 2011, the Mortgage Lender, First
Mezzanine Lender and the Second Mezzanine Lender agreed not to take any action or assert any right
or remedy arising with respect to any of the applicable loan documents or the collateral pledged
under such loan documents, including remedies with respect to the Companys Hard Rock management
agreement. In addition, pursuant to the Standstill and Forbearance Agreement, the Second Mezzanine
Lender agreed to withdraw its foreclosure notice, and the parties agreed to jointly request a stay
of all action on the pending motions that had been filed by various parties to enjoin such
foreclosure proceedings.
16
Table of Contents
On March 1, 2011, Hard Rock Hotel Holdings, LLC, the Mortgage Lender, the First Mezzanine
Lender, the Second Mezzanine Lender, the Morgans Parties and certain affiliates of DLJMB, as well
as Hard Rock Mezz Holdings LLC (the Third Mezzanine Lender) and other interested parties entered
into a comprehensive settlement to resolve the disputes among them and all matters relating to the
Hard Rock and related loans and guaranties. The settlement provided, among other things, for the
following:
| release of the non-recourse carve-out guaranties provided by the Company
with respect to the loans made by the Mortgage Lender, the First Mezzanine Lender,
the Second Mezzanine Lender and the Third Mezzanine Lender to the direct and indirect
owners of the Hard Rock; |
||
| termination of the management agreement pursuant to which the Companys
subsidiary managed the Hard Rock; |
||
| the transfer by Hard Rock Hotel Holdings, LLC to an affiliate of the First
Mezzanine Lender of 100% of the indirect equity interests in the Hard Rock; and |
||
| certain payments to or for the benefit of the Mortgage Lender, the First
Mezzanine Lender, the Second Mezzanine Lender, the Third Mezzanine Lender and the
Company. The Companys net payment was approximately $3.7 million. |
As a result of the settlement, the Company will no longer be subject to Nevada gaming
regulations, after completion of certain gaming de-registration procedures.
Mondrian SoHo
In June 2007, the Company entered into a joint venture with Cape Advisors Inc. to acquire and
develop a Mondrian hotel in the SoHo neighborhood of New York City. The Company initially
contributed $5.0 million for a 20% equity interest in the joint venture and subsequently loaned an
additional $3.3 million to the venture. The joint venture obtained a loan of $195.2 million to
acquire and develop the hotel, which matured in June 2010.
Based on the decline in market conditions following the inception of the joint venture and
more recently, the need for additional funding to complete the hotel, the Company wrote down its
investment in Mondrian SoHo to zero in June 2010 and recorded an impairment charge through equity
in loss of unconsolidated joint ventures.
On July 31, 2010, the lender amended the debt financing on the property to provide for, among
other things, extensions of the maturity date of the mortgage loan secured by the hotel to
November 2011 with extension options through 2015, subject to certain conditions including a
minimum debt service coverage test. In addition to new funds being provided by the lender, Cape
Advisors Inc. made cash and other contributions to the joint venture, and the Company agreed to
provide up to $3.2 million of additional funds to complete the project. The Companys contribution
will be treated as a loan with priority over the equity. The Company has contributed the full
amount of this priority loan, as well as additional funds, all of which were considered impaired
and recorded as impairment charges through equity in loss of unconsolidated joint ventures during
the period funds were contributed. As of March 31, 2011, the Companys investment balance in the
joint venture was zero.
Certain affiliates of
the Companys joint venture partner have agreed to provide a standard non-recourse
carve-out guaranty for bad boy type acts and a completion guaranty to the lenders for the
Mondrian SoHo loan, for which Morgans Group has agreed to indemnify the joint venture partner and
its affiliates up to 20% of such entities guaranty obligations, provided that each party is fully
responsible for any losses incurred as a result of its own gross negligence or willful misconduct.
The Mondrian SoHo opened in February 2011 and has 270 guest rooms, a restaurant, bar and other
facilities. The Company has a 10-year management contract with two 10-year extension options to
operate the hotel.
As of December 31, 2010, the Mondrian SoHo joint venture was determined to be a variable
interest entity, but the Company was not its primary beneficiary and, therefore, consolidations of
this joint venture is not required. In February 2011, when Mondrian SoHo opened, the Company
determined that the joint venture was an operating business. The Company continues to account for
its investment in Mondrian SoHo using the equity method of accounting.
17
Table of Contents
Ames
On June 17, 2008, the Company, Normandy Real Estate Partners, and Ames Hotel Partners entered
into a joint venture agreement as part of the development of the Ames hotel in Boston. Ames opened
on November 19, 2009 and has 114 guest rooms, a restaurant, bar and other facilities. The Company
manages Ames under a 15-year management contract.
The Company has contributed approximately $11.5 million in equity through March 31, 2011 for
an approximately 31% interest in the joint venture. The joint venture obtained a loan for $46.5
million secured by the hotel, which amount was outstanding as of March 31, 2011. The project also
qualified for federal and state historic rehabilitation tax credits which were sold for
approximately $16.9 million.
In October 2010, the mortgage loan secured by Ames matured, and the joint venture did not
satisfy the conditions necessary to exercise the first of two remaining one-year extension options
available under the loan, which included funding a debt service reserve account, among other
things. As a result, the mortgage lender for Ames served the joint venture with a notice of default
and acceleration of debt. In February 2011, the joint venture reached an agreement with the lender
whereby the lender waived the default, reinstated the loan and extended the loan maturity date
until October 9, 2011 with a one-year extension option, subject to certain conditions. In connection with the amendment, the joint
venture was required to deposit $1.0 million into a debt service account.
Shore Club
The Company operates Shore Club under a management contract and owned a minority ownership
interest of approximately 7% at March 31, 2011. On September 15, 2009, the joint venture that owns
Shore Club received a notice of default on behalf of the special servicer for the lender on the
joint ventures mortgage loan for failure to make its September monthly payment and for failure to
maintain its debt service coverage ratio, as required by the loan documents. On October 7, 2009,
the joint venture received a second letter on behalf of the special servicer for the lender
accelerating the payment of all outstanding principal, accrued interest, and all other amounts due
on the mortgage loan. The lender also demanded that the joint venture transfer all rents and
revenues directly to the lender to satisfy the joint ventures debt. In March 2010, the lender for
the Shore Club mortgage initiated foreclosure proceedings against the property in U.S. federal
district court. In October 2010, the federal court dismissed the case for lack of jurisdiction. In
November 2010, the lender initiated foreclosure proceedings in state court. The Company continues
to operate the hotel pursuant to the management agreement during these proceedings. However, there
can be no assurances the Company will continue to operate the hotel once foreclosure proceedings
are complete.
5. Other Liabilities
As of March 31, 2011 and December 31, 2010, the balance of other liabilities consisted of
$13.9 million, which is related to a fee payable to a designer. The Former Parent had an exclusive
service agreement with a hotel designer, pursuant to which the designer has initiated various
claims related to the agreement. Although the Company is not a party to the agreement, it may have
certain contractual obligations or liabilities to the Former Parent in connection with the
agreement. According to the agreement, the designer was owed a base fee for each designed hotel,
plus 1% of Gross Revenues, as defined in the agreement, for a 10-year period from the opening of
each hotel. In addition, the agreement also called for the designer to design a minimum number of
projects for which the designer would be paid a minimum fee. A liability amount has been estimated
and recorded in these consolidated financial statements before considering any defenses and/or
counter-claims that may be available to the Company or the Former Parent in connection with any
claim brought by the designer. The Company believes the probability of losses associated with this
claim in excess of the liability that is accrued of $13.9 million is remote and cannot reasonably
estimate of range of such additional losses, if any, at this time. The estimated costs of the
design services were capitalized as a component of the applicable hotel and amortized over the
five-year estimated life of the related design elements.
18
Table of Contents
6. Debt and Capital Lease Obligations
Debt and capital lease obligations consists of the following (in thousands):
As of | As of | Interest rate at | ||||||||||
March 31, | December 31, | March 31, | ||||||||||
Description | 2011 | 2010 | 2011 | |||||||||
Notes secured by Hudson (a) |
$ | 201,162 | $ | 201,162 | 1.29% (LIBOR + 1.03%) | |||||||
Notes secured by Hudson (a) |
26,500 | 26,500 | 3.24% (LIBOR + 2.98%) | |||||||||
Clift debt (b) |
85,506 | 85,033 | 9.60 | % | ||||||||
Liability to subsidiary trust (c) |
50,100 | 50,100 | 8.68 | % | ||||||||
Revolving credit (d) |
37,658 | 26,008 | (d | ) | ||||||||
Convertible Notes, face value of $172.5 million (e) |
164,437 | 163,869 | 2.38 | % | ||||||||
Capital lease obligations (f) |
6,107 | 6,107 | (f | ) | ||||||||
Debt and capital lease obligation |
$ | 571,471 | $ | 558,779 | ||||||||
Mortgage debt secured by assets held for sale
Mondrian Los Angeles (a) |
103,496 | 103,496 | 1.90% (LIBOR + 1.64%) | |||||||||
Notes secured by property held for non-sale
disposition (g) |
$ | | $ | 10,500 | 11.00 | % |
(a) Mortgage Agreement Notes secured by Hudson and Mondrian Los Angeles
On October 6, 2006, subsidiaries of the Company, Henry Hudson Holdings LLC (Hudson Holdings)
and Mondrian Holdings LLC (Mondrian Holdings), entered into non-recourse mortgage financings
consisting of two separate first mortgage loans secured by Hudson and Mondrian Los Angeles,
respectively (collectively, the Mortgages), and a mezzanine loan related to Hudson, secured by a
pledge of the equity interests in the Companys subsidiary owning Hudson.
On October 14, 2009, the Company entered into an agreement with the lender that holds, among
other loans, the mezzanine loan on Hudson. Under the agreement, the Company paid an aggregate of
$11.2 million to (i) reduce the principal balance of the mezzanine loan from $32.5 million to $26.5
million, (ii) acquire interests in $4.5 million of certain debt securities secured by certain of
the Companys other debt obligations, (iii) pay fees, and (iv) obtain a forbearance from the
mezzanine lender until October 12, 2013 from exercising any remedies resulting from a maturity
default, subject only to maintaining certain interest rate caps and making an additional aggregate
payment of $1.3 million to purchase additional interests in certain of the Companys other debt
obligations prior to October 11, 2011. The mezzanine lender also agreed to cooperate with the
Company in its efforts to seek an extension of the Hudson mortgage loan and consent to certain
refinancings and other modifications of the Hudson mortgage loan.
Until amended as described below, the Hudson Holdings Mortgage bore interest at 30-day LIBOR
plus 0.97% and the Mondrian Holdings Mortgage bore interest at 30-day LIBOR plus 1.23%. The Hudson
mezzanine loan bears interest at 30-day LIBOR plus 2.98%. The Company had entered into interest
rate swaps on the Mortgages and the mezzanine loan on Hudson which effectively fixed the 30-day
LIBOR rate at approximately 5.0%. These interest rate swaps expired on July 15, 2010. The Company
subsequently entered into short-term interest rate caps on the Mortgages that expired on September
12, 2010.
On October 1, 2010, Hudson Holdings and Mondrian Holdings each entered into a modification
agreement of its respective Mortgage, together with promissory notes and other related security
agreements, with Bank of America, N.A., as trustee, for the lenders. These modification agreements
and related agreements amended and extended the Mortgages (collectively, the Amended Mortgages)
until October 15, 2011. In connection with the Amended Mortgages, on October 1, 2010, Hudson
Holdings and Mondrian Holdings paid down a total of $15.8 million and $17 million, respectively, on
their outstanding mortgage loan balances. As of March 31, 2011, there is $331.1 million outstanding
under the Amended Mortgages.
The interest rates were also amended to 30-day LIBOR plus 1.03% on the Hudson Holdings Amended
Mortgage and 30-day LIBOR plus 1.64% on the Mondrian Holdings Amended Mortgage. The interest rate
on the Hudson mezzanine loan continues to bear interest at 30-day LIBOR plus 2.98%. The Company
entered into interest rate caps expiring October 15, 2011 in connection with the Amended Mortgages, which
effectively cap the 30-day LIBOR rate at 5.3% and 4.25% on the Hudson Holdings Amended Mortgage and
Mondrian Holdings Amended Mortgage, respectively, and effectively cap the 30-day LIBOR rate at 7.0%
on the Hudson mezzanine loan.
19
Table of Contents
The Amended Mortgages require the Companys subsidiary borrowers (entities owning Hudson and
Mondrian Los Angeles) to fund reserve accounts to cover monthly debt service payments. Those
subsidiary borrowers are also required to fund reserves for property, sales and occupancy taxes,
insurance premiums, capital expenditures and the operation and maintenance of those hotels.
Reserves are deposited into restricted cash accounts and are released as certain conditions are
met. Starting in 2009, the Mortgages had fallen below the required debt service coverage and as
such, all excess cash, once all other reserve accounts were completed, were funded into curtailment
reserve accounts. At September 30, 2010, the balance in the curtailment reserve accounts was $20.3
million, of which $16.5 million was used in October 2010 to reduce the amount of mortgage debt
outstanding under the Amended Mortgages, as discussed above. Under the Amended Mortgages, all
excess cash will continue to be funded into curtailment reserve accounts regardless of the debt
service coverage ratio. The subsidiary borrowers are not permitted to have any liabilities other
than certain ordinary trade payables, purchase money indebtedness, capital lease obligations and
certain other liabilities.
The Amended Mortgages prohibit the incurrence of additional debt on Hudson and Mondrian Los
Angeles. Furthermore, the subsidiary borrowers are not permitted to incur additional mortgage debt
or partnership interest debt. In addition, the Amended Mortgages do not permit (1) transfers of
more than 49% of the interests in the subsidiary borrowers, Morgans Group or the Company or (2) a
change in control of the subsidiary borrowers or in respect of Morgans Group or the Company itself
without, in each case, complying with various conditions or obtaining the prior written consent of
the lender.
The Amended Mortgages provide for events of default customary in mortgage financings,
including, among others, failure to pay principal or interest when due, failure to comply with
certain covenants, certain insolvency and receivership events affecting the subsidiary borrowers,
Morgans Group or the Company, and breach of the encumbrance and transfer provisions. In the event
of a default under the Mortgages, the lenders recourse is limited to the mortgaged property,
unless the event of default results from insolvency, a voluntary bankruptcy filing, a breach of the
encumbrance and transfer provisions, or various other bad boy type acts, in which event the
lender may also pursue remedies against Morgans Group.
As discussed further in note 12, on May 3, 2011, the Company completed the sale of Mondrian
Los Angeles for $137.0 million to Wolverines Owner LLC, an affiliate of Pebblebrook Hotel Trust
(Pebblebrook), pursuant to a purchase and sale agreement entered into on April 22, 2011. The
Company applied a portion of the proceeds from the sale, along with approximately $9.2 million of
cash in escrow, to retire the $103.5 million Mondrian Holdings Amended Mortgage.
After the repayment of the Mondrian Holdings Amended Mortgage, the Company is pursuing a
number of options to finance the Hudson Holdings Amended Mortgage and Hudson mezzanine loan
maturities, including using a portion of the proceeds from other asset sales such as Royalton and
Morgans, discussed in note 12, debt financing, and other sources. The Company believes the
combination of rising hotel cash flows and improving capital markets should provide sufficient
capital to refinance the debt and provide capital for growth.
(b) Clift Debt
In October 2004, Clift Holdings LLC (Clift Holdings) sold the hotel to an unrelated party
for $71.0 million and then leased it back for a 99-year lease term. Under this lease, the Company
is required to fund operating shortfalls including the lease payments and to fund all capital
expenditures. This transaction did not qualify as a sale due to the Companys continued involvement
and therefore is treated as a financing.
Due to the amount of the payments stated in the lease, which increase periodically, and the
economic environment in which the hotel operates, Clift Holdings, the Companys subsidiary that
leases Clift, had not been operating Clift at a profit and Morgans Group had been funding cash
shortfalls sustained at Clift in order to enable Clift Holdings to make lease payments from time to
time. On March 1, 2010, however, the Company discontinued
subsidizing the lease payments and Clift Holdings stopped making the scheduled monthly
payments. On May 4, 2010, the owners filed a lawsuit against Clift Holdings, which the court
dismissed on June 1, 2010. On June 8, 2010, the owners filed a new lawsuit and on June 17, 2010,
the Company and Clift Holdings filed an affirmative lawsuit against the owners.
20
Table of Contents
On September 17, 2010, the Company, Clift Holdings and another subsidiary of the Company, 495
Geary, LLC, entered into a settlement and release agreement with Hasina, LLC, Tarstone Hotels, LLC,
Kalpana, LLC, Rigg Hotel, LLC, and JRIA, LLC (collectively, the Lessors), and Tarsadia Hotels
(the Settlement and Release Agreement). The Settlement and Release Agreement, among other things,
effectively provided for the settlement of all outstanding litigation claims and disputes among the
parties relating to defaulted lease payments due with respect to the ground lease for the Clift and
reduced the lease payments due to Lessors for the period March 1, 2010 through February 29, 2012.
Clift Holdings and the Lessors also entered into an amendment to the lease, dated September 17,
2010 (Lease Amendment), to memorialize, among other things, the reduced annual lease payments of
$4.97 million from March 1, 2010 to February 29, 2012. Effective March 1, 2012, the annual rent
will be as stated in the lease agreement, which currently provides for base annual rent of
approximately $6.0 million per year through October 2014 increasing thereafter, at 5-year intervals
by a formula tied to increases in the Consumer Price Index, with a maximum increase of 40% and a
minimum of 20% at October 2014, and at each payment date thereafter, the maximum increase is 20%
and the minimum is 10%. The lease is non-recourse to the Company.
Morgans Group also entered into an agreement, dated September 17, 2010 (the Limited
Guaranty, together with the Settlement and Release Agreement and Lease Amendment, the Clift
Settlement Agreements), whereby Morgans Group agreed to guarantee losses of up to $6 million
suffered by the Lessors in the event of certain bad boy type acts.
(c) Liability to Subsidiary Trust Issuing Preferred Securities
On August 4, 2006, a newly established trust formed by the Company, MHG Capital Trust I (the
Trust), issued $50.0 million in trust preferred securities in a private placement. The Company
owns all of the $0.1 million of outstanding common stock of the Trust. The Trust used the proceeds
of these transactions to purchase $50.1 million of junior subordinated notes issued by the
Companys operating company and guaranteed by the Company (the Trust Notes) which mature on
October 30, 2036. The sole assets of the Trust consist of the Trust Notes. The terms of the Trust
Notes are substantially the same as preferred securities issued by the Trust. The Trust Notes and
the preferred securities have a fixed interest rate of 8.68% per annum during the first 10 years,
after which the interest rate will float and reset quarterly at the three-month LIBOR rate plus
3.25% per annum. The Trust Notes are redeemable by the Trust, at the Companys option, after five
years at par. To the extent the Company redeems the Trust Notes, the Trust is required to redeem a
corresponding amount of preferred securities.
Prior to the amendment described below, the Trust Notes agreement required that the Company
not fall below a fixed charge coverage ratio, defined generally as Consolidated Earnings Before
Interest, Taxes, Depreciation and Amortization (EBITDA) excluding Clifts EBITDA over
consolidated interest expense, excluding Clifts interest expense, of 1.4 to 1.0 for four
consecutive quarters. On November 2, 2009, the Company amended the Trust Notes agreement to
permanently eliminate this financial covenant. The Company paid a one-time fee of $2.0 million in
exchange for the permanent removal of the covenant.
The Company has identified that the Trust is a variable interest entity under ASC 810-10.
Based on managements analysis, the Company is not the primary beneficiary under the trust.
Accordingly, the Trust is not consolidated into the Companys financial statements. The Company
accounts for the investment in the common stock of the Trust under the equity method of accounting.
(d) Revolving Credit Facility
On October 6, 2006, the Company and certain of its subsidiaries entered into a revolving
credit facility with Wachovia Bank, National Association, as Administrative Agent, and the other
lenders party thereto, which was amended on August 5, 2009, and which is referred to as the Amended
Revolving Credit Facility.
21
Table of Contents
The Amended Revolving Credit Facility provides for a maximum aggregate amount of the
commitments of $125.0 million, divided into two tranches: (i) a revolving credit facility in an
amount equal to $90.0 million (the New York Tranche), which is secured by a mortgage on Morgans
and Royalton (the New York Properties) and a mortgage on Delano South Beach (the Florida
Property); and (ii) a revolving credit facility in an amount equal to $35.0 million (the Florida
Tranche), which is secured by the mortgage on the Florida Property (but not the New York
Properties). The Amended Revolving Credit Facility also provides for a letter of credit facility in
the amount of $25.0 million, which is secured by the mortgages on the New York Properties and the
Florida Property. At any given time, the amount available for borrowings under the Amended
Revolving Credit Facility is contingent upon the borrowing base valuation, which is calculated as
the lesser of (i) 60% of appraised value and (ii) the implied debt service coverage value of
certain collateral properties securing the Amended Revolving Credit Facility; provided that the
portion of the borrowing base attributable to the New York Properties will never be less than 35%
of the appraised value of the New York Properties. Following appraisals in March 2010, total
availability under the Amended Revolving Credit Facility as of March 31, 2011 was $116.4 million,
of which the outstanding principal balance was $37.7 million, and approximately $1.2 million of
letters of credit were posted. Of the $37.7 million outstanding, $33.7 million was allocated to
the Florida Tranche and $4.0 million was allocated to the New York Tranche.
The Amended Revolving Credit Facility bears interest at a fluctuating rate measured by
reference to, at the Companys election, either LIBOR (subject to a LIBOR floor of 1%) or a base
rate, plus a borrowing margin. LIBOR loans have a borrowing margin of 3.75% per annum and base rate
loans have a borrowing margin of 2.75% per annum. The Amended Revolving Credit Facility also
provides for the payment of a quarterly unused facility fee equal to the average daily unused
amount for each quarter multiplied by 0.5%.
In addition, the Amended Revolving Credit Facility includes the following, among other,
provisions:
| requirement that the Company maintain a fixed charge coverage ratio
(defined generally as the ratio of consolidated EBITDA excluding Mondrian
Scottsdales EBITDA for the periods ending June 30, 2009 and September 30, 2009 and
Clifts EBITDA for all periods to consolidated interest expense excluding Mondrian
Scottsdales interest expense for the periods ending June 30, 2009 and September 30,
2009 and Clifts interest expense for all periods) for each four-quarter period of no
less than 0.90 to 1.00. As of March 31, 2011, the Companys fixed charge coverage
ratio under the Amended Revolving Credit Facility was 1.81x; |
||
| prohibition on capital expenditures with respect to any hotels owned by the
Company, the borrowers, as defined, or subsidiaries, other than maintenance capital
expenditures for any hotel not exceeding 4% of the annual gross revenues of such
hotel and certain other exceptions; |
||
| prohibition on repurchases of the Companys common equity interests by the
Company or Morgans Group; and |
||
| certain limits on any secured swap agreements entered into after the
effective date of the Amended Revolving Credit Facility. |
The commitments under the Amended Revolving Credit Facility terminate on October 5, 2011, at
which time all outstanding amounts under the Amended Revolving Credit Facility will be due.
The Amended Revolving Credit Facility provides for customary events of default, including:
failure to pay principal or interest when due; failure to comply with covenants; any representation
proving to be incorrect; defaults relating to acceleration of, or defaults on, certain other
indebtedness of at least $10.0 million in the aggregate; certain insolvency and bankruptcy events
affecting the Company, Morgans Group or certain subsidiaries of the Company that are party to the
Amended Revolving Credit Facility; judgments in excess of $5.0 million in the aggregate affecting
the Company, Morgans Group and certain subsidiaries of the Company that are party to the Amended
Revolving Credit Facility; the acquisition by any person of 40% or more of any outstanding class of
capital stock having ordinary voting power in the election of directors of the Company; and the
incurrence of certain ERISA liabilities in excess of $5.0 million in the aggregate.
22
Table of Contents
(e) October 2007 Convertible Notes Offering
On October 17, 2007, the Company issued $172.5 million aggregate principal amount of 2.375%
Senior Subordinated Convertible Notes (the Convertible Notes) in a private offering. Net proceeds
from the offering were approximately $166.8 million.
The Convertible Notes are senior subordinated unsecured obligations of the Company and are
guaranteed on a senior subordinated basis by the Companys operating company, Morgans Group. The
Convertible Notes are convertible into shares of the Companys common stock under certain
circumstances and upon the occurrence of specified events.
Interest on the Convertible Notes is payable semi-annually in arrears on April 15 and October
15 of each year, beginning on April 15, 2008, and the Convertible Notes mature on October 15, 2014,
unless previously repurchased by the Company or converted in accordance with their terms prior to
such date. The initial conversion rate for each $1,000 principal amount of Convertible Notes is
37.1903 shares of the Companys common stock, representing an initial conversion price of
approximately $26.89 per share of common stock. The initial conversion rate is subject to
adjustment under certain circumstances. The maximum conversion rate for each $1,000 principal
amount of Convertible Notes is 45.5580 shares of the Companys common stock representing a maximum
conversion price of approximately $21.95 per share of common stock.
On January 1, 2009, the Company adopted ASC 470-20, Debt with Conversion and Other Options
(ASC 470-20), which clarifies the accounting for convertible notes payable. ASC 470-20 requires
the proceeds from the issuance of convertible notes to be allocated between a debt component and an
equity component. The debt component is measured based on the fair value of similar debt without an
equity conversion feature, and the equity component is determined as the residual of the fair value
of the debt deducted from the original proceeds received. The resulting discount on the debt
component is amortized over the period the debt is expected to be outstanding as additional
interest expense. ASC 470-20 required retroactive application to all periods presented. The equity
component, recorded as additional paid-in capital, was determined to be $9.0 million, which
represents the difference between the proceeds from issuance of the Convertible Notes and the fair
value of the liability, net of deferred taxes of $6.4 million as of the date of issuance of the
Convertible Notes.
In connection with the issuance of the Convertible Notes, the Company entered into convertible
note hedge transactions with respect to the Companys common stock (the Call Options) with
Merrill Lynch Financial Markets, Inc. and Citibank, N.A. (collectively, the Hedge Providers). The
Call Options are exercisable solely in connection with any conversion of the Convertible Notes and
pursuant to which the Company will receive shares of the Companys common stock from the Hedge
Providers equal to the number of shares issuable to the holders of the Convertible Notes upon
conversion. The Company paid approximately $58.2 million for the Call Options.
In connection with the sale of the Convertible Notes, the Company also entered into separate
warrant transactions with Merrill Lynch Financial Markets, Inc. and Citibank, N.A., whereby the
Company issued warrants (the Warrants) to purchase 6,415,327 shares of common stock, subject to
customary anti-dilution adjustments, at an exercise price of approximately $40.00 per share of
common stock. The Company received approximately $34.1 million from the issuance of the Warrants.
The Company recorded the purchase of the Call Options, net of the related tax benefit of
approximately $20.3 million, as a reduction of additional paid-in capital and the proceeds from the
Warrants as an addition to additional paid-in capital in accordance with ASC 815-30, Derivatives
and Hedging, Cash Flow Hedges.
In February 2008, the Company filed a registration statement with the Securities and Exchange
Commission to cover the resale of shares of the Companys common stock that may be issued from time
to time upon the conversion of the Convertible Notes.
(f) Capital Lease Obligations
The Company has leased two condominium units at Hudson from unrelated third-parties, which are
reflected as capital leases. One of the leases requires the Company to make annual payments,
currently $582,180 (subject to increases due to increases in the Consumer Price Index) from
acquisition through November 2096. This lease also allows the Company to purchase the unit at fair
market value after November 2015.
23
Table of Contents
The second lease requires the Company to make annual payments, currently $328,128 (subject to
increases due to increases in the Consumer Price Index) through December 2098. The Company has
allocated both of the leases payments between the land and building based on their estimated fair
values. The portion of the payments allocated to building has been capitalized at the present value
of the future minimum lease payments. The portion of the payments allocable to land is treated as
operating lease payments. The imputed interest rate on both of these leases is 8%, which is based
on the Companys incremental borrowing rate at the time the lease agreement was executed. The
capital lease obligations related to the units amounted to approximately $6.1 million as of March
31, 2011 and December 31, 2010. Substantially all of the principal payments on the capital lease
obligations are due at the end of the lease agreements.
The Company has also entered into capital lease obligations related to equipment at certain of
the hotels.
(g) Notes secured by property held for non sale disposition
An indirect subsidiary of the Company had issued a $10.0 million interest only non-recourse
promissory note to the seller of the property across from the Delano South Beach which was due on January 24,
2011 and secured by the property. Additionally, a separate indirect subsidiary of the Company had issued a
$0.5 million interest only non-recourse promissory note to an affiliate of the seller which was
also due on January 24, 2011 and secured with a pledge of the equity interests in the Companys
subsidiary that owned the property. In January 2011, the Companys indirect subsidiary transferred
its interests in the property across the street from Delano in South Beach to SU Gale Properties,
LLC (the Gale Transaction). As a result of the Gale Transaction, the Company was released from
the $10.5 million of non-recourse mortgage and mezzanine indebtedness.
7. Omnibus Stock Incentive Plan
On February 9, 2006, the Board of Directors of the Company adopted the Morgans Hotel Group Co.
2006 Omnibus Stock Incentive Plan (the 2006 Stock Incentive Plan). An aggregate of 3,500,000
shares of common stock of the Company were reserved and authorized for issuance under the 2006
Stock Incentive Plan, subject to equitable adjustment upon the occurrence of certain corporate
events. On April 23, 2007, the Board of Directors of the Company adopted, and at the annual meeting
of stockholders on May 22, 2007, the stockholders approved, the Companys 2007 Omnibus Incentive
Plan (the 2007 Incentive Plan), which amended and restated the 2006 Stock Incentive Plan and
increased the number of shares reserved for issuance under the plan by up to 3,250,000 shares to a
total of 6,750,000 shares. On April 10, 2008, the Board of Directors of the Company adopted, and at
the annual meeting of stockholders on May 20, 2008, the stockholders approved, an Amended and
Restated 2007 Omnibus Incentive Plan (the Restated 2007 Incentive Plan) which, among other
things, increased the number of shares reserved for issuance under the plan by up to 1,860,000
shares to a total of 8,610,000 shares. On November 30, 2009, the Board of Directors of the Company
adopted, and at a special meeting of stockholders of the Company held on January 28, 2010, the
Companys stockholders approved, an amendment to the Restated 2007 Incentive Plan (the Amended
2007 Incentive Plan) to increase the number of shares reserved for issuance under the plan by
3,000,000 shares to 11,610,000 shares.
The Amended 2007 Incentive Plan provides for the issuance of stock-based incentive awards,
including incentive stock options, non-qualified stock options, stock appreciation rights, shares
of common stock of the Company, including restricted stock units (RSUs) and other equity-based
awards, including membership units in Morgans Group which are structured as profits interests
(LTIP Units), or any combination of the foregoing. The eligible participants in the Amended 2007
Incentive Plan included directors, officers and employees of the Company. Awards other than options
and stock appreciation rights reduce the shares available for grant by 1.7 shares for each share
subject to such an award.
In connection with the Companys senior management changes announced in March 2011, the
Compensation Committee of the Board of Directors of the Company issued an aggregate of 200,000 LTIP
units to the Companys newly appointed Chief Executive Officer and Executive Chairman under the
Amended 2007 Incentive Plan on March 20, 2011. The 125,000 LTIP units granted to the newly
appointed Chief Executive Officer vest one-third of the amount granted on each of the first three
anniversaries of the grant date so long as the recipient continues to be
an eligible participant. The 75,000 LTIP units granted to the newly appointed Executive
Chairman vest pro rata on a monthly basis over the 12 months beginning on the first monthly
anniversary of the date of grant, so long as the recipient continues to be an eligible participant.
The estimated fair value of each LTIP unit granted was $8.87 at the grant date.
24
Table of Contents
Also in connection with the Companys senior management changes announced in March 2011, the
Compensation Committee of the Board of Directors of the Company issued an aggregate of 900,000
stock options to the Companys newly appointed Chief Executive Officer and Executive Chairman under
the Amended 2007 Incentive Plan on March 20, 2011. The stock options vest one-third of the amount
granted on each of the first three anniversaries of the grant date so long as the recipients
continue to be eligible participants and expire 10 years after the grant date. The fair value for
each such option granted was estimated at the date of grant using the Black-Scholes option-pricing
model, an allowable valuation method under ASC 718-10 with the following assumptions: risk-free
interest rate of approximately 2.3%, expected option lives of 5.85 years, 50% volatility, no
dividend rate and an approximately 10% forfeiture rate. The fair value of each such option was
$4.36 at the date of grant.
Additionally, on March 23, 2011, the Compensation Committee of the Board of Directors of the
Company issued an aggregate of 200,000 stock options to the Companys newly appointed Chief
Development Officer under the Amended 2007 Incentive Plan. The stock options vest one-third of the
amount granted on each of the first three anniversaries of the grant date so long as the recipient
continues to be an eligible participant and expire 10 years after the grant date. The fair value
for each such option granted was estimated at the date of grant using the Black-Scholes
option-pricing model, an allowable valuation method under ASC 718-10 with the following
assumptions: risk-free interest rate of approximately 2.4%, expected option lives of 5.85 years,
50% volatility, no dividend rate and an approximately 10% forfeiture rate. The fair value of each
such option was $4.75 at the date of grant.
On April 4, 2011, the Compensation Committee of the Board of Directors of the Company issued
an aggregate of 200,000 stock options to the Companys newly appointed Chief Operations Officer
under the Amended 2007 Incentive Plan. The stock options vest one-third of the amount granted on
each of the first three anniversaries of the grant date so long as the recipient continues to be an
eligible participant and expire 10 years after the grant date. The fair value for each such option
granted was estimated at the date of grant using the Black-Scholes option-pricing model, an
allowable valuation method under ASC 718-10 with the following assumptions: risk-free interest rate
of approximately 2.5%, expected option lives of 5.85 years, 50% volatility, no dividend rate and an
approximately 10% forfeiture rate. The fair value of each such option was $4.79 at the date of
grant.
In March 2011, the Company also announced changes to its Board of Directors, including the
addition of two new directors. As a result, on April 7, 2011 the Company issued an aggregate of
11,000 RSUs to the two newly appointed non-employee directors under the Amended 2007 Incentive
Plan, which vested immediately upon grant. The fair value of each such RSU was $9.09 at the grant
date.
Pursuant to the separation agreement with the Companys former president (the Former
President), the Former President retained his vested and unvested RSUs, LTIP units and stock
options. To the extent that these awards were not yet vested, they were fully vested on March 27,
2011. Pursuant to the expiration of the employment agreement with the Companys former CEO (the
Former CEO), the Former CEO retained his vested and unvested RSUs, LTIP units and stock options.
To the extent that these awards were not yet vested, they were fully vested on March 20, 2011. The
accelerated expense for these vested awards was recognized during the three months ended March 31,
2011.
A summary of stock-based incentive awards as of March 31, 2011 is as follows (in units, or
shares, as applicable):
Restricted Stock | ||||||||||||
Units | LTIP Units | Stock Options | ||||||||||
Outstanding as of January 1, 2011 |
805,334 | 2,271,437 | 1,506,337 | |||||||||
Granted during 2011 |
65,250 | 200,000 | 1,100,000 | |||||||||
Distributed/exercised during 2011 |
(37,182 | ) | | | ||||||||
Forfeited during 2011 |
(28,420 | ) | | | ||||||||
Outstanding as of March 31, 2011 |
804,982 | 2,471,437 | 1,514,872 | |||||||||
Vested as of March 31, 2011 |
166,806 | 2,184,993 | 1,267,108 | |||||||||
25
Table of Contents
As of March 31, 2011 and December 31, 2010, there were approximately $9.6 million and $6.8
million, respectively, of total unrecognized compensation costs related to unvested share awards.
As of March 31, 2011, the weighted-average period over which the unrecognized compensation expense
will be recorded is approximately 1.5 years.
Total stock compensation expense, which is included in corporate expenses on the accompanying
consolidated statements of operations, was $4.0 million and $3.8 million for the three months ended
March 31, 2011 and 2010, respectively.
8. Preferred Securities and Warrants
On October 15, 2009, the Company entered into a Securities Purchase Agreement (the Securities
Purchase Agreement) with the Investors. Under the Securities Purchase Agreement, the Company
issued and sold to the Investors (i) 75,000 shares of the Companys Series A Preferred Securities,
$1,000 liquidation preference per share (the Series A Preferred Securities), and (ii) warrants to
purchase 12,500,000 shares of the Companys common stock at an exercise price of $6.00 per share.
The Series A Preferred Securities have an 8% dividend rate for the first five years, a 10%
dividend rate for years six and seven, and a 20% dividend rate thereafter. The Company has the
option to accrue any and all dividend payments, and as of March 31, 2011, the Company had
undeclared and unpaid dividends of $8.8 million. The Company has the option to redeem any or all of
the Series A Preferred Securities at par at any time. The Series A Preferred Securities have
limited voting rights and only vote on the authorization to issue senior preferred, amendments to
their certificate of designations, amendments to the Companys charter that adversely affect the
Series A Preferred Securities and certain change in control transactions.
As discussed in note 2, the warrants to purchase 12,500,000 shares of the Companys common
stock at an exercise price of $6.00 per share have a 7-1/2 year term and are exercisable utilizing
a cashless exercise method only, resulting in a net share issuance. Until October 15, 2010, the
Investors had certain rights to purchase their pro rata share of any equity or debt securities
offered or sold by the Company. In addition, the $6.00 exercise price of the warrants was subject
to certain reductions if, any time prior to October 15, 2010, the Company issued shares of common
stock below $6.00 per share. Per ASC 815-40-15, as the strike price was adjustable until the first
anniversary of issuance, the warrants were not considered indexed to the Companys stock until that
date. Therefore, through October 15, 2010, the Company accounted for the warrants as liabilities at
fair value. On October 15, 2010, the Investors rights under this warrant exercise price adjustment
expired, at which time the warrants met the scope exception in ASC 815-10-15 and are accounted for
as equity instruments indexed to the Companys stock. At October 15, 2010, the warrants were
reclassified to equity and will no longer be adjusted periodically to fair value.
The exercise price and number of shares subject to the warrants are both subject to
anti-dilution adjustments.
Under the Securities Purchase Agreement, the Investors have consent rights over certain
transactions for so long as they collectively own or have the right to purchase through exercise of
the warrants 6,250,000 shares of the Companys common stock, including (subject to certain
exceptions and limitations):
| the sale of substantially all of the Companys assets to a third party; |
||
| the acquisition by the Company of a third party where the equity investment by the
Company is $100 million or greater; |
||
| the acquisition of the Company by a third party; or |
||
| any change in the size of the Companys Board of Directors to a number below 7 or
above 9. |
Subject to certain exceptions, the Investors may not transfer any Series A Preferred
Securities, warrants or common stock until October 15, 2012. The Investors are also subject to
certain standstill arrangements as long as they beneficially own over 15% of the Companys common
stock.
26
Table of Contents
In connection with the investment by the Investors, the Company paid to the Investors a
commitment fee of $2.4 million and reimbursed the Investors for $600,000 of expenses.
The Company calculated the fair value of the Series A Preferred Securities at its net present
value by discounting dividend payments expected to be paid on the shares over a 7-year period using
a 17.3% rate. The Company determined that the market discount rate of 17.3% was reasonable based on
the Companys best estimate of what similar securities would most likely yield when issued by
entities comparable to the Company.
The initial carrying value of the Series A Preferred Securities was recorded at its net
present value less costs to issue on the date of issuance. The carrying value will be periodically
adjusted for accretion of the discount. As of March 31, 2011, the value of the Series A Preferred
Securities was $51.8 million, which includes accretion of $3.7 million.
The Company calculated the estimated fair value of the warrants using the Black-Scholes
valuation model, as discussed in note 2.
The Company and Yucaipa American Alliance Fund II, LLC, an affiliate of the Investors (the
Fund Manager), also entered into a Real Estate Fund Formation Agreement (the Fund Formation
Agreement) on October 15, 2009 pursuant to which the Company and the Fund Manager agreed to use
their good faith efforts to endeavor to raise a private investment fund (the Fund). The purpose
of the Fund will be to invest in hotel real estate projects located in North America. The Company
will be offered the opportunity to manage the hotels owned by the Fund under long-term management
agreements. In connection with the Fund Formation Agreement, the Company issued to the Fund Manager
5,000,000 contingent warrants to purchase the Companys common stock at an exercise price of $6.00
per share with a 7-1/2 year term. These contingent warrants will only become exercisable if the
Fund obtains capital commitments in certain amounts over certain time periods and also meets
certain further capital commitment and investment thresholds. The exercise price and number of
shares subject to these contingent warrants are both subject to anti-dilution adjustments.
The Fund Formation Agreement terminated by its terms on January 30, 2011 due to the failure to
close a fund with $100 million of aggregate capital commitments by that date. The 5,000,000
contingent warrants issued to the Fund Manager will be forfeited in their entirety on October 15,
2011 if a fund with $250 million has not closed by that date. As of March 31, 2011, no contingent
warrants have been issued or exercised and no value has been assigned to the warrants, as the
Company cannot determine the probability that the Fund will be raised. In the event the Fund is
raised and contingent warrants are issued, the Company will determine the value of the contingent
warrants in accordance with ASC 505-50, Equity-Based Payments to Non-Employees. The Company cannot
provide any assurances that the Fund will be raised.
For so long as the Investors collectively own or have the right to purchase through exercise
of the warrants 875,000 shares of the Companys common stock, the Company has agreed to use its
reasonable best efforts to cause its Board of Directors to nominate and recommend to the Companys
stockholders the election of a person nominated by the Investors as a director of the Company and
to use its reasonable best efforts to ensure that the Investors nominee is elected to the
Companys Board of Directors at each such meeting. If that nominee is not elected by the Companys
stockholders, the Investors have certain observer rights and, in certain circumstances, the
dividend rate on the Series A Preferred Securities increases by 4% during any time that an
Investors nominee is not a member of the Companys Board of Directors. Effective October 15, 2009,
the Investors nominated and the Companys Board of Directors elected Michael Gross as a member of
the Companys Board of Directors. Effective March 20, 2011 when Mr. Gross was appointed Chief
Executive Officer of the Company, the Investors nominated, and the Companys Board of Directors
elected, Ron Burkle as a member of the Companys Board of Directors.
On April 21, 2010, the Company entered into a Waiver Agreement (the Waiver Agreement) with
the Investors. The Waiver Agreement allowed the purchase by the Investors of up to $88 million in
aggregate principal amount of the Convertible Notes within six months of April 21, 2010 and subject
to the limitations and conditions set forth therein. From April 21, 2010 to July 21, 2010, the
Investors purchased $88 million of the Convertible Notes. Pursuant to the Waiver Agreement, in the
event an Investor proposes to sell the Convertible Notes at a time when the market price of a share
of the Companys common stock exceeds the then effective conversion price of the Convertible Notes,
the Company is granted certain rights of first refusal for the purchase of the same from the
Investors. In the event an Investor proposes to sell the Convertible Notes at a time when the
market price of a share of the Companys common stock is equal to or less than the then effective
conversion price of the Convertible Notes, the Company is granted certain rights of first offer to
purchase the same from the Investors.
27
Table of Contents
9. Discontinued Operations
In May 2006, the Company obtained a $40.0 million non-recourse mortgage and mezzanine
financing on Mondrian Scottsdale, which accrued interest at LIBOR plus 2.3%, and for which Morgans
Group had provided a standard non-recourse carve-out guaranty. In June 2009, the non-recourse
mortgage and mezzanine loans matured and the Company discontinued subsidizing the debt service. The
lender foreclosed on the property and terminated the Companys management agreement related to the
property with an effective termination date of March 16, 2010.
The Company has reclassified the individual assets and liabilities to the appropriate
discontinued operations line items on its December 31, 2010 balance sheet. Additionally, the
Company reclassified the hotels results of operations and cash flows to discontinued operations on
the Companys statements of operations and cash flows.
Additionally, in January 2011, an indirect subsidiary of the Company transferred its interests
in the property across the street from Delano South Beach to SU Gale Properties, LLC. As a result
of this transaction, the Company was released from $10.5 million of non-recourse mortgage and
mezzanine indebtedness previously consolidated on the Companys balance sheet. The property across
the street from Delano South Beach was a development property.
The following sets forth the discontinued operations of Mondrian Scottsdale and the property
across the street from Delano South Beach for the three months ended March 31, 2011 and 2010 (in
thousands):
Three Months | Three Months | |||||||
Ended | Ended | |||||||
March 31, | March 31, | |||||||
2011 | 2010 | |||||||
Operating revenues |
$ | | $ | 1,594 | ||||
Operating expenses |
(27 | ) | (1,770 | ) | ||||
Interest expense |
| (433 | ) | |||||
Depreciation and amortization expense |
| (268 | ) | |||||
Income tax (expense) benefit |
(326 | ) | 126 | |||||
Gain on disposal |
843 | 17,953 | ||||||
Income from discontinued operations |
$ | 490 | $ | 17,202 | ||||
10. Related Party Transactions
The Company earned management fees, chain services fees and fees for certain technical
services and has receivables from hotels it owns through investments in unconsolidated joint
ventures. These fees totaled approximately $3.3 million and $4.4 million for the three months ended
March 31, 2011 and 2010, respectively.
As of March 31, 2011 and December 31, 2010, the Company had receivables from these affiliates
of approximately $3.8 million and $3.8 million, respectively, which are included in receivables
from related parties on the accompanying consolidated balance sheets.
11. Litigation
Potential Litigation
The Company understands that Mr. Philippe Starck has attempted to initiate arbitration
proceedings in the London Court of International Arbitration regarding an exclusive service
agreement that he entered into with Residual Hotel Interest LLC (formerly known as Morgans Hotel
Group LLC) in February 1998 regarding the design of certain hotels now owned by the Company and its
subsidiaries. The Company is not a party to these proceedings at this time. See note 5.
28
Table of Contents
Petra Litigation Regarding Scottsdale Mezzanine Loan
On April 7, 2010, Petra CRE CDO 2007-1, LTD, a Cayman Islands Exempt Company (Petra), filed
a complaint against Morgans Group LLC in the Supreme Court of the State of New York County of New
York in connection with an approximately $14.0 million non-recourse mezzanine loan made on December
1, 2006 by Greenwich Capital Financial Products Company LLC (the Original Lender) to Mondrian
Scottsdale Mezz Holding Company LLC, a wholly-owned subsidiary of Morgans Group LLC. The mezzanine
loan relates to the Scottsdale, Arizona property previously owned by the Company. In connection
with the mezzanine loan, Morgans Group LLC entered into a so-called bad boy guaranty providing
for recourse liability under the mezzanine loan in certain limited circumstances. Pursuant to an
assignment by the Original Lender, Petra is the holder of an interest in the mezzanine loan. The
complaint alleges that the foreclosure of the Scottsdale property by a senior lender on March 16,
2010 constitutes an impermissible transfer of the property that triggered recourse liability of
Morgans Group LLC pursuant to the guaranty. Petra demands damages of approximately $15.9 million
plus costs and expenses.
The Company believes that a foreclosure based on a payment default does not create one of the
limited circumstances under which Morgans Group LLC would have recourse liability under the
guaranty. On May 27, 2010, the Company answered Petras complaint, denying any obligation to make
payment under the guaranty. It also requested relevant documents from Petra. On July 9, 2010, Petra
moved for summary judgment on the ground that the loan documents unambiguously establish Morgans
Groups obligation under the guaranty. Petra also moved to stay discovery pending resolution of its
motion. The Company opposed Petras motion for summary judgment, and similarly moved for summary
judgment in favor of the Company on grounds that the guaranty was not triggered by a foreclosure
resulting from a payment default. On December 20, 2010, the court granted the Companys motion for
summary judgment dismissing the complaint, and denied the plaintiffs motion for summary judgment.
The action has accordingly been dismissed. Petra has appealed the decision, and the appeal was
heard on April 28, 2011. The Company will continue to defend this lawsuit vigorously. The Company
believes the probability of losses associated with this litigation is remote and cannot reasonably
estimate a range of such losses, if any, at this time.
Other Litigation
The Company is involved in various lawsuits and administrative actions in the normal course of
business. In managements opinion, disposition of these lawsuits is not expected to have a material
adverse effect on our financial position, results of operations or liquidity.
Environmental
As a holder of real estate, the Company is subject to various environmental laws of federal
and local governments. Compliance by the Company with existing laws has not had an adverse effect
on the Company and management does not believe that it will have a material adverse impact in the
future. However, the Company cannot predict the impact of new or changed laws or regulations on its
current investment or on investments that may be made in the future.
12. Assets Held for Sale
On April 2, 2011, Royalton LLC, a subsidiary of the Company, entered into a purchase and sale
agreement to sell Royalton for $88.2 million to Royalton 44 Hotel, L.L.C., an affiliate of FelCor
Lodging Trust, Incorporated, and Morgans Holdings LLC, a subsidiary of the Company, entered into a
purchase and sale agreement to sell Morgans for $51.8 million to Madison 237 Hotel, L.L.C., an
affiliate of FelCor Lodging Trust, Incorporated. The parties have agreed that the Company will
continue to operate the hotels under a 15-year management agreement with one 10-year extension
option. The transaction is expected to close in the second quarter of 2011 and is subject to
satisfaction of customary closing conditions.
On April 22, 2011, Mondrian Holdings entered into a purchase and sale agreement to sell
Mondrian Los Angeles for $137.0 million to Pebblebrook. The parties have agreed that the Company
will continue to operate the hotel under a 20-year management agreement with one 10-year extension
option. The transaction closed on May 3, 2011 and the Company applied a portion of the proceeds
from the sale, along with approximately $9.2 million of cash in escrow, to retire the $103.5
million Mondrian Holdings Amended Mortgage. Net proceeds, after the repayment of debt and closing
costs, are approximately $40 million.
The Company has reclassified the individual assets and liabilities of Royalton, Morgans and
Mondrian Los Angeles to the appropriate assets and liabilities of assets held for sale on its March
31, 2011 and December 31, 2010 balance sheets.
29
Table of Contents
ITEM 2. | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. |
The following discussion and analysis of our financial condition and results of operations
should be read in conjunction with our consolidated financial statements and related notes
appearing elsewhere in this Quarterly Report on Form 10-Q for the three months ended March 31,
2011. In addition to historical information, this discussion and analysis contains forward-looking
statements that involve risks, uncertainties and assumptions. Our actual results may differ
materially from those anticipated in these forward-looking statements as a result of certain
factors, including but not limited to, those set forth under Risk Factors and elsewhere in our
Annual Report on Form 10-K for the fiscal year ended December 31, 2010.
Overview
We are a fully integrated hospitality company that operates, owns, acquires, develops and
redevelops boutique hotels primarily in gateway cities and select resort markets in the United
States, Europe and other international locations. Over our 27-year history, we have gained
experience operating in a variety of market conditions.
The historical financial data presented herein is the historical financial data for:
| our wholly-owned hotels, or Owned Hotels, consisting, as of March 31, 2011, of
Morgans, Royalton and Hudson in New York, Delano South Beach in Miami Beach, Mondrian Los
Angeles in Los Angeles, and Clift in San Francisco; |
||
| our hotels in which we own partial interests, or Joint Venture Hotels, consisting, as
of March 31, 2011, of our London hotels (Sanderson and St Martins Lane), Mondrian South
Beach and Shore Club in Miami Beach, Ames in Boston, Mondrian SoHo in New York and the San
Juan Water and Beach Club in Isla Verde, Puerto Rico; |
||
| our investments in hotels under construction, such as Mondrian SoHo prior to its
opening in February 2011, and our investment in other proposed properties; |
||
| our investment in certain joint venture food and beverage operations at our Owned
Hotels and Joint Venture Hotels, discussed further below; |
||
| our management company subsidiary, Morgans Hotel Group Management LLC, or MHG
Management Company, and certain non-U.S. management company affiliates; and |
||
| the rights and obligations contributed to Morgans Group, our operating company, in
the formation and structuring transactions described in note 1 to the consolidated
financial statements, included elsewhere in this report. |
In April 2011, we entered into definitive agreements to sell Royalton, Morgans and Mondrian
Los Angeles. We will continue to operate these hotels under long-term management agreements. The
sale of Mondrian Los Angeles was completed on May 3, 2011 and the sale of Royalton and Morgans is
expected to close in the second quarter of 2011, subject to satisfaction of customary closing
conditions.
As of March 31, 2011, we consolidate the results of operations, including food and beverage
operations, for all of our Owned Hotels. Certain food and beverage operations at three of our Owned
Hotels, are operated under 50/50 joint ventures with restaurateur Jeffrey Chodorow. We consolidate
the food and beverage joint ventures as we believe that we are the primary beneficiary of these
entities. Our partners share of the results of operations of these food and beverage joint
ventures are recorded as noncontrolling interests in the accompanying consolidated financial
statements.
We own partial interests in the Joint Venture Hotels and certain food and beverage operations
at three of the Joint Venture Hotels, Sanderson, St Martins Lane and Mondrian South Beach. We
account for these investments using the equity method as we believe we do not exercise control over
significant asset decisions such as buying,
selling or financing nor are we the primary beneficiary of the entities. Under the equity
method, we increase our investment in unconsolidated joint ventures for our proportionate share of
net income and contributions and decrease our investment balance for our proportionate share of net
losses and distributions.
30
Table of Contents
As of March 31, 2011, we operated the following Joint Venture Hotels under management
agreements which expire as follows:
| Sanderson June 2018 (with one 10-year extension at our option); |
||
| St Martins Lane June 2018 (with one 10-year extension at our option); |
||
| Shore Club July 2022; |
||
| Mondrian South Beach August 2026; |
||
| Ames November 2024; |
||
| Mondrian SoHo February 2021 (with two 10-year extensions at our option, subject to
certain conditions); and |
||
| San Juan Water and Beach Club October 2019 (subject to certain conditions). |
In addition to the Joint Venture Hotels, we also manage Hotel Las Palapas in Playa del Carmen,
Mexico under a management agreement which expires in December 2014, with one five-year extension,
which is automatic so long as we are not in default under the management agreement. We do not have
an ownership interest in Hotel Las Palapas.
In February 2011, we opened Mondrian SoHo which we manage under a 10-year management agreement
with two 10-year extension options. We have signed management agreements to manage various other
hotels that are in development, including a Mondrian Palm Springs project, a Delano project in Cabo
San Lucas, Mexico, a Delano project on the Aegean Sea in Turkey, a hotel project in the Highline
area in New York City and a Mondrian project in Doha, Qatar, but we are unsure of the future of the
development of some of these hotels as financing has not yet been obtained.
These management agreements may be subject to early termination in specified circumstances.
Several of our hotels are also subject to substantial mortgage and mezzanine debt, and in some
instances our management fee is subordinated to the debt, and our management agreements may be
terminated by the lenders on foreclosure or certain other related events.
In March 2010, the lender for the Shore Club mortgage initiated foreclosure proceedings
against the property in U.S. federal district court. In October 2010, the federal court dismissed
the case for lack of jurisdiction. In November 2010, the lender initiated foreclosure proceedings
in state court. We continue to operate the hotel pursuant to the management agreement during these
proceedings. However, there can be no assurances we will continue to operate the hotel once
foreclosure proceedings are complete.
Until March 1, 2011, we managed and had a partial ownership interest in the Hard Rock Hotel &
Casino in Las Vegas (the Hard Rock) pursuant to a management agreement that was terminated in
connection with the Hard Rock settlement, discussed below in Recent Developments.
Factors Affecting Our Results of Operations
Revenues. Changes in our revenues are most easily explained by three performance indicators
that are commonly used in the hospitality industry:
| Occupancy; |
||
| Average daily room rate (ADR); and |
||
| Revenue per available rooms (RevPAR), which is the product of ADR and average daily
occupancy, but does not include food and beverage revenue, other hotel operating revenue
such as telephone, parking and other guest services, or management fee revenue. |
31
Table of Contents
Substantially all of our revenue is derived from the operation of our hotels. Specifically,
our revenue consists of:
| Rooms revenue. Occupancy and ADR are the major drivers of rooms revenue. |
||
| Food and beverage revenue. Most of our food and beverage revenue is earned by our
50/50 restaurant joint ventures and is driven by occupancy of our hotels and the
popularity of our bars and restaurants with our local customers. |
||
| Other hotel revenue. Other hotel revenue, which consists of ancillary revenue such as
telephone, parking, spa, entertainment and other guest services, is principally driven by
hotel occupancy. |
||
| Management fee-related parties revenue and other income. We earn fees under our
management agreements. These fees may include management fees as well as reimbursement for
allocated chain services. |
Fluctuations in revenues, which tend to correlate with changes in gross domestic product, are
driven largely by general economic and local market conditions but can also be impacted by major
events, such as terrorist attacks or natural disasters, which in turn affect levels of business and
leisure travel.
The seasonal nature of the hospitality business can also impact revenues. For example, our
Miami hotels are generally strongest in the first quarter, whereas our New York hotels are
generally strongest in the fourth quarter. However, given the global economic downturn, the impact
of seasonality in 2009 and 2010 was not as significant as in prior periods and may remain less
pronounced throughout 2011 depending on the timing and strength of the economic recovery.
In addition to economic conditions, supply is another important factor that can affect
revenues. Room rates and occupancy tend to fall when supply increases, unless the supply growth is
offset by an equal or greater increase in demand. One reason why we focus on boutique hotels in key
gateway cities is because these markets have significant barriers to entry for new competitive
supply, including scarcity of available land for new development and extensive regulatory
requirements resulting in a longer development lead time and additional expense for new
competitors.
Finally, competition within the hospitality industry can affect revenues. Competitive factors
in the hospitality industry include name recognition, quality of service, convenience of location,
quality of the property, pricing, and range and quality of food services and amenities offered. In
addition, all of our hotels, restaurants and bars are located in areas where there are numerous
competitors, many of whom have substantially greater resources than us. New or existing competitors
could offer significantly lower rates or more convenient locations, services or amenities or
significantly expand, improve or introduce new service offerings in markets in which our hotels
compete, thereby posing a greater competitive threat than at present. If we are unable to compete
effectively, we would lose market share, which could adversely affect our revenues.
Operating Costs and Expenses. Our operating costs and expenses consist of the costs to provide
hotel services, costs to operate our management company, and costs associated with the ownership of
our assets, including:
| Rooms expense. Rooms expense includes the payroll and benefits for the front office,
housekeeping, concierge and reservations departments and related expenses, such as
laundry, rooms supplies, travel agent commissions and reservation expense. Like rooms
revenue, occupancy is a major driver of rooms expense, which has a significant correlation
with rooms revenue. |
||
| Food and beverage expense. Similar to food and beverage revenue, occupancy of our
hotels and the popularity of our restaurants and bars are the major drivers of food and
beverage expense, which has a significant correlation with food and beverage revenue. |
32
Table of Contents
| Other departmental expense. Occupancy is the major driver of other departmental
expense, which includes telephone and other expenses related to the generation of other
hotel revenue. |
||
| Hotel selling, general and administrative expense. Hotel selling, general and
administrative expense consist of administrative and general expenses, such as payroll and
related costs, travel expenses and office rent, advertising and promotion expenses,
comprising the payroll of the hotel sales teams, the global sales team and advertising,
marketing and promotion expenses for our hotel properties, utility expense and repairs and
maintenance expenses, comprising the ongoing costs to repair and maintain our hotel
properties. |
||
| Property taxes, insurance and other. Property taxes, insurance and other consist
primarily of insurance costs and property taxes. |
||
| Corporate expenses, including stock compensation. Corporate expenses consist of the
cost of our corporate office, net of any cost recoveries, which consists primarily of
payroll and related costs, stock-based compensation expenses, office rent and legal and
professional fees and costs associated with being a public company. |
||
| Depreciation and amortization expense. Hotel properties are depreciated using the
straight-line method over estimated useful lives of 39.5 years for buildings and five
years for furniture, fixtures and equipment. |
||
| Restructuring, development and disposal costs include costs incurred related to
losses on asset disposals as part of major renovation projects, the write-off of abandoned
development projects resulting primarily from events generally outside managements
control such as the recent tightness of the credit markets, our restructuring initiatives
and severance costs related to our restructuring initiatives. These items do not relate
to the ongoing operating performance of our assets. |
Other Items
| Interest expense, net. Interest expense, net includes interest on our debt and
amortization of financing costs and is presented net of interest income and interest
capitalized. |
||
| Equity in (income) loss of unconsolidated joint ventures. Equity in (income) loss of
unconsolidated joint ventures constitutes our share of the net profits and losses of our
Joint Venture Hotels and our investments in hotels under development. Further, we and our
joint venture partners review our Joint Venture Hotels for other-than-temporary declines
in market value. In this analysis of fair value, we use discounted cash flow analysis to
estimate the fair value of our investment taking into account expected cash flow from
operations, holding period and net proceeds from the dispositions of the property. Any
decline that is not expected to be recovered is considered other-than-temporary and an
impairment charge is recorded as a reduction in the carrying value of the investment. |
||
| Other non-operating (income) expenses include costs associated with executive
terminations not related to restructuring initiatives, costs of financings, litigation and
settlement costs and other items that relate to the financing and investing activities
associated with our assets and not to the ongoing operating performance of our assets,
both consolidated and unconsolidated, as well as the change in fair market value of our
warrants issued in connection with the Yucaipa transaction. |
||
| Income tax expense (benefit). All of our foreign subsidiaries are subject to local
jurisdiction corporate income taxes. Income tax expense is reported at the applicable rate
for the periods presented. We are subject to Federal and state income taxes. Income taxes
for the quarters ended March 31, 2011 and 2010 were computed using our calculated
effective tax rate. We also recorded net deferred taxes related to cumulative differences
in the basis recorded for certain assets and liabilities. We established a reserve on the
deferred tax assets based on the ability to utilize net operating losses going forward. |
||
| Noncontrolling interest. Noncontrolling interest constitutes our third-party food and
beverage joint venture partners interest in the profits and losses of the restaurant
ventures at certain of our hotels as well as the
percentage of membership units in Morgans Group, our operating company, owned by Residual
Hotel Interest LLC, our former parent, as discussed in note 1 of our consolidated financial
statements. |
33
Table of Contents
| Income (loss) from discontinued operations, net of tax. In March 2010, the mortgage
lender foreclosed on Mondrian Scottsdale and we were terminated as the propertys manager.
As such, we have recorded the income or loss earned from Mondrian Scottsdale in the income
(loss) from discontinued operations, net of tax, on the accompanying consolidated
financial statements. In January 2011, we recognized income from the transfer of the
property across the street from Delano South Beach. |
||
| Preferred stock dividends and accretion. Dividends attributable to our outstanding
preferred stock and the accretion of the fair value discount on the issuance of the
preferred stock are reflected as adjustments to our net loss to arrive at net loss
attributable to common stockholders, as discussed in note 8 of our consolidated financial
statements. |
Most categories of variable operating expenses, such as operating supplies, and certain labor,
such as housekeeping, fluctuate with changes in occupancy. Increases in RevPAR attributable to
increases in occupancy are accompanied by increases in most categories of variable operating costs
and expenses. Increases in RevPAR attributable to improvements in ADR typically only result in
increases in limited categories of operating costs and expenses, primarily credit card and travel
agent commissions. Thus, improvements in ADR have a more significant impact on improving our
operating margins than occupancy.
Notwithstanding our efforts to reduce variable costs, there are limits to how much we can
accomplish because we have significant costs that are relatively fixed costs, such as depreciation
and amortization, labor costs and employee benefits, insurance, real estate taxes, interest and
other expenses associated with owning hotels that do not necessarily decrease when circumstances
such as market factors cause a reduction in our hotel revenues.
Recent Trends and Developments
Recent Trends. Starting in the fourth quarter of 2008 and continuing throughout 2009, the
weakened U.S. and global economies resulted in considerable negative pressure on both consumer and
business spending. As a result, lodging demand and revenues, which are primarily driven by growth
in GDP, business investment and employment growth weakened substantially during this period as
compared to the lodging demand and revenues we experienced prior to the fourth quarter of 2008.
After this extremely difficult recessionary period, the outlook for the U.S. and global economies
improved in 2010 and that improvement is expected to continue into 2011. We are optimistic as we
continue into 2011. However, spending by businesses and consumers remains restrained, and there
are still several trends which make our lodging performance difficult to forecast, including
shorter booking lead times at our hotels.
We experienced positive trends in 2010 as we saw improvement in demand in key gateway markets,
particularly in New York and London. These markets experienced increasing occupancy in all
quarters, accompanied by increases in average daily rate in the second, third and fourth quarters
of 2010.
During the first quarter of 2011, we continued to experience an increase in demand in most of
our markets, although we witnessed some softness, particularly in New York and London, where RevPAR
decreased slightly compared to the prior year. We believe this softness will prove to be temporary in
nature and primarily due to the impact of severe winter storms combined with recent new supply
additions during a seasonally slow period. Our overall RevPAR performance showed greater increases
beginning in March 2011 and this trend continued through April. Overall, however, our operating
results are still below pre-recessionary levels.
As demand continues to strengthen in 2011, we are focusing on revenue enhancement by actively
managing rates and availability. With increased demand, the ability to increase pricing will be a
critical component in driving profitability. Through these uncertain times, our strategy and focus
continues to be to preserve profit margins by maximizing revenue, increasing our market share and
managing costs. Our strategy includes re-energizing our food and beverage offerings by taking
action to improve key facilities with a focus on driving higher beverage to food ratios and
re-igniting the buzz around our nightlife and lobby scenes.
34
Table of Contents
We are also actively managing costs at each of our properties and our corporate office.
Through our multi-phased contingency plan, we reduced hotel operating expenses and corporate
expenses during 2008 and 2009. We continue to focus on containing operating costs without affecting
the guest experience. We believe that these cost reduction plans have resulted and will continue to
result in significant savings, although market conditions may require increases in certain areas.
The pace of new lodging supply has increased over the past two years as many projects
initiated before the economic downturn came to fruition. For example, we witnessed new competitive
luxury and boutique properties opening in 2008, 2009 and 2010 in some of our markets, particularly
in Los Angeles, Miami Beach and New York, which have impacted our performance in these markets and
may continue to do so. However, we believe the timing of new development projects may be affected
by the severe recession, ongoing uncertain economic conditions and reduced availability of
financing compared to pre-recession periods. These factors may dampen the pace of new supply
development, including our own, in the next few years.
In 2011, we believe that if various economic forecasts projecting continued modest expansion
are accurate, this may lead to a gradual and modest increase in lodging demand for both leisure and
business travel, although we expect there to be continued pressure on rates, as leisure and
business travelers alike continue to focus on cost containment. As such, there can be no assurances
that any increases in hotel revenues or earnings at our properties will occur, or be sustained, or
that any losses will not increase for these or any other reasons.
We believe that the global credit market conditions will also gradually improve during 2011,
although we believe there will continue to be less credit available and on less favorable terms
than were obtainable in prior years. Given the current state of the credit markets, some of our
development projects may not be able to obtain adequate project financing in a timely manner or at
all. If adequate project financing is not obtained, the joint ventures or developers, as
applicable, may seek additional equity investors to raise capital, limit the scope of the project,
defer the project or cancel the project altogether.
Recent Developments.
Settlement of Debt on Property Across from Delano in South Beach. In January 2011, our
indirect subsidiary transferred its interests in the property across the street from Delano in
South Beach to SU Gale Properties, LLC. As a result of this transaction, we were released from
$10.5 million of non-recourse mortgage and mezzanine indebtedness previously consolidated on our
balance sheet. The property across the street from Delano in South Beach was a development property
with no operations and generated no earnings before interest tax, depreciation and amortization
during 2010 or the first three months of 2011.
New Management Contracts. In February 2011, we announced a new hotel management agreement for
a 114 key Delano on the beach at the tip of the Baja Peninsula in Cabo San Lucas, Mexico,
overlooking the Sea of Cortez. The hotel is currently under construction and is expected to open
early in 2013. We also announced a management agreement for a 200 key Delano on the Aegean Sea in
Turkey, an exclusive, high-end resort destination easily accessible from Istanbul and other key
European locations, which is expected to open in 2013. Further, we announced a new management
agreement for a 175 key hotel in New York City in the Highline area. The hotel will be branded with
one of our existing brands and is expected to open in 2014. Finally, also in February 2011, we
announced a new hotel management agreement for a Mondrian hotel in Doha, Qatar that is currently
under construction and is expected to open in early 2013. We will operate the hotel pursuant to a
30-year management contract with extension options.
35
Table of Contents
Hard Rock Settlement Agreement. On March 1, 2011, Hard Rock Hotel Holdings, LLC, a joint
venture through which we held a minority interest in the Hard Rock Hotel & Casino in Las Vegas,
Vegas HR Private Limited (the Mortgage Lender), Brookfield Financial, LLC Series B (the First
Mezzanine Lender), NRFC HRH Holdings, LLC (the Second Mezzanine Lender), Morgans Group, the
Company and certain affiliates of DLJ Merchant Banking Partners (DLJMB), as well as Hard Rock
Mezz Holdings LLC (the Third Mezzanine Lender) and other interested parties, entered into a
comprehensive settlement to resolve the disputes among them and all matters relating to the Hard
Rock and related loans and guaranties. The Hard Rock settlement agreement provided, among other
things, for the following:
| release of the non-recourse carve-out guaranties provided by us with
respect to the loans made by the Mortgage Lender, the First Mezzanine Lender, the
Second Mezzanine Lender and the Third Mezzanine Lender to the direct and indirect
owners of the Hard Rock; |
||
| termination of the management agreement pursuant to which we managed the
Hard Rock; |
||
| the transfer by Hard Rock Hotel Holdings, LLC and its subsidiary Hard Rock
Hotel Inc. to an affiliate of the First Mezzanine Lender of 100% of the indirect
equity interests in the Hard Rock; and |
||
| certain payments to or for the benefit of the Mortgage Lender, the First
Mezzanine Lender, the Second Mezzanine Lender, the Third Mezzanine Lender and us. Our
net payment was approximately $3.7 million. |
As a result of the settlement, we will no longer be subject to Nevada gaming regulations,
after completion of certain gaming de-registration procedures. See Off-Balance Sheet Arrangements
for additional information.
Board of Director and Management Changes. In March 2011, we announced the following Board of
Directors (Board) and senior management changes:
| David Hamamoto, Chairman of the Board
and one of our largest stockholders, was
appointed Executive Chairman, effective
March 20, 2011; |
||
| Michael Gross, a member of the Board who
previously served on the Corporate
Governance and Nominating Committee, was
appointed Chief Executive Officer,
effective March 20, 2011; |
||
| Daniel Flannery, who
previously served with
Marriott International,
Inc., was appointed
Chief Operating Officer,
effective April 4, 2011; |
||
| Yoav Gery, who
previously served with
Marriott International,
Inc., was appointed
Chief Development
Officer, effective March
23, 2011; |
||
| Ron Burkle, Managing Partner at The
Yucaipa Companies, LLC, joined the
Board, effective March 20, 2011, as the
nominee appointed by Yucaipa, which is
our largest stakeholder; and |
||
| Jason Taubman Kalisman, a founding member of our largest stockholder,
OTK Associates, joined the Board, effective March 22, 2011. |
Also in March 2011, we announced that Fred Kleisner stepped down as Chief Executive Officer
and resigned from the Board effective March 20, 2011 and that the Companys President, Marc Gordon,
was leaving the Company to pursue other interests and resigned from the Board effective March 22, 2011. In connection with Mr. Gordons departure, we entered into a separation agreement and
release (the Separation Agreement) on March 20, 2011. Pursuant to the Separation Agreement, we
agreed to pay Mr. Gordon (1) a lump sum severance payment of $2,069,000, (2) monthly consulting
payments of $66,666 per month through December 2011, and (3) a lump sum payment of $300,000 in
January 2012. We also agreed that all of Mr. Gordons equity awards would vest and that he will be
eligible to elect continuation coverage under COBRA. In consideration of the monthly consulting
payments, Mr. Gordon agreed to make himself available to provide consulting services to us through
December 2011. In addition, Mr. Gordon agreed to certain non-competition and standstill provisions
that are effective for nine months following the date of the Separation Agreement and certain
non-solicitation provisions that are effective through March 31, 2012.
Agreement to sell Royalton and Morgans. On April 2, 2011, we entered into purchase
and sale agreements to sell Royalton for $88.2 million and Morgans for $51.8 million to affiliates
of FelCor Lodging Trust, Incorporated. The parties have agreed that we will continue to operate the
hotels following the sales under 15-year management
agreements with one 10-year extension option. The transactions are expected to close in the
second quarter of 2011 and are subject to satisfaction of customary closing conditions.
36
Table of Contents
We intend to use a portion of the proceeds of the sales to retire approximately $37.7 million
outstanding debt under our amended revolving credit facility as of March 31, 2011. The hotels, along
with Delano, are collateral for our amended revolving credit facility, which terminates upon the
sale of any of the properties securing the facility. Upon termination of the facility, Delano will
be unencumbered.
We received a $7 million security deposit, which is non-refundable except in the event of a
default by us.
Sale of Mondrian Los Angeles. On May 3, 2011, our subsidiary Mondrian Holdings LLC (Mondrian
Holdings) completed the sale of Mondrian Los Angeles for $137.0 million to Wolverines Owner LLC,
an affiliate of Pebblebrook Hotel Trust (Pebblebrook), pursuant to a purchase and sale agreement
entered into on April 22, 2011. We applied a portion of the proceeds from the sale, along with
approximately $9.2 million of cash in escrow, to retire the $103.5 million Mondrian Holdings
Amended Mortgage, defined below in Debt. Net proceeds, after the repayment of debt and
closing costs, were approximately $40 million. We will continue to operate the hotel under a
20-year management agreement with one 10-year extension option.
37
Table of Contents
Operating Results
Comparison of Three Months Ended March 31, 2011 to Three Months Ended March 31, 2010
The following table presents our operating results for the three months ended March 31, 2011
and 2010, including the amount and percentage change in these results between the two periods. The
consolidated operating results for the three months ended March 31, is comparable to the
consolidated operating results for the three months ended March 31, 2010, with the exception of the
Hard Rock, which we managed until March 1, 2011 and Mondrian SoHo, which opened in February 2011.
The consolidated operating results are as follows:
Three Months Ended | ||||||||||||||||
March 31, | March 31, | |||||||||||||||
2011 | 2010 | Changes ($) | Changes (%) | |||||||||||||
(Dollars in thousands) | ||||||||||||||||
Revenues: |
||||||||||||||||
Rooms |
$ | 31,034 | $ | 29,250 | $ | 1,784 | 6.1 | % | ||||||||
Food and beverage |
18,030 | 17,496 | 534 | 3.1 | ||||||||||||
Other hotel |
2,016 | 2,209 | (193 | ) | (8.7 | ) | ||||||||||
Total hotel revenues |
51,080 | 48,955 | 2,125 | 4.3 | ||||||||||||
Management fee-related parties and other income |
3,324 | 4,429 | (1,105 | ) | (24.9 | ) | ||||||||||
Total revenues |
54,404 | 53,384 | 1,020 | 1.9 | ||||||||||||
Operating Costs and Expenses: |
||||||||||||||||
Rooms |
11,174 | 10,025 | 1,149 | 11.5 | ||||||||||||
Food and beverage |
15,102 | 13,916 | 1,186 | 8.5 | ||||||||||||
Other departmental |
1,211 | 1,252 | (41 | ) | (3.3 | ) | ||||||||||
Hotel selling, general and administrative |
12,558 | 11,437 | 1,121 | 9.8 | ||||||||||||
Property taxes, insurance and other |
4,185 | 4,100 | 85 | 2.1 | ||||||||||||
Total hotel operating expenses |
44,230 | 40,730 | 3,500 | 8.6 | ||||||||||||
Corporate expenses, including stock compensation |
10,834 | 10,005 | 829 | 8.3 | ||||||||||||
Depreciation and amortization |
8,373 | 7,345 | 1,028 | 14.0 | ||||||||||||
Restructuring, development and disposal costs |
4,593 | 677 | 3,916 | (1 | ) | |||||||||||
Total operating costs and expenses |
68,030 | 58,757 | 9,273 | 15.8 | ||||||||||||
Operating loss |
(13,626 | ) | (5,373 | ) | (8,253 | ) | (1 | ) | ||||||||
Interest expense, net |
8,994 | 12,350 | (3,356 | ) | (27.2 | ) | ||||||||||
Equity in loss of unconsolidated joint venture |
9,483 | 263 | 9,220 | (1 | ) | |||||||||||
Other non-operating expenses |
1,390 | 15,029 | (13,639 | ) | (90.8 | ) | ||||||||||
Loss before income tax (benefit) expense |
(33,493 | ) | (33,015 | ) | (478 | ) | 1.4 | |||||||||
Income tax (benefit) expense |
(135 | ) | 294 | (429 | ) | (1 | ) | |||||||||
Net loss from continuing operations |
(33,358 | ) | (33,309 | ) | (49 | ) | 0.1 | |||||||||
Income from discontinued operations, net of tax |
490 | 17,202 | (16,712 | ) | (97.2 | ) | ||||||||||
Net loss |
(32,868 | ) | (16,107 | ) | (16,761 | ) | (1 | ) | ||||||||
Net loss attributable to non controlling interest |
825 | 147 | 678 | (1 | ) | |||||||||||
Net loss attributable to Morgans Hotel Group Co. |
(32,043 | ) | (15,960 | ) | (16,083 | ) | (1 | ) | ||||||||
Preferred stock dividends and accretion |
(2,187 | ) | (2,078 | ) | (109 | ) | 5.2 | |||||||||
Net loss attributable to common stockholders |
$ | (34,230 | ) | $ | (18,038 | ) | $ | (16,192 | ) | 89.8 | % | |||||
(1) | Not meaningful. |
Total Hotel Revenues. Total hotel revenues increased 1.9% to $54.4 million for the three
months ended March 31, 2011 compared to $53.4 million for the three months ended March 31, 2010.
The components of RevPAR from our Owned Hotels for the three months ended March 31, 2011 and 2010
are summarized as follows:
Three Months Ended | ||||||||||||||||
March 31, | March 31, | |||||||||||||||
2011 | 2010 | Change ($) | Change (%) | |||||||||||||
Occupancy |
75.4 | % | 72.0 | % | | 4.7 | % | |||||||||
ADR |
$ | 238 | $ | 236 | $ | 2 | 1.2 | % | ||||||||
RevPAR |
$ | 180 | $ | 170 | $ | 10 | 6.0 | % |
38
Table of Contents
RevPAR from our Owned Hotels increased 6.0% to $180 for the three months ended March 31, 2011
compared to $170 for the three months ended March 31, 2010.
Rooms revenue increased 6.1% to $31.0 million for the three months ended March 31, 2011
compared to $29.3 million for the three months ended March 31, 2010, which is directly attributable
to the increase in occupancy and ADR shown above.
Food and beverage revenue increased 3.1% to $18.0 million for the three months ended March 31,
2011 compared to $17.5 million for the three months ended March 31, 2010. The increase was
primarily attributable to Hudson, which was being re-concepted and was under renovation during the
three months ended March 31, 2010.
Other hotel revenue decreased 8.7% to $2.0 million for the three months ended March 31, 2011
compared to $2.2 million for the three months ended March 31, 2010. The overall decrease is
primarily due to decreased revenues related to ancillary services, such as our spas at Delano, as
guests are still spending conservatively in light of the uncertain economic recovery. Slightly
offsetting this decrease, newly installed wireless infrastructures at certain of our Owned Hotels
have contributed to an increase in internet revenues.
Management Fee Related Parties and Other Income. Management fee related parties and
other income decreased by 24.9% to $3.3 million for the three months ended March 31, 2011 compared
to $4.4 million for the three months ended March 31, 2010. This decrease is primarily attributable
to the decrease in management fees earned at Hard Rock as a result of the termination of our
management agreement effective March 1, 2011 in connection with the Hard Rock settlement.
Operating Costs and Expenses
Rooms expense increased 11.5% to $11.1 million for the three months ended March 31, 2011
compared to $10.0 million for the three months ended March 31, 2010. This increase is a result of
the increase in rooms revenue attributable to increased occupancy along with the timing of
operating supply purchases.
Food and beverage expense increased 8.5% to $15.1 million for the three months ended March 31,
2011 compared to $13.9 million for the three months ended March 31, 2010. This increase is
primarily due to an increase in food and beverage expenses at Hudson in the first quarter of 2011
compared to the first quarter of 2010 as a result of the primary restaurant being closed from
January 2010 to May 2010 during its re-concepting and renovation, and opened in the first quarter of
2011.
Other departmental expense decreased 3.3% to $1.2 million for the three months ended March 31,
2011 compared to $1.3 million for the three months ended March 31, 2010. This slight decrease is a
direct result of the decrease in other hotel revenue noted above.
Hotel selling, general and administrative expense increased 9.8% to $12.6 million for the
three months ended March 31, 2011 compared to $11.4 million for the three months ended March 31,
2010. This increase was primarily due to increased selling and marketing initiatives implemented
across our hotel portfolio including the addition of a global sales team.
Property taxes, insurance and other expense increased 2.1% to $4.2 million for the three
months ended March 31, 2011 compared to $4.1 million for the three months ended March 31, 2010.
This slight increase was primarily due to tax refunds received during the three months ended March
31, 2010.
Corporate expenses, including stock compensation increased 8.3% to $10.8 million for the three
months ended March 31, 2011 compared to $10.0 million for the three months ended March 31, 2010.
This increase is primarily due to an increase in stock compensation expense due to the acceleration
of vesting of unvested equity awards granted to our former Chief Executive Officer and President in
connection with their separation from the Company in March 2011 and incentive compensation that was
restored to more normalized levels than in prior years.
Depreciation and amortization increased 14.0% to $8.4 million for the three months ended March
31, 2011 compared to $7.3 million for the three months ended March 31, 2010. This increase is
primarily the result of depreciation on capital improvements required to maintain our existing
hotels incurred during 2010 and increased depreciation expense related to the recent lower level
expansion at Hudson, Good Units, and the restaurant re-concepting, Hudson Hall, both of which
occurred during the first half of 2010.
39
Table of Contents
Restructuring, development and disposal costs increased to $4.6 million for the three months
ended March 31, 2011 compared to $0.7 million for the three months ended March 31, 2010. The
increase in expense is primarily due to severance costs related to our executive restructurings
during March 2011, for which there was no comparable costs incurred during the three months ended
March 31, 2010.
Interest expense, net decreased 27.2% to $9.0 million for the three months ended March 31,
2011 compared to $12.4 million for the three months ended March 31, 2010. This decrease is
primarily due to decreased interest expense recognized as a result of the expiration in July 2010
of the interest rate swaps related to the loans secured by the Hudson and Mondrian Los Angeles
hotels which had fixed our interest expense on those loans at a much higher rate than the current
LIBOR rates.
Equity in loss of unconsolidated joint ventures resulted in a loss of $9.5 million for the
three months ended March 31, 2011 compared to a loss of $0.3 million for the three months ended
March 31, 2010. This change was primarily a result of charges recognized related to the Hard Rock
settlement, discussed above, and an impairment loss recognized on Mondrian SoHo, which opened in
February 2011.
The components of RevPAR from our comparable Joint Venture Hotels for the three months ended
March 31, 2011 and 2010, which includes Sanderson, St Martins Lane, Shore Club, and Mondrian South
Beach, but excludes the Hard Rock, which we managed until March 1, 2011, Mondrian SoHo, which
opened in February 2011, and San Juan Water and Beach Club in Isla Verde, Puerto Rico, which is a
non-Morgans Hotel Group branded hotel, are summarized as follows (in constant dollars):
Three Months Ended | ||||||||||||||||
March 31, | March 31, | |||||||||||||||
2011 | 2010 | Change ($) | Change (%) | |||||||||||||
Occupancy |
67.0 | % | 63.5 | % | | 5.5 | % | |||||||||
ADR |
$ | 326 | $ | 334 | $ | (8 | ) | (2.2 | )% | |||||||
RevPAR |
$ | 219 | $ | 212 | $ | 7 | 3.1 | % |
Other non-operating expense was $1.4 million for the three months ended March 31, 2011 as
compared to $15.0 million for the three months ended March 31, 2010. The change was primarily the
result of the loss on change in fair market value of the warrants issued to the Investors, defined
below in Derivative Financial Instruments, in connection with the Series A preferred securities
during 2010. For further discussion, see notes 2 and 8 of our consolidated financial statements.
Income tax expense (benefit) resulted in a benefit of $0.1 million for the three months ended
March 31, 2011 as compared to an expense of $0.3 million for the three months ended March 31, 2010.
The slight change was primarily due to overall operating performance of the quarters.
Income from discontinued operations, net of tax resulted in a gain of $0.5 million for the
three months ended March 31, 2011 compared to a gain of $17.2 million for the three months ended
March 31, 2010. This change was primarily a result of the gain on disposal of Mondrian Scottsdale
in March 2010 as compared to a slight gain on the disposal of the property across the street from
Delano South Beach in January 2011.
Liquidity and Capital Resources
As of March 31, 2011, we had approximately $6.0 million in cash and cash equivalents. The
maximum amount of borrowings available under our amended revolving credit facility was $116.5
million, of which $37.7 million of borrowings were outstanding and $1.2 million of letters of
credit were posted.
We have both short-term and long-term liquidity requirements as described in more detail
below.
Liquidity Requirements
Short-Term Liquidity Requirements. We generally consider our short-term liquidity requirements
to consist of those items that are expected to be incurred by us or our consolidated subsidiaries
within the next 12 months and
believe those requirements currently consist primarily of funds necessary to pay operating
expenses and other expenditures directly associated with our properties, including the funding of
our reserve accounts, capital commitments associated with certain of our development projects, and
payment of scheduled debt maturities, unless otherwise extended or refinanced.
40
Table of Contents
We are obligated to maintain reserve funds for capital expenditures at our Owned Hotels as
determined pursuant to our debt or lease agreements related to such hotels, with the exception of
Delano South Beach, Royalton and Morgans. Our Joint Venture Hotels and Hotel Las Palapas, which we
manage, generally are subject to similar obligations under debt agreements related to such hotels,
or under our management agreements. These capital expenditures relate primarily to the periodic
replacement or refurbishment of furniture, fixtures and equipment. Such agreements typically
require us to reserve funds at amounts equal to 4% of the hotels revenues and require the funds to
be set aside in restricted cash. In addition, our restaurant joint ventures require the ventures to
set aside restricted cash of between 2% to 4% of gross revenues of the restaurant. Our Owned Hotels
that were not subject to these reserve funding obligations Delano South Beach, Royalton, and
Morgans underwent significant room and common area renovations during 2006, 2007 and 2008, and
as such, are not expected to require a substantial amount of capital spending during 2011.
In addition to reserve funds for capital expenditures, our debt and lease agreements also
require us to deposit cash into escrow accounts for taxes, insurance and debt service payments. As
of March 31, 2011, total restricted cash was $29.9 million.
As of March 31, 2011, there was approximately $10.8 million in curtailment reserve accounts
related to Hudson and Mondrian Los Angeles loans. These loans previously required that all excess
cash be deposited into these accounts until such time as the debt service coverage ratio improved
above the required ratio of 1:05 to 1:00 for two consecutive quarters. On October 1, 2010, our subsidiaries Hudson
Holdings LLC (Hudson Holdings) and Mondrian Holdings LLC (Mondrian Holdings) each entered into a modification agreement of its respective
mortgage, together with promissory notes and other related security agreements, with Bank of
America, N.A., as trustee, for the lenders. These modification agreements and related agreements
amended and extended the mortgages (collectively, the Amended Mortgages) until October 15, 2011.
Under the Amended Mortgages all excess cash will continue to be deposited into curtailment reserve
accounts regardless of the debt service coverage ratio.
In May 2011, we completed the sale of Mondrian Los Angeles for $137.0 million. We utilized a
portion of the net proceeds along with cash held in escrow accounts to retire the $103.5 million of
debt scheduled to mature in October 2011.
In October 2011, both our amended revolving credit facility, with an outstanding balance of
$37.7 million as of March 31, 2011, and the Amended Mortgage on Hudson, with an outstanding
aggregate balance of $201.2 million as of March 31, 2011, will mature. In addition, the mezzanine
debt of $26.5 million at Hudson may not be extended if the underlying mortgage debt is not
extended.
As we implement our strategy to shift towards a more asset light business model, which
includes selling hotel assets, we announced in April 2011 that we entered into purchase and sale
agreements to sell Royalton for $88.2 million, Morgans for $51.8 million, and Mondrian Los Angeles for $137.0 million. The sale of Royalton
and Morgans is expected to close in the second quarter of 2011 and is subject to satisfaction of
customary closing conditions. The sale of Mondrian Los Angeles closed on May 3, 2011.
We intend to use a portion of the proceeds from the sale of Royalton and Morgans to repay the
approximately $37.7 million outstanding debt under our amended revolving credit facility secured by
Delano, Royalton and Morgans, with the remainder available for the Hudson debt refinancing and for
growth. Upon the closing of the sale, the facility will terminate and Delano will be unencumbered.
We have a number of options to finance the outstanding maturity on Hudson, including debt
financing opportunities, and sales of additional hotels and other sources. We believe that the
combination of rising hotel cash flows and improving capital markets should provide access to
sufficient capital to retire or refinance this debt and provide capital for growth.
41
Table of Contents
Historically, we have satisfied our liquidity requirements through various sources of capital,
including borrowings under our revolving credit facility, our existing working capital, cash
provided by operations, equity and debt offerings, and long-term mortgages on our properties. Other
sources may include cash generated through asset dispositions and joint venture transactions.
Additionally, we may secure other financing opportunities. Given the uncertain economic environment
and continuing difficult conditions in the credit markets, however, we may not be able to obtain
such financings, or succeed in selling any assets, on terms acceptable to us or at all. We may
require additional borrowings to satisfy these liquidity requirements. See also Other Liquidity
Matters below for additional liquidity that may be required in the short-term, depending on market
and other circumstances, including our ability to refinance or extend existing debt.
Long-Term Liquidity Requirements. We generally consider our long-term liquidity requirements
to consist of those items that are expected to be incurred by us or our consolidated subsidiaries
beyond the next 12 months and believe these requirements consist primarily of funds necessary to
pay scheduled debt maturities, renovations and other non-recurring capital expenditures that need
to be made periodically to our properties and the costs associated with acquisitions and
development of properties under contract and new acquisitions and development projects that we may
pursue.
Our Series A preferred securities have an 8% dividend rate for the first five years, a 10%
dividend rate for years six and seven, and a 20% dividend rate thereafter. We have the option to
accrue any and all dividend payments, and as of March 31, 2011, have not declared any dividends. We
have the option to redeem any or all of the Series A preferred securities at any time. While we do
not anticipate redeeming any or all of the Series A preferred securities in the near-term, we may
want to redeem them prior to the escalation in dividend rate to 20% in 2017.
Other long-term liquidity requirements include our obligations under our Hudson mezzanine
loan, obligations under our Convertible Notes, defined below, our obligations under our trust
preferred securities, and our obligations under the Clift lease, each as described under Debt.
Historically, we have satisfied our long-term liquidity requirements through various sources of
capital, including our existing working capital, cash provided by operations, equity and debt
offerings, and long-term mortgages on our properties. Other sources may include cash generated
through asset dispositions and joint venture transactions. Additionally, we may secure other
financing opportunities. Given the uncertain economic environment and continuing challenging
conditions in the credit markets, however, we may not be able to obtain such financings on terms
acceptable to us or at all. We may require additional borrowings to satisfy our long-term liquidity
requirements.
Additionally, we anticipate we will need to renovate Hudson, Clift, Sanderson and St Martins
Lane in the next few years, which will require capital and will most likely be funded by owner
equity contributions, debt financing, possible asset sales, future operating cash flows or a
combination of these sources.
Although the credit and equity markets remain challenging, we believe that these sources of
capital will become available to us in the future to fund our long-term liquidity requirements.
However, our ability to incur additional debt is dependent upon a number of factors, including our
degree of leverage, borrowing restrictions imposed by existing lenders and general market
conditions. We will continue to analyze which source of capital is most advantageous to us at any
particular point in time.
Other Liquidity Matters
In addition to our expected short-term and long-term liquidity requirements, our liquidity
could also be affected by potential liquidity matters at our Owned Hotels or Joint Venture Hotels,
as discussed below.
Mondrian South Beach Mortgage and Mezzanine Agreements. The non-recourse mortgage loan and
mezzanine loan agreements related to Mondrian South Beach matured on August 1, 2009. In April 2010,
the Mondrian South Beach joint venture amended the non-recourse financing and mezzanine loan
agreements secured by Mondrian South Beach and extended the maturity date for up to seven years
through extension options until April 2017, subject to certain conditions.
42
Table of Contents
Morgans Group and affiliates of our joint venture partner have agreed to provide standard
non-recourse carve-out guaranties and provide certain limited indemnifications for the Mondrian
South Beach mortgage and mezzanine loans. In the event of a default, the lenders recourse is
generally limited to the mortgaged property or related equity interests, subject to standard
non-recourse carve-out guaranties for bad boy type acts. Morgans Group and affiliates of our
joint venture partner also agreed to guaranty the joint ventures obligation to reimburse certain
expenses incurred by the lenders and indemnify the lenders in the event such lenders incur
liability as a result of any third-party actions brought against Mondrian South Beach. Morgans
Group and affiliates of our joint venture partner have also guaranteed the joint ventures
liability for the unpaid principal amount of any seller financing note provided for condominium
sales if such financing or related mortgage lien is found unenforceable, provided they shall not
have any liability if the seller financed unit becomes subject again to the lien of the lender
mortgage or title to the seller financed unit is otherwise transferred to the lender or if such
seller financing note is repurchased by Morgans Group and/or affiliates of our joint venture at the
full amount of unpaid principal balance of such seller financing note. In addition, although
construction is complete and Mondrian South Beach opened on December 1, 2008, Morgans Group and
affiliates of our joint venture partner may have continuing obligations under construction
completion guaranties until all outstanding payables due to construction vendors are paid. As of
March 31, 2011, there are remaining payables outstanding to vendors of approximately $1.5 million.
We believe that payment under these guaranties is not probable and the fair value of the guarantee
is not material.
We and affiliates of our joint venture partner also have an agreement to purchase
approximately $14 million each of condominium units under certain conditions, including an event of
default. In the event of a default under the mortgage or mezzanine loan, the joint venture partners
are obligated to purchase selected condominium units, at agreed-upon sales prices, having aggregate
sales prices equal to 1/2 of the lesser of $28.0 million, which is the face amount outstanding on
the mezzanine loan, or the then outstanding principal balance of the mezzanine loan. The joint
venture is not currently in an event of default under the mortgage or mezzanine loan. We have not
recognized a liability related to the construction completion or the condominium purchase
guarantees.
Mondrian SoHo. The mortgage loan on the Mondrian SoHo property matured in June 2010. On July
31, 2010, the lender amended the debt financing on the property to provide for, among other things,
extensions of the maturity date of the mortgage loan secured by the hotel to November 2011 with
extension options through 2015, subject to certain conditions including a minimum debt service
coverage test.
Certain affiliates of our joint venture partner have agreed to provide a standard non-recourse
carve-out guaranty for bad boy type acts and a completion guaranty to the lenders for the
Mondrian SoHo loan, for which Morgans Group has agreed to indemnify the joint venture partner and
its affiliates up to 20% of such entities guaranty obligations, provided that each party is fully
responsible for any losses incurred as a result of its respective gross negligence or willful
misconduct.
Mondrian SoHo opened in February 2011, and we are operating the hotel under a 10-year
management contract with two 10-year extension options. We anticipate there may be cash shortfalls
from the operations of the hotel and there may not be enough operating cash flow to cover debt
service payments in all months going forward, which could require additional contributions by the
joint venture partners.
Ames in Boston. As of March 31, 2011, the ownership joint ventures outstanding mortgage debt
secured by the hotel was $46.5 million. In October 2010, the mortgage loan matured, and the joint
venture did not satisfy the conditions necessary to exercise the first of two remaining one-year
extension options available under the loan, which included funding a debt service reserve account,
among other things. As a result, the mortgage lender for Ames served the joint venture with a
notice of default and acceleration of debt. In February 2011, the joint venture reached an
agreement with the lender whereby the lender waived the default, reinstated the loan and extended
the loan maturity date until October 9, 2011. The mortgage debt has one remaining extension option,
subject to certain conditions, which if exercised would extend the maturity date for one year to
October 9, 2012.
Potential Litigation. We may have potential liability in connection with certain claims by a
designer for which we have accrued $13.9 million as of March 31, 2011, as discussed in note 5 of
our consolidated financial statements. We believe the probability of losses associated with this
claim in excess of the liability that is accrued of $13.9 million is remote and we cannot
reasonably estimate of range of such additional losses, if any, at this time.
43
Table of Contents
Other Possible Uses of Capital. We have a number of development projects signed or under
consideration, some of which may require equity investments, key money or credit support from us.
Comparison of Cash Flows for the Three Months Ended March 31, 2011 to the Three Months ended March
31, 2010
Operating Activities. Net cash used in operating activities was $2.6 million for the three
months ended March 31, 2011 as compared to $7.0 million for the three months ended March 31, 2010.
The decrease in cash used in operating activities is primarily due to a reduction in deposits of
excess cash flow from Hudson into a curtailment reserve escrow account as a result of the decline
in operating results at Hudson during the three months ended March 31, 2011. During the three
months ended March 31, 2010, the deposit of funds into the reserve account was greater than during
the three months ended March 31, 2011.
Investing Activities. Net cash used in investing activities amounted to $8.1 million for the
three months ended March 31, 2011 as compared to $4.9 million for the three months ended March 31,
2010. The increase in cash used in investing activities primarily relates to an increase in
contributions made to our investments in unconsolidated joint ventures in 2011 compared to 2010,
primarily related to the Hard Rock settlement.
Financing Activities. Net cash provided by financing activities amounted to $11.4 million for
the three months ended March 31, 2011 as compared to net cash used by financing activities of $0.7
million for the three months ended March 31, 2010. During the three months ended March 31, 2011, we
drew $11.7 million on our amended revolving credit facility for which there were no comparable
proceeds in 2010.
Debt
Amended Revolving Credit Facility. On October 6, 2006, we and certain of our subsidiaries
entered into a revolving credit facility with Wachovia Bank, National Association, as
Administrative Agent, and the lenders thereto, which was amended on August 5, 2009, and which we
refer to as our amended revolving credit facility.
The amended revolving credit facility provides for a maximum aggregate amount of commitments
of $125.0 million, divided into two tranches: (i) a revolving credit facility in an amount equal to
$90.0 million (the New York Tranche), which is secured by a mortgage on Morgans and Royalton and
a mortgage on Delano South Beach and (ii) a revolving credit facility in an amount equal to $35.0
million (the Florida Tranche), which is secured by the mortgage on the Florida Property (but not
the Morgans and Royalton). Our amended revolving credit facility also provides for a letter of
credit facility in the amount of $25.0 million, which is secured by the mortgages on the Morgans
and Royalton and the Delano South Beach. At any given time, the amount available for borrowings
under the amended revolving credit facility is contingent upon the borrowing base valuation, which
is calculated as the lesser of (i) 60% of appraised value and (ii) the implied debt service
coverage value of certain collateral properties securing the amended revolving credit facility;
provided that the portion of the borrowing base attributable to the Morgans and Royalton will never
be less than 35% of the appraised value of the Morgans and Royalton. Following appraisals in March
2010, total availability under our amended revolving credit facility as of March 31, 2011 was
$116.5 million, of which $37.7 million of borrowings were outstanding, and approximately $1.2
million of letters of credit were posted. Of the outstanding $37.7 million, $33.7 million was
allocated to the Florida Tranche and $4.0 million was allocated to the New York Tranche.
The amended revolving credit facility bears interest at a fluctuating rate measured by
reference to, at our election, either LIBOR (subject to a LIBOR floor of 1%) or a base rate, plus a
borrowing margin. LIBOR loans have a borrowing margin of 3.75% per annum and base rate loans have a
borrowing margin of 2.75% per annum. The amended revolving credit facility also provides for the
payment of a quarterly unused facility fee equal to the average daily unused amount for each
quarter multiplied by 0.5%.
44
Table of Contents
In addition, the amended revolving credit facility includes the following, among other
provisions:
| requirement that we maintain a fixed charge coverage ratio (defined
generally as the ratio of consolidated EBITDA excluding Mondrian Scottsdales EBITDA
for the periods ending June 30, 2009 and September 30, 2009 and Clifts EBITDA for
all periods to consolidated interest expense excluding Mondrian Scottsdales interest
expense for the periods ending June 30, 2009 and
September 30, 2009 and Clifts interest expense for all periods) for each four-quarter
period of no less than 0.90 to 1.00. As of March 31, 2011, our fixed charge coverage
ratio was 1.81x; |
||
| prohibition on capital expenditures with respect to any hotels owned by us,
the borrowers, or our subsidiaries, other than maintenance capital expenditures for
any hotel not exceeding 4% of the annual gross revenues of such hotel and certain
other exceptions; |
||
| prohibition on repurchase of our common equity interests by us or Morgans
Group; and |
||
| certain limits on any secured swap agreements entered into after the
effective date of the amended revolving credit facility. |
The amended revolving credit facility provides for customary events of default, including:
failure to pay principal or interest when due; failure to comply with covenants; any representation
proving to be incorrect; defaults relating to acceleration of, or defaults on, certain other
indebtedness of at least $10.0 million in the aggregate; certain insolvency and bankruptcy events
affecting us, Morgans Group or certain of our other subsidiaries that are party to the amended
revolving credit facility; judgments in excess of $5.0 million in the aggregate affecting us,
Morgans Group and certain of our other subsidiaries that are party to the amended revolving credit
facility; the acquisition by any person of 40% or more of any outstanding class of our capital
stock having ordinary voting power in the election of directors; and the incurrence of certain
ERISA liabilities in excess of $5.0 million in the aggregate.
As of March 31, 2011, the principal balance of the amended revolving credit facility was $37.7
million, and approximately $1.2 million in letters of credit were outstanding. The commitments
under the amended revolving credit facility terminate on October 5, 2011, at which time all
outstanding amounts under the amended revolving credit facility will be due.
In connection with our proposed sale of Royalton and Morgans, we intend to use a portion of
the proceeds to retire the approximately $37.7 million outstanding debt under the amended revolving
credit facility as of March 31, 2011. These hotels, along with Delano, are collateral for the
amended revolving credit facility, which terminates upon the sale of any of the properties
securing the facility. Upon termination of the facility, Delano will be unencumbered.
Mortgages and Hudson Mezzanine Loan. On October 6, 2006, our subsidiaries, Hudson Holdings and
Mondrian Holdings, entered into non-recourse mortgage financings consisting of two separate first
mortgage loans secured by Hudson and Mondrian Los Angeles, respectively (collectively, the
Mortgages), and a mezzanine loan related to Hudson, secured by a pledge of our equity interests
in the subsidiary owning Hudson.
On October 14, 2009, we entered into an agreement with the lender that holds, among other
loans, the mezzanine loan on Hudson. Under the agreement, we paid an aggregate of $11.2 million to
(i) reduce the principal balance of the mezzanine loan from $32.5 million to $26.5 million, (ii)
acquire interests in $4.5 million of debt securities secured by certain of our other debt
obligations, (iii) pay fees, and (iv) obtain a forbearance from the mezzanine lender until October
12, 2013 from exercising any remedies resulting from a maturity default, subject only to
maintaining certain interest rate caps and making an additional aggregate payment of $1.3 million
to purchase additional interests in certain of our other debt obligations prior to October 11,
2011. The mezzanine lender also agreed to cooperate with us in our efforts to seek an extension of
the Hudson mortgage loan and to consent to certain refinancings and other modifications of the
Hudson mortgage loan.
Until amended as described below, the Hudson Holdings Mortgage bore interest at 30-day LIBOR
plus 0.97%, and the Mondrian Holdings Mortgage bore interest at 30-day LIBOR plus 1.23%. We had
entered into interest rate swaps on the Mortgages and the mezzanine loan on Hudson, which
effectively fixed the 30-day LIBOR rate at approximately 5.0%. These interest rate swaps expired on
July 15, 2010. We subsequently entered into short-term interest rate caps on the Mortgages that
expired on September 12, 2010.
45
Table of Contents
On October 1, 2010, Hudson Holdings and Mondrian Holdings each entered into a modification
agreement of its respective Mortgage, together with promissory notes and other related security
agreements, with Bank of America, N.A., as trustee, for the lenders. These modification agreements
and related agreements extended the Mortgages until October 15, 2011. In connection with the
Amended Mortgages, on October 1, 2010, Hudson Holdings and Mondrian Holdings paid down a total of
$16 million and $17 million, respectively, on their outstanding loan balances. The Hudson Holdings
Amended Mortgage bears interest at 30-day LIBOR plus 1.03% and the Mondrian Holdings Amended
Mortgage bears interest at 30-day LIBOR plus 1.64%.
The interest rate on the Hudson mezzanine loan continues to bear interest at 30-day LIBOR plus
2.98%. We entered into interest rate caps expiring October 15, 2011 in connection with the Amended
Mortgages, which effectively cap the 30-day LIBOR rate at 5.3% and 4.25% on the Hudson Holdings
Amended Mortgage and Mondrian Holdings Amended Mortgage, respectively, and effectively cap the
30-day LIBOR rate at 7.0% on the Hudson mezzanine loan.
The Amended Mortgages require our subsidiary borrowers to fund reserve accounts to cover
monthly debt service payments. Those subsidiary borrowers are also required to fund reserves for
property, sales and occupancy taxes, insurance premiums, capital expenditures and the operation and
maintenance of those hotels. Reserves are deposited into restricted cash accounts and are released
as certain conditions are met. Starting in 2009, the Mortgages had fallen below the required debt
service coverage and as such, all excess cash, once all other reserve accounts were completed, were
funded into curtailment reserve accounts. At the time the modification agreements were entered
into, the balance in the curtailment reserve accounts was $20.3 million, of which $16.5 million was
used to reduce the amount of debt outstanding under the Amended Mortgages, as discussed above.
Under the Amended Mortgages, all excess cash will continue to be funded into curtailment reserve
accounts regardless of our debt service coverage ratio. The subsidiary borrowers are not permitted
to have any liabilities other than certain ordinary trade payables, purchase money indebtedness,
capital lease obligations and certain other liabilities.
The Amended Mortgages prohibit the incurrence of additional debt on Hudson and Mondrian Los
Angeles. Furthermore, the subsidiary borrowers are not permitted to incur additional mortgage debt
or partnership interest debt. In addition, the Amended Mortgages do not permit (1) transfers of
more than 49% of the interests in the subsidiary borrowers, Morgans Group or the Company or (2) a
change in control of the subsidiary borrowers or in respect of Morgans Group or the Company itself
without, in each case, complying with various conditions or obtaining the prior written consent of
the lender.
The Amended Mortgages provide for events of default customary in mortgage financings,
including, among others, failure to pay principal or interest when due, failure to comply with
certain covenants, certain insolvency and receivership events affecting the subsidiary borrowers,
Morgans Group or the Company, and breach of the encumbrance and transfer provisions. In the event
of a default under the Amended Mortgages, the lenders recourse is limited to the mortgaged
property, unless the event of default results from insolvency, a voluntary bankruptcy filing, a
breach of the encumbrance and transfer provisions, or various other bad boy type acts, in which
event the lender may also pursue remedies against Morgans Group.
As of March 31, 2011 the balance outstanding on the Hudson Holdings Amended Mortgage was
$201.2 million and on the Mondrian Holdings Amended Mortgage was $103.5 million. As of March 31,
2011, the balance outstanding on the Hudson mezzanine loan was $26.5 million.
On May 3, 2011, we completed the sale of Mondrian Los Angeles for $137.0 million to an
affiliate of Pebblebrook, pursuant to a purchase and sale agreement entered into on April 22, 2011.
We applied a portion of the proceeds from the sale, along with approximately $9.2 million of cash
in escrow, to retire the $103.5 million Mondrian Holdings Amended Mortgage.
We are pursuing a number of alternatives to finance the Hudson Holdings Amended Mortgage and
Hudson mezzanine loan maturities, including using a portion of the proceeds from asset sales such
as Royalton and Morgans, debt financing, and other sources. The Company believes the combination of
rising hotel cash flows and improving capital markets should provide sufficient capital to
refinance the debt and provide capital for growth.
46
Table of Contents
Notes to a Subsidiary Trust Issuing Preferred Securities. In August 2006, we formed a trust,
MHG Capital Trust I (the Trust), to issue $50.0 million of trust preferred securities in a
private placement. The sole assets of the Trust consist of the trust notes due October 30, 2036
issued by Morgans Group and guaranteed by Morgans Hotel Group Co. The trust notes have a 30-year
term, ending October 30, 2036, and bear interest at a fixed rate of 8.68% for the first 10 years,
ending October 2016, and thereafter will bear interest at a floating rate based on the three-month
LIBOR plus 3.25%. These securities are redeemable by the Trust at par beginning on October 30,
2011.
Clift. We lease Clift under a 99-year non-recourse lease agreement expiring in 2103. The lease
is accounted for as a financing with a liability balance of $85.5 million at March 31, 2011.
Due to the amount of the payments stated in the lease, which increase periodically, and the
economic environment in which the hotel operates, our subsidiary that leases Clift had not been
operating Clift at a profit and Morgans Group had been funding cash shortfalls sustained at Clift
in order to enable our subsidiary to make lease payments from time to time. On March 1, 2010,
however, we discontinued subsidizing the lease payments and stopped making the scheduled monthly
payments. On May 4, 2010, the lessors under the Clift ground lease filed a lawsuit against Clift
Holdings LLC, which the court dismissed on June 1, 2010. On June 8, 2010, the lessors filed a new
lawsuit and on June 17, 2010, we and our subsidiary filed an affirmative lawsuit against the
lessors.
On September 17, 2010, we and our subsidiaries entered into a settlement and release agreement
with the lessors under the Clift ground lease, which among other things, effectively provided for
the settlement of all outstanding litigation claims and disputes among the parties relating to
defaulted lease payments due with respect to the ground lease for the Clift and reduced the lease
payments due to the lessors for the period March 1, 2010 through February 29, 2012. Effective March
1, 2012, the annual rent will be as stated in the lease agreement, which currently provides for
base annual rent of approximately $6.0 million per year through October 2014 increasing thereafter,
at 5-year intervals by a formula tied to increases in the Consumer Price Index, with a maximum
increase of 40% and a minimum of 20% at October 2014, and at each payment date thereafter, the
maximum increase is 20% and the minimum is 10%. The lease is non-recourse to us. Morgans Group also
entered into a limited guaranty, whereby Morgans Group agreed to guarantee losses of up to $6
million suffered by the lessors in the event of certain bad boy type acts.
Hudson Capital Leases. We lease two condominium units at Hudson which are reflected as capital
leases with balances of $6.1 million at March 31, 2011. Currently annual lease payments total
approximately $900,000 and are subject to increases in line with inflation. The leases expire in
2096 and 2098.
Promissory Notes. The purchase of the property across from the Delano South Beach was
partially financed with the issuance of a $10.0 million interest only non-recourse promissory note
to the seller with a scheduled maturity of January 24, 2009 and an interest rate of 10.0%. In
November 2008, we extended the maturity of the note until January 24, 2010 and agreed to pay 11.0%
interest for the extension year which we were required to prepay in full at the time of extension.
Effective January 24, 2010, we further extended the maturity of the note until January 24, 2011.
The note bore interest at 11.0%, but we are permitted to defer half of each monthly interest
payment until the maturity date. The obligations under the note were secured by the property.
Additionally, in January 2009, an affiliate of the seller financed an additional $0.5 million to
pay for costs associated with obtaining necessary permits. This $0.5 million promissory note had a
scheduled maturity date on January 24, 2010, which we extended to January 24, 2011, and bore
interest at 11%. The obligations under this note were secured with a pledge of the equity interests
in our subsidiary that owned the property.
In January 2011, our indirect subsidiary transferred its interest in the property to SU Gales
Properties, LLC. As a result of this transaction, we were released from this aggregate $10.5
million non-recourse debt.
Convertible Notes. On October 17, 2007, we completed an offering of $172.5 million aggregate
principal amount of 2.375% Senior Subordinated Convertible Notes (Convertible Notes), in a
private offering, which included an additional issuance of $22.5 million in aggregate principal
amount of Convertible Notes as a result of the initial purchasers exercise in full of their
overallotment option. The Convertible Notes are senior subordinated unsecured obligations of the
Company and are guaranteed on a senior subordinated basis by our operating company, Morgans Group.
The Convertible Notes are convertible into shares of our common stock under certain
circumstances and upon the occurrence of specified events. The Convertible Notes mature on
October 15, 2014, unless repurchased by us or converted in accordance with their terms prior to
such date.
47
Table of Contents
In connection with the private offering, we entered into certain Convertible Note hedge and
warrant transactions. These transactions are intended to reduce the potential dilution to the
holders of our common stock upon conversion of the Convertible Notes and will generally have the
effect of increasing the conversion price of the Convertible Notes to approximately $40.00 per
share, representing a 82.23% premium based on the closing sale price of our common stock of $21.95
per share on October 11, 2007. The net proceeds to us from the sale of the Convertible Notes were
approximately $166.8 million (of which approximately $24.1 million was used to fund the Convertible
Note call options and warrant transactions).
On January 1, 2009, we adopted Accounting Standard Codification (ASC) 470-20, Debt with
Conversion and other Options (ASC 470-20). ASC 470-20 requires the proceeds from the sale of the
Convertible Notes to be allocated between a liability component and an equity component. The
resulting debt discount is amortized over the period the debt is expected to remain outstanding as
additional interest expense. ASC 470-20 required retroactive application to all periods presented.
The equity component, recorded as additional paid-in capital, was $9.0 million, which represents
the difference between the proceeds from issuance of the Convertible Notes and the fair value of
the liability, net of deferred taxes of $6.4 million, as of the date of issuance of the Convertible
Notes.
Joint Venture Debt. See Off-Balance Sheet Arrangements for descriptions of joint venture
debt.
Seasonality
The hospitality business is seasonal in nature. For example, our Miami hotels are generally
strongest in the first quarter, whereas our New York hotels are generally strongest in the fourth
quarter. Quarterly revenues also may be adversely affected by events beyond our control, such as
the current recession, extreme weather conditions, terrorist attacks or alerts, natural disasters,
airline strikes, and other considerations affecting travel. Given the recent global economic
downturn, the impact of seasonality in 2010 and the first quarter of 2011 was not as significant as
in prior periods and may remain less pronounced throughout 2011 depending on the timing and
strength of the economic recovery.
To the extent that cash flows from operations are insufficient during any quarter, due to
temporary or seasonal fluctuations in revenues, we may have to enter into additional short-term
borrowings or increase our borrowings, if available, to meet cash requirements.
Capital Expenditures and Reserve Funds
We are obligated to maintain reserve funds for capital expenditures at our Owned Hotels as
determined pursuant to our debt and lease agreements related to such hotels, with the exception of
Delano South Beach, Royalton and Morgans. Our Joint Venture Hotels and Hotel Las Palapas, which we
manage, generally are subject to similar obligations under debt agreements related to such hotels,
or under our management agreements. These capital expenditures relate primarily to the periodic
replacement or refurbishment of furniture, fixtures and equipment. Such agreements typically
require us to reserve funds at amounts equal to 4% of the hotels revenues and require the funds to
be set aside in restricted cash. In addition, our restaurant joint ventures require the ventures to
set aside restricted cash of between 2% to 4% of gross revenues of the restaurant. As of March 31,
2011, approximately $3.0 million was available in restricted cash reserves for future capital
expenditures under these obligations related to our Owned Hotels.
Additionally, we anticipate we will need to renovate Hudson, Clift, Sanderson and St Martins
Lane in the next few years which will require capital and will most likely be funded by owner
equity contributions, debt financing, possible asset sales, future operating cash flows or a
combination of these sources.
48
Table of Contents
The lenders under the Amended Mortgages require our subsidiary borrowers to fund reserve
accounts to cover monthly debt service payments. Those subsidiary borrowers are also required to
fund reserves for property, sales and occupancy taxes, insurance premiums, capital expenditures and
the operation and maintenance of those hotels. Reserves are deposited into restricted cash accounts
and are released as certain conditions are met. In 2009, the
Mortgages had fallen below the required debt service coverage and as such, all excess cash,
once all other reserve accounts are completed, was funded into curtailment reserve accounts. In
October 2010, $16.5 million from these curtailment reserve accounts was used to reduce the amount
of mortgage debt outstanding under the Amended Mortgages. Under the Amended Mortgages, all excess
cash will continue to be funded into curtailment reserve accounts. As of March 31, 2011, the
balance in these curtailment reserve accounts was $10.8 million. Our subsidiary borrowers are not
permitted to have any liabilities other than certain ordinary trade payables, purchase money
indebtedness, capital lease obligations, and certain other liabilities. As a result of the sale of
Mondrian Los Angeles and repayment of the Mondrian Holdings Amended Mortgage on May 3, 2011,
approximately $9.2 million held in escrow related to this debt was applied to the repayment of the
Mondrian Holdings Amended Mortgage.
During 2006, 2007 and 2008, our Owned Hotels that were not subject to these reserve funding
obligations Delano South Beach, Royalton, and Morgans underwent significant room and common
area renovations, and as such, are not expected to require a substantial amount of capital during
2011. Management will evaluate the capital spent at these properties on an individual basis and
ensure that such decisions do not impact the overall quality of our hotels or our guests
experience.
Under our amended revolving credit facility, we are generally prohibited from funding capital
expenditures with respect to any hotels owned by us other than maintenance capital expenditures for
any hotel not exceeding 4% of the annual gross revenues of such hotel and certain other exceptions.
Derivative Financial Instruments
We use derivative financial instruments to manage our exposure to the interest rate risks
related to our variable rate debt. We do not use derivatives for trading or speculative purposes
and only enter into contracts with major financial institutions based on their credit rating and
other factors. We determine the fair value of our derivative financial instruments using models
which incorporate standard market conventions and techniques such as discounted cash flow and
option pricing models to determine fair value. We believe these methods of estimating fair value
result in general approximation of value, and such value may or may not be realized.
On February 22, 2006, we entered into an interest rate forward starting swap that effectively
fixed the interest rate on $285.0 million of mortgage debt at approximately 5.04% on Mondrian Los
Angeles and Hudson with an effective date of July 9, 2007 and a maturity date of July 9, 2010. This
derivative qualified for hedge accounting treatment per ASC 815-10, Derivatives and Hedging (ASC
815-10) and accordingly, the change in fair value of this instrument was recognized in accumulated
other comprehensive loss. In connection with the Mortgages, we also entered into an $85.0 million
interest rate swap that effectively fixed the LIBOR rate on $85.0 million of the debt at
approximately 5.0% with an effective date of July 9, 2007 and a maturity date of July 15, 2010.
This derivative qualified for hedge accounting treatment per ASC 815-10 and accordingly, the change
in fair value of this instrument was recognized in accumulated other comprehensive loss.
The foregoing swaps expired in July 2010, when the underlying debt was scheduled to mature. In
connection with forbearance agreements we entered into in July and September 2010 with the mortgage
lenders on Hudson and Mondrian Los Angeles, we entered into short-term interest rate caps. These
interest rate caps were entered into in August and matured in September of 2010. In September 2010,
in connection with the Amended Mortgages, we entered into interest rate caps which qualify for
hedge accounting treatment per ASC 815-10 and accordingly, the change in fair value of this
instrument is recognized in accumulated other comprehensive loss. Additionally, in August 2010, we
entered into an interest rate cap on the Hudson mezzanine loan which does not qualify for hedge
accounting treatment per ASC 815-10 and accordingly, the change in fair value of this instrument is
recognized in interest expense. The fair value of all of these interest rate caps was insignificant
as of March 31, 2011.
In connection with the sale of the Convertible Notes, we entered into call options which are
exercisable solely in connection with any conversion of the Convertible Notes and pursuant to which
we will receive shares of our common stock from counterparties equal to the number of shares of our
common stock, or other property, deliverable by us to the holders of the Convertible Notes upon
conversion of the Convertible Notes, in excess of an amount of shares or other property with a
value, at then current prices, equal to the principal amount of the converted Convertible Notes.
Simultaneously, we also entered into warrant transactions, whereby we sold warrants to purchase in
the aggregate 6,415,327 shares of our common stock, subject to customary anti-dilution adjustments,
at an exercise price of approximately $40.00 per share of common stock. The warrants may be
exercised over a 90-day trading period commencing January 15, 2015. The call options and the
warrants are separate contracts and are not part of the terms of the Convertible Notes and will not
affect the holders rights under the Convertible Notes.
The call options are intended to offset potential dilution upon conversion of the Convertible
Notes in the event that the market value per share of the common stock at the time of exercise is
greater than the exercise price of the call options, which is equal to the initial conversion price
of the Convertible Notes and is subject to certain customary adjustments.
49
Table of Contents
On October 15, 2009, we entered into a securities purchase agreement with Yucaipa American
Alliance Fund II, L.P. and Yucaipa American Alliance (Parallel) Fund II, L.P., which we refer to
collectively as the Investors. Under the securities purchase agreement, we issued and sold to the
Investors (i) 75,000 shares of the our Series A preferred securities, $1,000 liquidation preference
per share, and (ii) warrants to purchase 12,500,000 shares of the Companys common stock at an
exercise price of $6.00 per share. The warrants have a 7-1/2 year term and are exercisable
utilizing a cashless exercise method only, resulting in a net share issuance. The exercise price
and number of shares subject to the warrant are both subject to anti-dilution adjustments.
We and Yucaipa American Alliance Fund II, LLC, an affiliate of the Investors, as the fund
manager, also entered into a real estate fund formation agreement on October 15, 2009 pursuant to
which we and the fund manager agreed to use good faith efforts to endeavor to raise a private
investment fund. In connection with the agreement, we issued to the fund manager 5,000,000
contingent warrants to purchase our common stock at an exercise price of $6.00 per share with a
7-1/2 year term. These contingent warrants will only become exercisable if the Fund obtains capital
commitments in certain amounts over certain time periods and also meets certain further capital
commitment and investment thresholds. The exercise price and number of shares subject to these
contingent warrants are both subject to anti-dilution adjustments.
The fund formation agreement terminated by its terms on January 30, 2011 due to the failure to
close a fund with $100 million of aggregate capital commitments by that date. The 5,000,000
contingent warrants issued to the fund manager will be forfeited in their entirety on October 15,
2011 if a fund with $250 million has not closed by that date.
Off-Balance Sheet Arrangements
As of March 31, 2011, we have unconsolidated joint ventures that we account for using the
equity method of accounting, most of which have mortgage or related debt, as described below. In
some cases, we provide non-recourse carve-out guaranties of joint venture debt, which guaranty is
only triggered in the event of certain bad boy acts, and other limited liquidity or credit
support, as described below.
Morgans Europe. We own interests in two hotels through a 50/50 joint venture known as Morgans
Europe. Morgans Europe owns two hotels located in London, England, St Martins Lane, a 204-room
hotel, and Sanderson, a 150-room hotel. Under a management agreement with Morgans Europe, we earn
management fees and a reimbursement for allocable chain service and technical service expenses.
On July 15, 2010, Morgans Europe venture refinanced in full its then outstanding £99.3 million
mortgage debt with a new £100 million loan maturing in July 2015 that is non-recourse to us and is
secured by Sanderson and St Martins Lane. As of March 31, 2011, Morgans Europe had outstanding
mortgage debt of £99.6 million, or approximately $160.4 million at the exchange rate of 1.61 US
dollars to GBP at March 31, 2011.
Morgans Europes net income or loss and cash distributions or contributions are allocated to
the partners in accordance with ownership interests. At March 31, 2011, we had an investment in
Morgans Europe of $2.2 million. We account for this investment under the equity method of
accounting. Our equity in income of the joint venture amounted to income of $0.1 million and income
of $0.9 million for the three months ended March 31, 2011 and 2010, respectively.
Mondrian South Beach. We own a 50% interest in Mondrian South Beach, a recently renovated
apartment building which was converted into a condominium and hotel. Mondrian South Beach opened in
December 2008, at which time we began operating the property under a long-term management contract.
In April 2010, the Mondrian South Beach joint venture amended its non-recourse financing
secured by the property and extended the maturity date for up to seven years, through extension
options until April 2017, subject to
certain conditions. In April 2010, in connection with the loan amendment, each of the joint
venture partners provided an additional $2.75 million to the joint venture resulting in total
mezzanine financing provided by the partners of $28.0 million. As of March 31, 2011, the joint
ventures outstanding mortgage and mezzanine debt was $91.6 million, which does not include the
$28.0 million mezzanine loan provided by the joint venture partners, which in effect is on par with
the lenders mezzanine debt.
50
Table of Contents
Morgans Group and affiliates of our joint venture partner have agreed to provide standard
non-recourse carve-out guaranties and provide certain limited indemnifications for the Mondrian
South Beach mortgage and mezzanine loans. In the event of a default, the lenders recourse is
generally limited to the mortgaged property or related equity interests, subject to standard
non-recourse carve-out guaranties for bad boy type acts. Morgans Group and affiliates of our
joint venture partner also agreed to guaranty the joint ventures obligation to reimburse certain
expenses incurred by the lenders and indemnify the lenders in the event such lenders incur
liability as a result of any third-party actions brought against Mondrian South Beach. Morgans
Group and affiliates of our joint venture partner have also guaranteed the joint ventures
liability for the unpaid principal amount of any seller financing note provided for condominium
sales if such financing or related mortgage lien is found unenforceable, provided they shall not
have any liability if the seller financed unit becomes subject again to the lien of the lenders
mortgage or title to the seller financed unit is otherwise transferred to the lender or if such
seller financing note is repurchased by Morgans Group and/or affiliates of our joint venture at the
full amount of unpaid principal balance of such seller financing note. In addition, although
construction is complete and Mondrian South Beach opened on December 1, 2008, Morgans Group and
affiliates of our joint venture partner may have continuing obligations under construction
completion guaranties until all outstanding payables due to construction vendors are paid. As of
March 31, 2011, there are remaining payables outstanding to vendors of approximately $1.5 million.
We believe that payment under these guaranties is not probable and the fair value of the guarantee
is not material. For further discussion, see note 4 of our consolidated financial statements.
The Mondrian South Beach joint venture was determined to be a variable interest entity as
during the process of refinancing the ventures mortgage in April 2010, its equity investment at
risk was considered insufficient to permit the entity to finance its own activities. In April 2010,
each of the joint venture partners provided an additional $2.75 million of mezzanine financing to
the joint venture in order to complete a refinancing of the outstanding mortgage debt of the
venture. We determined that we are not the primary beneficiary of this variable interest entity as
we do not have a controlling financial interest in the entity. Our maximum exposure to losses as
result of our involvement in the Mondrian South Beach variable interest entity is limited to our
current investment, outstanding management fee receivable and advances in the form of mezzanine
financing. We have not committed to providing financial support to this variable interest entity,
other than as contractually required and all future funding is expected to be provided by the joint
venture partners in accordance with their respective ownership interests in the form of capital
contributions or mezzanine financing, or by third parties.
We account for this investment under the equity method of accounting. At March 31, 2011, our
investment in Mondrian South Beach was $5.3 million. Our equity in loss of Mondrian South Beach was
$0.5 million and $0.4 million for the three months ended March 31, 2011 and 2010, respectively.
Ames in Boston. On June 17, 2008, we, Normandy Real Estate Partners, and Ames Hotel Partners,
entered into a joint venture to develop the Ames hotel in Boston. Upon the hotels completion in
November 2009, we began operating Ames under a 20-year management contract.
As of March 31, 2011, we had an approximately 31% economic interest in the joint venture and
our investment in the Ames joint venture was $10.2 million. Our equity in loss for the three months
ended March 31, 2011 and 2010 was $0.5 million and $0.4 million, respectively.
As of March 31, 2011, the joint ventures outstanding mortgage debt secured by the hotel was
$46.5 million. In October 2010, the mortgage loan secured by Ames matured, and the joint venture
did not satisfy the conditions necessary to exercise the first of two remaining one-year extension
options available under the loan, which included funding a debt service reserve account, among
other things. As a result, the mortgage lender for Ames served the joint venture with a notice of
default and acceleration of debt. In February 2011, the joint venture reached an agreement with the
lender whereby the lender waived the default, reinstated the loan and extended the loan maturity
date until October 9, 2011 with a one-year extension option, subject to certain conditions. In connection with the amendment, the
joint venture was required to deposit $1 million into a debt service account. The mortgage debt has
one remaining extension option, subject to certain conditions, which if exercised would extend the
maturity date for one year to October 9, 2012.
51
Table of Contents
Mondrian SoHo. In June 2007, we contributed approximately $5.0 million for a 20% equity
interest in a joint venture with Cape Advisors Inc. to develop a Mondrian hotel in the SoHo
neighborhood of New York. The joint venture obtained a loan of $195.2 million to acquire and
develop the hotel. We subsequently loaned an additional $3.3 million to the joint venture. As a
result of the decline in general market conditions and real estate values since the inception of
the joint venture, and more recently, the need for additional funding to complete the hotel, in
June 2010, we wrote down our investment in Mondrian SoHo to zero. All of our subsequent fundings in
2010 and 2011, all of which are in the form of loans, have been impaired, and as of March 31, 2011,
our investment balance in Mondrian SoHo is zero.
The mortgage loan on the property matured in June 2010. On July 31, 2010, the loan was amended
to, among other things, provide for extensions of the maturity date of the mortgage loan secured by
the hotel to November 2011 with extension options through 2015, subject to certain conditions
including a minimum debt service coverage test.
Certain affiliates of our joint venture partner have agreed to provide a standard non-recourse
carve-out guaranty for bad boy type acts and a completion guaranty to the lenders for the
Mondrian SoHo loan, for which Morgans Group has agreed to indemnify the joint venture partner and
its affiliates up to 20% of such entities guaranty obligations, provided that each party is fully
responsible for any losses incurred as a result of its respective gross negligence or willful
misconduct.
In July 2010, the joint venture partners each agreed to provide additional funding to the
joint venture in proportionate to their equity interest in order to complete the project. At that
time, the Mondrian SoHo joint venture was determined to be a variable interest entity as its equity
investment at risk was considered insufficient to permit the entity to finance its own activities.
Further, we determined that we were not the primary beneficiary of this variable interest entity as
we do not have a controlling financial interest in the entity. In February 2011, the hotel opened
and as such, we determined that the joint venture was an operating business. We continue to
account for our investment in Mondrian SoHo using the equity method of accounting.
Mondrian SoHo opened in February 2011, and we are operating the hotel under a 10-year
management contract with two 10-year extension options.
Shore Club. As of March 31, 2011, we owned approximately 7% of the joint venture that owns
Shore Club. On September 15, 2009, the joint venture received a notice of default on behalf of the
special servicer for the lender on the joint ventures mortgage loan for failure to make its
September monthly payment and for failure to maintain its debt service coverage ratio, as required
by the loan documents. On October 7, 2009, the joint venture received a second letter on behalf of
the special servicer for the lender accelerating the payment of all outstanding principal, accrued
interest, and all other amounts due on the mortgage loan. The lender also demanded that the joint
venture transfer all rents and revenues directly to the lender to satisfy the joint ventures debt.
In March 2010, the lender for the Shore Club mortgage initiated foreclosure proceedings against the
property in U.S. federal district court. In October 2010, the federal court dismissed the case for
lack of jurisdiction. In November 2010, the lender initiated foreclosure proceedings in state
court. We continue to operate the hotel pursuant to the management agreement during these
proceedings. However, there can be no assurances we will continue to operate the hotel once
foreclosure proceedings are complete.
For further information regarding our off balance sheet arrangements, see note 4 to our
consolidated financial statements.
Critical Accounting Policies
Our discussion and analysis of our financial condition and results of operations is based upon
our consolidated financial statements, which have been prepared in accordance with accounting
principles generally accepted in the
United States of America. The preparation of these financial statements requires us to make
estimates and judgments that affect the reported amounts of assets, liabilities, revenues and
expenses, and related disclosure of contingent assets and liabilities.
52
Table of Contents
We consider properties to be assets held for sale when management approves and commits to a
formal plan to actively market a property or group of properties for sale and the sale is probable.
Upon designation as an asset held for sale, we record the carrying value of each property or group
of properties at the lower of its carrying value, which includes allocable goodwill, or its
estimated fair value, less estimated costs to sell, and we stop recording depreciation expense.
Any gain realized in connection with the sale of the properties for which we has significant
continuing involvement, such as through a long-term management agreement, is deferred and
recognized over the initial term of the related management agreement. The operations of the
properties held for sale prior to the sale date are recorded in discontinued operations unless we
have continuing involvement, such as through a management agreement, after the sale.
We evaluate our estimates on an ongoing basis. We base our estimates on historical experience,
information that is currently available to us and on various other assumptions that we believe are
reasonable under the circumstances. Actual results may differ from these estimates under different
assumptions or conditions. No material changes to our critical accounting policies have occurred
since December 31, 2010.
ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. |
Quantitative and Qualitative Disclosures About Market Risk
Our future income, cash flows and fair values relevant to financial instruments are dependent
upon prevailing market interest rates. Market risk refers to the risk of loss from adverse changes
in market prices and interest rates. Some of our outstanding debt has a variable interest rate. As
described in Managements Discussion and Analysis of Financial Results of Operations Derivative
Financial Instruments above, we use some derivative financial instruments, primarily interest rate
swaps, to manage our exposure to interest rate risks related to our floating rate debt. We do not
use derivatives for trading or speculative purposes and only enter into contracts with major
financial institutions based on their credit rating and other factors. As of March 31, 2011, our
total outstanding consolidated debt, including capital lease obligations, was approximately $675.0
million, of which approximately $368.8 million, or 54.6%, was variable rate debt. At March 31,
2011, the one month LIBOR rate was 0.24%.
As of March 31, 2011, the $368.8 million of variable rate debt consists of our outstanding
balances on the Amended Mortgages and our amended revolving credit facility. In connection with
the Amended Mortgages, interest rate caps for 5.3% and 4.25%, in the amounts of approximately
$201.2 million and $103.5 million, respectively, were entered into in September 2010, and were
outstanding as of March 31, 2011. These interest rate caps mature on October 15, 2011. If market
rates of interest on this $368.8 million variable rate debt increase by 1.0%, or 100 basis points,
the increase in interest expense would reduce future pre-tax earnings and cash flows by
approximately $3.7 million annually and the maximum annual amount the interest expense would
increase on this variable rate debt is $16.2 million due to our interest rate cap agreements, which
would reduce future pre-tax earnings and cash flows by the same amount annually. If market rates of
interest on this $368.8 million variable rate decrease by 1.0%, or 100 basis points, the decrease
in interest expense would increase pre-tax earnings and cash flow by approximately $3.7 million
annually.
As of March 31, 2011, our fixed rate debt of $306.2 million consisted of the trust notes
underlying our trust preferred securities, the Convertible Notes, and the Clift lease. The fair
value of some of this debt is greater than the book value. As such, if market rates of interest
increase by 1.0%, or approximately 100 basis points, the fair value of our fixed rate debt at March
31, 2011 would decrease by approximately $30.2 million. If market rates of interest decrease by
1.0%, or 100 basis points, the fair value of our fixed rate debt at March 31, 2011 would increase
by $36.7 million.
Interest risk amounts were determined by considering the impact of hypothetical interest rates
on our financial instruments and future cash flows. These analyses do not consider the effect of a
reduced level of overall economic activity. If overall economic activity is significantly reduced,
we may take actions to further mitigate our exposure.
However, because we cannot determine the specific actions that would be taken and their
possible effects, these analyses assume no changes in our financial structure.
53
Table of Contents
We have entered into agreements with each of our derivative counterparties in connection with
our interest rate swaps and hedging instruments related to the Convertible Notes, providing that in
the event we either default or are capable of being declared in default on any of our indebtedness,
then we could also be declared in default on our derivative obligations.
Currency Exchange Risk
As we have international operations with our two London hotels and the hotel we manage in
Mexico, currency exchange risks between the U.S. dollar and the British pound and the U.S. dollar
and Mexican peso, respectively, arise as a normal part of our business. We reduce these risks by
transacting these businesses in their local currency. As we have a 50% ownership in Morgans Europe,
a change in prevailing rates would have an impact on the value of our equity in Morgans Europe. The
U.S. dollar/British pound and U.S. dollar/Mexican peso currency exchanges are currently the only
currency exchange rates to which we are directly exposed. Generally, we do not enter into forward
or option contracts to manage our exposure applicable to net operating cash flows. We do not
foresee any significant changes in either our exposure to fluctuations in foreign exchange rates or
how such exposure is managed in the future.
ITEM 4. | CONTROLS AND PROCEDURES. |
As of the end of the period covered by this report, an evaluation was performed under the
supervision and with the participation of our management, including the chief executive officer and
the chief financial officer, of the effectiveness of the design and operation of our disclosure
controls and procedures as defined in Rule 13a-15 of the rules promulgated under the Securities and
Exchange Act of 1934, as amended. Based on this evaluation, our chief executive officer and the
chief financial officer concluded that the design and operation of these disclosure controls and
procedures were effective as of the end of the period covered by this report.
There were no changes in our internal control over financial reporting (as defined in Exchange
Act Rule 13a-15) that occurred during the quarter ended March 31, 2011 that have materially
affected, or are reasonably likely to materially affect, our internal control over financial
reporting.
54
Table of Contents
PART II OTHER INFORMATION
ITEM 1. | LEGAL PROCEEDINGS. |
Litigation
Potential Litigation
We understand that Mr. Philippe Starck has attempted to initiate arbitration proceedings in
the London Court of International Arbitration regarding an exclusive service agreement that he
entered into with Residual Hotel Interest LLC (formerly known as Morgans Hotel Group LLC) in
February 1998 regarding the design of certain hotels now owned by us. We are not a party to these
proceedings at this time. See note 5 of our consolidated financial statements.
Petra Litigation Regarding Scottsdale Mezzanine Loan
On April 7, 2010, Petra CRE CDO 2007-1, LTD, a Cayman Islands Exempt Company (Petra), filed
a complaint against Morgans Group in the Supreme Court of the State of New York County of New York
in connection with an approximately $14.0 million non-recourse mezzanine loan made on December 1,
2006 by Greenwich Capital Financial Products Company LLC, the original lender, to Mondrian
Scottsdale Mezz Holding Company LLC, a wholly-owned subsidiary of Morgans Group LLC. The mezzanine
loan relates to the Scottsdale, Arizona property previously owned by us. In connection with the
mezzanine loan, Morgans Group entered into a so-called bad boy guaranty providing for recourse
liability under the mezzanine loan in certain limited circumstances. Pursuant to an assignment by
the original lender, Petra is the holder of an interest in the mezzanine loan. The complaint
alleges that the foreclosure of the Scottsdale property by a senior lender on March 16, 2010
constitutes an impermissible transfer of the property that triggered recourse liability of Morgans
Group pursuant to the guaranty. Petra demands damages of approximately $15.9 million plus costs and
expenses.
We believe that a foreclosure based on a payment default does not create one of the limited
circumstances under which Morgans Group would have recourse liability under the guaranty. On May
27, 2010, we answered Petras complaint, denying any obligation to make payment under the guaranty.
On July 9, 2010, Petra moved for summary judgment on the ground that the loan documents
unambiguously establish Morgans Groups obligation under the guaranty. Petra also moved to stay
discovery pending resolution of its motion. We opposed Petras motion for summary judgment, and
similarly moved for summary judgment in favor of us on grounds that the guaranty was not triggered
by a foreclosure resulting from a payment default. On December 20, 2010, the court granted our
motion for summary judgment dismissing the complaint, and denied the plaintiffs motion for summary
judgment. The action has accordingly been dismissed. Petra has appealed the decision, and the
appeal was heard on April 28, 2011. We will continue to defend this lawsuit vigorously. However, it
is not possible to predict the outcome of the lawsuit.
Other Litigation
We are involved in various lawsuits and administrative actions in the normal course of
business. In managements opinion, disposition of these lawsuits is not expected to have a material
adverse effect on our financial position, results of operations or liquidity.
ITEM 1A. | RISK FACTORS. |
In addition to the other information set forth in this report, you should carefully consider
the factors discussed in Part I, Item 1A. Risk Factors in our Annual Report on Form 10-K for the
fiscal year ended December 31, 2010. These risks and uncertainties have the potential to materially
affect our business, financial condition, results of operations, cash flows, projected results and
future prospects.
55
Table of Contents
ITEM 2. | UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS. |
None
ITEM 3. | DEFAULTS UPON SENIOR SECURITIES. |
None
ITEM 4. | REMOVED AND RESERVED. |
ITEM 5. | OTHER INFORMATION. |
None.
ITEM 6. | EXHIBITS. |
The exhibits listed in the accompanying Exhibit Index are filed as part of this report.
56
Table of Contents
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
Morgans Hotel Group Co. |
||||
/s/ Michael J. Gross | ||||
Michael J. Gross | ||||
Chief Executive Officer | ||||
/s/ Richard Szymanski | ||||
Richard Szymanski | ||||
Chief Financial Officer and Secretary | ||||
May 9, 2011
57
Table of Contents
EXHIBIT INDEX
Exhibit | ||||
Number | Description | |||
2.1 | Agreement and Plan of Merger, dated May 11, 2006, by and among Morgans
Hotel Group Co., MHG HR Acquisition Corp., Hard Rock Hotel, Inc. and
Peter Morton (incorporated by reference to Exhibit 2.1 to the Companys
Current Report on Form 8-K filed on May 17, 2006) |
|||
2.2 | First Amendment to Agreement and Plan of Merger, dated as of January
31, 2007, by and between Morgans Hotel Group Co., MHG HR Acquisition
Corp., Hard Rock Hotel, Inc., (solely with respect to Section 1.6 and
Section 1.8 thereof) 510 Development Corporation and (solely with
respect to Section 1.7 thereof) Peter A. Morton (incorporated by
reference to Exhibit 2.1 to the Companys Current Report on Form 8-K
filed on February 6, 2007) |
|||
3.1 | Amended and Restated Certificate of Incorporation of Morgans Hotel
Group Co.(incorporated by reference to Exhibit 3.1 to Amendment No. 5
to the Companys Registration Statement on Form S-1 (File No.
333-129277) filed on February 6, 2006) |
|||
3.2 | Amended and Restated By-laws of Morgans Hotel Group Co. (incorporated
by reference to Exhibit 3.2 to Amendment No. 5 to the Companys
Registration Statement on Form S-1 (File No. 333-129277) filed on
February 6, 2006) |
|||
3.3 | Certificate of Designations for Series A Preferred Securities
(incorporated by reference to Exhibit 3.1 to the Companys Current
Report on Form 8-K filed on October 16, 2009) |
|||
4.1 | Specimen Certificate of Common Stock of Morgans Hotel Group Co.
(incorporated by reference to Exhibit 4.1 to Amendment No. 3 to the
Companys Registration Statement on Form S-1 (File No. 333-129277)
filed on January 17, 2006) |
|||
4.2 | Junior Subordinated Indenture, dated as of August 4, 2006, between
Morgans Hotel Group Co., Morgans Group LLC and JPMorgan Chase Bank,
National Association (incorporated by reference to Exhibit 4.1 to the
Companys Current Report on Form 8-K filed on August 11, 2006) |
|||
4.3 | Amended and Restated Trust Agreement of MHG Capital Trust I, dated as
of August 4, 2006, among Morgans Group LLC, JPMorgan Chase Bank,
National Association, Chase Bank USA, National Association, and the
Administrative Trustees Named Therein (incorporated by reference to
Exhibit 4.2 to the Companys Current Report on Form 8-K filed on August
11, 2006) |
|||
4.4 | Amended and Restated Stockholder Protection Rights Agreement, dated as
of October 1, 2009, between Morgans Hotel Group Co. and Mellon Investor
Services LLC, as Rights Agent (including Forms of Rights Certificate
and Assignment and of Election to Exercise as Exhibit A thereto and
Form of Certificate of Designation and Terms of Participating Preferred
Stock as Exhibit B thereto) (incorporated by reference to Exhibit 4.1
of the Companys Current Report on Form 8-K filed on October 2, 2009) |
|||
4.5 | Amendment No. 1, dated as of October 15, 2009, to Amended and Restated
Stockholder Protection Rights Agreement, dated as of October 1, 2009,
between Morgans Hotel Group Co. and Mellon Investor Services LLC, as
Rights Agent (incorporated by reference to Exhibit 4.4 to the Companys
Current Report on Form 8-K filed on October 16, 2009) |
|||
4.6 | Amendment No. 2, dated as of April 21, 2010, to Amended and Restated
Stockholder Protection Rights Agreement, dated as of October 1, 2009,
between Morgans Hotel Group Co. and Mellon Investor Services LLC, as
Rights Agent (incorporated by reference to Exhibit 4.1 to the Companys
Current Report on Form 8-K filed on April 22, 2010) |
|||
4.7 | Indenture related to the Senior Subordinated Convertible Notes due
2014, dated as of October 17, 2007, by and among Morgans Hotel Group
Co., Morgans Group LLC and The Bank of New York, as trustee (including
form of 2.375% Senior Subordinated Convertible Note due 2014)
(incorporated by reference to Exhibit 4.1 of the Companys Current
Report on Form 8-K filed on October 17, 2007) |
58
Table of Contents
Exhibit | ||||
Number | Description | |||
4.8 | Supplemental Indenture, dated as of November 2, 2009, by and among
Morgans Group LLC, the Company and The Bank of New York Mellon Trust
Company, National Association (as successor to JPMorgan Chase Bank,
National Association), as Trustee (incorporated by reference to Exhibit
4.1 to the Companys Current Report on Form 8-K filed on November 4,
2009) |
|||
4.9 | Registration Rights Agreement, dated as of October 17, 2007, between
Morgans Hotel Group Co. and Merrill Lynch, Pierce, Fenner & Smith
Incorporated (incorporated by reference to Exhibit 4.2 of the Companys
Current Report on Form 8-K filed on October 17, 2007) |
|||
4.10 | Form of Warrant for Warrants issued under Securities Purchase Agreement
to Yucaipa American Alliance Fund II, L.P. and Yucaipa American
Alliance (Parallel) Fund II, L.P. (incorporated by reference to Exhibit
4.1 to the Companys Current Report on Form 8-K filed on October 16,
2009) |
|||
4.11 | Warrant, dated October 15, 2009, issued to Yucaipa American Alliance
Fund II, LLC (incorporated by reference to Exhibit 4.2 to the Companys
Current Report on Form 8-K filed on October 16, 2009) |
|||
4.12 | Warrant, dated October 15, 2009, issued to Yucaipa American Alliance
Fund II, LLC (incorporated by reference to Exhibit 4.3 to the Companys
Current Report on Form 8-K filed on October 16, 2009) |
|||
4.13 | Form of Amended Common Stock Purchase Warrants issued under Securities
Purchase Agreement to Yucaipa American Alliance Fund II, L.P. and
Yucaipa American Alliance (Parallel) Fund II, L.P. (incorporated by
reference to Exhibit 4.1 to the Companys Current Report on Form 8-K
filed on December 14, 2009) |
|||
4.14 | Amendment No. 1 to Common Stock Purchase Warrant issued under the Real
Estate Fund Formation Agreement to Yucaipa American Alliance Fund II,
LLC, dated as of December 11, 2009 (incorporated by reference to
Exhibit 4.2 to the Companys Current Report on Form 8-K filed on
December 14, 2009) |
|||
4.15 | Amendment No. 1 to Common Stock Purchase Warrant issued under the Real
Estate Fund Formation Agreement to Yucaipa American Alliance Fund II,
LLC, dated as of December 11, 2009 (incorporated by reference to
Exhibit 4.3 to the Companys Current Report on Form 8-K filed on
December 14, 2009) |
|||
10.1 | * | Separation Agreement and Release, dated as of March 20, 2011, between
Marc Gordon and Morgans Hotel Group, Inc. |
||
10.2 | * | Employment Agreement, effective as of March 20, 2011, between Morgans
Hotel Group Co. and David Hamamoto |
||
10.3 | * | Employment Agreement, effective as of March 20, 2011, between Morgans
Hotel Group Co. and Michael Gross |
||
10.4 | * | Employment Agreement, effective as of March 23, 2011, between Morgans
Hotel Group Co. and Yoav Gery |
||
10.5 | * | Employment Agreement, effective as of April 4, 2011, between Morgans
Hotel Group Co. and Daniel Flannery |
||
10.6 | * | Form of Morgans Hotel Group Co. 2011 Outperformance Plan Award Agreement |
||
10.7 | * | Form of Morgans Hotel Group Co. 2011 Executive Promoted Interest Bonus
Pool Award Agreement |
||
31.1 | * | Certification by the Chief Executive Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002 |
||
31.2 | * | Certification by the Chief Financial Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002 |
||
32.1 | * | Certification by the Chief Executive Officer pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002 |
||
32.2 | * | Certification by the Chief Financial Officer pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002 |
* | Filed herewith. |
59