MORGANS HOTEL GROUP CO MHGC
June 22, 2011 - 6:09pm EST by
nick980
2011 2012
Price: 7.19 EPS $0.00 $0.00
Shares Out. (in M): 31 P/E 0.0x 0.0x
Market Cap (in $M): 224 P/FCF 0.0x 0.0x
Net Debt (in $M): 407 EBIT 0 0
TEV ($): 631 TEV/EBIT 0.0x 0.0x

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Description

Description and Background

Founded by Ian Schrager in 1983, Morgans Hotel Group Co. (Nasdaq: MHGC) is credited as the creator of the first "boutique" hotel and a continuing leader of the hotel industry's boutique sector.  The Company operates Morgans, Royalton and Hudson in New York, Delano and Shore Club in South Beach, Mondrian in Los Angeles, South Beach and New York, Clift in San Francisco, Ames in Boston, Sanderson and St Martins Lane in London, and hotels in Isla Verde, Puerto Rico and Playa del Carmen, Mexico. Morgans also owns, or has ownership interests in, several of these hotels. 

Despite the Company's track record of building hip, ultra modern hotels designed by the likes Phillipe Starck, the Company is now rapidly transforming itself from a capital intensive boutique hotel owner and operator to an asset-light hotel manager and franchiser.   Through June of 2011, the Company has sold three of its wholly-owned hotels while retaining their management contracts at favorable terms and is currently marketing its assets in London.  MHGC will also eventually monetize its remaining wholly-owned hotels in New York and Miami.  

Hotels & Management Contracts as of 3/31/11

 

Location

Interest

Opened

Rooms

Designer

 

 

 

 

 

 

Owned & Operated:

 

 

 

 

 

Morgans(1)

New York, NY

100%

1984

114

 Andree Putnam

Royalton(1)

New York, NY

100%

1988

168

 Roman & Williams

Hudson

New York, NY

100%

2000

834

 Phillipe Starck

Delano

Miami, FL

100%

1995

194

 Phillipe Starck

Mondrian LA(2)

Los Angeles, CA

100%

1996

237

 Phillipe Starck

Clift(3)

San Francisco, CA

100%

2001

372

 Phillipe Starck

 

Management Contracts & Joint Ventures:

       

St. Martins Lane

London, UK

50%

1999

204

 Phillipe Starck

Sanderson

London, UK

50%

2000

150

 Phillipe Starck

Shore Club

Miami, FL

7%

2001

309

 David Chipperfield

Mondrian South Beach

Miami, FL

50%

2008

281

 Marcel Wanders

Ames

Boston, MA

35%

2009

114

 Rockwell Group

Mondrain SoHo

New York, NY

20%

2011

270

 Benjamin Noriega Ortiz

San Juan Water & Beach Club

San Juan, PR

NA

2009

78

 

Hotel Las Palapas

Playa del Carmen, MX

NA

2009

75

 

(1) Sold to Felcor Lodging Trust on May 23, 2011.  MHGC will continue to operate the hotels under a 15-year management agreement with one 10-year extension option.

(2) Sold to Pebblebrook Hotel Trust on May 2, 2011.  MHGC will continue to operate the hotels under a 20-year management agreement with one 10-year extension option.

(3) The Clift is operated under a 99-year lease arrangement.

       

 

Thesis

Shares of MHGC appear highly leveraged and extremely expensive on traditional metrics (both on an absolute and relative basis), but the Company is, in fact, trading below the value of its core real estate holdings and you're getting the remaining high ROIC hotel management and franchising business and minority stakes in four boutique hotels for free.  In addition, the Company's debt profile has improved dramatically following the sale of hotels in New York and Los Angeles.  Pro forma for the sales that closed during Q2'11, the Company's total indebtedness has been reduced by almost 40% to $523 million, of which only $289 is recourse to the Company. 

I believe the key to achieving my  base case valuation of over $12 per share is the sale of MHGC's remaining core hotel real estate, the Delano in Miami, the Hudson in New York and the Sanderson and St. Martins Lane in London.  By unlocking the value of its real estate, the Company will be in a position to pay down all its debt and use the significant excess proceeds to invest in its management and franchising business. The London assets are presently being marketed for sale and I believe the U.S. assets will be sold once management has targeted an efficient use for recycling proceeds. 

 

How does MHGC make money? Is this a great business?

How does the MHGC make money?

As a hotel owner and operator, the Company primarily made money by investing significant amounts of capital into building and operating boutique hotels in gateway markets.  Ownership had two distinct ramifications on the cash flow of the business: (1) in order to grow, capital needs to be continually fed into the business in an effort to increase the unit base; and (2) owing to the fixed costs associated with operating a hotel (depreciation, staff, etc.), operating cash flows were extremely cyclical as operating leverage magnified positive revenue performance, but also penalized them as owners when they did meet their fixed costs. 

As a hotel manager, MHGC will generate revenue by receiving a contractually stipulated percentage of room revenue (typically base fees 3-5% of hotel revenues) at the hotels in its system, and in some cases, a percentage of operating income at the hotels (incentive fees) based on certain performance criteria.  In the U.S., incentive fees are generally 10-30% of a hotel profits after an owner priority, or profitability threshold.  Outside the U.S., there is typically no owner's priority, so management contracts can be more lucrative relative to U.S. contracts (all else being equal).  Owing to the minimal costs associated with this business, the fees generate extremely high operating margins.  Furthermore, the low fixed cost and fee-based nature of this business somewhat limit the volatility of cash flows through the lodging cycle.  As a manager, the Company may also be expected to provide hotel owners with sliver equity or mezzanine financing to show their commitment to the property by having "skin in the game". 

As a franchiser, MHGC will license the hotel owners the rights to the Delano and Mondrian brands.  The benefits to the franchisee from brand affiliation include national marketing and advertising programs, central reservation systems, ongoing training programs for employees, and sales and technology support.  In return, MHGC will receive one-time application fees, recurring royalty fees (typically 4-6% of room revenue and 2-3% of food and beverage revenue) and fees for use of the central reservation system.  

Is this a great business?

By moving into a less capital intensive and less cyclical business model, I believe MHGC will be viewed as a great business as the manager and franchiser model is generally characterized as having stable and extremely high returns on invested capital.  For instance, Choice Hotels (NYSE: CHH), the only listed pure-play hotel franchisor, has consistently generated ROIC's in excess of 50% throughout the last two lodging cycles (2002 - 2010).  I view these levels of returns as spectacular in any industry and indicative of a great business. That being said, there is still significant competition amongst hotel brands and MHGC's management team must execute to maintain and enhance their brand equity in order to grow.  I have also included MAR and HOT, which are also striving to increase their management and franchise business, to show the variance in returns of the different industry models and volatility through cycles.  

Comparison of Select Lodging Company ROIC's

Lodging Peers ROIC(1)

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

HOT(2)

10%

11%

14%

11%

11%

9%

13%

13%

14%

18%

16%

10%

13%

MAR(3)

12%

11%

12%

9%

7%

6%

8%

9%

15%

17%

11%

9%

11%

CHH(4)

15%

16%

16%

21%

28%

37%

50%

63%

79%

69%

60%

48%

48%

(1) Defined as recurring, tax effected EBIT, plus D&A, less maintenance capex divided by total assets less current liabilities.

           

(2) HOT is generally defined as an owner and operator, but selectively transitioning to a manager and franchiser at select assets.

         

(3) MAR is an manager and franchiser who's returns have been weighed down its time share business.

             

(4) The decline in CHH's ROIC is generally attributed to lack of unit growth.

                 

Source: sell-side research

                         

 

Why and how is MHGC cheap? How should the company be valued?

As stated above, on traditional metrics MHGC looks very expensive and overleveraged; shares presently trade at over 25x LTM EV/adjusted EBITDA and 18x Net Debt/LTM adjusted EBITDA (debt calculation includes non-recourse hotel debt).  How then are the shares cheap?  MHGC is cheap because at the current share price you're only paying for the real estate underlying the Delano, Hudson Hotel and share of the London hotels and getting a growing hotel management business and joint venture assets for free.

I believe shares of MHGC should be valued on a sum-of-the-parts basis rather than on traditional EV/EBITDA metrics as this method separates the value of the real estate, minority investments and hotel management business. 

Sum-of-the-Parts Walk Through

2011 YTD Sale Transactions

Through June of 2011, the Company has already successfully sold off three hotels for over $150 million in proceeds.  The assets, which were purchased by REITs, averaged valuations of $534K/Key and ~20x EV/2010 EBITDA likely due to the following:  1.) we're in the early stages of the lodging recovery suggesting significant upside to 2010 EBITDA, 2.) MHGC's assets generate significant streams of income besides lodging related revenue (more on this below), and 3.) the condition and quality of the assets.  

 

 

 

 

 

 

 

EV/EBITDA

 

EBITDA

 

Purchase Price

Debt

Net Proceeds

Cash in Escrow

Total Proceeds

Value/ Key (000)

2010

Peak

Rooms

2010

Peak

                       

Asset Sales

 

 

 

 

 

 

 

 

 

 

 

Morgans - NY

                   51.8

       

$454

28.6x

7.5x

            114

                 1.8

                 6.9

Royalton - NY

                   88.2

 

 

 

 

$525

43.8x

11.7x

            168

                 2.0

                 7.5

 

                 140.0

           26.0

              114.0

 

               114.0

$496

36.6x

9.7x

            282

                 3.8

               14.4

                       

Mondrian - LA

                 137.0

         103.5

                33.5

             6.0

                 39.5

$578

13.2x

7.8x

            237

               10.3

17.6

                       

Total

                277.0

        140.0

             147.5

             6.0

              153.5

$534

19.5x

8.7x

           519

              14.2

              32.0

 

Pro Forma Balance Sheet ($ in millions)

With the sale of Morgans, Royalton and Mondrian the Company's net debt declines from $659 million to $407 million.  Excluding non-recourse property debt, the Company's net debt is now down to $173 million.  The Company is also left with an NOL worth ~$100 million that could be used for limiting tax leakage from future asset sales.  

 

Maturity

Rate

Security

Balance 3/31/2011

 

Closed Asset Sales(1)

 

Pro Forma

                 

Cash and cash equivalents

     

                   6.0

 

                110.2

 

       116.2

                 

Revolver ($116M/$125M Capacity)

Oct-11

L + 3.75%

Delano, Royalton, Morgans

                                                    37.7

 

          (37.7)

 

                 - 

Liability and subsidiary trust

Oct-26

8.680%

 

                                                    50.1

 

               -  

 

            50.1

Convertible Notes

Oct-14

2.375%

 

                     164.4

 

               -  

 

          164.4

Capital lease obligations

   

Hudson

                                                      6.1

 

               -  

 

              6.1

                 

Non-recourse mortgage and mezzanine note

Oct-11

L + 1.03%

Hudson

                     201.2

 

               -   

 

          201.2

Non-recourse mortgage and mezzanine note

Oct-11

L + 3.24%

Hudson

                                                    26.5

 

               -  

 

            26.5

Non-recourse mortgage note

Oct-11

L + 1.54%

Mondrian

                     103.5

 

        (103.5)

 

                 - 

                 

Series A preferred securities

 

8.000%

 

                                                    75.0

 

               -  

 

            75.0

Total Debt

     

                    664.5


   

         523.3

Net debt

 

 

 

                     658.5

 

 

 

          407.1

(1) Reflects the proceeds received from the sales of the Mondrian (LA), Morgans (NY) and Roylaton (NY), offset by the acquisition of CMG.

       

 

London Hotel Sales

MHGC owns 50% stakes in two London hotels, the Sanderson and St Martins Lane, which it also manages.  Per press reports, the Company and their joint venture partner, Walton Street Capital, are looking to sell the hotels in London and have MHGC retain the management contracts.  I am valuing the London assets at $250 to $319 million, which would yield net proceeds of $84 to $119 million to MHGC.  My valuation is supported by press reports and prior transactions for these assets that indicate potentially higher values.  For instance, in 2007, when Lehman Brothers offloaded the hotels to Walton Street the implied value was ~$300 million and Property Week has published reports that the sellers are seeking £215 million, or $346 million at today's exchange rates.  As the Company's 50% ownership in these assets are held through equity in a joint venture, management believes that they could use their U.S. NOL's to limit tax leakage.  

London Hotel Assets ($ in millions)

 

 

$000/Key

 

EV

 

Hotel

 

 

 

Equity Value

 

Rooms

Low

Base

High

 

Low

Base

High

 

Debt

 

Equity

 

Low

Base

High

                                 

St. Martins Lane

204

$700

$800

$900

 

$142.8

$163.2

$183.6

     

50%

       

Sanderson

150

700

800

900

 

105.0

120.0

135.0

 

 

 

50%

 

 

 

 

Total

354

$1,400

$800

$900

 

$247.8

$283.2

$318.6

 

80.2

 

50%

 

83.8

101.5

119.2


Sanderson Hotel Overview

Opened in 2000, Sanderson has 150 guestrooms and suites, seven with private terraces and 18 suites, including a luxury penthouse and apartment. The hotel is located in London's Soho district, within walking distance of Trafalgar Square, Leicester Square and the West End business district. Sanderson's structure is considered a model of 1950s British architecture and the hotel has been designated as a landmark building. Designed by Philippe Starck, the guestrooms do not have interior walls (the dressing room and bathroom are encased in a glass box that is wrapped in layers of sheer curtains). Dining and bar offerings include Suka restaurant, Long Bar and the Purple Bar. Other amenities include the Courtyard Garden, the Billiard Room, and Agua Spa. Like the Light Bar at St Martins Lane, the Long Bar is a popular destination that has consistently attracted a high-profile celebrity clientele and has generated significant media coverage.

St Martins Lane Overview

Opened in 1999, St Martins Lane has 204 guestrooms and suites, including 16 rooms with private patio gardens, and a loft-style luxury penthouse and apartment with expansive views of London. The renovated 1960s building that previously housed the Mickey Mouse Club and the Lumiere Cinema is located in the hub of Covent Garden and the West End theatre district, within walking distance of Trafalgar Square, Leicester Square and the London business district. Designed by Philippe Starck, the hotel's meeting and special event space includes the Back Room, Studios, and an executive boardroom. St Martins Lane features Asia de Cuba Restaurant; The Rum Bar, which is a modern twist on the classic English pub; the Light Bar, an exclusive destination which has attracted significant celebrity patronage and received frequent media coverage; and Bungalow 8, a members-only bar. Gymbox, a state-of- the-art gym, is operated by a third party under a lease agreement.

Delano and Hudson Hotels

As the Company pursues its asset-light strategy it will also opportunistically look to unload its remaining wholly-owned hotels, the Delano in Miami and the Hudson in New York City, and retain the management contracts at those properties.  Based on recent press reports and my own due diligence, I believe that the Company could again garner significant premium valuations for these trophy assets and fetch upwards of $300 million in net proceeds. 

In my base case sum-of-the-parts, I assume that the Delano is sold for $184 million by assuming $950K/Key.  While on the surface this appears to be a very rich multiple, I believe it is defensible and could, in fact, prove conservative.  For instance, at $950K/Key for the Delano a buyer would be paying only ~7.5x peak EBITDA for THE landmark hotel in Miami (see valuation matrix below).   In addition, I believe the Delano deserves a premium valuation due to its diversified income streams.  Unlike most full service hotels in the U.S. that generate less than 30% of their revenue from food and beverage business, the Delano earns greater than 50% as the hotel is designed to capture significant non-guest restaurant and bar business.  Finally, I believe my valuation is further supported by management's statement that the property has historically been appraised at $160 million, or $825K/Key, for the credit facility.

I estimate that The Hudson will be sold for $396 million in my base scenario, or $475K/Key.  This valuation is supported by several New York City transactions of comparable assets (see below) and commentary from Real Capital Analytics that the average value per transaction was $435K/Key in the trailing twelve months. 

Delano Overview

Opened in 1995, Delano South Beach has 194 guest rooms, suites and lofts and is located in the heart of Miami Beach's fashionable South Beach Art Deco district. Room renovations began in 2006, including technology upgrades and upgrading of suites and bungalows, and was completed in October 2007. Formerly a 1947 landmark hotel, Delano South Beach is noted for its simple white Art Deco décor. The hotel features an "indoor/outdoor" lobby, the Water Salon and Orchard (which is Delano South Beach's landscaped orchard and 100-foot long pool) and beach facilities. The hotel's accommodations also include eight poolside bungalows and a penthouse and apartment. Delano South Beach's restaurant and bar offerings include the recently re-concepted restaurant Blue Door Fish, which opened in November 2010, Blue Sea, a poolside bistro, the Rose Bar and a lounge, The Florida Room, designed by Kravitz Design. The hotel also features Agua Spa, a full-service spa facility.

Delano Historical Results ($ in millions, expect ADR and RevPAR)

 

2005

2006

2007

2008

2009

2010

 

Max

Median

Min

Delano

 

 

 

 

 

 

 

 

 

 

Occupancy

72%

67%

73%

79%

62%

61%

 

79%

70%

61%

ADR

$474

$505

$557

$540

$488

$480

 

$557

$497

$474

RevPAR

$342

$338

$407

$428

$304

$293

 

$428

$340

$293

                     

Room Revenue

$24.3

$24.0

$28.9

$30.4

$21.5

$20.8

 

$30.4

$24.1

$20.8

Total Revenue

           49.7

           50.4

           56.6

           62.1

           44.8

           43.6

 

$62.1

$50.1

$43.6

Depreciation

             3.3

             2.2

             3.9

             5.8

             4.6

             4.9

 

$5.8

$4.3

$2.2

Operating Income

           15.9

           16.1

           17.9

           18.9

           11.0

             9.5

 

$18.9

$16.0

$9.5

EBITDA

$19.1

$18.3

$21.7

$24.7

$15.7

$14.4


$24.7

$18.7

$14.4

Delano Valuation Matrix 

 

Delano Valuation Matrix

             

Rooms

194

194

194

194

194

194

$/Key (000)

$775

$825

$875

$925

$975

$1,025

EV (mm)

$150

$160

$170

$179

$189

$199

Peak EBITDA (mm)

$24.7

$24.7

$24.7

$24.7

$24.7

$24.7

EV / Peak EBITDA

6.1x

6.5x

6.9x

7.3x

7.7x

8.1x

LTM EBITDA (mm)

$13

$13

$13

$13

$13

$13

EV / LTM EBITDA

11.6x

12.3x

13.1x

13.8x

14.6x

15.3x

Hotel debt (mm)

$2.0

$2.0

$2.0

$2.0

$2.0

$2.0

Equity value (mm)

$148.4

$158.1

$167.8

$177.5

$187.2

$196.9

 

Miami Hotel Upper Upscale and Luxury Transactions

Property

Date

Price ($mm)

Price/Key($K)

       

Viceroy

May-11

$36.5

$247.0

Royal Palm(1)

Apr-11

                 130.0

                 412.0

Savoy

Jul-05

                   30.0

                 400.0

Raleigh

Oct-09

                   31.0

                 300.0

 

 

 

 

Median

   

$350.0

Mean

 

 

                 339.8

(1) Includes $42.5 million of schedule renovations.

 
 

Hudson Hotel Overview

Opened in 2000, Hudson is MHGC's largest New York City hotel, with 834 guest rooms and suites, including two ultra-luxurious accommodations - a 3,355 square foot penthouse with a landscaped terrace and an apartment with a 2,500 square foot tented terrace. Hudson occupies the former clubhouse of the American Women's Association, which was originally constructed in 1929 by J.P. Morgan's daughter. The hotel, which is only a few blocks away from Columbus Circle, Time Warner Center and Central Park, was designed by Philippe Starck to offer guests affordable luxury and style. Hudson's notable design includes a 40-foot high ivy-covered lobby and a lobby ceiling fresco by renowned artist Francesco Clemente. The hotel's food and beverage offerings include Hudson Hall, the primary restaurant, which was renovated, re-concepted and opened in May 2010, Private Park, a restaurant and bar in the indoor/outdoor lobby garden, Hudson Bar, the Library Bar and Sky Terrace, an exclusive landscaped terrace on the 15th floor. In February 2010, we completed and opened Good Units, an exclusive venue for special functions. The raw space was conceived for performances and other experiences. Good Units is located in approximately 8,000 square feet of previously unused basement space within the hotel.

 

Hudson Hotel Historical Results 

 

2005

2006

2007

2008

2009

2010

 

Max

Median

Min

Hudson Hotel

 

 

 

 

 

 

 

 

 

 

Occupancy

85%

88%

92%

91%

84%

89%

 

92%

88%

84%

ADR

$247

$265

$284

$283

$200

$213

 

$284

$256

$200

RevPAR

$211

$232

$261

$257

$168

$189

 

$261

$222

$168

                     

Room Revenue

$61.7

$68.1

$76.6

$75.7

$49.9

$57.4

 

$76.6

$64.9

$49.9

Total Revenue

           80.9

           88.1

         101.3

           97.8

           65.7

           72.8

 

$101.3

$84.5

$65.7

Depreciation

             9.4

             5.1

             6.3

             6.4

             6.8

             7.9

 

$9.4

$6.6

$5.1

Operating Income

           24.8

           33.8

           36.8

           32.9

             6.3

             9.6

 

$36.8

$28.8

$6.3

EBITDA

$34.2

$38.9

$43.1

$39.3

$13.1

$17.4


$43.1

$36.5

$13.1

 
Hudson Hotel Valuation Matrix
 

Hudson Valuation Matrix

             

Rooms

834

834

834

834

834

834

$/Key (000)

$375

$400

$425

$450

$475

$500

EV (mm)

$313

$334

$354

$375

$396

$417

Peak EBITDA (mm)

$43.1

$43.1

$43.1

$43.1

$43.1

$43.1

EV / Peak EBITDA

7.3x

7.7x

8.2x

8.7x

9.2x

9.7x

LTM EBITDA (mm)

$15

$15

$15

$15

$15

$15

EV / LTM EBITDA

20.9x

22.2x

23.6x

25.0x

26.4x

27.8x

Hotel debt (mm)

$233.8

$233.8

$233.8

$233.8

$233.8

$233.8

Equity value (mm)

$79.0

$99.8

$120.7

$141.5

$162.4

$183.2

 

New York City Luxury and Upper Upscale Hotel Transactions

Property

Date

Price ($mm)

Price/Key($K)

       

Paramount Hotel

Jun-11

    $275.0

     $461.0

Palace Hotel

May-11

                 400.0

                 445.0

Helmsley Hotel

Jan-11

                 313.5

                 405.6

Doubletree Metropolitan

Dec-10

                 331.6

                 439.2

Roger Williams Hotel

Oct-10

                   90.0

                 466.0

W Union Square

Aug-10

                 182.0

                 686.0

Median

   

     $453.0

Mean

   

                 483.8

 

Core Real Estate Value ($ in millions, except $/key)

On real estate value alone, I believe the Company is worth between $6.56 and $9.05, so at present levels you're getting the operating business and remaining joint ventures for essentially free.  But who is going to buy the assets and why? MHGC's assets are most likely to be acquired by either hotel REITs and/or private equity firms that are awash with cash given the present industry dynamics favor buy vs. build strategies.  

 

 

$000/Key

 

EV

Hotel

 

Equity Value

 

Rooms

Low

Base

High

 

Low

Base

High

Debt

Equity

Low

Base

High

                           

Real Estate

                         

Delano

194

$850

$950

$1,050

 

$164.9

$184.3

$203.7

2.0

100%

$162.9

$182.3

$201.7

Hudson

834

450

475

500

 

375.3

396.2

417.0

233.8

100%

141.5

162.4

183.2

Sub-total

1,028

$525

$565

$604

 

$540.2

$580.5

$620.7

235.8

100%

304.4

344.7

384.9

                           

St. Martins Lane

204

$700

$800

$900

 

$142.8

$163.2

$183.6

 

50%

     

Sanderson

150

700

800

900

 

105.0

120.0

135.0

 

50%

 

 

 

Sub-total

354

$1,400

$800

$900

 

$247.8

$283.2

$318.6

80.2

50%

83.8

101.5

119.2

                           

PF Corporate Net Debt

                 

173.3

173.3

173.3

                           

Equity Value

                   

214.9

272.8

330.8

                           

Equity Value per Share

                 

$6.91

$8.77

$10.64

DSO

                   

31.1

31.1

31.1

                           

Value/share adjusted for warrants

 

 

 

 

 

 

 

 

$6.56

$7.78

$9.05

  

The major hotel REITS presently have significant liquidity and capacity for asset purchases and per Bjorn Hanson, dean of the Tisch Center for Hospitality, Tourism and Sports Management at New York University, "there are over 40 private equity funds hunting for deals in the sector, and many are under the gun to buy earlier than later".  These players are motivated buyers for a variety of reasons, including: 1.) the existing room supply pipeline is significantly below historical norms (< 1% room supply growth) and should be easily absorbed by surging demand, 2.) the lead time for new hotels is ~3 years and there is limited/no financing for new developments, and 3.) asset values remain below replacement cost.  

 

Snapshot of Hotel REIT Liquidity ($ in millions)

 

Cash

Credit Line

Total Liquidity

Comments

         

HST

$154.0

$438.0

$592.0

European JV (Euro Fund Two) looking to make $1B in acquisitions

LHO

43.1

393.1

436.2

Focus on independent hotels in gateway, costal cities

SHO

184.7

150.0

334.7

 

DRH

250.0

200.0

450.0

Focus on premium, upper-upscale properties

PEB

140.0

200.0

340.0

Acquired Mondrian LA; Management stated acquisition capacity of $500-$575

FCH

175.0

225.0

400.0

Acquired Morgans and Royalton

 

Joint Venture Assets ($ in millions, except $/key)

In addition to the above mentioned properties, the Company holds minority stakes and management contracts at four U.S. hotels.  I assume that the Company will eventually look to monetize these assets so I valued the real estate on a per key basis and value the management contracts separately on EV/EBITDA.  As stated above, I believe the Company will likely grow their portfolio of minority-owned assets as a means to grow the management and franchising business, so I would expect greater turnover in these assets going forward. 

 

 

$000/Key

 

EV

Hotel

 

Equity Value

 

Rooms

Low

Base

High

 

Low

Base

High

Debt

Equity

Low

Base

High

                           

Shore Club(1)

309

300

350

400

 

$92.7

$108.2

$123.6

8.4

7%

5.9

7.0

8.1

Mondrian SB

281

300

350

400

 

84.3

98.4

112.4

47.8

50%

18.3

25.3

32.3

Ames

114

300

325

350

 

34.2

37.1

39.9

14.2

35%

7.0

8.0

9.0

Mondrian SoHo

270

500

550

600

 

135.0

148.5

162.0

38.0

20%

19.4

22.1

24.8

Sub-Total

         

346.2

392.1

437.9

108.3

 

50.6

62.4

74.2

                           

Equity value of Joint Ventures

                 

134.4

163.9

193.4

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1) Appraised at $86 million in September 2009.

                     

 

Management Contracts

Assuming the Company sells the Delano, Hudson and London assets and retains the management contracts, MHGC's consolidated revenue and income will consist mainly of high margin hotel management and franchising fees.  I believe the recurring revenue/EBITDA from these contracts will be approximately $25 million.  

 

Room

F&B

Hotel

Mgmt Fees

         

'10 Reported Revenue

      139.3 

     78.8

      218.0

      18.3

Mondrian LA

         15.9

         15.9

         31.7

            -   

Royalton

         16.0

           5.0

         21.0

            -  

Morgans

           9.8

           7.8

         17.5

            -  

Delano

         20.8

         22.8

         43.6

            -  

Hudson

         57.4

         15.4

         72.8

            -  

Total, ex. Clift

       119.7

         67.0

       186.7

         18.3

Less: Hard Rock

            -  

            -  

            -  

          (9.0)

Less: Asset Sales

       

Mondrian LA(1)

            -  

            -  

            -  

           2.1

Mondrian SoHo

 

            -  

            -  

           2.0

Royalton(2)

            -  

            -  

            -  

           1.4

Morgans(2)

            -  

            -  

            -  

           1.1

Delano(2)

            -  

            -  

            -  

           2.8

Hudson(3)

            -  

            -   

            -  

           4.7

PF Revenue

            -  

            -  

            -  

         25.0

         

EBITDA

 

   -  

           -  

        25.0

Margins

 

 

 

100%

(1) Pro forma for 2010 results per the Company's 8-K filings.

   

(2) Assumes $1M per 100 rooms.

       

(3) Assume $750K per 100 rooms.

       

 

In addition to the Company's existing base of management contracts, MHGC has a pipeline of four hotel management contracts that are in various stages of development.  Importantly, three of these contracts are outside the U.S. so incentive fees will come quickly as there is no owner's priority.  I believe the earnings power of the management fees alone could generate an additional $7.5 million by 2014 by assuming $1 million in fees per 100 rooms.  Management will endeavor to supplement this pipeline with two to three management contracts per year.  If successful, by 2014 MHGC will have at least 21 contracts that are generating over $40 million of annual EBITDA.

I have NOT included any value for MHGC's announced pipeline or potential growth in my sum-of-the-parts, but a highly a conservative DCF of just those contracts that have been announced yields at least $0.60/share in incremental equity value.  I assume the $7.5 million of EBITDA from 10-year contracts and discount them at 15%, which yields an NPV of $38 million.  I then discount the NPV from 2014 back to today using the same discount rate of 15%, which yield ~$25 million in equity value. 

Existing Management Contracts Expirations

Location

Hotel

Mgmt Contract Expirations

Extension Options

       

Los Angeles, CA

Mondrian

2031

one 10-year

New York, NY

Morgans

2026

one 10-year

New York, NY

Royalton

2026

one 10-year

London, UK

Sanderson

2018

one 10-year

London, UK

St. Martins Lane

2018

one 10-year

Miami, FL

Shore Club

2022

None

Miami, FL

Mondrian South Beach

2026

None

Boston, MA

Ames

2024

None

San Juan, PR

San Juan Water and Beach Club

2019

None

Playa del Carment, MX

Hotel Las Palapas

2014

one 5-year

New York, NY

Mondrian SoHo

2021

two 10-year

 
Pipeline of Management Contracts

Location

Brand

Development

Rooms

Est. Opening

$/100 Keys (millions)

Est. Revenue

             

Aegean Sea, Turkey

Delano

New Development

200

2013

$1.0

$2.0

Cabo San Lucas, Mexico

Delano

Condo Conversion

114

2013

             1.0

             1.1

Doha, Qatar

Mondrian

New Development

265

2013

             1.0

             2.7

New York, NY

Morgans

New Development

175

2014

             1.0

             1.8

Total

   

754

   

$7.5

 

2014 EBITDA Potential ($ in millions)

2014 Est. Mgmt Revenue/EBITDA

 

Pro Forma Contract Revenue/EBITDA

       $25.0

Announced Contracts

 

           7.5

Incremental Contract Wins(1)

 

           8.0

EBITDA potential

 

        40.5

(1) Assumes two contract wins/year @ $2M/year.

 

To be conservative, I am valuing the pro forma management and franchising business at 12x - 13x EV/EBITDA, which is only in-line with other lodging C-Corps.  That being said, I believe there is a strong argument to be made that this business should trade at a premium for the following reasons: 1.) the Company has a contractual, recurring revenue/EBITDA base with an average life of 18 years, 2.) this is an extremely high ROIC business, and 3.) given the Company's pipeline of announced and potential opportunities, there is a clear path to growth.  In addition, were the Company's management contracts and brands to be acquired by strategic buyer, I believe the multiple of EBITDA would be substantially higher given that the buyer would be able to eliminate almost all of the Company's $25 million in corporate overhead. Potential buyers for the brands and management business would most likely be major lodging C-Corps that have had moderate success with growing their boutique brands, such as Hilton, Marriott or Hyatt.  Hilton in particular is in need of a lifestyle/boutique brand as they are temporarily banned from building or acquiring such a brand since the Denizen scandal where they admitted to stealing trade secrets from Starwood Hotels.   

C-Corp Trading Multiples

Lodging C-Corps

 

2011 EV/EBITDA

Marriott International

MAR

13.0x

Starwood Hotels & Resorts

HOT

13.4x

Hyatt Hotels Corporation

H

14.7x

Wyndham Worldwide

WYN

7.5x

Choice Hotels

CHH

11.5x

Orient-Express

OEH

15.0x

Gaylord Entertainment

GET

11.4x

Median

 

13.0x

Mean

 

12.4x

 

Potential C-Corp Acquirers of Management & Franchising Business

C-Corp

Boutique Brand

Hotels

     

Hyatt

Andaz

5

Marriott

Edition

7

Hilton

NA

0

 
 

Consolidated Sum-of-the-Parts

 

 

EV/EBITDA

 

Enterprise Value

 

 

Equity Value

 

'12 EBITDA

Low

Base

High

 

Low

Base

High

Debt

Equity %

Low

Base

High

                           

Delano & Hudson RE

         

$540.2

$580.5

$620.7

235.8

100%

$304.4

$344.7

$384.9

London RE

         

247.8

283.2

318.6

80.2

50%

83.8

101.5

119.2

Joint Ventures

         

346.2

392.1

437.9

108.3

Various

50.6

62.4

74.2

Management Contracts

              25.0

12.0x

12.5x

13.0x

 

300.1

312.6

325.1

                -  

100%

300.1

312.6

325.1

Corporate Overhead

            (25.0)

7.0x

7.0x

7.0x

 

(175.0)

(175.0)

(175.0)

                -  

100%

(175.0)

(175.0)

(175.0)

Total

                   

$563.9

$646.1

$728.4

                           

PF net debt

                   

173.3

173.3

173.3

                           

Total Equity Value

                   

390.5

472.8

555.0

                           

Equity value/share

                   

$12.56

$15.20

$17.85

DSO

                   

31.1

31.1

31.1

                           

Yucaipa Warrant Dilution

                   

6.5

7.6

8.3

DSO, including warrant dilution

                 

37.6

38.7

39.4

Value/share adjusted for warrants

     

 

 

 

 

 

 

$10.38

$12.23

$14.09

Yucaipa Warrants

In October of 2009, when the Company had approximately $736 million of consolidated debt, $275 million of JV debt and was facing mounting property-level maturities, Yucaipa, the private equity firm founded by Ron Burkle, purchased of $75 million of Series A preferred securities to enhance the Company's liquidity profile. In connection with the issuance of the preferreds, Yucaipa received 12.5 million warrants exercisable using the cashless exercise method at an exercise price of $6.00/share.  For their investment, Yucaipa also received a seat on the board and nominated Michael Gross, who served as a consultant to Yucaipa.  When Michael Gross became CEO and discontinued his relationship with Yucaipa, Ron Burkle replaced him as Yucaipa's board designee.

I reflect the dilution from the warrants in my sum-of-the-parts, but believe their repurchase on favorable terms to the minority shareholders would add significant value. 

 

 Why will MHGC shares reach their intrinsic value (catalysts)?

  • Hotel real estate sale announcements
    • London assets (Sanderson and St Martins Lane),
    • The Delano in Miami, and
    • Hudson Hotel in New York
  • New hotel management and franchise contract announcements
  • Repurchase of Yucaipa warrants
  • Acquisition of the Company's management and franchising business by a strategic acquirer

 

Investment positives?

  • New management team with interests that are well aligned with shareholders via the Outperformance Award Program.  This program will entitle management to 10% of the total market value created in excess of the 30% cumulative return over $8.87/share over a three-year period. 
  • The U.S. is in the early stages of a lodging recovery which should bode well for reported results, especially as gateway cities should lead the rebound
  • Room supply growth near historic lows and anticipated to come mostly from the upper mid-scale segment. 
  • Positive lodging trends in Miami should support a premium valuation for the Delano.  I'll defer to the experts at Jones Lang and LaSalle to describe the improving market dynamics (see link: http://www.joneslanglasallehotels.com/hotels/EN-GB/Pages/NewsItem.aspx?ItemID=21330)
  • Significant underlying real estate value already recognized by strategic investors, such as HG Vora who had filed a 13D (the HG stands for Highgate, as in Highgate Holdings the real estate PE firm who's holdings include Highgate Hotels)

Investment negatives/risks?

  • Collapse of the capital markets could stymie potential asset sales
  • Slower RevPAR growth and increased room supply in Manhattan
  • October 2011 debt maturities at the Hudson
  • Unsuccessful outcome of Shore Club litigation
  • Failure to successfully grow the management contract pipeline
  • The Company has significant exposure to the New York City, which would not bode well for an investment if there were, god forbid, another terrorist attack 
  


Catalyst

  • Hotel real estate sale announcements
    • London assets (Sanderson and St Martins Lane),
    • The Delano in Miami, and
    • Hudson Hotel in New York
  • New hotel management and franchise contract announcements
  • Repurchase of Yucaipa warrants
  • Acquisition of the Company's management and franchising business by a strategic acquirer
    sort by    

    Description

    Description and Background

    Founded by Ian Schrager in 1983, Morgans Hotel Group Co. (Nasdaq: MHGC) is credited as the creator of the first "boutique" hotel and a continuing leader of the hotel industry's boutique sector.  The Company operates Morgans, Royalton and Hudson in New York, Delano and Shore Club in South Beach, Mondrian in Los Angeles, South Beach and New York, Clift in San Francisco, Ames in Boston, Sanderson and St Martins Lane in London, and hotels in Isla Verde, Puerto Rico and Playa del Carmen, Mexico. Morgans also owns, or has ownership interests in, several of these hotels. 

    Despite the Company's track record of building hip, ultra modern hotels designed by the likes Phillipe Starck, the Company is now rapidly transforming itself from a capital intensive boutique hotel owner and operator to an asset-light hotel manager and franchiser.   Through June of 2011, the Company has sold three of its wholly-owned hotels while retaining their management contracts at favorable terms and is currently marketing its assets in London.  MHGC will also eventually monetize its remaining wholly-owned hotels in New York and Miami.  

    Hotels & Management Contracts as of 3/31/11

     

    Location

    Interest

    Opened

    Rooms

    Designer

     

     

     

     

     

     

    Owned & Operated:

     

     

     

     

     

    Morgans(1)

    New York, NY

    100%

    1984

    114

     Andree Putnam

    Royalton(1)

    New York, NY

    100%

    1988

    168

     Roman & Williams

    Hudson

    New York, NY

    100%

    2000

    834

     Phillipe Starck

    Delano

    Miami, FL

    100%

    1995

    194

     Phillipe Starck

    Mondrian LA(2)

    Los Angeles, CA

    100%

    1996

    237

     Phillipe Starck

    Clift(3)

    San Francisco, CA

    100%

    2001

    372

     Phillipe Starck

     

    Management Contracts & Joint Ventures:

           

    St. Martins Lane

    London, UK

    50%

    1999

    204

     Phillipe Starck

    Sanderson

    London, UK

    50%

    2000

    150

     Phillipe Starck

    Shore Club

    Miami, FL

    7%

    2001

    309

     David Chipperfield

    Mondrian South Beach

    Miami, FL

    50%

    2008

    281

     Marcel Wanders

    Ames

    Boston, MA

    35%

    2009

    114

     Rockwell Group

    Mondrain SoHo

    New York, NY

    20%

    2011

    270

     Benjamin Noriega Ortiz

    San Juan Water & Beach Club

    San Juan, PR

    NA

    2009

    78

     

    Hotel Las Palapas

    Playa del Carmen, MX

    NA

    2009

    75

     

    (1) Sold to Felcor Lodging Trust on May 23, 2011.  MHGC will continue to operate the hotels under a 15-year management agreement with one 10-year extension option.

    (2) Sold to Pebblebrook Hotel Trust on May 2, 2011.  MHGC will continue to operate the hotels under a 20-year management agreement with one 10-year extension option.

    (3) The Clift is operated under a 99-year lease arrangement.

           

     

    Thesis

    Shares of MHGC appear highly leveraged and extremely expensive on traditional metrics (both on an absolute and relative basis), but the Company is, in fact, trading below the value of its core real estate holdings and you're getting the remaining high ROIC hotel management and franchising business and minority stakes in four boutique hotels for free.  In addition, the Company's debt profile has improved dramatically following the sale of hotels in New York and Los Angeles.  Pro forma for the sales that closed during Q2'11, the Company's total indebtedness has been reduced by almost 40% to $523 million, of which only $289 is recourse to the Company. 

    I believe the key to achieving my  base case valuation of over $12 per share is the sale of MHGC's remaining core hotel real estate, the Delano in Miami, the Hudson in New York and the Sanderson and St. Martins Lane in London.  By unlocking the value of its real estate, the Company will be in a position to pay down all its debt and use the significant excess proceeds to invest in its management and franchising business. The London assets are presently being marketed for sale and I believe the U.S. assets will be sold once management has targeted an efficient use for recycling proceeds. 

     

    How does MHGC make money? Is this a great business?

    How does the MHGC make money?

    As a hotel owner and operator, the Company primarily made money by investing significant amounts of capital into building and operating boutique hotels in gateway markets.  Ownership had two distinct ramifications on the cash flow of the business: (1) in order to grow, capital needs to be continually fed into the business in an effort to increase the unit base; and (2) owing to the fixed costs associated with operating a hotel (depreciation, staff, etc.), operating cash flows were extremely cyclical as operating leverage magnified positive revenue performance, but also penalized them as owners when they did meet their fixed costs. 

    As a hotel manager, MHGC will generate revenue by receiving a contractually stipulated percentage of room revenue (typically base fees 3-5% of hotel revenues) at the hotels in its system, and in some cases, a percentage of operating income at the hotels (incentive fees) based on certain performance criteria.  In the U.S., incentive fees are generally 10-30% of a hotel profits after an owner priority, or profitability threshold.  Outside the U.S., there is typically no owner's priority, so management contracts can be more lucrative relative to U.S. contracts (all else being equal).  Owing to the minimal costs associated with this business, the fees generate extremely high operating margins.  Furthermore, the low fixed cost and fee-based nature of this business somewhat limit the volatility of cash flows through the lodging cycle.  As a manager, the Company may also be expected to provide hotel owners with sliver equity or mezzanine financing to show their commitment to the property by having "skin in the game". 

    As a franchiser, MHGC will license the hotel owners the rights to the Delano and Mondrian brands.  The benefits to the franchisee from brand affiliation include national marketing and advertising programs, central reservation systems, ongoing training programs for employees, and sales and technology support.  In return, MHGC will receive one-time application fees, recurring royalty fees (typically 4-6% of room revenue and 2-3% of food and beverage revenue) and fees for use of the central reservation system.  

    Is this a great business?

    By moving into a less capital intensive and less cyclical business model, I believe MHGC will be viewed as a great business as the manager and franchiser model is generally characterized as having stable and extremely high returns on invested capital.  For instance, Choice Hotels (NYSE: CHH), the only listed pure-play hotel franchisor, has consistently generated ROIC's in excess of 50% throughout the last two lodging cycles (2002 - 2010).  I view these levels of returns as spectacular in any industry and indicative of a great business. That being said, there is still significant competition amongst hotel brands and MHGC's management team must execute to maintain and enhance their brand equity in order to grow.  I have also included MAR and HOT, which are also striving to increase their management and franchise business, to show the variance in returns of the different industry models and volatility through cycles.  

    Comparison of Select Lodging Company ROIC's

    Lodging Peers ROIC(1)

    1998

    1999

    2000

    2001

    2002

    2003

    2004

    2005

    2006

    2007

    2008

    2009

    2010

    HOT(2)

    10%

    11%

    14%

    11%

    11%

    9%

    13%

    13%

    14%

    18%

    16%

    10%

    13%

    MAR(3)

    12%

    11%

    12%

    9%

    7%

    6%

    8%

    9%

    15%

    17%

    11%

    9%

    11%

    CHH(4)

    15%

    16%

    16%

    21%

    28%

    37%

    50%

    63%

    79%

    69%

    60%

    48%

    48%

    (1) Defined as recurring, tax effected EBIT, plus D&A, less maintenance capex divided by total assets less current liabilities.

               

    (2) HOT is generally defined as an owner and operator, but selectively transitioning to a manager and franchiser at select assets.

             

    (3) MAR is an manager and franchiser who's returns have been weighed down its time share business.

                 

    (4) The decline in CHH's ROIC is generally attributed to lack of unit growth.

                     

    Source: sell-side research

                             

     

    Why and how is MHGC cheap? How should the company be valued?

    As stated above, on traditional metrics MHGC looks very expensive and overleveraged; shares presently trade at over 25x LTM EV/adjusted EBITDA and 18x Net Debt/LTM adjusted EBITDA (debt calculation includes non-recourse hotel debt).  How then are the shares cheap?  MHGC is cheap because at the current share price you're only paying for the real estate underlying the Delano, Hudson Hotel and share of the London hotels and getting a growing hotel management business and joint venture assets for free.

    I believe shares of MHGC should be valued on a sum-of-the-parts basis rather than on traditional EV/EBITDA metrics as this method separates the value of the real estate, minority investments and hotel management business. 

    Sum-of-the-Parts Walk Through

    2011 YTD Sale Transactions

    Through June of 2011, the Company has already successfully sold off three hotels for over $150 million in proceeds.  The assets, which were purchased by REITs, averaged valuations of $534K/Key and ~20x EV/2010 EBITDA likely due to the following:  1.) we're in the early stages of the lodging recovery suggesting significant upside to 2010 EBITDA, 2.) MHGC's assets generate significant streams of income besides lodging related revenue (more on this below), and 3.) the condition and quality of the assets.  

     

     

     

     

     

     

     

    EV/EBITDA

     

    EBITDA

     

    Purchase Price

    Debt

    Net Proceeds

    Cash in Escrow

    Total Proceeds

    Value/ Key (000)

    2010

    Peak

    Rooms

    2010

    Peak

                           

    Asset Sales

     

     

     

     

     

     

     

     

     

     

     

    Morgans - NY

                       51.8

           

    $454

    28.6x

    7.5x

                114

                     1.8

                     6.9

    Royalton - NY

                       88.2

     

     

     

     

    $525

    43.8x

    11.7x

                168

                     2.0

                     7.5

     

                     140.0

               26.0

                  114.0

     

                   114.0

    $496

    36.6x

    9.7x

                282

                     3.8

                   14.4

                           

    Mondrian - LA

                     137.0

             103.5

                    33.5

                 6.0

                     39.5

    $578

    13.2x

    7.8x

                237

                   10.3

    17.6

                           

    Total

                    277.0

            140.0

                 147.5

                 6.0

                  153.5

    $534

    19.5x

    8.7x

               519

                  14.2

                  32.0

     

    Pro Forma Balance Sheet ($ in millions)

    With the sale of Morgans, Royalton and Mondrian the Company's net debt declines from $659 million to $407 million.  Excluding non-recourse property debt, the Company's net debt is now down to $173 million.  The Company is also left with an NOL worth ~$100 million that could be used for limiting tax leakage from future asset sales.  

     

    Maturity

    Rate

    Security

    Balance 3/31/2011

     

    Closed Asset Sales(1)

     

    Pro Forma

                     

    Cash and cash equivalents

         

                       6.0

     

                    110.2

     

           116.2

                     

    Revolver ($116M/$125M Capacity)

    Oct-11

    L + 3.75%

    Delano, Royalton, Morgans

                                                        37.7

     

              (37.7)

     

                     - 

    Liability and subsidiary trust

    Oct-26

    8.680%

     

                                                        50.1

     

                   -  

     

                50.1

    Convertible Notes

    Oct-14

    2.375%

     

                         164.4

     

                   -  

     

              164.4

    Capital lease obligations

       

    Hudson

                                                          6.1

     

                   -  

     

                  6.1

                     

    Non-recourse mortgage and mezzanine note

    Oct-11

    L + 1.03%

    Hudson

                         201.2

     

                   -   

     

              201.2

    Non-recourse mortgage and mezzanine note

    Oct-11

    L + 3.24%

    Hudson

                                                        26.5

     

                   -  

     

                26.5

    Non-recourse mortgage note

    Oct-11

    L + 1.54%

    Mondrian

                         103.5

     

            (103.5)

     

                     - 

                     

    Series A preferred securities

     

    8.000%

     

                                                        75.0

     

                   -  

     

                75.0

    Total Debt

         

                        664.5


       

             523.3

    Net debt

     

     

     

                         658.5

     

     

     

              407.1

    (1) Reflects the proceeds received from the sales of the Mondrian (LA), Morgans (NY) and Roylaton (NY), offset by the acquisition of CMG.

           

     

    London Hotel Sales

    MHGC owns 50% stakes in two London hotels, the Sanderson and St Martins Lane, which it also manages.  Per press reports, the Company and their joint venture partner, Walton Street Capital, are looking to sell the hotels in London and have MHGC retain the management contracts.  I am valuing the London assets at $250 to $319 million, which would yield net proceeds of $84 to $119 million to MHGC.  My valuation is supported by press reports and prior transactions for these assets that indicate potentially higher values.  For instance, in 2007, when Lehman Brothers offloaded the hotels to Walton Street the implied value was ~$300 million and Property Week has published reports that the sellers are seeking £215 million, or $346 million at today's exchange rates.  As the Company's 50% ownership in these assets are held through equity in a joint venture, management believes that they could use their U.S. NOL's to limit tax leakage.  

    London Hotel Assets ($ in millions)

     

     

    $000/Key

     

    EV

     

    Hotel

     

     

     

    Equity Value

     

    Rooms

    Low

    Base

    High

     

    Low

    Base

    High

     

    Debt

     

    Equity

     

    Low

    Base

    High

                                     

    St. Martins Lane

    204

    $700

    $800

    $900

     

    $142.8

    $163.2

    $183.6

         

    50%

           

    Sanderson

    150

    700

    800

    900

     

    105.0

    120.0

    135.0

     

     

     

    50%

     

     

     

     

    Total

    354

    $1,400

    $800

    $900

     

    $247.8

    $283.2

    $318.6

     

    80.2

     

    50%

     

    83.8

    101.5

    119.2


    Sanderson Hotel Overview

    Opened in 2000, Sanderson has 150 guestrooms and suites, seven with private terraces and 18 suites, including a luxury penthouse and apartment. The hotel is located in London's Soho district, within walking distance of Trafalgar Square, Leicester Square and the West End business district. Sanderson's structure is considered a model of 1950s British architecture and the hotel has been designated as a landmark building. Designed by Philippe Starck, the guestrooms do not have interior walls (the dressing room and bathroom are encased in a glass box that is wrapped in layers of sheer curtains). Dining and bar offerings include Suka restaurant, Long Bar and the Purple Bar. Other amenities include the Courtyard Garden, the Billiard Room, and Agua Spa. Like the Light Bar at St Martins Lane, the Long Bar is a popular destination that has consistently attracted a high-profile celebrity clientele and has generated significant media coverage.

    St Martins Lane Overview

    Opened in 1999, St Martins Lane has 204 guestrooms and suites, including 16 rooms with private patio gardens, and a loft-style luxury penthouse and apartment with expansive views of London. The renovated 1960s building that previously housed the Mickey Mouse Club and the Lumiere Cinema is located in the hub of Covent Garden and the West End theatre district, within walking distance of Trafalgar Square, Leicester Square and the London business district. Designed by Philippe Starck, the hotel's meeting and special event space includes the Back Room, Studios, and an executive boardroom. St Martins Lane features Asia de Cuba Restaurant; The Rum Bar, which is a modern twist on the classic English pub; the Light Bar, an exclusive destination which has attracted significant celebrity patronage and received frequent media coverage; and Bungalow 8, a members-only bar. Gymbox, a state-of- the-art gym, is operated by a third party under a lease agreement.

    Delano and Hudson Hotels

    As the Company pursues its asset-light strategy it will also opportunistically look to unload its remaining wholly-owned hotels, the Delano in Miami and the Hudson in New York City, and retain the management contracts at those properties.  Based on recent press reports and my own due diligence, I believe that the Company could again garner significant premium valuations for these trophy assets and fetch upwards of $300 million in net proceeds. 

    In my base case sum-of-the-parts, I assume that the Delano is sold for $184 million by assuming $950K/Key.  While on the surface this appears to be a very rich multiple, I believe it is defensible and could, in fact, prove conservative.  For instance, at $950K/Key for the Delano a buyer would be paying only ~7.5x peak EBITDA for THE landmark hotel in Miami (see valuation matrix below).   In addition, I believe the Delano deserves a premium valuation due to its diversified income streams.  Unlike most full service hotels in the U.S. that generate less than 30% of their revenue from food and beverage business, the Delano earns greater than 50% as the hotel is designed to capture significant non-guest restaurant and bar business.  Finally, I believe my valuation is further supported by management's statement that the property has historically been appraised at $160 million, or $825K/Key, for the credit facility.

    I estimate that The Hudson will be sold for $396 million in my base scenario, or $475K/Key.  This valuation is supported by several New York City transactions of comparable assets (see below) and commentary from Real Capital Analytics that the average value per transaction was $435K/Key in the trailing twelve months. 

    Delano Overview

    Opened in 1995, Delano South Beach has 194 guest rooms, suites and lofts and is located in the heart of Miami Beach's fashionable South Beach Art Deco district. Room renovations began in 2006, including technology upgrades and upgrading of suites and bungalows, and was completed in October 2007. Formerly a 1947 landmark hotel, Delano South Beach is noted for its simple white Art Deco décor. The hotel features an "indoor/outdoor" lobby, the Water Salon and Orchard (which is Delano South Beach's landscaped orchard and 100-foot long pool) and beach facilities. The hotel's accommodations also include eight poolside bungalows and a penthouse and apartment. Delano South Beach's restaurant and bar offerings include the recently re-concepted restaurant Blue Door Fish, which opened in November 2010, Blue Sea, a poolside bistro, the Rose Bar and a lounge, The Florida Room, designed by Kravitz Design. The hotel also features Agua Spa, a full-service spa facility.

    Delano Historical Results ($ in millions, expect ADR and RevPAR)

     

    2005

    2006

    2007

    2008

    2009

    2010

     

    Max

    Median

    Min

    Delano

     

     

     

     

     

     

     

     

     

     

    Occupancy

    72%

    67%

    73%

    79%

    62%

    61%

     

    79%

    70%

    61%

    ADR

    $474

    $505

    $557

    $540

    $488

    $480

     

    $557

    $497

    $474

    RevPAR

    $342

    $338

    $407

    $428

    $304

    $293

     

    $428

    $340

    $293

                         

    Room Revenue

    $24.3

    $24.0

    $28.9

    $30.4

    $21.5

    $20.8

     

    $30.4

    $24.1

    $20.8

    Total Revenue

               49.7

               50.4

               56.6

               62.1

               44.8

               43.6

     

    $62.1

    $50.1

    $43.6

    Depreciation

                 3.3

                 2.2

                 3.9

                 5.8

                 4.6

                 4.9

     

    $5.8

    $4.3

    $2.2

    Operating Income

               15.9

               16.1

               17.9

               18.9

               11.0

                 9.5

     

    $18.9

    $16.0

    $9.5

    EBITDA

    $19.1

    $18.3

    $21.7

    $24.7

    $15.7

    $14.4


    $24.7

    $18.7

    $14.4

    Delano Valuation Matrix 

     

    Delano Valuation Matrix

                 

    Rooms

    194

    194

    194

    194

    194

    194

    $/Key (000)

    $775

    $825

    $875

    $925

    $975

    $1,025

    EV (mm)

    $150

    $160

    $170

    $179

    $189

    $199

    Peak EBITDA (mm)

    $24.7

    $24.7

    $24.7

    $24.7

    $24.7

    $24.7

    EV / Peak EBITDA

    6.1x

    6.5x

    6.9x

    7.3x

    7.7x

    8.1x

    LTM EBITDA (mm)

    $13

    $13

    $13

    $13

    $13

    $13

    EV / LTM EBITDA

    11.6x

    12.3x

    13.1x

    13.8x

    14.6x

    15.3x

    Hotel debt (mm)

    $2.0

    $2.0

    $2.0

    $2.0

    $2.0

    $2.0

    Equity value (mm)

    $148.4

    $158.1

    $167.8

    $177.5

    $187.2

    $196.9

     

    Miami Hotel Upper Upscale and Luxury Transactions

    Property

    Date

    Price ($mm)

    Price/Key($K)

           

    Viceroy

    May-11

    $36.5

    $247.0

    Royal Palm(1)

    Apr-11

                     130.0

                     412.0

    Savoy

    Jul-05

                       30.0

                     400.0

    Raleigh

    Oct-09

                       31.0

                     300.0

     

     

     

     

    Median

       

    $350.0

    Mean

     

     

                     339.8

    (1) Includes $42.5 million of schedule renovations.

     
     

    Hudson Hotel Overview

    Opened in 2000, Hudson is MHGC's largest New York City hotel, with 834 guest rooms and suites, including two ultra-luxurious accommodations - a 3,355 square foot penthouse with a landscaped terrace and an apartment with a 2,500 square foot tented terrace. Hudson occupies the former clubhouse of the American Women's Association, which was originally constructed in 1929 by J.P. Morgan's daughter. The hotel, which is only a few blocks away from Columbus Circle, Time Warner Center and Central Park, was designed by Philippe Starck to offer guests affordable luxury and style. Hudson's notable design includes a 40-foot high ivy-covered lobby and a lobby ceiling fresco by renowned artist Francesco Clemente. The hotel's food and beverage offerings include Hudson Hall, the primary restaurant, which was renovated, re-concepted and opened in May 2010, Private Park, a restaurant and bar in the indoor/outdoor lobby garden, Hudson Bar, the Library Bar and Sky Terrace, an exclusive landscaped terrace on the 15th floor. In February 2010, we completed and opened Good Units, an exclusive venue for special functions. The raw space was conceived for performances and other experiences. Good Units is located in approximately 8,000 square feet of previously unused basement space within the hotel.

     

    Hudson Hotel Historical Results 

     

    2005

    2006

    2007

    2008

    2009

    2010

     

    Max

    Median

    Min

    Hudson Hotel

     

     

     

     

     

     

     

     

     

     

    Occupancy

    85%

    88%

    92%

    91%

    84%

    89%

     

    92%

    88%

    84%

    ADR

    $247

    $265

    $284

    $283

    $200

    $213

     

    $284

    $256

    $200

    RevPAR

    $211

    $232

    $261

    $257

    $168

    $189

     

    $261

    $222

    $168

                         

    Room Revenue

    $61.7

    $68.1

    $76.6

    $75.7

    $49.9

    $57.4

     

    $76.6

    $64.9

    $49.9

    Total Revenue

               80.9

               88.1

             101.3

               97.8

               65.7

               72.8

     

    $101.3

    $84.5

    $65.7

    Depreciation

                 9.4

                 5.1

                 6.3

                 6.4

                 6.8

                 7.9

     

    $9.4

    $6.6

    $5.1

    Operating Income

               24.8

               33.8

               36.8

               32.9

                 6.3

                 9.6

     

    $36.8

    $28.8

    $6.3

    EBITDA

    $34.2

    $38.9

    $43.1

    $39.3

    $13.1

    $17.4


    $43.1

    $36.5

    $13.1

     
    Hudson Hotel Valuation Matrix
     

    Hudson Valuation Matrix

                 

    Rooms

    834

    834

    834

    834

    834

    834

    $/Key (000)

    $375

    $400

    $425

    $450

    $475

    $500

    EV (mm)

    $313

    $334

    $354

    $375

    $396

    $417

    Peak EBITDA (mm)

    $43.1

    $43.1

    $43.1

    $43.1

    $43.1

    $43.1

    EV / Peak EBITDA

    7.3x

    7.7x

    8.2x

    8.7x

    9.2x

    9.7x

    LTM EBITDA (mm)

    $15

    $15

    $15

    $15

    $15

    $15

    EV / LTM EBITDA

    20.9x

    22.2x

    23.6x

    25.0x

    26.4x

    27.8x

    Hotel debt (mm)

    $233.8

    $233.8

    $233.8

    $233.8

    $233.8

    $233.8

    Equity value (mm)

    $79.0

    $99.8

    $120.7

    $141.5

    $162.4

    $183.2

     

    New York City Luxury and Upper Upscale Hotel Transactions

    Property

    Date

    Price ($mm)

    Price/Key($K)

           

    Paramount Hotel

    Jun-11

        $275.0

         $461.0

    Palace Hotel

    May-11

                     400.0

                     445.0

    Helmsley Hotel

    Jan-11

                     313.5

                     405.6

    Doubletree Metropolitan

    Dec-10

                     331.6

                     439.2

    Roger Williams Hotel

    Oct-10

                       90.0

                     466.0

    W Union Square

    Aug-10

                     182.0

                     686.0

    Median

       

         $453.0

    Mean

       

                     483.8

     

    Core Real Estate Value ($ in millions, except $/key)

    On real estate value alone, I believe the Company is worth between $6.56 and $9.05, so at present levels you're getting the operating business and remaining joint ventures for essentially free.  But who is going to buy the assets and why? MHGC's assets are most likely to be acquired by either hotel REITs and/or private equity firms that are awash with cash given the present industry dynamics favor buy vs. build strategies.  

     

     

    $000/Key

     

    EV

    Hotel

     

    Equity Value

     

    Rooms

    Low

    Base

    High

     

    Low

    Base

    High

    Debt

    Equity

    Low

    Base

    High

                               

    Real Estate

                             

    Delano

    194

    $850

    $950

    $1,050

     

    $164.9

    $184.3

    $203.7

    2.0

    100%

    $162.9

    $182.3

    $201.7

    Hudson

    834

    450

    475

    500

     

    375.3

    396.2

    417.0

    233.8

    100%

    141.5

    162.4

    183.2

    Sub-total

    1,028

    $525

    $565

    $604

     

    $540.2

    $580.5

    $620.7

    235.8

    100%

    304.4

    344.7

    384.9

                               

    St. Martins Lane

    204

    $700

    $800

    $900

     

    $142.8

    $163.2

    $183.6

     

    50%

         

    Sanderson

    150

    700

    800

    900

     

    105.0

    120.0

    135.0

     

    50%

     

     

     

    Sub-total

    354

    $1,400

    $800

    $900

     

    $247.8

    $283.2

    $318.6

    80.2

    50%

    83.8

    101.5

    119.2

                               

    PF Corporate Net Debt

                     

    173.3

    173.3

    173.3

                               

    Equity Value

                       

    214.9

    272.8

    330.8

                               

    Equity Value per Share

                     

    $6.91

    $8.77

    $10.64

    DSO

                       

    31.1

    31.1

    31.1

                               

    Value/share adjusted for warrants

     

     

     

     

     

     

     

     

    $6.56

    $7.78

    $9.05

      

    The major hotel REITS presently have significant liquidity and capacity for asset purchases and per Bjorn Hanson, dean of the Tisch Center for Hospitality, Tourism and Sports Management at New York University, "there are over 40 private equity funds hunting for deals in the sector, and many are under the gun to buy earlier than later".  These players are motivated buyers for a variety of reasons, including: 1.) the existing room supply pipeline is significantly below historical norms (< 1% room supply growth) and should be easily absorbed by surging demand, 2.) the lead time for new hotels is ~3 years and there is limited/no financing for new developments, and 3.) asset values remain below replacement cost.  

     

    Snapshot of Hotel REIT Liquidity ($ in millions)

     

    Cash

    Credit Line

    Total Liquidity

    Comments

             

    HST

    $154.0

    $438.0

    $592.0

    European JV (Euro Fund Two) looking to make $1B in acquisitions

    LHO

    43.1

    393.1

    436.2

    Focus on independent hotels in gateway, costal cities

    SHO

    184.7

    150.0

    334.7

     

    DRH

    250.0

    200.0

    450.0

    Focus on premium, upper-upscale properties

    PEB

    140.0

    200.0

    340.0

    Acquired Mondrian LA; Management stated acquisition capacity of $500-$575

    FCH

    175.0

    225.0

    400.0

    Acquired Morgans and Royalton

     

    Joint Venture Assets ($ in millions, except $/key)

    In addition to the above mentioned properties, the Company holds minority stakes and management contracts at four U.S. hotels.  I assume that the Company will eventually look to monetize these assets so I valued the real estate on a per key basis and value the management contracts separately on EV/EBITDA.  As stated above, I believe the Company will likely grow their portfolio of minority-owned assets as a means to grow the management and franchising business, so I would expect greater turnover in these assets going forward. 

     

     

    $000/Key

     

    EV

    Hotel

     

    Equity Value

     

    Rooms

    Low

    Base

    High

     

    Low

    Base

    High

    Debt

    Equity

    Low

    Base

    High

                               

    Shore Club(1)

    309

    300

    350

    400

     

    $92.7

    $108.2

    $123.6

    8.4

    7%

    5.9

    7.0

    8.1

    Mondrian SB

    281

    300

    350

    400

     

    84.3

    98.4

    112.4

    47.8

    50%

    18.3

    25.3

    32.3

    Ames

    114

    300

    325

    350

     

    34.2

    37.1

    39.9

    14.2

    35%

    7.0

    8.0

    9.0

    Mondrian SoHo

    270

    500

    550

    600

     

    135.0

    148.5

    162.0

    38.0

    20%

    19.4

    22.1

    24.8

    Sub-Total

             

    346.2

    392.1

    437.9

    108.3

     

    50.6

    62.4

    74.2

                               

    Equity value of Joint Ventures

                     

    134.4

    163.9

    193.4

     

     

     

     

     

     

     

     

     

     

     

     

     

     

    (1) Appraised at $86 million in September 2009.

                         

     

    Management Contracts

    Assuming the Company sells the Delano, Hudson and London assets and retains the management contracts, MHGC's consolidated revenue and income will consist mainly of high margin hotel management and franchising fees.  I believe the recurring revenue/EBITDA from these contracts will be approximately $25 million.  

     

    Room

    F&B

    Hotel

    Mgmt Fees

             

    '10 Reported Revenue

          139.3 

         78.8

          218.0

          18.3

    Mondrian LA

             15.9

             15.9

             31.7

                -   

    Royalton

             16.0

               5.0

             21.0

                -  

    Morgans

               9.8

               7.8

             17.5

                -  

    Delano

             20.8

             22.8

             43.6

                -  

    Hudson

             57.4

             15.4

             72.8

                -  

    Total, ex. Clift

           119.7

             67.0

           186.7

             18.3

    Less: Hard Rock

                -  

                -  

                -  

              (9.0)

    Less: Asset Sales

           

    Mondrian LA(1)

                -  

                -  

                -  

               2.1

    Mondrian SoHo

     

                -  

                -  

               2.0

    Royalton(2)

                -  

                -  

                -  

               1.4

    Morgans(2)

                -  

                -  

                -  

               1.1

    Delano(2)

                -  

                -  

                -  

               2.8

    Hudson(3)

                -  

                -   

                -  

               4.7

    PF Revenue

                -  

                -  

                -  

             25.0

             

    EBITDA

     

       -  

               -  

            25.0

    Margins

     

     

     

    100%

    (1) Pro forma for 2010 results per the Company's 8-K filings.

       

    (2) Assumes $1M per 100 rooms.

           

    (3) Assume $750K per 100 rooms.

           

     

    In addition to the Company's existing base of management contracts, MHGC has a pipeline of four hotel management contracts that are in various stages of development.  Importantly, three of these contracts are outside the U.S. so incentive fees will come quickly as there is no owner's priority.  I believe the earnings power of the management fees alone could generate an additional $7.5 million by 2014 by assuming $1 million in fees per 100 rooms.  Management will endeavor to supplement this pipeline with two to three management contracts per year.  If successful, by 2014 MHGC will have at least 21 contracts that are generating over $40 million of annual EBITDA.

    I have NOT included any value for MHGC's announced pipeline or potential growth in my sum-of-the-parts, but a highly a conservative DCF of just those contracts that have been announced yields at least $0.60/share in incremental equity value.  I assume the $7.5 million of EBITDA from 10-year contracts and discount them at 15%, which yields an NPV of $38 million.  I then discount the NPV from 2014 back to today using the same discount rate of 15%, which yield ~$25 million in equity value. 

    Existing Management Contracts Expirations

    Location

    Hotel

    Mgmt Contract Expirations

    Extension Options

           

    Los Angeles, CA

    Mondrian

    2031

    one 10-year

    New York, NY

    Morgans

    2026

    one 10-year

    New York, NY

    Royalton

    2026

    one 10-year

    London, UK

    Sanderson

    2018

    one 10-year

    London, UK

    St. Martins Lane

    2018

    one 10-year

    Miami, FL

    Shore Club

    2022

    None

    Miami, FL

    Mondrian South Beach

    2026

    None

    Boston, MA

    Ames

    2024

    None

    San Juan, PR

    San Juan Water and Beach Club

    2019

    None

    Playa del Carment, MX

    Hotel Las Palapas

    2014

    one 5-year

    New York, NY

    Mondrian SoHo

    2021

    two 10-year

     
    Pipeline of Management Contracts

    Location

    Brand

    Development

    Rooms

    Est. Opening

    $/100 Keys (millions)

    Est. Revenue

                 

    Aegean Sea, Turkey

    Delano

    New Development

    200

    2013

    $1.0

    $2.0

    Cabo San Lucas, Mexico

    Delano

    Condo Conversion

    114

    2013

                 1.0

                 1.1

    Doha, Qatar

    Mondrian

    New Development

    265

    2013

                 1.0

                 2.7

    New York, NY

    Morgans

    New Development

    175

    2014

                 1.0

                 1.8

    Total

       

    754

       

    $7.5

     

    2014 EBITDA Potential ($ in millions)

    2014 Est. Mgmt Revenue/EBITDA

     

    Pro Forma Contract Revenue/EBITDA

           $25.0

    Announced Contracts

     

               7.5

    Incremental Contract Wins(1)

     

               8.0

    EBITDA potential

     

            40.5

    (1) Assumes two contract wins/year @ $2M/year.

     

    To be conservative, I am valuing the pro forma management and franchising business at 12x - 13x EV/EBITDA, which is only in-line with other lodging C-Corps.  That being said, I believe there is a strong argument to be made that this business should trade at a premium for the following reasons: 1.) the Company has a contractual, recurring revenue/EBITDA base with an average life of 18 years, 2.) this is an extremely high ROIC business, and 3.) given the Company's pipeline of announced and potential opportunities, there is a clear path to growth.  In addition, were the Company's management contracts and brands to be acquired by strategic buyer, I believe the multiple of EBITDA would be substantially higher given that the buyer would be able to eliminate almost all of the Company's $25 million in corporate overhead. Potential buyers for the brands and management business would most likely be major lodging C-Corps that have had moderate success with growing their boutique brands, such as Hilton, Marriott or Hyatt.  Hilton in particular is in need of a lifestyle/boutique brand as they are temporarily banned from building or acquiring such a brand since the Denizen scandal where they admitted to stealing trade secrets from Starwood Hotels.   

    C-Corp Trading Multiples

    Lodging C-Corps

     

    2011 EV/EBITDA

    Marriott International

    MAR

    13.0x

    Starwood Hotels & Resorts

    HOT

    13.4x

    Hyatt Hotels Corporation

    H

    14.7x

    Wyndham Worldwide

    WYN

    7.5x

    Choice Hotels

    CHH

    11.5x

    Orient-Express

    OEH

    15.0x

    Gaylord Entertainment

    GET

    11.4x

    Median

     

    13.0x

    Mean

     

    12.4x

     

    Potential C-Corp Acquirers of Management & Franchising Business

    C-Corp

    Boutique Brand

    Hotels

         

    Hyatt

    Andaz

    5

    Marriott

    Edition

    7

    Hilton

    NA

    0

     
     

    Consolidated Sum-of-the-Parts

     

     

    EV/EBITDA

     

    Enterprise Value

     

     

    Equity Value

     

    '12 EBITDA

    Low

    Base

    High

     

    Low

    Base

    High

    Debt

    Equity %

    Low

    Base

    High

                               

    Delano & Hudson RE

             

    $540.2

    $580.5

    $620.7

    235.8

    100%

    $304.4

    $344.7

    $384.9

    London RE

             

    247.8

    283.2

    318.6

    80.2

    50%

    83.8

    101.5

    119.2

    Joint Ventures

             

    346.2

    392.1

    437.9

    108.3

    Various

    50.6

    62.4

    74.2

    Management Contracts

                  25.0

    12.0x

    12.5x

    13.0x

     

    300.1

    312.6

    325.1

                    -  

    100%

    300.1

    312.6

    325.1

    Corporate Overhead

                (25.0)

    7.0x

    7.0x

    7.0x

     

    (175.0)

    (175.0)

    (175.0)

                    -  

    100%

    (175.0)

    (175.0)

    (175.0)

    Total

                       

    $563.9

    $646.1

    $728.4

                               

    PF net debt

                       

    173.3

    173.3

    173.3

                               

    Total Equity Value

                       

    390.5

    472.8

    555.0

                               

    Equity value/share

                       

    $12.56

    $15.20

    $17.85

    DSO

                       

    31.1

    31.1

    31.1

                               

    Yucaipa Warrant Dilution

                       

    6.5

    7.6

    8.3

    DSO, including warrant dilution

                     

    37.6

    38.7

    39.4

    Value/share adjusted for warrants

         

     

     

     

     

     

     

    $10.38

    $12.23

    $14.09

    Yucaipa Warrants

    In October of 2009, when the Company had approximately $736 million of consolidated debt, $275 million of JV debt and was facing mounting property-level maturities, Yucaipa, the private equity firm founded by Ron Burkle, purchased of $75 million of Series A preferred securities to enhance the Company's liquidity profile. In connection with the issuance of the preferreds, Yucaipa received 12.5 million warrants exercisable using the cashless exercise method at an exercise price of $6.00/share.  For their investment, Yucaipa also received a seat on the board and nominated Michael Gross, who served as a consultant to Yucaipa.  When Michael Gross became CEO and discontinued his relationship with Yucaipa, Ron Burkle replaced him as Yucaipa's board designee.

    I reflect the dilution from the warrants in my sum-of-the-parts, but believe their repurchase on favorable terms to the minority shareholders would add significant value. 

     

     Why will MHGC shares reach their intrinsic value (catalysts)?

    • Hotel real estate sale announcements
      • London assets (Sanderson and St Martins Lane),
      • The Delano in Miami, and
      • Hudson Hotel in New York
    • New hotel management and franchise contract announcements
    • Repurchase of Yucaipa warrants
    • Acquisition of the Company's management and franchising business by a strategic acquirer

     

    Investment positives?

    • New management team with interests that are well aligned with shareholders via the Outperformance Award Program.  This program will entitle management to 10% of the total market value created in excess of the 30% cumulative return over $8.87/share over a three-year period. 
    • The U.S. is in the early stages of a lodging recovery which should bode well for reported results, especially as gateway cities should lead the rebound
    • Room supply growth near historic lows and anticipated to come mostly from the upper mid-scale segment. 
    • Positive lodging trends in Miami should support a premium valuation for the Delano.  I'll defer to the experts at Jones Lang and LaSalle to describe the improving market dynamics (see link: http://www.joneslanglasallehotels.com/hotels/EN-GB/Pages/NewsItem.aspx?ItemID=21330)
    • Significant underlying real estate value already recognized by strategic investors, such as HG Vora who had filed a 13D (the HG stands for Highgate, as in Highgate Holdings the real estate PE firm who's holdings include Highgate Hotels)

    Investment negatives/risks?

    • Collapse of the capital markets could stymie potential asset sales
    • Slower RevPAR growth and increased room supply in Manhattan
    • October 2011 debt maturities at the Hudson
    • Unsuccessful outcome of Shore Club litigation
    • Failure to successfully grow the management contract pipeline
    • The Company has significant exposure to the New York City, which would not bode well for an investment if there were, god forbid, another terrorist attack 
      


    Catalyst

    • Hotel real estate sale announcements
      • London assets (Sanderson and St Martins Lane),
      • The Delano in Miami, and
      • Hudson Hotel in New York
    • New hotel management and franchise contract announcements
    • Repurchase of Yucaipa warrants
    • Acquisition of the Company's management and franchising business by a strategic acquirer
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