10-K 1 mhgc-10k_20151231.htm 10-K mhgc-10k_20151231.htm

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10-K

 

(Mark One)

x

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2015

or

¨

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

incorporation or organization)

(I.R.S. Employer

Identification No.)

 

475 Tenth Avenue

New York, New York

10018

(Address of principal executive offices)

(Zip Code)

(212) 277-4100

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

 

Title of Each Class 

 

Name of Each Exchange on Which Registered 

Common Stock, $0.01 par value

 

The NASDAQ Stock Market LLC

Securities registered pursuant to Section 12(g) of the Act:

None

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  ¨    No  x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act.    Yes  ¨    No  x

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  x    No  ¨

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 (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  x

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.

 

Large accelerated filer

¨

Accelerated filer

x

 

 

 

 

Non-accelerated filer

¨  (Do not check if a smaller reporting company)

Smaller reporting company

¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).    Yes  ¨    No  x

The aggregate market value of the registrant’s voting and non-voting common equity held by non-affiliates of the registrant was approximately $198,126,782, based on a closing sale price of $6.74 as reported on the NASDAQ Global Market on June 30, 2015.

As of March 11, 2016, the registrant had issued and outstanding 34,764,261 shares of common stock, par value $0.01 per share.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of Morgans Hotel Group Co.’s Proxy Statement in connection with its Annual Meeting of Stockholders to be held in 2015 are incorporated by reference into Part III of this report.

 

 

 

 


 

INDEX

 

 

 

Page

PART I

 

 

 

 

 

ITEM 1 BUSINESS

 

5

 

 

 

ITEM 1A RISK FACTORS

 

10

 

 

 

ITEM 1B UNRESOLVED STAFF COMMENTS

 

28

 

 

 

ITEM 2 PROPERTIES

 

29

 

 

 

ITEM 3 LEGAL PROCEEDINGS

 

34

 

 

 

ITEM 4 MINE SAFETY DISCLOSURES

 

34

 

 

 

PART II

 

 

 

 

 

ITEM 5 MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

 

35

 

 

 

ITEM 6 SELECTED FINANCIAL DATA

 

37

 

 

 

ITEM 7 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

40

 

 

 

ITEM 7A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

60

 

 

 

ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

 

61

 

 

 

ITEM 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

 

61

 

 

 

ITEM 9A CONTROLS AND PROCEDURES

 

61

 

 

 

ITEM 9B OTHER INFORMATION

 

63

 

 

 

PART III

 

 

 

 

 

ITEM 10 DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

 

64

 

 

 

ITEM 11 EXECUTIVE COMPENSATION

 

64

 

 

 

ITEM 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

 

64

 

 

 

ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

 

64

 

 

 

ITEM 14 PRINCIPAL ACCOUNTING FEES AND SERVICES

 

64

 

 

 

PART IV

 

 

 

 

 

ITEM 15 EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

 

65

 

 

 

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FORWARD-LOOKING STATEMENTS

This Annual Report on Form 10-K contains certain “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are generally identifiable by use of forward-looking terminology such as “may,” “will,” “should,” “potential,” “intend,” “expect,” “endeavor,” “seek,” “anticipate,” “estimate,” “believe,” “could,” “project,” “predict,” “continue” or other similar words or expressions. References to “we,” “our” and the “Company” refer to Morgans Hotel Group Co. together in each case with our consolidated subsidiaries and any predecessor entities unless the context suggests otherwise.

The forward-looking statements contained in this Annual Report on Form 10-K 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.  Such forward-looking statements include, without limitation, statements regarding our expectations with respect to:

 

·

our future financial performance, including selling, general and administrative expenses, capital expenditures, income taxes and our expected available cash and use of available cash;

 

·

our business operations, including entering into new management, franchise or licensing agreements and enhancing the value of existing hotels and management agreements;

 

·

our ability to service our obligations under our debt and preferred equity instruments, including our ability to redeem our outstanding Series A preferred securities, or restructure or refinance these obligations;

 

·

our ability to complete the monetization of the Hudson and Delano South Beach hotels as part of our strategic process on the timeline we anticipate, if at all;

 

·

the status and expectations with respect to the development and opening of new hotels;

 

·

the effect of new lodging supply;

 

·

the impact of the strong U.S. dollar and a weak global economy;

 

·

our ability to utilize our net operating losses to offset any gains on hotel sales;

 

·

the timing of hiring open executive and other key employee positions;

 

·

our ability to execute our management and brand business growth strategy;

 

·

the timing of receiving hotel management agreement termination fees; and

 

·

the outcome of litigation to which the Company is a party.

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 those expressed in any forward-looking statements include, but are not limited to economic, business, competitive market and regulatory conditions such as:

 

·

a downturn in economic and market conditions, both in the U.S. and internationally, particularly as it impacts demand for travel, hotels, dining and entertainment;

 

·

our level of debt under our outstanding debt agreements, our obligations under our preferred equity instruments, our ability to restructure or refinance our current outstanding debt and preferred equity instruments, our ability to generate sufficient cash to repay or redeem outstanding debt and preferred equity instruments or make payments on guarantees as they may become due;

 

·

the impact of any dividend payments or accruals on our Series A preferred equity instruments on our cash flow and the value of our common stock;

 

·

the impact of any strategic plans established by our Board of Directors, including the broker-marketed monetization of the Hudson and Delano South Beach hotels;

 

·

the impact of restructuring charges on our liquidity;

 

·

general volatility of our stock price, the capital markets and our ability to access the capital markets, and the ability of our joint ventures to do the foregoing;

 

·

the impact of financial and other covenants in our loan agreements and other debt instruments that limit our ability to borrow and restrict certain of our operations;

 

·

our history of losses;

 

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·

our liquidity position;   

 

·

our ability to compete in the “boutique” or “lifestyle” hotel segments of the hospitality industry and changes in the competitive environment in our industry and the markets where we invest;

 

·

our ability to protect the value of our name, image and brands and our intellectual property;

 

·

risks related to natural disasters or outbreaks of contagious diseases, terrorist attacks, the threat of terrorist attacks and similar disasters, including a downturn in travel, hotels, dining and entertainment resulting therefrom;

 

·

risks related to our international operations, such as global economic conditions, political or economic instability, compliance with foreign regulations and satisfaction of international business and workplace requirements;

 

·

our ability to timely fund the renovations and capital improvements necessary to sustain the quality of the properties of Morgans Hotel Group and associated brands;

 

·

risks associated with the acquisition, disposition, development and integration of properties and businesses;

 

·

the risks of conducting business through joint venture entities over which we may not have full control;

 

·

our ability to perform under management agreements and to resolve any disputes with owners of properties that we manage but do not wholly own;

 

·

potential terminations of management agreements and timing of receipt of anticipated termination fees;

 

·

the impact of any material litigation, claims or disputes, including labor disputes;

 

·

the seasonal nature of the hospitality business and other aspects of the hospitality and travel industry that are beyond our control;

 

·

our ability to maintain state of the art information technology systems and protect such systems from cyber-attacks;

 

·

our ability to comply with complex U.S. and international regulations, including regulations related to the environment, labor, food and beverage operations, and data privacy;

 

·

ownership of a substantial block of our common stock by a small number of investors and the ability of such investors to influence key decisions;

 

·

the impact of recent changes to our Board of Directors and senior management team; and

 

·

other risks discussed in this Annual Report on Form 10-K in the sections entitled “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Result of Operations.”

Other than as required by applicable law, we are under no duty to update any of the forward-looking statements after the date of this Annual Report on Form 10-K to conform these statements to actual results.

 

 

 

 

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PART I

ITEM 1.

BUSINESS

Overview

Morgans Hotel Group Co. is a fully integrated lifestyle hospitality company that operates, owns, licenses, and develops boutique hotels, primarily in gateway cities and select resort markets in the United States, Europe and other international locations.  

At December 31, 2015 our portfolio of Morgans Hotel Group branded hotel properties and food and beverage operations and entities consisted of:

 

·

our three owned hotels, consisting of Hudson in New York, Delano South Beach in Miami Beach, and Clift in San Francisco (which we lease under a long-term lease that is treated as a financing), comprising approximately 1,450 rooms, and the food and beverage operations located at these hotels (collectively, our “Owned Hotels”);

 

·

our owned food and beverage operations, consisting of leasehold interests in the food and beverage operations located at Sanderson, in London, and Mandalay Bay in Las Vegas (collectively, our “Owned F&B Operations”);

 

·

our unconsolidated joint venture hotel, Mondrian South Beach in Miami Beach, comprising approximately 220 rooms (our “Joint Venture Hotel”), and our investment in certain unconsolidated food and beverage operations at Mondrian South Beach (“F&B Venture”);

 

·

our seven managed hotels, consisting of Royalton and Morgans in New York, Shore Club in Miami Beach, Mondrian in Los Angeles, and Sanderson, St Martins Lane, and Mondrian London in London, (collectively our “Managed Hotels”), comprising approximately 1,540 rooms; and

 

·

our licensed hotel, Delano Las Vegas, comprising 1,117 rooms, and our franchised hotel, 10 Karaköy, in Istanbul, comprising 71 rooms.

We have one reportable operating segment, as discussed further in note 1 to our consolidated financial statements.

We conduct our operations through Morgans Group LLC, a Delaware limited liability company and our operating company (“Morgans Group”). Morgans Group holds substantially all of our assets. We are the managing member of Morgans Group and held approximately 99.8% of its membership units at December 31, 2015, excluding long-term incentive plan units (“LTIP Units”) convertible into membership units issued as part of our employee compensation plans. As of December 31, 2015, there were 75,446 membership units outstanding, each of which is exchangeable for one share of Morgans Hotel Group Co.’s common stock.

We manage all aspects of Morgans Group, including the operation, development, sale and purchase of, and investments in, hotels through subsidiaries, including our management companies, Morgans Hotel Group Management LLC (“Morgans Management”) and our non-U.S. management company affiliate.

We were incorporated in Delaware in October 2005 and completed our initial public offering of common stock on February 17, 2006. Our corporate offices are located at 475 Tenth Avenue, New York, New York 10018. Our telephone number is (212) 277-4100. We maintain a website that contains information about us at www.morganshotelgroup.com. The content of our website is not part of this report.  

Corporate Strategy

On November 4, 2015, our Board of Directors announced a plan pursuant to which, we initiated a broker-marketed process for the monetization of Hudson and Delano South Beach and commenced a search for a permanent chief executive officer.  Monetizing Hudson and Delano South Beach is expected to further focus our business on an asset-light, brand-centered model with lower leverage.

Our long-term corporate strategy is to achieve growth as a boutique hotel management and brand company by leveraging our management experience and one-of-a-kind luxury brands for expansion into major gateway markets and key resort destinations in both domestic and international markets. We intend to achieve growth primarily through the pursuit of new management agreements and, in select situations where we believe third-party managers have the experience and resources to satisfy our high branding standards, through franchise or licensing agreements. We will pursue this targeted strategy while remaining open and flexible to unique opportunities.

Monetization of Assets.  As part of our growth strategy, we shifted towards a more “asset light” business model in 2011 by selling five hotels we had previously owned or partially owned while retaining management pursuant to long-term management

 

5


 

agreements. In connection with our strategy to reduce reliance on owned real estate as noted above, we have retained Hodges Ward Elliott LLC, a leading hotel brokerage firm to market the Hudson and Delano South Beach hotels.  We currently expect to complete the process during the second quarter of 2016.  

Cultivate Unique Brands. A key element of our growth strategy is our unique brand portfolio, which we continue to cultivate and develop. Many of our brands, including Delano, Mondrian and Hudson, may be extended to other hotels in existing and new markets as we seek to secure new management agreements with third parties.  

Unlike traditional franchised or large brand-managed hotels, we believe our portfolio of boutique hotel brands provides guests with a distinctive lodging experience. Each of our Morgans Hotel Group branded hotels has a personality specifically tailored to reflect the local market environment and features a modern, sophisticated design that includes critically acclaimed public spaces, popular “destination” bars and restaurants and highly personalized service. We believe that the Morgans Hotel Group brand and each of our individual property brands are synonymous with style, innovation and service, with a distinctive combination of lodging and social experiences.

Delano is our luxury brand, which offers a luxury atmosphere with unexpected and unique touches of individuality. Delano has a modern style of service that is designed to deliver on the needs of the most discerning travelers. Delano’s brand values are sophisticated, casual chic, effortless and exclusive.

Our Mondrian brand offers a stimulating atmosphere and energy that fosters social engagement. The service level is designed to be engaged and highly personal and the brand offers a dynamic nightlife which exudes attitude and ambience. Mondrian’s brand values are confident, engaged and trendsetting.

Hudson is our urban gateway brand which appeals to our younger or more price sensitive travelers. Hudson is designed to offer cutting-edge style that is accessible, edgy and young at heart. Its service level is friendly and casual and the lobby of Hudson is the social hub. Hudson’s brand values are connected, collaborative and intriguing.  

We also have a portfolio of Original brands, which include Clift, Sanderson, St Martins Lane, and Morgans. Each of these hotel brands is unique, offering an atmosphere filled with designs from an eclectic mix of designers, artists and influencers and our signature personalized service.

Pursue New Management and Franchise Opportunities. Consistent with our focus on growing our brands, we plan to pursue new management contracts in new and existing markets. We base our decisions to enter new markets on a number of criteria, with a focus on markets that attract affluent travelers who value a distinctive and sophisticated atmosphere and outstanding service. Specifically, we target key gateway destinations that attract both domestic and foreign business and leisure travelers, as well as select resort markets.  We plan to focus on major North American metropolitan markets, London and key European destinations, and select locations in the Middle East.  We may also pursue opportunities in select resort destinations and key markets in Asia and South America.  

In addition, we may pursue license or franchise opportunities with third-party managers who have the experience and resources to satisfy our high brand standards. We believe we can create substantial value for potential franchisees through connection to our loyal and affluent customer base, creation of unique designs and valuable food and beverage venues, and affiliation with our hotel sales and marketing systems and programs. For example, Delano Las Vegas, a 1,117-room hotel at Mandalay Bay, opened in September 2014 and is operated under a 10-year licensing agreement with affiliates of MGM Resorts International (“MGM”), and includes two five-year extensions at our option, subject to performance thresholds.  

 

We have signed management agreements for five hotels in various stages of development, including two hotels under construction consisting of Mondrian Doha, currently scheduled to open in late 2016, and Delano Dubai, currently scheduled to open in 2017.  There can be no assurances that any or all of our projects will be developed as planned, if at all. If adequate project financing is not obtained, projects may need to be limited in scope, deferred or cancelled altogether.  

Management and Operations of Our Portfolio

Overview of Management

We manage and operate each of our hotels, other than licensed or franchised hotels, which are generally staffed in the United States by our employees, and outside of the United States by the employees of the hotel owners, with personnel dedicated to each of the properties or a cluster of properties, including a general manager, director of finance, director of sales and marketing, director of revenue management, director of human resources and other employees. As we have expanded in our existing markets, we have been successful in the regionalization of certain operational, finance and sales functions.  

 

6


 

Our management team is headquartered in New York City and coordinates the management and operations of our hotels. The corporate office provides supervision and support directly to certain functions at the hotel, such as operations, sales, marketing, brand standards, revenue management, finance, food and beverage, technology, legal, human resources, training, and design services. This organizational structure allows for each property to operate in a responsive and dynamic fashion while insuring integrity of our guest experience and core values across our properties. The management team is also responsible for the design of our hotels and overall product and service quality levels.

Managed Hotels

As of December 31, 2015, we operated seven hotels pursuant to long-term management agreements with third-party property owners, one hotel pursuant to a long-term management agreement with an unconsolidated joint venture in which we have a 50% ownership interest, and three hotels that we own, including Clift in San Francisco, which we lease under a long-term lease that is treated as a financing.  Terms of our management agreements vary, but we earn a management fee that is typically composed of a base management fee, which is a percentage of the revenues of the hotel, and an incentive management fee, which is based on the profits of the hotel and generally subject to a threshold. Our management agreements also generally include reimbursement for allocated chain services, typically calculated as a percentage of revenues, as well as other general reimbursables. Our hotel management agreements are generally long-term, although they may be subject to early termination in specified circumstances, or we may agree to early termination as circumstances require.

Food and Beverage Operations

We own the leasehold interests in three food and beverage venues at Mandalay Bay in Las Vegas, which are managed by our former subsidiary, The Light Group (“TLG”), and are being operated pursuant to 10-year operating leases with an MGM affiliate.  We pay minimum annual lease payments and a percentage rent based on cash flow.  

 Sales, Marketing and Public Relations  

Direct sales have been an integral part of our success. We employ a sales force of approximately 120 people with multiple sales managers stationed in each of our markets, deployed by industry focus and geography. Our sales force is divided into a global sales organization and a property and regional level sales force. Our global sales organization handles the majority of our key accounts and can provide our clients with one point of contact for all brands. The property and regional level sales force has responsibility for sourcing business for their respective hotels and regions. Our sales efforts are designed to be proactive and direct and are focused on building success in the transient, leisure, corporate business travel, group and consortia markets. We believe these segments are key to our competitiveness in the market. Unlike many hotel companies, our sales force is trained to sell the “experience,” not simply the rate. By branding the “experience,” we showcase the kind of creativity that happens inside our hotels, and we believe that our guests come to us for much more than just a room or a bed. Our objective is to create differentiation by selling an “experience” and brand. Our core corporate business comes from the financial services, entertainment, advertising and public relations, technology, and fashion industries.

We place significant emphasis on branded communication strategies that are multi-layered and non-traditional. We believe our integrated approach that includes utilizing multiple channels such as public relations, social media, partnerships, digital content creation and distribution, and branded experiences reinforces an authentic message in a highly cost-effective manner. Through highly publicized events or high profile partnerships, prospective guests are more likely to be made aware of our hotels through word-of-mouth or from media coverage rather than direct advertising. This publicity is supplemented with focused marketing activities to our existing customers, primarily through digital campaigns, keeping them informed and engaged with our properties and brands. Our in-house marketing and digital team coordinates with the efforts of third-party public relations and marketing firms to promote our properties through various local, national and international travel, entertainment, and food and beverage print media. We host events that attract celebrity guests, cultural leaders, and journalists, generating articles in well recognized media outlets around the world. Our marketing efforts also include hosting special events, which include annual happenings during iconic events such as Art Basel Miami, The Academy Awards, The Grammy’s, film premieres, and Fashion Week in New York and London. 

Over the past year, we continued to enhance and reinvest in our website, www.morganshotelgroup.com, and our digital marketing efforts. We continue to expand our social media presence and to engage our followers through these platforms with more targeted emails, mobile messaging, and digital partnerships.  The content of our website is not part of this report.  

Competition

We believe competition in the hospitality industry reflects a highly fragmented group of owners and operators offering a wide range of quality and service levels. Our hotels compete with other hotels, as well as alternative lodging companies, such as privately-

 

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owned residential room and accommodation rentals, in their respective locations that operate in the same segments of the hospitality market. These segments consist of traditional hotels in the luxury sector and boutique hotels in the same local area. Competitive factors include name recognition, pricing, quality of service, convenience of location, quality of the property, and range and quality of food and beverage services and amenities offered.  Our competitors generally also have more established and broader reaching guest loyalty programs which may enable them to attract more customers and more effectively retain guests.  We compete by providing a differentiated combination of location, design, amenities and service. We are constantly striving to enhance the experience and service we are providing for our guests and have a continuing focus on improving our customer experience.

Seasonality

The hospitality business is seasonal in nature. Our revenue is generally higher in the second and fourth quarters. However, prevailing economic conditions, including supply, can cause fluctuations which impact seasonality.

Insurance

We bid out our insurance programs to obtain the most competitive coverage and pricing. We believe our programs provide coverage of the insurable risks facing our business that are consistent with or exceed industry standards.

Directors and officers liability insurance has been in place since our initial public offering in February 2006 at limits and retentions that we believe are consistent with public companies in our industry groups. Coverage includes protection for securities claims.

We believe that the premiums we pay and the insurance coverages we maintain are reasonable and consistent with comparable businesses of our size and risk profile. Our insurance policies require annual renewal. Given current trends, our insurance expense may increase in the foreseeable future.  

Employees

As of December 31, 2015, we employed approximately 2,700 individuals, approximately 28.4% of whom were represented by labor unions. We believe relations with our employees are positive.

Government Regulations

We are subject to numerous foreign, federal, state and local government laws and regulations, including those relating to the preparation and sale of food and beverages, building and zoning requirements, environmental requirements, safety, data privacy, consumer protection, general business license and permit requirements, antitrust and anti-corruption laws and regulations in the various jurisdictions in which we manage, franchise, license and own properties. We are also subject to laws governing our relationships with employees, including minimum wage requirements, overtime, working conditions, hiring and firing, non-discrimination for disabilities and other individual characteristics, work permits and benefit offerings. Also, our ability to expand our existing properties may be dependent upon our obtaining necessary building permits or zoning variances from local authorities. Compliance with these various laws and regulations can affect the revenues and profits of properties managed, franchised, licensed or owned and could adversely affect our operations. We believe that our businesses are conducted in substantial compliance with applicable laws and regulations.

Environmental Compliance

Our hotel properties expose us to possible environmental liabilities in both the United States and other jurisdictions in which we operate, including liabilities related to activities that predated our acquisition or operation of a property. Under various federal, state, local and international laws, ordinances and regulations, a current or previous owner or operator of real estate may be required to investigate and clean up certain hazardous substances released at the property and may be held liable to a governmental entity or to third parties for property damages and for investigation and cleanup costs incurred by such parties in connection with the contamination. Environmental liability can be incurred by a current owner or operator of a property for environmental problems or violations that occurred on a property prior to acquisition or operation. These laws often impose liability whether or not the owner knew of, or was responsible for, the presence of hazardous or toxic substances. In addition, some environmental laws create a lien on the contaminated site in favor of the government for damages and costs it incurs in connection with the contamination. The presence of contamination or the failure to remediate contamination may adversely affect the owner’s ability to sell or lease real estate or to borrow using the real estate as collateral. The owner or operator of a site may be liable under common law to third parties for damages and injuries resulting from environmental contamination emanating from the site.

 

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The properties we operate are also subject to national, state, and local laws and regulations that relate to protecting the environment including requirements that address health and safety; the use, management, and disposal of hazardous substances and wastes; and emission or discharge of wastes or other materials. From time to time, we or third-party owners may be required to manage, abate or remove mold, lead or asbestos-containing materials at our properties. We believe that our properties and operations are in compliance, in all material respects, with all applicable environmental regulations.  Compliance with such provisions has not materially impacted our capital expenditures, earnings, or competitive position, and we do not anticipate that it will have a material impact in the future. However, additional operating costs and capital expenditures could be incurred if additional or more stringent requirements are enacted in the future.

Intellectual Property

We operate in a highly competitive industry and our brand names, trademarks, service marks, trade names, and logos are very important to the success of our business. We believe that our brand names and other intellectual property represent an enhanced experience to our customers as a result of our high standards of hotel and design quality, service, and amenities. Accordingly, we register and protect our intellectual property where we deem appropriate and we actively enforce, maintain and protect this property against unauthorized use.

Our trademarks include, without limitation, Morgans Hotel Group®, Morgans®, Clift Hotel®, Delano®, Hudson®, Mondrian®, Sanderson®, St Martins®, St Martins Lane Hotel®, Agua®, Agua Baby®, Agua Bath House®, Agua Home®, Henry®, Hudson Common®, Redwood Room®, Rose Bar™, The Florida Room Delano (and design)™, Skybar®, Mondrian Skybar®, Velvet Room™, Mister H®, Morgans Original™;, Morgans Originals™,  A Morgans Original®, Atrium, A Morgans Original™, Back of House®, Bricktop's®, Agua At Mondrian®, Dandelyan®, Delano South Beach™, FDR®, Hudson A Morgans Original™,  Isola Trattoria And Crudo Bar®,  Morgans Hotel Group Originals™, Rumpus Room®, Sanderson Hotel®, Skybar At Delano®,  Skybar At Mondrian®, Suka®, Tequila Park®, and Wardroom®.

The majority of these trademarks are registered in the United States or the European Community. Certain of these trademarks are also registered in Australia, Colombia, Morocco, Panama, Spain, Canada, France, the United Kingdom, Argentina, Mexico, China, Lebanon, Italy, Turkey, the United Arab Emirates and Russia.  We are currently seeking registration of several of our trademarks in Russia, the United Kingdom, India, China, Brazil, the Bahamas, Indonesia, Egypt, Japan, Vietnam, Qatar and Turkey.  We are also seeking registration of the Delano trademark in Bahrain, Israel, Japan, Jordan, Kuwait, Malaysia, New Zealand, Oman, Pakistan, Philippines, Saudi Arabia, Singapore, South Africa, Switzerland, and Thailand, among other countries. Our trademarks are very important to the success of our business and we actively enforce, maintain and protect these marks. 

Materials Available On Our Website

We file annual, quarterly and periodic reports, proxy statements and other information with the Securities and Exchange Commission (“SEC”). You may obtain and copy any document we file with or furnish to the SEC at the SEC’s public reference room at 100 F Street, N.E., Room 1580, Washington, D.C. 20549. You may obtain information on the operation of the SEC’s public reference room by calling the SEC at 1-800-SEC-0330. You can request copies of these documents, upon payment of a duplicating fee, by writing to the SEC at its principal office at 100 F Street, N.E., Washington, D.C. 20549. The SEC maintains a website at www.sec.gov that contains reports, proxy and information statements, and other information regarding issuers that file or furnish such information electronically with the SEC. Our SEC filings are accessible through the Internet at that website.

Copies of SEC filings including our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports, as well as reports on Forms 3, 4, and 5 regarding officers, directors or 10% beneficial owners of our Company, and our code of ethics, are available for download, free of charge, as soon as reasonably practicable after these reports are filed or furnished with the SEC, at our website at www.morganshotelgroup.com.  The content of our website is not a part of this report.

You may request a copy of any of the above documents, at no cost to you, by writing or telephoning us at: Morgans Hotel Group Co., 475 Tenth Avenue, New York, New York 10018, Attention: Investor Relations, telephone (212) 277-4100. We will not send exhibits to these reports, unless the exhibits are specifically requested and you pay a modest fee for duplication and delivery.

 

 

 

 

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ITEM 1A.

RISK FACTORS  

Set forth below are risks that we believe are material to investors who purchase or own our common stock. You should consider carefully the following risks, together with the other information contained in and incorporated by reference in this Annual Report on Form 10-K, and the descriptions included in our consolidated financial statements and accompanying notes.

Risks Related to Our Business

Financing and Liquidity Risks

To service our obligations under our debt and preferred equity instruments, we will require a significant amount of cash. Our ability to generate cash depends on many factors beyond our control, and any failure to meet our obligations under our debt and preferred equity instruments could materially harm our business, financial condition and results of operations.

As of December 31, 2015, we had approximately $606.4 million of consolidated outstanding debt and capital lease obligations, and $75.0 million of outstanding Series A preferred securities, which have accrued and unpaid dividends of $55.6 million.  Our near term consolidated outstanding debt obligation consisted of nonrecourse mortgage and mezzanine loans in the then aggregate principal amount of $450.0 million, secured by mortgages encumbering Delano South Beach and Hudson (collectively, the “Hudson/Delano 2014 Mortgage Loan”).  Additionally, as of December 31, 2015, we had $50.1 million of junior subordinated trust preferred notes issued by our operating company and guaranteed by us (the “Trust Preferred Notes”), which mature in October 2036.

Our ability to pay interest and dividends on, and the outstanding balances of, these obligations, along with our other outstanding debt and capital lease obligations, will primarily depend upon our ability to monetize our owned hotels, discussed below, and our future operating performance.

As a result of the $28.2 million prepayment of outstanding debt under the Hudson/Delano 2014 Mortgage Loan in February 2016, the maturity of the remaining $421.8 million of outstanding debt was extended to February 9, 2017.  We have two remaining one-year extension options that will permit us to extend the maturity date to February 9, 2019, if certain conditions are satisfied at the respective extension dates, including the achievement of a debt yield of 7.75% for the first extension and 8.00% for the second extension. To the extent we decide to further extend the maturity date of the debt outstanding under the Hudson/Delano 2014 Mortgage Loan, we may need to prepay the Hudson/Delano 2014 Mortgage Loan in an amount necessary to achieve the applicable debt yield.  Additionally, each of the remaining extension options also requires the payment of an extension fee in an amount equal to 0.25% of the then outstanding principal amount under the Hudson/Delano 2014 Mortgage Loan.  Based on our trailing 12 month cash flow through December 31, 2015, we currently estimate that we would be required to prepay approximately $27.0 million of outstanding debt under the Hudson/Delano 2014 Mortgage Loan by February 9, 2017 and pay an approximately $1.0 million extension fee in order to extend the maturity date of the debt outstanding under the Hudson/Delano 2014 Mortgage Loan to February 9, 2018.  Our internally generated cash may be inadequate to pay any necessary amount to meet the 7.75% debt service yield and the required 0.25% extension fee to extend the Hudson/Delano 2014 Mortgage Loan in February 2017.  See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Debt” for more information about the Hudson/Delano 2014 Mortgage Loan.

Our Series A preferred securities currently have a dividend rate of 10% per annum, which will increase to a 20% per annum effective October 16, 2016.  We have the option to accrue any and all dividend payments.  The cumulative accrued and unpaid dividends have a dividend rate equal to the then applicable dividend rate on the Series A preferred securities. As of December 31, 2015, we have not declared any dividends on our Series A preferred securities.  We have the option to redeem any or all of the Series A preferred securities at any time at a redemption price equal to the sum of (i) $1,000 per security and (ii) the accumulated and unpaid dividends to the redemption date. Our internally generated cash may be inadequate to redeem the outstanding Series A preferred securities should we elect to redeem them prior to the dividend rate increase in October 2016.  If we continue to accrue dividend payments, including following the increase of the dividend rate to 20% per annum, the value of the Company attributable to holders of our common stock may decline and, if a sale of the Company or other monetization event were to occur, less value, if any, will be available to the holders of our common stock.  See “Risks Related to Our Organization and Corporate Structure” and note 11 of our consolidated financial statements for more information about our Series A preferred securities.

In addition, in the event we were to undertake a transaction that was deemed to constitute a transfer of our assets substantially as an entirety within the meaning of the indenture governing the Trust Preferred Notes, and the holders of the Trust Preferred Notes exercise their right to accelerate payment of the Trust Preferred Notes, we would be required to repay the Trust Preferred Notes prior to their maturity.  In such an event, there can be no assurance that we would have sufficient cash to pay the holders of the Trust Preferred Notes or, alternatively, be able to obtain the necessary consents from the holders of the Trust Preferred Notes in connection with such transfer, and any failure to do so would have an adverse effect, which could be material, on our business, financial condition and results of operations.  We cannot assure investors that the sale of the Hudson and Delano South Beach hotels will not be deemed to constitute a transfer of our assets substantially as an entirety within the meaning of the trust preferred indenture.  See “Item 7.

 

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Management’s Discussion and Analysis of Financial Condition and Results of Operations—Debt” for more information about the Trust Preferred Notes.

We intend to generate liquidity to meet our obligations through the monetization of our owned real estate assets and on December 7, 2015, we retained a leading hotel brokerage firm to market the Hudson and Delano South Beach hotels.  See “—We face risks associated with the monetization of the Hudson and Delano South Beach hotels.”  We cannot predict whether we will be able to sell either Hudson or Delano South Beach for the price or on the terms desired by us, or whether any price or other terms offered by a prospective purchaser would be acceptable to us. While we currently expect to complete the process during the second quarter of 2016, we cannot assure you that a transaction will be completed on that timeline, if at all.

If our internally generated cash, including cash received through the monetization of our owned real estate assets, if any, is not sufficient to satisfy our obligations to extend or repay the Hudson/Delano 2014 Mortgage Loan in February 2017 or redeem the outstanding Series A preferred securities and accrued dividends, or pay amounts that may become due as the result of an acceleration in payment of the Trust Preferred Notes, if any, we may have to undertake alternative financing plans, such as refinancing or restructuring these obligations, reducing or delaying capital investments or seeking to raise additional capital, if available to us. Our ability to restructure or refinance these obligations will depend on general economic conditions, the condition of the capital markets and our operating results and financial condition at such time, much of which is beyond our control. Any restructuring or refinancing of these obligations could be at higher interest or dividend rates and may require us to comply with more onerous covenants, which could further restrict our business operations. The terms of existing or future instruments may restrict us from adopting some of these alternatives, which in turn could exacerbate the effects of any failure to generate sufficient cash flow to satisfy our obligations. Our inability to generate sufficient internally generated cash, including through the monetization of our owned real estate assets, to satisfy our obligations under our debt and Series A preferred securities, or to restructure or refinance these obligations on commercially reasonable terms or at all, would have an adverse effect, which could be material, on our business, financial condition and results of operations.

We face risks associated with the monetization of the Hudson and Delano South Beach hotels.

We intend to generate liquidity to meet our obligations, including in respect of both the Hudson/Delano 2014 Mortgage Loan and our Series A preferred securities, through the monetization of the Hudson and Delano South Beach hotels. We cannot predict whether we will be able to sell either of the Hudson or Delano South Beach hotels for the prices or on the terms desired by us, or whether any price or other terms offered by a prospective purchaser would be acceptable to us and/or sufficient to satisfy our obligations under the Hudson/Delano 2014 Mortgage Loan and in respect to the Series A preferred securities. While we currently expect to complete the process during the second quarter of 2016, we cannot assure you that a transaction will be completed on that timeline, if at all.

The process of marketing the Hudson and Delano South Beach hotels, including the identifications of potential buyers and the negotiation of the terms of, and documentation relating to, such transactions, will require significant time and attention on the part of our senior management, and may divert management’s attention from our day-to-day operations, which could have an adverse effect, which could be material, on our business, financial condition and results of operations. In addition, uncertainty about the monetization of the Hudson and Delano South Beach hotels may have an adverse effect on us. These uncertainties may impair our ability to attract and retain key personnel or make it more difficult to attract new management agreements and franchise or license agreements until the process is complete.

If the monetization of Hudson and Delano South Beach is not completed, we will have to revisit our strategic plan and will need to consider other alternatives to generate liquidity to meet our obligations. No assurance can be given whether we would be able to successfully restructure our obligations or raise capital or other financing in such circumstances or, if so, under what terms.

The terms of our outstanding debt and preferred equity instruments place restrictions on us and our subsidiaries and these restrictions could reduce our operational flexibility.

The Hudson/Delano 2014 Mortgage Loan contains restrictions on the ability of the borrowers to incur additional debt or liens on their assets and on the transfer of direct or indirect interests in Hudson or Delano South Beach and the owners of Hudson and Delano South Beach and other affirmative and negative covenants and events of default customary for multiple asset commercial mortgage-backed securities loans.  

Some of our existing indebtedness, and the indebtedness of certain of our joint ventures, contain limitations on the ability to incur additional debt on specific properties, as well as financial and other covenants relating to the performance or operation of those properties. If these covenants restrict us or the applicable joint venture from engaging in activities that we believe would benefit those properties, our growth may be limited. If we or the applicable joint venture fail to comply with these covenants, consents or waivers

 

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from compliance with these covenants will need to be obtained, which may take time, cost money, or require prepayment of the debt containing the restrictive covenants.

The indenture governing the Trust Preferred Notes includes limitations on our ability to sell all or substantially all of our assets and engage in mergers, consolidations and certain acquisitions. These covenants may restrict our ability to consolidate or merge into any other person or convey, transfer or lease our properties and assets substantially as an entirety to any person and any other person’s ability to consolidate with or merge into us or convey, transfer or leases its properties and assets substantially as an entirety to us. These covenants may restrict our ability to engage in transactions that we believe would otherwise be in the best interests of our stockholders or cause us to accelerate payment of the Trust Preferred Notes, as discussed above.

In addition, the instruments governing our Series A preferred securities provide the holders with certain consent rights over certain transactions and other corporate actions. See “—Risks Related to Our Organization and Corporate Structure—The Yucaipa Investors, who own our Series A preferred securities and warrants to purchase our common stock, may have interests that are not aligned with yours and will have substantial influence over the vote on key matters requiring stockholder approval.”

 If we were required to make payments under the “bad boy” nonrecourse carve-out guarantees that we have provided in connection with certain mortgages and related mezzanine loans, our business and financial results could be materially adversely affected.

We have provided standard “bad boy” nonrecourse carve-out guarantees in connection with certain leases, mortgages and related mezzanine loans, which are otherwise nonrecourse to us or have agreed to indemnify joint venture partners who have provided such guarantees for our pro rata share of certain liabilities under such guarantees. See, for example, nonrecourse carve-out guarantees and other guarantees or indemnification obligations provided by us in connection with mortgage and mezzanine loans associated with Mondrian South Beach as described in “Management’s Discussion and Analysis of Financial Condition and Results of Operations —Liquidity and Capital Resources—Other Liquidity Matters.”

Although we believe that our “bad boy” carve-out guarantees and related indemnification obligations are not guarantees of payment in the event of foreclosure or other actions of the foreclosing lender that are beyond our control, some lenders in the real estate industry have sought to make claims for payment under such guarantees. In the event such a claim were made against us under one of our “bad boy” carve-out guarantees or related indemnification obligations following foreclosure on a related mortgage or mezzanine loan and such claim were successful, our business and financial results could be materially adversely affected.

However, a violation of any of the nonrecourse carve-out guaranty provisions, including fraud, misapplication of funds and other customary nonrecourse carve-out provisions, could cause the debt to become fully recourse to us.

We have incurred substantial losses and have a significant net deficit and may continue to incur losses in the future.

We reported pre-tax net losses of $28.1 million, $48.6 million, and $43.4 million for the years ended December 31, 2015, 2014, and 2013, respectively. Our net losses primarily reflected losses related to restructuring and disposal costs, development costs, impairment charges and non-operating costs, interest expense and depreciation and amortization charges. We may continue to incur these costs in the future which could result in an increase in our net deficit and additional losses and could negatively affect our ability to service our obligations under our debt and preferred equity instruments.  

Cash generated by our hotels that secures the Hudson/Delano 2014 Mortgage Loan is distributed to us only after the related debt service and certain impound amounts are paid, which could affect our liquidity and limit our ability to use funds for other corporate purposes. 

Cash generated by Hudson and Delano South Beach, which secures the Hudson/Delano 2014 Mortgage Loan, is distributed to us only after certain items are paid, including, but not limited to, the payment of debt service, insurance, taxes, operating expenses, and capital expenditures. This limit on distributions could affect our liquidity and our ability to use cash generated by those hotels for other corporate purposes.

Because Clift is leased pursuant to a 99-year lease and a portion of Hudson is leases of condominium interests, we are subject to the risk that these leases could be terminated or that we could default on payments under the leases, either of which would cause us to lose the ability to operate all or a portion of these hotels.

Our rights to operate Clift in San Francisco are based upon our interest in a 99-year lease. In addition, a portion of Hudson in New York are condominium interests that are leased to us under 99-year leases. Pursuant to the terms of the leases for these hotels, we are required to pay all rent due and comply with all other lessee obligations under the leases. Any transfer, including a pledge, of our interest in a lease may require the consent of the applicable lessor and its lenders. As a result, we may not be able to sell, assign,

 

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transfer or convey our lessee’s interest in any hotel subject to a lease in the future absent consent of such third parties even if such transactions may be in the best interest of our stockholders.

The lessors may require us, at the expiration or termination of a given lease to surrender or remove any improvements, alterations or additions to the land or hotel at our own expense. The leases also generally require us to restore the premises following a casualty or taking and to apply in a specified manner any proceeds received in connection therewith. We may have to restore the premises if a material casualty, such as a fire or an act of God, occurs, the cost of which may exceed any available insurance proceeds. The termination of either of these leases could cause us to lose the ability to continue operating all or a portion of these hotels, which would materially affect our business and results of operations.

In addition, we may be unable to make payments under the leases if we are not able to operate the properties profitably. The Clift lease agreement provided for base annual rent of approximately $6.0 million per year until October 2014.  Thereafter, base rent increases by a formula tied to increases in the Consumer Price Index, with a maximum increase of 20% and a minimum increase of 10% at each five-year rent increase date. As a result of the first contractual increase, effective October 14, 2014, the annual rent increased to $7.6 million.  The lease is nonrecourse to us. Morgans Group also entered into a limited guaranty, whereby Morgans Group agreed to guarantee losses of up to $6.0 million suffered by the lessors in the event of certain “bad boy” type acts.

Operational Risks

The loss of management agreements will reduce our cash flow and may materially and adversely affect our operations and ability to execute our management agreement and brand growth strategy.

In April 2015, we lost the hotel management agreement for Mondrian SoHo and we currently expect to lose our management agreement for Shore Club in the second quarter of 2016.  Additionally, on January 28, 2016, we entered into amendments to each of the hotel management agreements relating to Royalton and Morgans, both owned by the same hotel owner.  In connection with the owner’s potential sale of each of those hotels, we agreed to allow the hotel owner to sell the hotels unencumbered by the current hotel management agreements.  Under each of the amendments, the owner has the right to terminate the hotel management agreements at any time upon at least 30 days’ prior written notice in exchange for paying us $3.5 million for each of the hotels, or $7.0 million in total, upon a termination of each agreement.  We expect to continue to manage the hotels for the owner until they are sold.

The loss and potential loss of these management agreements has and will result in a negative impact on our cash flow, which could have a material adverse effect on our business.  Furthermore, the loss of these contracts, which are not tied to our performance, may create a perception of additional uncertainty about our business, which may make it more difficult to secure new management agreements and license or franchise agreements with third-party owners, which would adversely affect our growth strategy.   

Additionally, certain of our hotel management agreements and franchise or license agreements contain performance tests that stipulate certain minimum levels of operating performance. Our failure to meet the specified minimum levels of operating performance once the performance test period begins, which is generally multiple years after a hotel opens, could result in early termination of our hotel management, license or franchise agreements.

Our hotels are geographically concentrated in a limited number of cities and, accordingly, we could be disproportionately harmed by an economic downturn, increased supply, or other financial pressures in these cities or a terrorist attack or natural disaster, such as a hurricane or earthquake.

The concentration of our hotels in a limited number of cities exposes us to greater risks regarding local economic, business and other conditions than more geographically diversified hotel companies.  Morgans, Royalton, and Hudson, all located in Manhattan, represented approximately 36.3% of our total guest rooms for all the hotels we manage. An economic downturn, a natural disaster, an outbreak of a contagious disease, a terrorist attack or similar disaster in New York would likely cause a decline in the Manhattan hotel market and adversely affect occupancy rates, the financial performance of our New York hotels and our overall results of operations, which could be material. In addition, we currently operate three hotels in Miami and three hotels in London, making us susceptible to economic slowdowns and other risks in these markets, which could materially and adversely affect our business and results of operations.

Additionally, the pace of new lodging supply, especially in New York City and Miami, has increased over the past several years. In New York City and South Beach, new lodging supply impacted our hotels’ occupancy and constrained rate growth during 2015, and we expect that these trends will continue through 2016 as the new supply in these markets is absorbed.  

In addition, certain of our hotels are located in markets that are more susceptible to natural disasters than others, which could adversely affect those hotels, the local economies, or both. Specifically, the Miami area, where Delano South Beach, Shore Club and

 

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Mondrian South Beach are located, is susceptible to hurricanes and California, where Mondrian Los Angeles and Clift are located, is susceptible to earthquakes.

In order to be successful, we must attract, engage, retain and integrate key employees and failure to do so could have a material adverse effect on our ability to manage our business.  We currently do not have a chief executive officer and we are dependent upon the services of our senior management team.  

Our success depends, in large part, on our ability to attract and integrate qualified executives, including a new chief executive officer, and retain members of our senior management team.  We had an Interim Chief Executive Officer from September 2013 until May 2015 and have had no chief executive officer since May 2015. We also announced on February 25, 2016 that our Chief Operating Officer resigned, with an Interim Chief Operating Officer taking over these duties effective February 29, 2016.  Identifying, developing internally or hiring externally, training and retaining highly-qualified personnel are critical to our future, and competition for experienced employees can be intense, and made more intense for us in light of the ongoing strategic process. In order to attract and retain executives and other key employees in a competitive marketplace, we must provide a competitive compensation package.  Failure to successfully hire key executives and other key employees, or the loss of any members of our senior management or other key employees, could have a significant impact on our operations. The loss of services of any key personnel, the inability to retain and attract qualified personnel in the future or delays in hiring may materially and adversely affect our business and results of operations.

If we are unable to maintain good relationships with third-party property owners and/or if we terminate agreements with defaulting third-party property owners, our revenues could decrease and we may be unable to maintain or expand our presence.

We earn fees for managing and franchising/licensing hotels and, since our shift in 2011 to an “asset light” strategy, we are dependent on maintaining and developing positive relationships with third-party owners and joint venture partners. Third-party developers and owners and joint venture partners are focused on maximizing the value of their investment and working with a management company that can help them maximize profitability and return on investment. The effectiveness of our management, the value of our brands, and the rapport that we maintain with our third-party owners and joint venture partners impact the likelihood of renewals of existing agreements and are also important factors for existing or new third-party owners or joint venture partners considering doing additional business with us in the future. If we are unable to maintain these relationships, we may be unable to maintain existing agreements or effectively grow our portfolio, which may have a material adverse effect on our financial position and results of operations.

We may be involved in disputes, from time to time, with the owners of the hotels that we manage and premature termination of our management agreements could hurt our financial performance.

The nature of our responsibilities under our management agreements to manage hotels that are not wholly-owned by us may be subject to interpretation and will from time to time give rise to disagreements. To the extent that such conflicts arise, we seek to resolve them by negotiation with the relevant parties. In the event that such resolution cannot be achieved, litigation may result in damages or other remedies against us. Such remedies could in certain circumstances include termination of the right to manage the relevant property, as was the case with the loss of the Mondrian SoHo management agreement in April 2015, as discussed further in “Item 3. Legal Proceedings.”  Additionally, although our hotel management, franchise and license agreements are generally long-term, they may be subject to early termination in specified circumstances, or we may agree to early termination as circumstances require.

In addition, some courts have applied principles of agency law and related fiduciary standards to managers of third-party hotel properties (or have interpreted hotel management agreements as “personal services contracts”). This means, among other things, that property owners may assert the right to terminate management agreements even where the agreements provide otherwise, and some courts have upheld such assertions regarding management agreements and may do so in the future. In the event of any such termination, we may need to enforce our right to damages for breach of contract and related claims, which may cause us to incur significant legal fees and expenses. Any damages we ultimately collect could be less than the projected future value of the fees and other amounts we would have otherwise collected under the management agreement.  

Several of our hotels are also subject to mortgage and mezzanine debt, and in some instances our management, franchise or license fee is subordinated to the debt. Some of our management agreements also may be terminated by the lenders upon foreclosure or certain other related events. With some of our existing management, franchise and license agreements we have negotiated, and with all of our new management, franchise and license agreements for hotels under development we attempt to negotiate, non-disturbance agreements or similar protections with the mortgage lender, or to require that such agreements be entered into upon securing of financing, in order to protect our agreements in the event of foreclosure.  However, we are not always successful in imposing these requirements, and some of our new development projects and existing hotels do not have non-disturbance or similar protections, which may make the related agreements subject to termination by the lenders on foreclosure or certain other related

 

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events.  Even if we have such non-disturbance protections in place, they may be subject to conditions and may be difficult or costly to enforce in a foreclosure situation.

Negative publicity concerning our properties or our business could harm our brands and reputation as well as increase our costs and reduce our revenues.

Our brands and our reputation regarding the quality of our hotels and services are key to attracting guests to our properties. Incidents involving the potential safety or security of our associates or our guests, or other negative incidents involving guests, or adverse publicity relating to the geographic areas in which any of our properties are located or the hotel or travel industry generally, may harm our brands and reputation, cause a loss of consumer confidence in the industry, and materially and adversely impact our results of operations. The continued expansion of the use of social media and multiple digital platforms over recent years could increase our exposure to negative publicity that could damage our reputation and materially adversely affect our financial position.

Our success depends on the value of our name, image and brands, and if the demand for our hotels and their features decreases or the value of our name, image or brands diminishes, our business and operations could be materially and adversely affected.

Our success depends, to a large extent, on our ability to shape and stimulate consumer tastes and demands by producing and maintaining innovative, attractive, and exciting properties and services, as well as our ability to remain competitive in the areas of design and quality. There can be no assurance that we will be successful in this regard or that we will be able to anticipate and react to changing consumer tastes and demands in a timely manner.

Furthermore, a high media profile, including new digital platforms, is an integral part of our ability to shape and stimulate demand for our hotels with our target customers. A key aspect of our marketing strategy is to focus on attracting media coverage. If we fail to attract sufficient media coverage, we may need to substantially increase our advertising and marketing costs, which would adversely affect our results of operations. In addition, other types of marketing tools, such as traditional advertising and marketing, may not be successful in attracting our target customers.

Our business could be adversely affected if our public image, reputation or brands were to be diminished, including as a result of any failure to remain competitive in the areas of design, quality and service or as a result of negative social media content. If we do not maintain our hotel properties at a high level, which necessitates, from time to time, capital expenditures and the replacement of furniture, fixtures and equipment, or the owners of the hotels that we manage fail to develop or maintain the properties at our standards, the value of our name, image or brands would be diminished and our business and operations could be materially and adversely affected.

Any failure to protect our trademarks could have a negative impact on the value of our brand names and materially and adversely affect our business.

We believe that our trademarks are critical to our success. We rely on trademark laws to protect our intellectual property rights. The success of our business depends in part upon our continued ability to use our trademarks to increase brand awareness and further develop our brands in both domestic and international markets. Monitoring the unauthorized use of our intellectual property is difficult. Litigation has been and may continue to be necessary to enforce our intellectual property rights or to determine the validity and scope of the intellectual property rights of others. Litigation of this type could result in substantial costs and diversion of resources, may result in counterclaims or other claims against us and could significantly harm our results of operations. In addition, the laws of some foreign countries do not protect our intellectual property rights to the same extent as do the laws of the United States.

We cannot assure you that all of the steps we have taken to protect our trademarks in the United States and foreign countries will be adequate to prevent imitation of our trademarks by others. The unauthorized reproduction of our trademarks could diminish the value of our brands and their market acceptance, competitive advantages or goodwill, which could adversely affect our business.

In addition, there may be prior registrations or use of trademarks in the United States or foreign countries for similar or competing marks or other intellectual property rights. In all such countries it may be possible for any third-party owner of a national trademark registration or other intellectual property right to enjoin or limit our expansion into those countries or to seek damages for our use of such intellectual property in such countries. In the event a claim against us was successful and we could not obtain a license to the relevant intellectual property or redesign or rename our products or operations to avoid infringement, our business, financial condition or results of operations could be harmed. Securing registrations does not fully insulate us against intellectual property claims, as another party may have rights superior to our registration or our registration may be vulnerable to attack on various grounds.

 

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Our operations are sensitive to currency exchange risks, and we cannot predict the impact of future exchange-rate fluctuations on our business and operating results.

Our operations are sensitive to currency exchange risks. Changes in exchange rates between foreign currencies and the U.S. dollar may adversely affect our operating results. For example, all else being equal, a stronger U.S. dollar could harm international tourism in our domestic markets and may increase U.S. travel to our international markets. As foreign currencies depreciate against the U.S. dollar, it becomes more expensive, in terms of those depreciating foreign currencies, to pay for our U.S. hotel services. Conversely, all else being equal, a depreciating U.S. dollar could affect demand for our U.S. hotel services but may decrease U.S. travel to our international markets.

Due to the concentration of our hotels in global cities, such as New York and Miami, which are frequently visited by guests from other countries, our business could be impacted by the change in the value of foreign currencies as compared to the U.S. dollar.  For example, if the value of the U.S. dollar continues to strengthen against the value of the Euro, guests from Europe may not travel to New York or Miami as frequently, and/or room rates we are able to charge international guests may be driven down, which could have a significant impact on our operating results.  

We are exposed to the risks of a global market, which could hinder our ability to maintain and expand our international operations.

We currently manage hotels in the United States and the United Kingdom, have a franchise hotel in Turkey, currently plan to open a hotel in Doha in late 2016, and plan further expansion into other international markets. The success and profitability of any future international operations are subject to numerous risks and uncertainties, many of which are outside of our control, such as:

 

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global economic conditions, such as economic contraction, economic uncertainty or the perception by our customers of weak or weakening economic conditions;

 

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political or economic instability;

 

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changes in governmental regulation;

 

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trade restrictions;

 

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foreign currency controls;

 

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difficulties and costs of staffing and managing operations in certain foreign countries;

 

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war, acts of terrorism, civil unrests, or threats and heighted travel security measures;

 

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work stoppages or other changes in labor conditions;

 

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taxes;

 

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payments terms; and

 

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seasonal reductions in business activity in some parts of the world.

Furthermore, changes in policies and/or laws of the United States or foreign governments resulting in, among other things, higher taxation, currency conversion limitations or the expropriation of private enterprises could reduce the anticipated benefits of our international operations. Any actions by countries in which we conduct business to reverse policies that encourage foreign trade could adversely affect our business relationships and gross profit. In addition, we may be restricted in moving or repatriating funds attributable to our international properties without the approval of foreign governmental authorities or courts. These limitations could have a material adverse effect on our business and results of operations.

Establishing operations in any foreign country or region presents risks such as those described above, as well as risks specific to the particular country or region. We may not be able to maintain and expand our international operations successfully, and as a result, our business operations could be adversely affected.

We have high fixed costs, including certain payroll costs, property taxes and insurance costs, which we may be unable to adjust in a timely manner in response to a reduction in revenues.

The costs associated with owning and operating hotels are significant, some of which may not be altered in a timely manner in response to changes in demand for services. Failure to adjust our expenses may adversely affect our business and operations. For example, pursuant to the terms of our agreements with the labor unions for our New York City and San Francisco hotels, we may not unilaterally reduce the wages of the employees subject to these agreements, and are restricted in the manner in which we may layoff and/or alter the schedule of union employees.

 

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Property taxes and insurance costs are a significant part of our operating expenses. In recent years, our real property taxes have increased and those increases may continue. Our real property taxes may increase as property tax rates change and as the values of properties are assessed and reassessed by taxing authorities. Our real estate taxes do not depend on our revenues, and generally we cannot reduce them, other than by filing appeals with the applicable tax jurisdictions to reduce our tax assessments.

Insurance premiums for the hospitality industry have increased significantly in recent years, and continued escalation may result in our inability to obtain adequate insurance at acceptable premium rates. A continuation of this trend would appreciably increase the operating expenses of our hotels. Additionally, our directors and officers insurance may increase in future years.

Development and Growth Risks

We may not be able to successfully compete for desirable hotel management, development, or investment opportunities.

We may not be successful in identifying or competing for new management agreements.  We compete for management agreements based primarily on the value and quality of our management services and reputation, our brand recognition, our ability and willingness to invest key money into projects, the level of our management fees, and the terms of our management agreements.  We compete with hotel operating companies, institutional pension funds, private equity investors, real estate investment trusts, owner-operators of hotels and others who are engaged in hotel operating or real estate investment activities for the operation and development of hotels. Some competitors may have substantially greater financial resources than we do, and as such, will be able to invest more or accept greater risk than we can prudently manage. In addition, our potential hotel management or development projects may find our competitors to be more attractive investors because they may have greater resources, be willing to pay more, have a more compatible operating philosophy, or better relationships with hotel franchisors, sellers or lenders.

We also have experienced challenges in securing new projects in recent years as a result of the occurrence of certain events at our corporate level, including our Board of Directors’ strategic review process, the lack of a permanent chief executive officer, and actual and threatened proxy contests.  

We cannot assure you that any of our current arrangements will continue or that we will be able to enter into future collaborations, renew agreements, or enter into new agreements in the future on terms that are favorable to us.

Some of our existing and future development pipeline may not be developed into new hotels and costs to develop the pipeline may be underestimated.  

We have signed management, license or franchise agreements for new hotels which are in various stages of development. The commitments of owners and developers under this pipeline of agreements and letters of intent are subject to numerous conditions.  The eventual development and construction of our pipeline not currently under construction or in the initial stages of construction, or the signing of a management agreement in the case of letters of intent, is subject to numerous risks, including, in certain cases, obtaining governmental and regulatory approvals and adequate financing. As a result, we cannot assure you that our development pipeline will be completed and developed into new hotels.

Further, we may underestimate the costs necessary to bring a development project or hotel management agreement up to the standards established for its intended market position or to develop it as a Morgans Hotel Group brand hotel or the costs to integrate it with our existing operations. Significant costs of hotel development projects could materially impact our operating results, including costs of uncompleted hotel development projects or acquisitions, as they would generally be expensed in the time period during which they are incurred. We also may incur significant costs and divert management attention in connection with evaluating and negotiating potential hotel management or development projects, including ones that we or others are subsequently unable to complete.

Disruptions in the financial markets could affect our ability and the ability of our joint venture partners, development partners, or other third-party owners to obtain capital or financing for development of properties and other purposes on reasonable terms.

As part of our strategy, we focus on seeking new management opportunities, which may entail the investment of key money and/or equity. We also may continue, through joint ventures, to acquire and develop hotel properties as suitable opportunities arise. These investments could require significant capital expenditures, especially since these properties usually generate little or no cash flow until the project’s completion. To the extent the expenditures are significant, we, our joint venture partners, our development partners or other third-party owners may rely upon the availability of debt or equity capital.

In prior years, the U.S. and global markets have experienced significant price volatility, severely diminished liquidity and credit availability and other market dislocations. These circumstances materially impacted liquidity in the financial markets, making terms for certain types of capital or financings less attractive, and in some cases resulted in the unavailability of capital or financing. In the future, weaknesses in certain areas of global economies, as well as our financial condition or the financial condition of our properties,

 

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may prevent or negatively impact our ability to access additional capital or financing for development of properties and other purposes at reasonable terms, which may cause us, our joint venture partners, or other third-party owners, to suspend, abandon or delay development and other activities and otherwise negatively affect our business. As a result, we, our joint venture partners, our development partners, or other third-party owners, may be forced to seek alternative sources of potentially less attractive capital or financing and adjust business plans accordingly. These events also may make it more difficult or costly for us to raise capital through the issuance of our common stock or preferred stock and therefore could materially adversely affect our growth strategy.

 Integration of new hotels may be difficult and may adversely affect our business and operations.

The success of any hotel management or development project or acquisition will depend, in part, on our ability to realize the anticipated benefits from integrating new hotels with our existing operations. For instance, we may manage or develop new hotels in geographic areas in which our management may have little or no operating experience and in which potential customers may not be familiar with our existing hotels, name, image or brands. Unanticipated expenses and insufficient demand could result in inferior operating results at new hotel properties as compared to those of our existing hotels, all of which could adversely affect our business.  

Our success in realizing anticipated benefits and the timing of this realization depend upon the successful integration of the operations of the new hotel. This integration is a complex, costly and time-consuming process across multiple functional areas of our business including, among others, sales, marketing, information technology and branding.  We may not accomplish the integration of new hotels smoothly or successfully. The diversion of the attention of our management from our existing operations to integration efforts and any difficulties encountered in combining operations could prevent us from realizing the anticipated benefits from the new addition and could adversely affect our business and operations.

The use of joint ventures or other entities, over which we may not have full control, for hotel development projects or acquisitions could prevent us from achieving our objectives.

We have in the past, and may in the future acquire or develop hotel properties through joint ventures with third parties, acquiring non-controlling interests in or sharing responsibility for managing the affairs of a property, joint venture or other entity. As of December 31, 2015, we owned our Mondrian South Beach hotel through a 50/50 joint venture.

To the extent we own properties through joint ventures or other entities, we may not be in a position to exercise sole decision-making authority regarding the property, joint venture or other entity. Investments in joint ventures or other entities may, under certain circumstances, involve risks not present were a third party not involved, including the possibility that partners might become bankrupt or fail to fund their share of required capital contributions. Likewise, partners may have economic or other business interests or goals which are inconsistent with our business interests or goals and may be in a position to take actions contrary to our policies or objectives. Such investments may also have the potential risk of creating impasses on decisions if neither we nor our partner have full control over the joint venture or other entity. Disputes between us and our partners may result in litigation or arbitration that would increase our expenses and prevent management from focusing their time and effort on our business. Consequently, actions by, or disputes with, our partners might result in subjecting properties owned by the joint venture to additional risk. In addition, we may, in certain circumstances, be liable for the actions of our partners.  

We have invested, and may continue to invest in the future, in select properties which have residential components, and this strategy may not yield the returns we expect and may result in disruptions to our business or strain management resources.

As part of our growth strategy, we may seek to leverage awareness of our hotel brands by developing and/or managing non-hotel properties, such as condominium developments and other residential projects, including condominiums or apartments. For example, in August 2006, together with a 50/50 joint venture partner, we acquired an apartment building in the South Beach area of Miami Beach, Florida, which we renovated and converted into a hotel and condominium project and re-branded as Mondrian South Beach. This strategy, however, may expose us to additional risks, including our ability to complete development the property in a cost effective manner; a downturn in local residential real estate market conditions; overall project costs may significantly exceed the costs that were estimated when the project was originally undertaken, which will result in reduced returns, or even losses, from our investment; failure to attract sufficient participation in the hotel rental program by condominium hotel unit owners may result in a low hotel room inventory making it difficult to run the hotel profitably; and condominium hotel unit owners may attempt to rent their units as hotel units outside of the hotel rental program, which may result in confusion and guest relations issues and reputational damage to our brands.

 

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Risks Related to Our Organization and Corporate Structure

The Yucaipa Investors, who own our Series A preferred securities and warrants to purchase our common stock, may have interests that are not aligned with yours and will have substantial influence over the vote on key matters requiring stockholder approval.

As of December 31, 2015, Yucaipa American Alliance Fund II, L.P. and Yucaipa American Alliance (Parallel) Fund II, L.P., (collectively, the “Yucaipa Investors” or “Yucaipa”), held warrants to purchase 12,500,000 shares of our common stock and owned 75,000 shares of our Series A preferred securities.  

For so long as the Yucaipa Investors own a majority of the outstanding Series A preferred securities, in addition to any vote or consent required by law or our certificate of incorporation, under the certificate of designations governing the Series A preferred securities, they have certain consent rights, subject to certain exceptions and limitations, over transactions (i) involving the acquisition of the Company by any third party (other than as the result of the disposition of our real estate assets where we continue to engage in the business of managing hotel properties and other real estate) or (ii) pursuant to which the Series A preferred securities are converted or otherwise reclassified into or exchanged for securities of another entity.  

In addition, subject to the terms of a securities purchase agreement relating to the Series A preferred securities and warrants (the “Securities Purchase Agreement”), the Yucaipa Investors have certain consent rights over certain transactions for so long as they collectively own or have the right to purchase through the exercise of warrants (assuming a cashless exercise) 6,250,000 shares of our common stock, including, subject to certain exceptions and limitations:

 

·

the sale of all or substantially all of our assets to a third party;

 

·

the acquisition (including by merger, consolidation or other business combination) by us of a third party where the equity investment by us is $100.0 million or greater;

 

·

our acquisition by a third party (other than as the result of the disposition of our real estate assets where we continue to engage in the business of managing hotel properties and other real estate); or

 

·

any change in the size of our Board of Directors to a number below 7 or above 9.

For so long as the Yucaipa Investors collectively own or have the right to purchase through exercise of the warrants (assuming a cash exercise of such warrants) 875,000 shares of our common stock, we have agreed to use our reasonable best efforts to cause our Board of Directors to nominate and recommend to our stockholders the election of a person nominated by the Yucaipa Investors as a director of the Company and to use its reasonable best efforts to ensure that the Yucaipa Investors’ nominee is elected to our Board of Directors at each such meeting. If that nominee is not elected as a director at a meeting of stockholders, the Yucaipa Investors have certain Board of Director observer rights. Further, if we do not, within 30 days from the date of such meeting, create an additional seat on the Board of Directors and make available such seat to the nominee, the dividend rate on the Series A preferred securities increases by 4% per annum during any time that a Yucaipa Investors’ nominee is not a member of our Board of Directors.

Accordingly, the Yucaipa Investors have substantial control rights over our business and may be able to decide the outcome of key corporate decisions. The interests of the Yucaipa Investors may differ from the interests of our other stockholders, and they may cause us to take or not take certain actions with which you may disagree. Third parties may be discouraged from making a tender offer or bid to acquire us because of this concentration of ownership, and we may have more difficulty raising equity or debt financing, completing the sale of assets, and/or completing a transformative corporate transaction due to the Yucaipa Investors’ significant ownership and ability to influence certain decisions.

We face risks associated with the payment of dividends and the potential redemption of our Series A preferred securities.

The Yucaipa Investors, as the holders of the Series A preferred securities are entitled to cumulative cash dividends, payable in arrears on every three-month anniversary following the original date of issuance if such dividends are declared by the Board of Directors or an authorized committee thereof, at a rate of 8% per annum until October 2014, 10% per annum until October 2016, and 20% per annum thereafter. In addition, should the Yucaipa Investors’ nominee fail to be elected to our Board of Directors, the dividend rate would increase by 4% during any time that the Yucaipa Investors’ nominee is not a director.  The current dividend rate on the Series A preferred securities is 10% per annum and is scheduled to increase to 20% per annum in October 2016.

We have the option to accrue any and all dividend payments. As of December 31, 2015, we have not declared or paid any dividends and outstanding accrued dividends totaled $55.6 million. The accrual of these dividends may have a negative impact on the value of our common stock.

We have the option to redeem any or all of the Series A preferred securities at any time at a redemption price equal to the sum of (i) $1,000 per security and (ii) the accumulated and unpaid dividends to the redemption date. While the Series A preferred securities

 

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and dividends have no stated maturity date, we are focused on repaying some or all of our outstanding Series A preferred securities along with the accrued and unpaid dividends prior to the dividend rate increasing to 20% per annum in October 2016.  We currently intend to redeem the Series A preferred securities primarily through the remaining proceeds, if any, from the monetization of Hudson and Delano South Beach after repaying the debt outstanding under the Hudson/Delano 2014 Mortgage Loan, as discussed above in “Risks Related to Our BusinessFinancing and Liquidity Risks,or through a combination of asset sales and debt financing, to the extent it is available to us.  Currently, our internally generated cash is inadequate to repay the Series A preferred securities and accrued and unpaid dividends. We cannot assure you that the monetization of Hudson and Delano South Beach will produce sufficient proceeds to repay the Hudson/Delano 2014 Mortgage Loan and the Series A preferred securities or that alternative financing will be available on acceptable terms, if at all.  See note 11 to our consolidated financial statements for more information about our Series A preferred securities.

Our stock price has been and continues to be volatile.

As a result of certain events at our corporate level, including our Board of Director’s strategic review process, the lack of a permanent chief executive officer, actual and threatened proxy contests, as well as a limited amount of shares outstanding which are readily tradable in the open market and not held by large stockholders, our stock price has been extremely volatile. Our stock price may continue to fluctuate as a result of various factors, such as:

 

·

announcements relating to significant corporate transactions including our strategic plan and search for a permanent chief executive officer;

 

·

a perceived threat of or an actual proxy contest;

 

·

general industry and economic conditions;

 

·

actual or anticipated fluctuations in our quarterly and annual financial results;

 

·

general stock market volatility unrelated to our operating performance;

 

·

operating and stock price performance of companies that investors deem comparable to us;

 

·

our ability to generate cash flow and meet our obligations under our debt and preferred equity instruments;

 

·

the status of litigation against us;

 

·

changes in government regulation or proposals relating thereto;

 

·

sales or the expectation of sales of a substantial number of shares of our common stock in the public market; and

 

·

securities analysts' earnings projections or recommendations, third-party research recommendations, or general market conditions.

The stock market in general and the NASDAQ Global Select Market (“NASDAQ”) have experienced extreme price and volume fluctuations that may have been unrelated or disproportionate to the operating performance of the listed companies. These price fluctuations may be rapid and severe and may leave investors little time to react. Broad market and industry factors may seriously harm the market price of our common stock, regardless of our operating performance.

In the past 52 weeks, the trading price of our common stock has been as low as $0.79. If the trading price of our common stock falls below $1.00 again in the future, we could be in violation of the listing requirements of NASDAQ, which could result in the delisting of our common stock by NASDAQ if not remediated. If the trading price of our common stock remained below $1.00 for 30 consecutive days or more, NASDAQ may send us a deficiency notice. Once a deficiency notice has been sent, we would have 180 days to comply with the continued listing standards. In order to be compliant, the trading price of our common stock must rise above $1.00 for at least 10 consecutive days during the 180-day period. If we were to receive a deficiency notice from NASDAQ, we can give no assurances that we would be able to regain compliance with the NASDAQ continued listing standards.

 

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Our business could be negatively affected as a result of proxy contests and other actions of activist stockholders.

We have been subject to in the past and could be subject to future proxy contests.  Our business and our stock price could be materially and adversely affected by a proxy contest because:

 

·

responding to proxy contests and other actions by insurgent stockholders can be costly and time consuming;

 

·

perceived uncertainties as to our future direction may harm our ability to attract investors in order to raise capital, and may impact our existing and potential development collaborations and/or strategic relationships and make it more difficult to attract and retain qualified personnel; and

 

·

if individuals are elected to our Board of Directors with a specific agenda, it may adversely affect our ability to effectively and timely implement our strategic plan.  

We believe success by an activist stockholder in a proxy contest would materially and adversely affect our business, our prospects and stockholder value.

We are a holding company with no operations and depend upon our subsidiaries for our cash flow.

We are a holding company and we conduct all of our operations through our subsidiaries. We do not have, apart from our ownership of Morgans Group, any independent operations. Consequently, our cash flow and our ability to meet our debt service and other obligations or to pay dividends on our equity securities or make other distributions in the future will depend upon the cash flow of our subsidiaries and our subsidiaries’ payment of funds to us in the form of dividends or otherwise. The ability of Morgans Group and our other subsidiaries to pay dividends or make other payments or distributions to us will depend on their earnings, the terms of their current and future debt, tax considerations and legal and contractual restrictions on the ability to make distributions.

In addition, because we are a holding company, claims of our stockholders will be structurally subordinated to all existing and future liabilities and obligations (whether or not for borrowed money) of our subsidiaries. Therefore, in the event of our bankruptcy, liquidation or reorganization, our assets and those of our subsidiaries will be able to satisfy the claims of our stockholders only after all of our and our subsidiaries’ liabilities and obligations have been paid in full.

Substantially all of our businesses are held through our direct subsidiary, Morgans Group. Other than with respect to 75,446 membership units held by affiliates of NorthStar Capital Investment Corp. and LTIP Units convertible into membership units issued as part of our employee compensation plans, we own all of the outstanding membership units of Morgans Group. We may, in connection with acquisitions or otherwise, issue additional membership units of Morgans Group in the future. Such issuances would reduce our ownership of Morgans Group. Because our stockholders do not directly own Morgans Group units, they do not have any voting rights with respect to any such issuances or other corporate level activities of Morgans Group.

Provisions in our charter documents and Delaware law could discourage potential acquisition proposals, could delay, deter or prevent a change in control and could limit the price certain investors might be willing to pay for our stock.

Certain provisions of our certificate of incorporation and bylaws may inhibit changes in control of our Company not approved by our Board of Directors or changes in the composition of our Board of Directors, which could result in the entrenchment of current management. These provisions include:

 

·

a prohibition on stockholder action through written consents;

 

·

a requirement that special meetings of stockholders be called by the Board of Directors;

 

·

advance notice requirements for stockholder proposals and director nominations;

 

·

limitations on the ability of stockholders to amend, alter or repeal our bylaws; and

 

·

the authority of the Board of Directors to issue, without stockholder approval, preferred stock with such terms as the Board of Directors may determine and additional shares of our common stock.

We are also afforded the protections of Section 203 of the Delaware General Corporation Law, which prevents us from engaging in a business combination with a person who becomes a 15% or greater stockholder for a period of three years from the date such person acquires such status unless certain Board of Directors or stockholder approvals are obtained. These provisions could limit the price that certain investors might be willing to pay in the future for shares of our common stock.

 

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Our basis in our Owned Hotels is generally substantially less than their fair market value.

Some of the hotels which were part of our formation and structuring transactions at the time of our initial public offering in 2006 were contributed to us in tax-free transactions. Accordingly, our tax basis in the assets contributed was not adjusted in connection with our initial public offering and is generally substantially less than the fair market value of the contributed hotels as of the date of our initial public offering. We also intend to generally use the “traditional” method for making allocations under Section 704(c) of the Internal Revenue Code of 1986, as amended, as opposed to the “curative” or “remedial” method for making such allocations. Consequently, (i) our depreciation deductions with respect to our hotels will likely be substantially less than the depreciation deductions that would have been available to us had our tax basis been equal to the fair market value of the hotels as of the date of our initial public offering, and (ii) we may recognize gain upon the sale of an asset that is attributable to appreciation in the value of the asset that accrued prior to the date of our initial public offering, however, we believe we would be able to utilize available net operating losses (“NOLs”) against the potential gain from the sale of an asset.

The change of control rules under Section 382 of the Internal Revenue Code may limit our ability to use NOL carryforwards to reduce future taxable income.

We have NOL carryforwards for federal and state income tax purposes. Generally, NOL carryforwards can be used to reduce future taxable income. Our use of our NOL carryforwards will be limited, however, under Section 382 of the Internal Revenue Code (the “Code”) if we undergo a change in ownership of more than 50% of our capital stock over a three-year period as measured under Section 382 of the Code. These complex change of ownership rules generally focus on ownership changes involving stockholders owning directly or indirectly 5% or more of our stock, including certain public “groups” of stockholders as set forth under Section 382 of the Code, including those arising from new stock issuances and other equity transactions. We believe we experienced an ownership change for these purposes in April 2008, but that the resulting annual limit on our NOL carryforwards did not affect our ability to use the NOL carryforwards that we had at the time of that ownership change. Our stock is actively traded and it is possible that we will experience another ownership change within the meaning of Section 382 of the Code, measured for this purpose by including transfers and issuances of stock that took place after the ownership change that we believe occurred in April 2008. If we experienced another ownership change, the resulting annual limit on the use of our NOL carryforwards (which would equal the product of the applicable federal long-term tax-exempt rate, multiplied by the value of our capital stock immediately before the ownership change, then increased by certain existing gains recognized within 5 years after the ownership change if we have a net built-in gain in our assets at the time of the ownership change) could result in a meaningful increase in our federal and state income tax liability in future years. Whether an ownership change occurs by reason of public trading in our stock is not within our control and the determination of whether an ownership change has occurred is complex. No assurance can be given that we have not already undergone, or that we will not in the future undergo, another ownership change that would have a significant adverse effect on the value of our stock. In addition, the possibility of causing an ownership change may reduce our willingness to issue new stock to raise capital.  

Non-U.S. holders owning more than 5% of our common stock may be subject to U.S. federal income tax on gain recognized on the disposition of our common stock.

Because of our significant U.S. real estate holdings, we believe that we are a “United States real property holding corporation” as defined under Section 897 of the Internal Revenue Code. As a result, any “non-U.S. holder” (as defined in the applicable tax provisions) will be subject to U.S. federal income tax on gain recognized on a disposition of our common stock if such non-U.S. holder has held, directly or indirectly, 5% of our common stock at any time during the five-year period ending on the date of the disposition and such non-U.S. holder is not eligible for any treaty exemption.

Changes in market conditions or sales of our common stock could adversely affect the market price of our common stock.

Sales of a substantial number of additional shares of our common stock, or the perception that such sales could occur, could adversely affect prevailing market prices for our common stock. In addition to the possibility that we may sell shares of our common stock in a public offering at any time, we also may issue shares of common stock in connection with the warrants we issued to the Yucaipa Investors and their affiliates or grants of restricted stock or LTIP Units that we grant to our directors, officers and employees. All of these shares may be available for sale in the public markets from time to time. As of December 31, 2015, there were:

 

·

up to 12,500,000 shares of common stock issuable upon exercise of the warrants we issued to the Yucaipa Investors at an exercise price of $6.00 per share, utilizing a cashless exercise method only, resulting in a net share issuance;

 

·

248,315 shares of our common stock issuable upon exercise of outstanding options, all of which were exercisable at a weighted average exercise price of $17.15 per share;

 

·

913,423 LTIP Units outstanding exercisable for a total of 913,423 shares of our common stock;

 

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·

218,529 restricted stock units outstanding and subject to vesting requirements for a total of 218,529 shares of our common stock; and  

 

·

up to 3,810,460 shares of our common stock available for future grants under our equity incentive plans.

Most of the outstanding shares of our common stock are eligible for resale in the public market and certain holders of our shares have the right to require us to file a registration statement for purposes of registering their shares for resale. A significant portion of these shares is held by a small number of stockholders. If our stockholders sell substantial amounts of our common stock, the market price of our common stock could decline, which may make it more difficult for us to sell equity or equity related securities in the future at a time and price that we deem appropriate. We are unable to predict the effect that sales of our common stock may have on the prevailing market price of our common stock.

Risks Related to the Hospitality Industry

A number of factors, many of which are common to the lodging industry and beyond our control, could affect our business.

A number of factors, many of which are common to the lodging industry and beyond our control, could affect our business, including those described elsewhere in this section, as well as the following:

 

·

over-building of hotels in the markets in which we operate which results in increased supply and would likely adversely affect occupancy and revenues at our hotels;

 

·

increased consumer preference for privately held lodging accommodations;  

 

·

changes in the desirability of particular locations or travel patterns of guests;

 

·

dependence on business, commercial and leisure travelers and tourism;

 

·

decreased airline capacity and routes;

 

·

travel-related accidents;

 

·

acts of terrorism in the markets in which we operate;

 

·

fear of outbreaks or actualized outbreaks of pandemic or contagious diseases;

 

·

dependence on group and meeting/conference business and the impact of decreased corporate budgets and spending;

 

·

increases in energy costs, property taxes or insurance costs;

 

·

increases in operating costs due to inflation and other factors that may not be offset by increased room rates;

 

·

changes in interest rates;

 

·

changes in the availability, cost and terms of financing;

 

·

adverse effects of worsening conditions in the lodging industry;

 

·

changes in laws and regulations, fiscal policies and zoning ordinances and the related costs of compliance with laws and regulations, fiscal policies and ordinances;

 

·

changes in taxes and regulations that impact wages (including minimum wage increases) and benefits; and

 

·

risks generally associated with the ownership of hotel properties and real estate.

These factors and the resulting reputational harm could have an adverse effect on individual properties and our financial condition and results of operations as a whole.

Economic conditions may reduce demand for hotel properties and adversely affect our profitability.

The performance of the lodging industry is highly cyclical and has traditionally been closely linked with the performance of the general economy and, specifically, growth in the U.S. gross domestic product (“GDP”), employment, and investment and travel demand. We cannot predict the pace or duration of the global economic cycle or the cycles of the lodging industry. In the event conditions in the industry deteriorate or do not continue to see sustained improvement, or there is an extended period of economic weakness, our occupancy rates, revenues and profitability could be adversely affected. Furthermore, other macroeconomic factors, such as consumer confidence and conditions which negatively shape public perception of travel, may have a negative effect on the lodging industry and may adversely affect our business.

 

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Furthermore, in an economic downturn, boutique hotels may be more susceptible to a decrease in revenues, as compared to hotels in other segments that have lower room rates, because our hotels generally target business and high-end leisure travelers. Business and high-end leisure travelers may seek to reduce travel costs by limiting travel, choosing lower cost hotels or otherwise reducing the costs of their trips. These changes could result in steep declines in average daily room rates or occupancy, or both. Profitability also may be negatively affected by the relatively high fixed costs of operating hotels such as ours, when compared to other segments of the hospitality industry.

Boutique hotels are a highly competitive segment of the hospitality industry. If we are unable to compete effectively, our business and operations will be adversely affected.

We generally compete in the “boutique” or “lifestyle” hotel segment of the hospitality industry, which we believe is highly competitive and that competition within this segment is likely to increase in the future.  Competitive factors in the hospitality industry include name recognition, pricing, quality of service, convenience of location, quality of the property, design esthetic of the property, and range and quality of food and beverage services and amenities offered.

We compete with other operators of full service hotels, including major hospitality chains with well-established and recognized brands, as well as alternative lodging companies that offer private room and accommodation rentals.  Most of the major hospitality chains are larger than we are based on the number of properties or rooms they manage, franchise or own or based on the number of geographic locations in which they operate. Our competitors generally also have more established and broader reaching guest loyalty programs and marketing channels which may enable them to attract more customers and more effectively retain such guests. Additionally, the rising popularity of privately-owned residential properties, including homes and condominiums that can be rented on a nightly, weekly or monthly could have an adverse impact on our business and operations.  Competition from these alternative lodging companies could reduce occupancy levels and room revenue at our hotels, which would harm our operations, especially in larger cities such as New York and Miami where we have a concentration of hotel rooms.  

If we are unable to compete for guests effectively, we would lose market share, which could adversely affect our business and operations.

The growth of alternative reservation channels could adversely affect our business and profitability.

A significant percentage of hotel rooms for individual guests is booked through internet travel intermediaries. In most cases, we have contracts with such intermediaries and pay them various commissions and transaction fees for sales of our rooms through their systems. If such bookings increase, these intermediaries may be able to obtain higher commissions, reduced room rates or other significant concessions from us. Although we may have established agreements with many of these intermediaries that limit transaction fees for hotels, there can be no assurance that we will be able to renegotiate such agreements upon their expiration with terms as favorable as the provisions that exist today. Moreover, hospitality intermediaries generally employ aggressive marketing strategies, including expending significant resources for online and television advertising campaigns to drive consumers to their websites. As a result, consumers may develop brand loyalties to the intermediaries’ offered brands, websites and reservations systems rather than to our hotel brands. If this happens, our business and profitability may be significantly negatively impacted.

A failure to keep pace with developments in technology could impair our operations and competitive position.  

Sophisticated information technology and other systems are critical for the hospitality industry, including systems used for our central reservations, revenue management, and property management, as well as technology systems that we make available to our guests. These information technology and other systems must be refined, updated, and/or replaced with more advanced systems on a regular basis. Developing and maintaining these systems may require significant capital. If we are unable to replace or introduce information technology and other systems as quickly as our competitors or within budgeted costs or schedules when these systems become outdated or need replacing, or if we are unable to achieve the intended benefits of any new information technology or other systems, our operations could be harmed and our ability to compete effectively could be diminished.

We are exposed to risks and costs associated with protecting the integrity of internal and customer data.  

Our business is reliant upon technology systems and networks, including systems and networks managed by third parties, to process, transmit and store information and to conduct many of our business activities and transactions with employees, clients, vendors and other third parties. Furthermore, we are required to comply with legal, regulatory and contractual obligations which are designed to protect personally identifiable and other information pertaining to our customers, employees, and stockholder. The integrity of our systems and networks and protection of our customers, employees, and stockholder data is critical to our business. If that data is inaccurate or incomplete, we could make faulty decisions.

 

24


 

The information, security, and privacy requirements imposed by governmental regulations and the requirements of the payment card industry are also increasingly demanding, in both the United States and other jurisdictions where we operate. Our systems and the systems maintained or used by our owners, franchisees, licensees, vendors and service providers may not be able to satisfy these changing requirements and employee and customer expectations, or may require significant additional investments or time in order to do so. Significant actual or potential theft, loss, fraudulent use or misuse of customer, employee or stockholder data by non-compliance with our contractual or other legal obligations regarding such data, or a violation of our privacy policies with respect to such data, may result in fines, damage to our reputation, litigation or regulatory actions against us and transfer of information may have a material adverse impact on our business, financial condition or results of operations.

We are subject to numerous laws, regulations, and contractual obligations designed to protect personal information, including foreign data protection laws, various U.S. federal and state laws, and credit card industry security standards and other applicable information privacy and security standards.  Compliance with changes in applicable privacy regulations may increase our operating costs and violations of any applicable privacy regulations may lead to costly fines or litigation which may have a material adverse impact on our business.

Cyber-attacks could have a disruptive effect on our business.

Efforts to hack or breach security measures, failures of systems or software to operate as designed or intended, viruses, operator error, or inadvertent releases of data may materially impact our, including our owners’, franchisees’, licensees’, or service providers’, information systems and records.  The hospitality industry is under increasing attack by cyber-criminals in the U.S. and other jurisdictions in which we operate.

We have implemented security measures designed to protect against such breaches of security. Despite these measures, we cannot be sure that our systems and networks will not be subject to breaches or interference. The size and complexity of our information security systems, and those of our third-party vendors and business partners with whom we contract, make such systems potentially vulnerable to security breaches from inadvertent or intentional actions by our employees or vendors, or from attacks by malicious third parties. The frequency of third party cyber-attacks in the hospitality industry have increased in recent years.  Such attacks are of ever-increasing levels of sophistication and are made by groups and individuals with a wide range of motives and expertise.  Furthermore, given the ever-changing tactics used by cyber criminals, there can be no assurance that a compromise of our systems would be discovered promptly.  A successful attack or other security breach could result in unauthorized access to or the disclosure or loss of customer, stockholder, employee or other data, which in turn may result in legal claims, regulatory scrutiny and liability, reputational damage, the incurrence of costs to eliminate or mitigate further exposure and damage to our business. We have, in the past, been subject to systems, network and data breaches, including breaches that resulted in unauthorized access to customer data. There can be no assurance that such incidents will not occur again. Although we carry cyber-risk insurance that is designed to protect us against these risks, such insurance coverage may be insufficient to cover all losses or all types of claims that may arise in connection with cyber-attacks, security breaches, and other related breaches.

Information technology system failures, delays in the operation of our information technology systems or system enhancement failures could reduce our revenues and profits and harm the reputation of our brands and our business.

Our success depends on the efficient and uninterrupted operation of our information technology systems. For example, we depend on our central reservation system, which allows bookings by hotels directly, via telephone through our call centers, by travel agents, online through our website www.morganshotelgroup.com, and through our online reservations partners. In addition, we depend on information technology to run our day-to-day operations, including, among others, hotel services and amenities such as guest check-in and check-out, housekeeping and room service and systems for tracking and reporting our financial results and the financial results of our hotels.

Our information technology systems are vulnerable to damage or interruption from fire, floods, hurricanes, power loss, telecommunications failures, computer viruses, hackers and similar events. The occurrence of any of these unanticipated problems at any information technology facilities we manage or subscribe to, or any of our call centers could cause interruptions or delays in our business or loss of data, or render us unable to process reservations.

In addition, if our information technology systems are unable to provide the communications capacity that we need, or if our information technology systems suffer problems caused by installing system enhancements, we could experience failures or interruptions. If our information technology systems fail and our redundant systems or disaster recovery plans are not adequate to address such failures, or if our property and business interruption insurance does not sufficiently compensate us for any losses that we may incur, our revenues and profits could be reduced and the reputation of our brands and our business could be harmed.

 

25


 

The hotel business is capital intensive and requires capital improvements to remain competitive.

Our hotel properties have an ongoing need for renovations and other capital improvements to remain competitive, including replacement, from time to time, of furniture, fixtures and equipment. To compete effectively, we will need to, or convince our joint venture partners or other third-party owners to, make capital expenditures to maintain our innovative property concepts and designs. In addition, we will need to make capital expenditures to comply with applicable laws and regulations.

If we, our joint venture entities or other owners of our hotels are not able to fund capital improvements solely from cash provided from hotel operations, debt or equity capital may be needed, which may not be available. If we, our joint venture entities or other owners of our hotels cannot access debt or equity capital, capital improvements may need to be postponed or cancelled, which could harm our ability to remain competitive.

In addition, renovations and other capital improvements to our hotels may be expensive and may require us to close all or a portion of the hotels to customers during such renovations, affecting occupancy and average daily rate. These capital improvements may give rise to additional risks such as cost overruns and delays, disruptions in service and room availability causing reduced demand and rates, environmental issues, among others.  As a result, capital improvement projects may increase our expenses and reduce our cash flows and our revenues. If capital expenditures exceed our expectations, this excess would have an adverse effect on our available cash.

Our hotels may be faced with labor disputes or, upon expiration of a collective bargaining agreement, a strike, which would adversely affect the operation of our hotels.

We rely heavily on our employees to provide high-quality personal service at our hotels and any labor dispute or work stoppage caused by poor relations with a labor union or the hotels’ employees could adversely affect our ability to provide those services, which could reduce occupancy and room revenue, tarnish our reputation and hurt our results of operations. Most of our employees who work at Morgans, Royalton, Hudson, and Clift are members of local labor unions. Our relationship with our employees or the union could deteriorate due to disputes relating to, among other things, wage or benefit levels or management responses to various economic and industry conditions. The collective bargaining agreement governing the terms of employment for employees working in our New York City hotels expires on June 30, 2019. The collective bargaining agreement with the unions representing the majority of the Clift employees expires in August 2018.

Labor shortages could restrict our ability to operate our properties or grow our business or result in increased labor costs that could reduce our profits.

Our success depends in large part on our ability to attract, retain, train, manage and engage our employees. Our properties are staffed 24 hours a day, seven days a week by thousands of employees. If we are unable to attract, retain, train and engage skilled workers, our ability to manage and staff our properties adequately could be impaired, which could harm our reputation. Staffing shortages could also hinder our ability to grow and expand our business. Because payroll costs are a major component of the operating expenses at our properties, a shortage of skilled labor could also require higher wages that would increase our labor costs, which could reduce our profits and the profits of our third-party owners.

Our business and operations are heavily regulated and a failure to comply with regulatory requirements could increase our costs and may result in an adverse effect on our financial condition and business.

We are subject to numerous federal, state and local laws, and failure to comply with regulatory requirements may result in an adverse effect on our financial condition and business. Our hotel properties are subject to various laws and regulations related to our relations with employees, preparation of food and beverages, building codes and other land use regulations, taxation requirements, fire and safety requirements, and access and use by disabled persons, among others.

We are subject to laws governing our relationship with our employees in such areas as minimum wage and maximum working hours, overtime, working conditions, hiring and firing employees and work permits. We are subject to laws relating to the preparation and sale of food and beverages, including alcohol. The failure to comply with such laws could subject us to a number of adverse consequences, including fines or even suspension or revocation of liquor licenses. Also, our ability to remodel, refurbish or add to our existing properties may be dependent upon our obtaining necessary building permits from local authorities. The failure to obtain any of these permits could adversely affect our ability to increase revenues and net income through capital improvements of our properties. In addition, we are subject to the numerous rules and regulations relating to state and federal taxation. Compliance with these rules and regulations requires significant management attention. Any failure to comply with all such rules and regulations could subject us to fines or audits by the applicable taxation authority.

 

26


 

Our hotel properties are also subject to the Americans with Disabilities Act. Under the Americans with Disabilities Act, all public accommodations must meet various federal requirements related to access and use by disabled persons. Compliance with the requirements of the Americans with Disabilities Act could require removal of access barriers and non-compliance could result in the U.S. government imposing fines or in private litigants’ winning damages. If we are required to make substantial modifications to our hotels, whether to comply with the Americans with Disabilities Act or other changes in governmental rules and regulations, our financial condition and results of operations could be harmed.

We are subject to restrictions imposed by the U.S. Foreign Corrupt Practices Act and anti-corruption laws and regulations of other countries applicable to our operations, such as the UK Bribery Act. Anti-corruption laws and regulations generally prohibit companies and their intermediaries from making improper payments to government officials or other persons in order to receive or retain business. The compliance programs, internal controls and policies we maintain and enforce to promote compliance with applicable anti-bribery and anti-corruption laws may not prevent our associates, contractors or agents from acting in ways prohibited by these laws and regulations. We are also subject to trade sanctions administered by the Office of Foreign Assets Control and the U.S. Department of Commerce. Our compliance programs and internal controls also may not prevent conduct that is prohibited under these rules. The United States may impose additional sanctions at any time against any country in which or with whom we do business. Depending on the nature of the sanctions imposed, our operations in the relevant country could be restricted or otherwise adversely affected. Any violations of anti-corruption laws and regulations or trade sanctions could result in significant civil and criminal penalties, reduce our profits, disrupt our business or damage our reputation. In addition, an imposition of further restrictions in these areas could increase our cost of operations, reduce our profits or cause us to forgo development opportunities that would otherwise support growth.

Uninsured and underinsured losses could adversely affect our financial condition and results of operations.

We, our hotel owners and our licensees carry insurance from solvent insurance carriers that we believe is adequate for foreseeable losses and with terms and conditions that are reasonable and customary within the hospitality industry. Market forces beyond our control may nonetheless limit the scope of the insurance coverage we, our owners, or our licensees can obtain, or our or their ability to obtain coverage at reasonable rates. Certain types of losses, generally of a catastrophic nature, such as earthquakes, hurricanes and floods, or terrorist acts, may be uninsurable or not economically insurable, or may be subject to insurance coverage limitations, such as large deductibles or co-payments. Uninsured and underinsured losses could harm our financial condition and results of operations. We could incur liabilities resulting from loss or injury to our hotels or to persons at our hotels. Claims, whether or not they have merit, could harm the reputation of a hotel and cause us to incur expenses to the extent of insurance deductibles, which may be high, or losses in excess of policy limitations, which could harm our results of operations.

In the event of a substantial loss, the insurance coverage that we carry, our owners carry or our licensees carry may not be sufficient to pay the full value of our financial obligations, our liabilities or the replacement cost of any lost investment or property loss. In some cases, these factors could result in an uninsured loss or a loss in excess of insured limits.  As a result, we could lose all or a portion of the capital we have invested in a property, as well as the anticipated future revenues, profits, management or license fee income from the property, we could remain obligated for performance guarantees in favor of third-party property owners or for their debt or other financial obligations, suffer an uninsured or underinsured property loss or we may not have sufficient insurance to cover awards of damages resulting from our liabilities.

In addition, local jurisdictions in the United States where our hotel properties are located do not allow for insurance to cover damages that are characterized as punitive or similar damages. As a result, any claims or legal proceedings, or settlement of any such claims or legal proceedings that result in damages that are characterized as punitive or similar damages may not be covered by our insurance. If these types of damages are substantial, our financial resources may be adversely affected.

Claims of illness or injury associated with the service of food and beverage to the public could adversely affect us.

Claims of illness or injury relating to food quality or food handling are common in the food and beverage business, and a number of these claims may exist at any given time. As a result, we could be adversely affected by negative publicity, whether or not accurate, regarding food quality or handling claims at one or more of the restaurants, bars or other food and beverage venues that we operate. In addition to decreasing sales and profitability at these restaurants, bars or other food and beverage venues, adverse publicity could negatively impact our reputation, hindering our ability to renew contracts on favorable terms or to obtain new business.

The threat of terrorism may negatively impact the hospitality industry generally and may have a particularly adverse impact on major metropolitan areas.

The threat of terrorism may negatively impact hotel occupancy and average daily rate, due to resulting disruptions in business and leisure travel patterns and concerns about travel safety. Hotels in major metropolitan areas, such as New York and London, which

 

27


 

represented approximately 58.5% of our total guest rooms for all the hotels we managed at December 31, 2015, may be particularly adversely affected due to concerns about travel safety. The possibility of future attacks may hamper business and leisure travel patterns and, accordingly, the performance of our business and our operations.

Seasonal variations in revenue at our hotels can be expected to cause quarterly fluctuations in our revenues.

The hospitality industry is seasonal in nature. This seasonality can be expected to cause quarterly fluctuations in our revenues. Our revenue is generally highest in the second and fourth quarters. Our quarterly earnings may also be adversely affected by factors outside our control, including weather conditions and poor economic conditions. As a result, we may have to enter into short-term borrowing arrangements, assuming such arrangements are available to us at all or on acceptable terms to us, in certain quarters in order to offset these fluctuations in revenues.

Environmental laws and regulations could increase our compliance costs and liabilities and adversely affect our financial condition and results of operations.

Our operations and the properties we develop, own and manage are subject to extensive environmental laws and regulations of various federal, state, local and foreign governments, including requirements addressing health and safety, the use, management and disposal of hazardous substances and wastes, discharge of waste materials into the environment and air emissions.  

Under these laws, courts and government agencies have the authority to require us, if we are the owner of a contaminated property, to clean up the property, even if we did not know of or were not responsible for the contamination. These laws also apply to persons who owned a property at the time it became contaminated. In addition to the costs of clean-up, environmental contamination can affect the value of a property and, therefore, an owner’s ability to borrow funds using the property as collateral or to sell the property. Under such environmental laws, courts and government agencies also have the authority to require that a person who sent waste to a waste disposal facility, such as a landfill or an incinerator, to pay for the clean-up of that facility if it becomes contaminated and threatens human health or the environment.

Furthermore, various court decisions have established that third parties may recover damages for injury caused by property contamination. For instance, a person exposed to asbestos while staying in or working at a hotel may seek to recover damages for injuries suffered. Additionally, some of these environmental laws restrict the use of a property or place conditions on various activities. For example, some laws require a business using chemicals (such as swimming pool chemicals at a hotel) to manage them carefully and to notify local officials that the chemicals are being used.  The costs to clean up a contaminated property, to defend against a claim, or to comply with environmental laws could be material. Future laws or regulations may impose material environmental liabilities on us, or the current environmental condition of our hotel properties may be affected by the condition of the properties in the vicinity of our hotels (such as the presence of leaking underground storage tanks) or by third parties unrelated to us.  

 

 

ITEM 1B.

UNRESOLVED STAFF COMMENTS

None.  

 

 

 

 

28


 

ITEM 2.

PROPERTIES  

Hotel Properties

Set forth below is a summary of certain information related to hotel properties operated by Morgans Hotel Group as of December 31, 2015.  The table below does not include information related to hotels we franchise or license:

 

 

 

 

 

 

 

 

 

 

 

Number

 

 

Twelve Months

 

 

 

 

 

Year

 

Interest

 

 

of

 

 

Ended December 31, 2015

 

Hotel

 

City

 

Opened

 

Owned

 

 

Rooms

 

 

ADR(1)

 

 

Occupancy(2)

 

 

RevPAR(3)

 

Owned Hotels:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Hudson

 

New York

 

2000

 

 

100

%

(4)

 

878

 

(4)

 

 

 

 

 

 

 

 

 

 

 

Delano South Beach

 

Miami

 

1995

 

 

100

%

 

 

194

 

 

 

 

 

 

 

 

 

 

 

 

 

Clift

 

San Francisco

 

2001

 

 

 

 

(5)

 

372

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating Statistics for Owned Hotels (6)

 

 

 

 

 

 

 

 

 

 

 

 

 

$

258

 

 

 

87.6

%

 

$

226

 

Managed Hotels:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mondrian South Beach

 

Miami

 

2008

 

 

50

%

(7)

 

220

 

(7)

 

 

 

 

 

 

 

 

 

 

 

Shore Club

 

Miami

 

2001

 

 

 

(8)

 

308

 

 

 

 

 

 

 

 

 

 

 

 

 

Morgans

 

New York

 

1984

 

 

 

(9)

 

117

 

 

 

 

 

 

 

 

 

 

 

 

 

Royalton

 

New York

 

1988

 

 

 

(9)

 

168

 

 

 

 

 

 

 

 

 

 

 

 

 

Mondrian Los Angeles

 

Los Angeles

 

1996

 

 

 

(9)

 

236

 

 

 

 

 

 

 

 

 

 

 

 

 

St Martins Lane

 

London

 

1999

 

 

 

(10)

 

204

 

 

 

 

 

 

 

 

 

 

 

 

 

Sanderson

 

London

 

2000

 

 

 

(10)

 

150

 

 

 

 

 

 

 

 

 

 

 

 

 

Mondrian London

 

London

 

2014

 

 

 

(10)

 

359

 

 

 

 

 

 

 

 

 

 

 

 

 

System-wide Comparable (11)

 

 

 

 

 

 

 

 

 

 

 

 

 

$

271

 

 

 

83.7

%

 

$

227

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Comparable Hotel Operating Statistics by Region:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

New York Comparable Hotels (12)

 

 

 

 

 

 

 

 

 

 

 

 

 

$

232

 

 

 

88.9

%

 

$

207

 

West Coast Comparable Hotels (13)

 

 

 

 

 

 

 

 

 

 

 

 

 

$

282

 

 

 

90.0

%

 

$

254

 

Miami Comparable Hotels (14)

 

 

 

 

 

 

 

 

 

 

 

 

 

$

339

 

 

 

69.5

%

 

$

236

 

United States Comparable Hotels (15)

 

 

 

 

 

 

 

 

 

 

 

 

 

$

271

 

 

 

83.7

%

 

$

227

 

 

 

(1)

Average daily rate (“ADR”)

(2)

Average daily occupancy

(3)

Revenue per available room (“RevPAR”) is the product of ADR and average daily occupancy. RevPAR does not include food and beverage revenues or other hotel operations revenues such as telephone, parking and other guest services.

(4)

We own 100% of Hudson through our subsidiary, Henry Hudson Holdings LLC, 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. As of December 31, 2015, Hudson has 878 guest rooms and 60 SROs. Each SRO is for occupancy by a single eligible individual. The unit need not, but may, contain food preparation or sanitary facilities, or both. SROs remain from the prior ownership of the building and we are by statute required to maintain these long-term tenants, unless we get their consent, as long as they pay us their rent. Certain of our subsidiaries, including Henry Hudson Holdings LLC, Hudson Leaseco LLC, the lessee of our Hudson hotel, and certain related entities and lessees are required by the terms of the non-recourse indebtedness related to Hudson to maintain their status as “single purpose entities.” As such, their assets, which are included in our consolidated financial statements, are not available to satisfy the indebtedness or other obligations of our other subsidiaries.

(5)

Clift is operated under a long-term lease, which is accounted for as a financing.

(6)

Owned Hotels includes all hotels that we both own and operate, which for the year ended December 31, 2015 includes Hudson, Delano South Beach, and Clift.

(7)

Operated as a condominium hotel under a management contract and owned through a 50/50 unconsolidated joint venture. As of December 31, 2015, 276 hotel residences have been sold, of which 161 were in the hotel rental pool and are included in the hotel room count, and 59 hotel residences remain to be sold, all of which are in the hotel program.

(8)

Operated under a management contract. As of December 31, 2015, we have an immaterial contingent profit participation equity interest in Shore Club. We expect to no longer manage Shore Club during the second quarter of 2016.  

(9)

Operated under a management contract.

(10)

Operated under a management contract. The currency translation is based on an exchange rate of 1 British pound = 1.53 U.S. dollars, which is an average monthly exchange rate provided by www.oanda.com for the last twelve months ended December 31, 2015.

 

29


 

(11)

System-Wide Comparable Hotels includes all Morgans Hotel Group hotels that we operate except for hotels added or under major renovation during the current or the prior year, development projects and hotels we no longer manage. System-Wide Comparable Hotels for the year ended December 31, 2015 excludes Sanderson and St Martins Lane, which were both under renovation in 2014, and Mondrian London, which opened on September 30, 2014.   

(12)

New York Comparable Hotels includes all hotels that we operate in New York City, except for hotels added or under major renovation during the current or the prior year, development projects and hotels we no longer manage. New York Comparable Hotels for the year ended December 31, 2015 includes Hudson, Morgans, and Royalton.

(13)

West Coast Comparable Hotels includes all hotels that we operate on the Western coast of the United States except for hotels added or under major renovation during the current or the prior year, development projects and hotels we no longer manage. West Coast Comparable Hotels for the year ended December 31, 2015 includes Mondrian Los Angeles and Clift.  

(14)

Miami Comparable Hotels includes all hotels that we operate in the Miami area of Florida, except for hotels added or under major renovation during the current or the prior year, development projects and hotels we no longer manage. Miami Comparable Hotels for the year ended December 31, 2015 includes Delano South Beach, Shore Club and Mondrian South Beach.

(15)

United States Comparable Hotels includes all hotels that we operate in the United States, except for hotels added or under major renovation during the current or the prior year, development projects and hotels we no longer manage. United States Comparable Hotels for the year ended December 31, 2015 includes Hudson, Morgans, Royalton, Mondrian Los Angeles, Clift, Delano South Beach, Mondrian South Beach and Shore Club.

Owned Operations

Owned Hotels

The information below reflect the results of operations of our Owned Hotel properties.

Hudson

Overview

Opened in 2000, Hudson is our largest hotel, with 878 guest rooms and suites as of December 31, 2015, 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. The hotel, located only a few blocks away from Columbus Circle, Time Warner Center and Central Park, has numerous food and beverage offerings.

Hudson’s numerous food and beverage offerings include Hudson Commons, a modern-day beer hall and burger joint, the Library Bar, which is reminiscent of an old English club or drawing room with a fireplace and billiards, Private Park, Hudson Bar, and Hudson Terrace.

We own a fee simple interest in 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. Hudson has a total of 928 rooms, comprised of 878 guest rooms and 60 SROs as of December 31, 2015. Each SRO is for occupancy by a single eligible individual. The unit need not, but may, contain food preparation or sanitary facilities, or both. SROs remain from the prior ownership of the building and we are by statute required to maintain these long-term tenants, unless we get their consent to terminate the lease, as long as they pay us their rent.

The hotel is subject to mortgage and mezzanine indebtedness as more fully described under “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Debt.”  As discussed above, we are currently marketing Hudson for sale.  

 

30


 

Selected Financial and Operating Information

The following table shows selected financial and operating information for Hudson:

 

 

 

Year Ended December 31,

 

 

 

2015

 

 

2014

 

 

2013

 

 

2012

 

 

2011

 

Selected Operating Information:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Occupancy

 

 

90.2

%

 

 

90.9

%

 

 

89.0

%

 

 

74.9

%

 

 

88.0

%

ADR

 

$

213

 

 

$

229

 

 

$

236

 

 

$

234

 

 

$

220

 

RevPAR

 

$

192

 

 

$

208

 

 

$

210

 

 

$

175

 

 

$

194

 

Selected Financial Information (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Room Revenue (1)

 

$

61,660

 

 

$

65,860

 

 

$

66,207

 

 

$

53,141

 

 

$

58,627

 

Total Revenue (1)

 

 

80,139

 

 

 

84,823

 

 

 

81,107

 

 

 

61,948

 

 

 

72,736

 

Depreciation (1)

 

 

11,041

 

 

 

11,443

 

 

 

11,461

 

 

 

8,472

 

 

 

8,223

 

Operating Income (1)

 

 

7,700

 

 

 

10,345

 

 

 

9,391

 

 

 

2,520

 

 

 

5,919

 

EBITDA (1) (2)

 

 

18,741

 

 

 

21,788

 

 

 

20,851

 

 

 

10,992

 

 

 

14,142

 

 

 

(1)

Hudson was under major renovations beginning in late 2011 throughout 2012.

(2)

Amount represents earnings before interest, taxes, depreciation and amortization (“EBITDA”).  We consider EBTIDA to be a key performance indicator used by management when evaluating our performance, as discussed further in “Part II — Item 6. Selected Financial Data.”

Delano South Beach

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. 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 food and beverage offerings include the restaurant, Bianca, Delano Beach Club, a poolside bar and bistro, FDR, a nightclub, and Umi Sushi & Sake Bar.  These food and beverage venues at Delano South Beach were managed by TLG from January 2012 until January 15, 2015, on which date we began managing the venues.  The hotel also features Agua Spa, a full-service spa facility. Delano South Beach also offers multi-service meeting facilities, consisting of one executive boardroom and other facilities, including a state-of-the-art media room.

We own a fee simple interest in Delano South Beach. The hotel is subject to mortgage and mezzanine indebtedness as more fully described under “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Debt.” As discussed above, we are currently marketing Delano South Beach for sale.

Selected Financial and Operating Information

The following table shows selected financial and operating information for Delano South Beach:

 

 

 

Year Ended December 31,

 

 

 

2015

 

 

2014

 

 

2013

 

 

2012

 

 

2011

 

Selected Operating Information:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Occupancy

 

 

68.5

%

 

 

70.6

%

 

 

68.6

%

 

 

67.6

%

 

 

64.1

%

ADR

 

$

495

 

 

$

520

 

 

$

525

 

 

$

494

 

 

$

499

 

RevPAR

 

$

339

 

 

$

367

 

 

$

360

 

 

$

334

 

 

$

320

 

Selected Financial Information (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Room Revenue

 

$

24,032

 

 

$

26,019

 

 

$

25,485

 

 

$

23,722

 

 

$

22,612

 

Total Revenue

 

 

47,347

 

 

 

48,231

 

 

 

46,950

 

 

 

45,294

 

 

 

44,478

 

Depreciation

 

 

4,576

 

 

 

4,544

 

 

 

4,568

 

 

 

4,604

 

 

 

4,649

 

Operating Income

 

 

14,704

 

 

 

14,882

 

 

 

11,855

 

 

 

9,240

 

 

 

9,052

 

EBITDA (1)

 

 

19,280

 

 

 

19,426

 

 

 

16,423

 

 

 

13,844

 

 

 

13,700

 

 

 

(1)

We consider EBTIDA to be a key performance indicator used by management when evaluating our performance, as discussed further in “Part II — Item 6. Selected Financial Data.”

 

31


 

Clift

Overview

Acquired in 1999 and reopened after an extensive renovation in 2001, Clift has 372 guest rooms and suites and is located in the heart of San Francisco’s Union Square district. The hotel features a restaurant, The Velvet Room, the Redwood Room Bar and the Living Room, which is available for private events. Clift also offers multi-service meeting facilities, consisting of two executive boardrooms, one suite and other facilities. Clift was last renovated in 2001 and the property may need to be renovated in the future.

 Our rights to operate Clift in San Francisco are based upon our interest in a 99-year lease. The lease is accounted for as a financing as more fully described under “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Debt.”

Selected Financial and Operating Information

The following table shows selected financial and operating information for Clift:

 

 

 

Year Ended December 31,

 

 

 

2015

 

 

2014

 

 

2013

 

 

2012

 

 

2011

 

Selected Operating Information:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Occupancy

 

 

91.3

%

 

 

91.1

%

 

 

86.7

%

 

 

77.7

%

 

 

79.5

%

ADR

 

$

269

 

 

$

256

 

 

$

245

 

 

$

240

 

 

$

220

 

RevPAR

 

$

246

 

 

$

233

 

 

$

212

 

 

$

186

 

 

$

175

 

Selected Financial Information (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Room Revenue

 

$

33,331

 

 

$

31,618

 

 

$

28,833

 

 

$

25,361

 

 

$

23,732

 

Total Revenue

 

 

45,581

 

 

 

44,061

 

 

 

42,102

 

 

 

37,543

 

 

 

36,379

 

Depreciation

 

 

2,584

 

 

 

2,590

 

 

 

2,947

 

 

 

3,077

 

 

 

3,133

 

Operating Income

 

 

7,798

 

 

 

5,144

 

 

 

4,063

 

 

 

2,705

 

 

 

2,130

 

EBITDA (1)

 

 

10,382

 

 

 

7,734

 

 

 

7,010

 

 

 

5,782

 

 

 

5,263

 

 

 

(1)

We consider EBTIDA to be a key performance indicator used by management when evaluating our performance, as discussed further in “Part II — Item 6. Selected Financial Data.”

Owned Food and Beverage Operations

We own three food and beverage venues subject to leasehold agreements at Mandalay Bay in Las Vegas, which we acquired in August 2012 from the former tenant. Following the TLG Equity Sale, the venues continue to be managed by TLG and operated pursuant to the 10-year operating leases our subsidiary has entered into with an MGM affiliate.

As of December 31, 2015 the Company leased and managed all but one of the Sanderson food and beverage venues.  

Managed Operations

We manage hotels, including food and beverage venues, pursuant to management agreements of varying terms.

Our managed hotels as of December 31, 2015 are operated under management agreements, which contractually expire as follows:

 

·

Mondrian South Beach, owned through an unconsolidated joint venture — August 2026;

 

·

Shore Club — July 2022.  See below for early termination provision;

 

·

Mondrian Los Angeles — May 2031 (with one 10-year extension at our option);

 

·

Royalton — May 2026 (with one 10-year extension at our option, subject to certain conditions.)  See below for early termination provisions;

 

·

Morgans — May 2026 (with one 10-year extension at our option, subject to certain conditions.)  See below for early termination provisions;

 

·

Sanderson — June 2018 (with one 10-year extension at our option);  

 

32


 

 

·

St Martins Lane — June 2018 (with one 10-year extension at our option); and 

 

·

Mondrian London — June 2039 (with two 10-year extensions at our option, subject to certain conditions).

Together with the third party owners of Shore Club, we amended the Shore Club hotel management agreement to terminate our management of the hotel effective in the second quarter of 2016.  We will continue to manage Shore Club in accordance with the terms of the management agreement until the termination date becomes effective.  Upon termination, we expect to receive a termination fee of approximately $3.0 million.  

On January 28, 2016, we entered into amendments to each of the hotel management agreements relating to Royalton and Morgans, both owned by the same hotel owner.  In connection with owner’s potential sale of each of those hotels, we agreed to allow the owner to sell the hotels unencumbered by the current hotel management agreements.  Under each of the amendments, the hotel owner has the right to terminate the hotel management agreements at any time upon at least 30 days’ prior written notice in exchange for paying us $3.5 million for each of the hotels, or a total of $7.0 million, upon a termination of each agreement.  We expect to continue to manage the hotels until they are sold.

We are currently subject to performance tests under certain of our hotel management agreements, which could result in early termination of certain of our hotel management agreements.  As of December 31, 2015, we are in compliance with these termination performance tests and are not exercising any contractual cure rights.  Generally, the performance tests are two part tests based on achievement of budget or cash flow and revenue per available room indices.  In addition, once the performance test period begins, which is generally multiple years after a hotel opens, each of these performance tests must fail for two or more consecutive years and we have the right to cure any performance failures, subject to certain limitations.  

Licensed and Franchised Hotels

Consistent with our growth strategy and expansion of our hotel brands, we have entered into license and franchise agreements.  Delano Las Vegas, a 1,117-room hotel at Mandalay Bay, opened in early September 2014 and is operated under a license agreement with MGM.  This all-suite hotel features a unique sand-meets-water design and blends signature elements of Delano South Beach with the energy of the Las Vegas Strip. Additionally, 10 Karaköy, a 71-room Morgans Original in Istanbul, Turkey which is subject to a franchise agreement, opened in November 2014.  

Development Hotels

We have also signed management agreements for various other hotels. As of December 31, 2015, these hotels, which are in various stages of development, included the following:

 

 

 

Expected

Room Count

 

 

Anticipated

Opening

 

Initial

Term

Hotels Currently Under Construction or Renovation:

 

 

 

 

 

 

 

 

Mondrian Doha

 

 

270

 

 

2016

 

30 years

Delano Dubai

 

 

110

 

 

2017

 

20 years

Other Signed Agreements:

 

 

 

 

 

 

 

 

Mondrian Dubai

 

 

235

 

 

 

 

15 years

Delano Aegean Sea

 

 

150

 

 

 

 

20 years

Delano Cartagena

 

 

211

 

 

 

 

20 years

 

However, financing and/or governmental approvals have not been obtained for the hotel projects listed under “Other Signed Agreements” above, and there can be no assurances that any or all of our projects listed above will be developed as planned. If adequate project financing is not obtained, these projects may need to be limited in scope, deferred or cancelled altogether, in which case we may be unable to recover any previously funded key money, equity investments or debt financing.  

Corporate Headquarters

Our corporate headquarters are located at 475 10th Avenue, New York, New York, 10018. These offices consist of approximately 18,500 square feet of leased space. The lease for this property expires on October 31, 2018. We believe that our existing office properties are in good condition and are sufficient and suitable for the conduct of our business.  

 

33


 

ITEM 3.

LEGAL PROCEEDINGS  

We are involved in various lawsuits and administrative actions in the normal course of business, as well as other litigations as noted below.

Litigation Regarding TLG Promissory Notes

On August 5, 2013, Andrew Sasson and Andy Masi filed a lawsuit in the Supreme Court of the State of New York against TLG Acquisition LLC and Morgans Group LLC relating to the $18.0 million in notes convertible into shares of our common stock at $9.50 per share subject to the achievement of certain EBITDA (earnings before interest, tax, depreciation and amortization) targets for the acquired TLG business (the “TLG Promissory Notes”), which were issued in connection with our November 2011 acquisition of 90% of the equity interests in a group of companies known as The Light Group (the “Light Group Transaction”). See note 7 of our consolidated financial statements regarding the background of the TLG Promissory Notes. The complaint alleged, among other things, a breach of contract and an event of default under the TLG Promissory Notes as a result of our failure to repay the TLG Promissory Notes following an alleged “Change of Control” that purportedly occurred upon the election of the Board of Directors on June 14, 2013. The complaint sought payment of Mr. Sasson’s $16 million TLG Promissory Note and Mr. Masi’s $2 million TLG Promissory Note, plus interest compounded to principal, as well as default interest, and reasonable costs and expenses incurred in the lawsuit. We believe that a Change of Control, within the meaning of the TLG Promissory Notes, did not and has not occurred and that no prepayments were or are required under the TLG Promissory Notes. On September 26, 2013, we filed a motion to dismiss the complaint in its entirety. On February 6, 2014, the court granted our motion to dismiss. On March 7, 2014, Messrs. Sasson and Masi filed a Notice of Appeal from this decision with the Appellate Division, First Department.  On April 9, 2015, the Appellate Division, First Department, reversed the trial court’s decision, denying the motion to dismiss and remanding to the trial court for further proceedings. We filed a motion for reconsideration at the appellate court, which was denied on July 7, 2015.  We also filed our answer to the complaint with the trial court on May 11, 2015.  On August 27, 2015, Messrs. Sasson and Masi filed a motion for partial summary judgment with the trial court and we filed our opposition to that motion on October 12, 2015.  In February 2016, the plaintiff’s partial summary judgment motion was granted. We intend to appeal.  Although the TLG Promissory Notes were repaid and retired in December 2014, this lawsuit remains pending in connection with issues related primarily to the interest rates applicable to the TLG Promissory Notes.  

Litigations Regarding Mondrian SoHo  

On January 16, 2013, German American Capital Corporation (“GACC” or the “lender”), the lender for the mortgage loans on the Mondrian SoHo property, filed a complaint in the Supreme Court of the State of New York, County of New York against Sochin Downtown Realty, LLC, the joint venture that then owned Mondrian SoHo (“Sochin JV”), Morgans Management, the then manager for the hotel, Morgans Group, Happy Bar LLC and MGMT LLC, seeking foreclosure including, among other things, the sale of the mortgaged property free and clear of the management agreement, entered into between Sochin JV and Morgans Management on June 27, 2007, as amended on July 30, 2010. According to the complaint, Sochin JV defaulted by failing to repay the approximately $217.0 million outstanding on the loans when they became due on November 15, 2012.  Cape Advisors Inc. indirectly owned 80% of the equity interest in Sochin JV and Morgans Group indirectly owned the remaining 20% equity interest.

A foreclosure judgment was issued on November 25, 2014 and the foreclosure sale was held on January 7, 2015, at which GACC was the sole and winning bidder. GACC had an agreement to assign its bid to 9 Crosby LLC, an affiliate of Sapir, a New York-based real estate development and management organization.  In connection with that contract, GACC and Sapir agreed to terminate us as manager of Mondrian SoHo.  The sale of the Mondrian SoHo hotel property to Sapir closed on March 6, 2015.  

On April 24, 2015, the court ordered Morgans to vacate the premises on or before April 27, 2015.  Consistent with that order, Morgans ceased to manage Mondrian SoHo on April 27, 2015.

On October 24, 2014, we filed suit in the Supreme Court of the State of New York seeking a declaration that the mortgage lenders to the Mondrian SoHo debt or Sapir could not remove us as hotel manager following the conclusion of the foreclosure proceedings. On October 2, 2015, we entered into a settlement agreement in connection with this litigation with the mortgage lenders to the Mondrian SoHo debt and the current owner of the hotel formerly known as Mondrian SoHo.  Pursuant to the settlement agreement, we received a $10.0 million payment on October 2, 2015.  The settlement agreement resolves all outstanding litigation related to Mondrian SoHo.

ITEM 4.

MINE SAFETY DISCLOSURES

Not Applicable.

 

 

34


 

PART II

ITEM 5.

MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Market Information

Our common stock has been listed on the NASDAQ Global Market under the symbol “MHGC” since the completion of our initial public offering in February 2006. The following table sets forth the high and low sales prices for our common stock, as reported on the NASDAQ Global Market, for each of the periods listed. No dividends were declared or paid during the periods listed.  

 

Period

 

High

 

 

Low

 

First Quarter 2014

 

$

8.37

 

 

$

7.28

 

Second Quarter 2014

 

$

8.30

 

 

$

7.19

 

Third Quarter 2014

 

$

8.49

 

 

$

7.15

 

Fourth Quarter 2014

 

$

8.25

 

 

$

7.30

 

First Quarter 2015

 

$

8.00

 

 

$

7.00

 

Second Quarter 2015

 

$

7.98

 

 

$

6.26

 

Third Quarter 2015

 

$

7.00

 

 

$

3.07

 

Fourth Quarter 2015

 

$

4.09

 

 

$

2.93

 

 

On March 11, 2016, the closing sale price for our common stock, as reported on the NASDAQ Global Market, was $1.63. As of March 11, 2016, there were 37 record holders of our common stock, although there is a much larger number of beneficial owners.

Dividend Policy

We have never declared or paid any cash dividends on our common stock and we do not currently intend to pay any cash dividends on our common stock. We expect to retain future earnings, if any, to fund the development and growth of our business. Any future determination to pay dividends on our common stock will be, subject to applicable law, at the discretion of our Board of Directors and will depend upon, among other factors, our results of operations, financial condition, capital requirements and contractual restrictions. Our Hudson/Delano 2014 Mortgage Loan prohibits us from paying cash dividends on our common stock. In addition, so long as any Series A preferred securities are outstanding, we are prohibited from paying dividends on our common stock, unless all accumulated and unpaid dividends on all outstanding Series A preferred securities have been declared and paid in full.

The Series A preferred securities we issued in October 2009 had an 8% dividend rate until October 2014, and have a 10% dividend rate until October 2016, and a 20% dividend rate thereafter, with a 4% increase in the dividend rate during certain periods in which the Yucaipa Investors’ nominee to our Board of Directors has not been elected as a director or subsequently appointed as a director by our Board of Directors. The cumulative unpaid dividends also have a dividend rate equal to the then applicable dividend rate on the Series A preferred securities. We have the option to accrue any and all dividend payments, and as of December 31, 2015, have not declared any dividends. As of December 31, 2015, we have undeclared dividends of approximately $55.6 million.

 

 

 

 

35


 

Performance Graph  

The following graph below shows the cumulative total stockholder return of our common stock from December 31, 2010 through December 31, 2015 compared to the S&P 500 Stock Index and the S&P 500 Hotels. The graph assumes that the value of the investment in our common stock and each index was $100 at December 31, 2010. We have declared no dividends during this period. The stockholder return on the graph below is not indicative of future performance.

Comparison of Cumulative Total Return of the Company, S&P 500 Stock Index

and S&P 500 Hotels Index From December 31, 2010 through December 31, 2015

 

 

 

 

 

12/31/2010

 

 

12/31/2011

 

 

12/31/2012

 

 

12/31/2013

 

 

12/31/2014

 

 

12/31/2015

 

Morgans Hotel Group Co.

 

$

100.00

 

 

$

65.05

 

 

$

61.08

 

 

$

89.64

 

 

$

86.44

 

 

$

37.16

 

S&P 500 Stock Index

 

 

100.00

 

 

 

100.00

 

 

 

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