Morgans Reports Sluggish 3Q

Morgans Hotel Group Co. (MHGC - Snapshot Report) reported third quarter 2012 loss per share of 59 cents, substantially higher than the Zacks consensus Estimate of a loss of 29 cents. However, the loss narrowed from the year-ago loss of 89 cents.

Total revenue came in at $44.0 million, down 5.7% year over year. The decrease was attributable to a 12.2% decline in total hotel revenues, partially offset by 77.2% increase in management fees. Also, revenues missed the Zacks Consensus Estimate of $46.0 million.

Quarter Highlights

During the reported quarter, management fees were primarily driven by company's acquisition of 90% of The Light Group in November 2011 and fees from new management agreements related to sale of assets.

For System-Wide Comparable Hotels, RevPar, or revenue per available room (excluding the results of all hotels under renovation), increased 8.0% in constant dollars and 7.4% in actual dollars on year-over-year basis. The growth was strong in the company’s hotels in London (14.5% in actual dollars).

On a regional basis, the revenue growth for the company’s brand hotels in London was strongly impacted by the strong demand during the Olympics and increase in rates. In the Northeast U.S. hotels, RevPAR increased by 4.6% and San Francisco hotels enjoyed a RevPAR increase of 11.0%. However, RevPAR for Morgan’s hotels in Miami were flat year-on-year during the quarter.

The company reported an operating loss of $6.3 million, which widened from the year-ago loss of $4.3 million.

Renovations and Developments

During the reported quarter, the company completed full renovation of the guest rooms of Hudson brand hotel in New York. The company expects to change 32 SRO (single room dwelling) units into guest rooms, which is expected to complete by December 2012, thus totaling the total number of rooms at Hudson to 866. In addition, the company is in progress to open a new restaurant in Hudson by early 2013.

Morgans Hotel Group has been very active on the development front during the reported quarter. The company signed an agreement with MGM Resorts International (MGM - Analyst Report) to convert the THEhotel at Mandalay Bay into Delano Las Vegas, expected to complete by 2013. In addition, the company penned a new long term deal for the management of Delano Moscow, a 160 room hotel in Russia, which is slated to open in 2015.

Also during the quarter, the Company opened its newest international property, the 71-room Delano Marrakech in Morocco.

As of September 30, 2012, Morgans Hotel Group has signed management agreements for eight hotels slated to open by 2015. The company expects to open three of these hotels in the next eighteen months.

Liquidity

Morgans Hotel Group ended the third quarter with cash and cash equivalents of $8.6 million and total consolidated debt (excluding the Clift lease) of $416.0 million. The company had $16.8 million available under its revolving credit facility.

Our Take

Considering the third quarter result, we remain cautious about the company’s growth going forward. The company has substantially missed the Zacks earnings estimate over the last 11 consecutive quarters. However, the ongoing hotel expansion will likely lead the company to generate high EBITDA margin in coming years.

Currently, the Zacks Consensus Estimate for 2012 and 2013 are pegged at loss of $1.54 and 87 cents, respectively.

Morgans Hotel Group currently carries a Zacks #3 Rank, implying a short-term Hold rating. We also reiterate our long-term Neutral recommendation on the stock.