Jones Lang LaSalle
NYC 02 14 06
MORGANS' IPO: THE LOUNGE, THE NICHE AND THE WARDROBE
Peter Slatin
If, on a balmy evening, you've enjoyed a high-fashion cocktail served by a nearly nude nymph (or at least an aspiring actress or model) while seated poolside at the Delano Hotel in South Beach or on a mattress in the Mondrian's SkyBar in West Hollywood, then you may be tempted to dip into this week's IPO of Morgans Hotel Group (OTC: MHGC). Morgans is the hotel company that owns these and seven other supercharged boutique properties in the U.S. and U.K. Management is hoping to raise some $275 million to pay down debt and make an acquisition when it goes public at a price that underwriters Morgan Stanley and J.P. Morgan Chase have pegged at between $19 and $21/share.
Well, put down that passion-fruit mojito and have some coffee: you'll need a clear head to think this one through. Even in the middle, at $20/share, this may be a rich brew. According to respected real estate securities analysts Green Street Advisors, the company warrants a share price of $16.25.
Why so stingy? Perhaps because Morgans is loaded with debt, hasn't turned a profit in at least three years, and is in the hands of a new management team that may have mastered finance but isn't known for the kind of fashion sense needed to keep its properties on the knife-edge of desirability in an increasingly competitive marketplace.
Nonetheless, the roughly $1 billion Morgans portfolio is a stellar, storied one, with sex appeal in spades. Its nine properties, in New York, San Francisco, Los Angeles and London, are the handiwork of Studio 54 founder Ian Schrager, now resigned from Morgans' leadership. Schrager basically created the high-end boutique hotel business back in 1984 with the launch of the company's namesake hotel in Manhattan. Schrager's golden touch (i.e., his control-freak, hands-on management style) made his hotels, even those, like New York's Hudson Hotel, with postage-stamp-sized rooms and stripped-down furnishings, highly desirable places to see and be seen.
And to stay. According to Green Street, Morgans' RevPAR (revenue per available room, a hotel industry benchmark) is in line with that of five-star brands like Four Seasons and Orient Express. In addition, with the hotel cycle likely to stay in the sweet spot in the gateway cities that are Morgans' turf for the next few years, those numbers should continue gain.
But the group's success, in financial as well as in fashion terms, has also spawned a host of competitors, mostly from private companies such as Kimpton Hotels, with its more laid-back hotels, which dominate the boutique world in cities like San Francisco, Chicago and Washington, D.C.; Kor Group, now expanding rapidly from a small group of smart, sophisticated properties in California; and Andre Balasz's Standard hotels. The biggest competitor of the bunch is the mighty W, which, backed by Starwood capital and marketing muscle, has become a global brand in less than a decade. Today, there are 19 Ws in ten U.S. cities and three countries, with more than 5,000 rooms; plans are afoot to add another nine hotels in five U.S. cities and three more countries. Among the expansion cities: Miami Beach, just down the street from the signature Delano.
These competitors are hard to ignore. Easy to overlook, though, is a very likely rival that, at the moment, controls 7% of the stock: Morgans founder Ian Schrager, who last June resigned from the company but remains as a non-exclusive consultant through 2007, with a hefty set of perks and no non-compete. Schrager and the company's principal financial backer, NorthStar Capital, will be selling approximately $46 million worth of stock in conjunction with the IPO, taking money off the table even as the guests are invited into the dining room. That's just one of the factors giving pause to analysts; another is the continuing responsibilities of Morgans Chairman David Hamamoto and CEO Edward Scheetz at NorthStar, the investment firm they founded in the mid-1990s when Hamamoto left Goldman Sachs' Whitehall Funds and Scheetz left Apollo Rea Estate Advisors.
Even as Scheetz and Hamamoto are distracted by their duties at NorthStar, where they have other investments to track (including personal stakes in some Morgans properties, according to Green Street), they will also be tasked to upgrade and revivify their legacy hotels. Such properties are critically dependent on being as au courant as fashion itself. The appeal of these hotels depends on a daring tightrope walk between exclusivity and the mass market. Extreme vigilance, heretofore exercised by Schrager, is essential to avoiding a tilt in either direction. With Schrager out of the picture and Hamamoto and Scheetz (both regarded as smart and shrewd real estate investment bankers but neither with a provenance as tastemaker) focused on the financial rather than the fashionable, the Morgans hotels are vulnerable to a slide in upkeep. It may seem unduly skeptical to note that this danger could be exacerbated by the current strong market conditions and performance that the hotels are enjoying, but that very success could make it easier to postpone the updating they will require.
On the other hand, Morgans' management will have its hands full with several new projects, including one repositioning, an expansion and two ground-up developments. The first is the acquisition of the 194-room James Hotel in Scottsdale, Ariz., from New York restaurateur and nascent hotelier Steve Hanson; it will be reborn as the Mondrian Scottsdale. The hotel is under contract for $47.5 million, and funds for the purchase are to come in part from the IPO. (One source with knowledge of the deal, who spoke on condition of anonymity, says the James was a "practice run" for Hanson, who has ambitions of his own as a boutique hotelier. "So Ian Schrager's old hotel company is now taking on practice-run hotels," sneers the source.)
Management is also practicing on something it's perfected, with plans to add a hotel tower across the street from the Delano in Miami. Its most ambitious project, though, is a 50-50 joint venture with Boyd Gaming at Boyd's Echelon project along the Strip in Las Vegas, where Morgans is slated to build a 600-room Delano and 1,000-room Mondrian as part of this multi-billion-dollar, 5,500-room buildout. Both hotels are slated to open in 2010. Morgans has pledged $350 million toward the partnership, at around 33% of its asset base, a huge stake in a single location. In this high-profile project as in virtually all of its properties, positioning the new hotels will be crucial, as will the health of the Vegas market; another mega-development, MGM's Mirage CityCenter, is due to come online in 2009.
Meanwhile, the designer whose touch helped catapult Schrager's hotels into the fashion, media and art-world spotlight is himself a potential competitor to Morgans. Philippe Starck is a co-founder with developer John Hitchcox in YOO, a global residential builder. Now, according to Green Street, Starck "may be partnering with a capital source to launch several new innovative boutique hotels.
"As for Schrager? Freed from his responsibilities at Morgans (where, following the IPO, he can divest his holdings entirely after six months), Schrager has already begun building a new company. He is selling luxury condos that are attached to the Gramercy Park Hotel, which he redeveloped but which will be managed by Morgans; he is quite close to announcing a major condo conversion project nearby at 1 Madison Avenue, a historic building now owned by SL Green Realty Trust; and he has acquired three Miami Beach properties as well. All of these deals are being done with new, well-financed partner Aby Rosen of RFR Holdings, which controls Manhattan's legendary Modernist masterpieces such as the Seagram's Building and Lever House on Park Avenue.
"Ian is ramping up," says a former Schrager executive. "He may circle back around and buy back the company at a tremendous firesale price.
"Scheetz and Hamamoto, who first bought into the company in the late 1990s, have long planned to take Morgans public. They've been stymied along the way by factors from street dissatisfaction with the deal, problems at some hotels (like the Clift in San Francisco, which was put into bankruptcy protection), and the roiled post-9/11 hotel market nationwide. Today, hotel and real estate industry insiders are highly skeptical of the IPO; many feel that going public is a last resort for management in its quest to lighten a hefty debt load. In addition, the challenge of growing in a crowded marketplace where Morgans already own dominant properties is a daunting one. If the IPO goes according to plan and management follows through with absolute attention to detail (and the market cooperates) Morgans could be on its way to finding new value for its existing and future properties. But that's a big if.
NYC 02 14 06
MORGANS' IPO: THE LOUNGE, THE NICHE AND THE WARDROBE
Peter Slatin
If, on a balmy evening, you've enjoyed a high-fashion cocktail served by a nearly nude nymph (or at least an aspiring actress or model) while seated poolside at the Delano Hotel in South Beach or on a mattress in the Mondrian's SkyBar in West Hollywood, then you may be tempted to dip into this week's IPO of Morgans Hotel Group (OTC: MHGC). Morgans is the hotel company that owns these and seven other supercharged boutique properties in the U.S. and U.K. Management is hoping to raise some $275 million to pay down debt and make an acquisition when it goes public at a price that underwriters Morgan Stanley and J.P. Morgan Chase have pegged at between $19 and $21/share.
Well, put down that passion-fruit mojito and have some coffee: you'll need a clear head to think this one through. Even in the middle, at $20/share, this may be a rich brew. According to respected real estate securities analysts Green Street Advisors, the company warrants a share price of $16.25.
Why so stingy? Perhaps because Morgans is loaded with debt, hasn't turned a profit in at least three years, and is in the hands of a new management team that may have mastered finance but isn't known for the kind of fashion sense needed to keep its properties on the knife-edge of desirability in an increasingly competitive marketplace.
Nonetheless, the roughly $1 billion Morgans portfolio is a stellar, storied one, with sex appeal in spades. Its nine properties, in New York, San Francisco, Los Angeles and London, are the handiwork of Studio 54 founder Ian Schrager, now resigned from Morgans' leadership. Schrager basically created the high-end boutique hotel business back in 1984 with the launch of the company's namesake hotel in Manhattan. Schrager's golden touch (i.e., his control-freak, hands-on management style) made his hotels, even those, like New York's Hudson Hotel, with postage-stamp-sized rooms and stripped-down furnishings, highly desirable places to see and be seen.
And to stay. According to Green Street, Morgans' RevPAR (revenue per available room, a hotel industry benchmark) is in line with that of five-star brands like Four Seasons and Orient Express. In addition, with the hotel cycle likely to stay in the sweet spot in the gateway cities that are Morgans' turf for the next few years, those numbers should continue gain.
But the group's success, in financial as well as in fashion terms, has also spawned a host of competitors, mostly from private companies such as Kimpton Hotels, with its more laid-back hotels, which dominate the boutique world in cities like San Francisco, Chicago and Washington, D.C.; Kor Group, now expanding rapidly from a small group of smart, sophisticated properties in California; and Andre Balasz's Standard hotels. The biggest competitor of the bunch is the mighty W, which, backed by Starwood capital and marketing muscle, has become a global brand in less than a decade. Today, there are 19 Ws in ten U.S. cities and three countries, with more than 5,000 rooms; plans are afoot to add another nine hotels in five U.S. cities and three more countries. Among the expansion cities: Miami Beach, just down the street from the signature Delano.
These competitors are hard to ignore. Easy to overlook, though, is a very likely rival that, at the moment, controls 7% of the stock: Morgans founder Ian Schrager, who last June resigned from the company but remains as a non-exclusive consultant through 2007, with a hefty set of perks and no non-compete. Schrager and the company's principal financial backer, NorthStar Capital, will be selling approximately $46 million worth of stock in conjunction with the IPO, taking money off the table even as the guests are invited into the dining room. That's just one of the factors giving pause to analysts; another is the continuing responsibilities of Morgans Chairman David Hamamoto and CEO Edward Scheetz at NorthStar, the investment firm they founded in the mid-1990s when Hamamoto left Goldman Sachs' Whitehall Funds and Scheetz left Apollo Rea Estate Advisors.
Even as Scheetz and Hamamoto are distracted by their duties at NorthStar, where they have other investments to track (including personal stakes in some Morgans properties, according to Green Street), they will also be tasked to upgrade and revivify their legacy hotels. Such properties are critically dependent on being as au courant as fashion itself. The appeal of these hotels depends on a daring tightrope walk between exclusivity and the mass market. Extreme vigilance, heretofore exercised by Schrager, is essential to avoiding a tilt in either direction. With Schrager out of the picture and Hamamoto and Scheetz (both regarded as smart and shrewd real estate investment bankers but neither with a provenance as tastemaker) focused on the financial rather than the fashionable, the Morgans hotels are vulnerable to a slide in upkeep. It may seem unduly skeptical to note that this danger could be exacerbated by the current strong market conditions and performance that the hotels are enjoying, but that very success could make it easier to postpone the updating they will require.
On the other hand, Morgans' management will have its hands full with several new projects, including one repositioning, an expansion and two ground-up developments. The first is the acquisition of the 194-room James Hotel in Scottsdale, Ariz., from New York restaurateur and nascent hotelier Steve Hanson; it will be reborn as the Mondrian Scottsdale. The hotel is under contract for $47.5 million, and funds for the purchase are to come in part from the IPO. (One source with knowledge of the deal, who spoke on condition of anonymity, says the James was a "practice run" for Hanson, who has ambitions of his own as a boutique hotelier. "So Ian Schrager's old hotel company is now taking on practice-run hotels," sneers the source.)
Management is also practicing on something it's perfected, with plans to add a hotel tower across the street from the Delano in Miami. Its most ambitious project, though, is a 50-50 joint venture with Boyd Gaming at Boyd's Echelon project along the Strip in Las Vegas, where Morgans is slated to build a 600-room Delano and 1,000-room Mondrian as part of this multi-billion-dollar, 5,500-room buildout. Both hotels are slated to open in 2010. Morgans has pledged $350 million toward the partnership, at around 33% of its asset base, a huge stake in a single location. In this high-profile project as in virtually all of its properties, positioning the new hotels will be crucial, as will the health of the Vegas market; another mega-development, MGM's Mirage CityCenter, is due to come online in 2009.
Meanwhile, the designer whose touch helped catapult Schrager's hotels into the fashion, media and art-world spotlight is himself a potential competitor to Morgans. Philippe Starck is a co-founder with developer John Hitchcox in YOO, a global residential builder. Now, according to Green Street, Starck "may be partnering with a capital source to launch several new innovative boutique hotels.
"As for Schrager? Freed from his responsibilities at Morgans (where, following the IPO, he can divest his holdings entirely after six months), Schrager has already begun building a new company. He is selling luxury condos that are attached to the Gramercy Park Hotel, which he redeveloped but which will be managed by Morgans; he is quite close to announcing a major condo conversion project nearby at 1 Madison Avenue, a historic building now owned by SL Green Realty Trust; and he has acquired three Miami Beach properties as well. All of these deals are being done with new, well-financed partner Aby Rosen of RFR Holdings, which controls Manhattan's legendary Modernist masterpieces such as the Seagram's Building and Lever House on Park Avenue.
"Ian is ramping up," says a former Schrager executive. "He may circle back around and buy back the company at a tremendous firesale price.
"Scheetz and Hamamoto, who first bought into the company in the late 1990s, have long planned to take Morgans public. They've been stymied along the way by factors from street dissatisfaction with the deal, problems at some hotels (like the Clift in San Francisco, which was put into bankruptcy protection), and the roiled post-9/11 hotel market nationwide. Today, hotel and real estate industry insiders are highly skeptical of the IPO; many feel that going public is a last resort for management in its quest to lighten a hefty debt load. In addition, the challenge of growing in a crowded marketplace where Morgans already own dominant properties is a daunting one. If the IPO goes according to plan and management follows through with absolute attention to detail (and the market cooperates) Morgans could be on its way to finding new value for its existing and future properties. But that's a big if.
posted by Jones Lang LaSalle NJ News Blog at 9:44 AM
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