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Article by DailyStocks_admin    (06-24-08 09:31 AM)

Morgans Hotel Group Co. CEO FRED J KLEISNER bought 20000 shares on 6-18-2008 at $12.51

BUSINESS OVERVIEW

Overview

Morgans Hotel Group Co. is a fully integrated hospitality company that operates, owns, acquires, develops and redevelops boutique hotels primarily in gateway cities and select resort markets in the United States and Europe. Over our 24-year history, we have gained experience operating in a variety of market conditions. At December 31, 2007, we owned or partially owned, and managed a portfolio of eleven luxury hotel properties in New York, Miami, Los Angeles, Scottsdale, San Francisco, London and Las Vegas, comprising approximately 3,400 rooms. In addition, we currently have eight announced developments or expansions, representing an estimated 3,350 additional guest rooms.

Unlike traditional brand-managed or franchised hotels, boutique hotels provide their guests with what we believe is a distinctive lodging experience. Each of our 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. Significant media attention has been devoted to our hotels which we believe is as a result of their distinctive nature, renowned design, dynamic and exciting atmosphere, celebrity guests and high-profile events. We believe that the Morgans Hotel Group brand, and each of our individual property brands are synonymous with style, innovation and service. We believe that this combination of lodging and social experiences, and association with our brands, increases our occupancy levels and pricing power.

At December 31, 2007, we owned or partially owned, and managed a portfolio of eleven luxury hotel properties in New York, Miami, Los Angeles, Scottsdale, San Francisco, London and Las Vegas, comprising approximately 3,400 rooms. These properties consisted of:


• seven hotels that we own and manage, or the Owned Hotels — the Morgans, Royalton and Hudson in New York, the Delano Miami in Miami, the Mondrian Los Angeles in Los Angeles, the Clift in San Francisco and the Mondrian Scottsdale in Scottsdale, comprising approximately 2,100 rooms;

• a 50% interest in two hotels in London, St Martins Lane and Sanderson, comprising approximately 350 rooms, which we manage;

• a 7% interest in the 300-room Shore Club in Miami which we also manage; and

• a 33.3% interest in the Hard Rock Hotel and Casino in Las Vegas, or Hard Rock, which we also manage.

In addition to our current portfolio, we expect to operate, own, acquire, redevelop and develop new hotel properties that are consistent with our portfolio in major metropolitan cities and select resort markets in the United States, Europe and elsewhere. We currently have development or expansion projects in Las Vegas, South Beach Miami, Chicago and SoHo, New York, and in January 2008, we announced a project to develop a Mondrian in Palm Springs. We are also in the process of redeveloping an apartment building on Biscayne Bay in Miami, which we have rebranded under our Mondrian brand, as a hotel condominium project under the name Mondrian South Beach Hotel Residences, or Mondrian South Beach. We will manage Mondrian South Beach upon completion.

We conduct our operations through Morgans Group LLC, a Delaware limited liability company and our operating company, which we refer to as Morgans Group. Morgans Group holds substantially all of our assets. We are the managing member of Morgans Group and held approximately 97.0% of its membership units at December 31, 2007. We manage all aspects of Morgans Group, including the operation, development, sale and purchase of, and investments in, hotels.

We were incorporated in Delaware in October 2005 and completed our initial public offering of common stock, or IPO, 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 .

Corporate Strategy

We intend to grow through our proven ability to replicate our model on an individualized but consistent basis across a growing portfolio and by leveraging our portfolio of brands for expansion in both new and existing markets. We have enhanced our management team through new hires with a renewed focus on acquisitions and growth. We believe that our current management team and existing operating infrastructure provide us with the ability to successfully integrate assets into our portfolio as we grow and expand.

Internal Growth. We believe our portfolio is poised for internal growth driven by selected renovation and expansion projects and operational and technology infrastructure initiatives.

Targeted Renovations and Expansions. We have targeted and are pursuing a number of specific renovation and expansion projects throughout our portfolio that we believe will increase our appeal to potential guests and generate increased revenue at our properties. These projects also include utilization of unused space, room refurbishments and upgrades, and the reconfiguration of public areas with the addition of amenities and revenue drivers, such as restaurants, bars, health clubs, banquet and meeting spaces and retail shops in certain properties. For example, during 2007, we completed a renovation of guest rooms, common areas and the restaurant and bars at Mondrian Scottsdale and Royalton and a rooms and spa renovation at Delano Miami. We expanded through the addition of two nightlife venues at both St Martins Lane and Delano Miami. During 2007, we also began the room renovation, including technology upgrades, of Mondrian Los Angeles and the complete renovation and repositioning of Mondrian South Beach, both of which are expected to be completed in 2008. We also are planning room and lobby renovations of Morgans, which is expected to be completed in 2008, and are undertaking expansion projects at Hudson and Hard Rock. We continuously evaluate alternative uses of our properties throughout our portfolio, including residential conversion and other opportunities.

Operational and Infrastructure Initiatives. We strive to implement state-of-the-art operational systems and apply best practices to maximize synergies at the portfolio level. Within the past few years, we have launched a number of operational and technology initiatives that are designed to result in revenue growth, significant improvements in our operating costs and efficiencies, an improved guest experience and an enhanced ability to market to our customers’ specific lodging needs. Recent initiatives include centralization of our telephone reservations office, centralization of our computer reservations systems, utilization of a proprietary revenue management system, globalization of our sales system, and deployment of a company-wide customer relationship management system.

External Growth. We believe we are poised for external growth that will be driven by growth in major metropolitan markets and select resort locations as we extend our hotel, restaurant and bar brands. We intend to be flexible with respect to transaction structures and real estate requirements as we grow our business.

Target Markets. We intend to 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 for both domestic and foreign travelers that attract both business and leisure travelers as well as select resort markets. We believe that Las Vegas, where we have a planned development project and have completed a hotel purchase, is an example of such a market. Consistent with our prior expansion activities, we will continue to seek growth primarily in markets with multiple demand drivers and high barriers to entry, including:


• Major North American metropolitan markets with vibrant urban locations, including existing markets such as New York, Miami and Los Angeles and new markets such as Chicago, Boston, Atlanta, and Washington, DC;

• Select resort locations such as Hawaii, the Caribbean/Bahamas and Mexico;

• Key European destinations that we believe offer a similar customer base as our established United States and United Kingdom markets, such as Paris and Milan; and

• Select locations in the Middle East and Asia.

Brand Extensions. We believe that our existing brand portfolio has considerable development potential. Many of our brands, including hotel brands such as Delano, Mondrian, Hudson, Sanderson and Royalton, and restaurant and bar brands such as Asia de Cuba and Skybar, may be extended to other hotels, restaurants and bars in our existing and new markets. For example, during 2006 we purchased the James Hotel Scottsdale and in January 2007 rebranded the hotel as Mondrian Scottsdale and launched Asia de Cuba and Skybar at the hotel. Similarly, we believe our brand portfolio improves our ability to secure joint ventures and management agreements with third parties. For example, Boyd Gaming Corporation, or Boyd, chose our Delano and Mondrian brands and our management team for a portion of its Echelon development in Las Vegas. We also have development projects in SoHo, New York, Chicago and Palm Springs to expand our Mondrian brand. We believe that we also may have new growth opportunities through the extension of our brands into condominium development and other residential projects, including condominiums or apartments with hotel services and condominiums that may be contributed to a hotel rental pool when not occupied by the owner. Furthermore, we believe that we have additional brand extension opportunities outside the hospitality and real estate industries, such as selective retail product placement opportunities.

Flexible Business Model. We intend to be flexible with respect to transaction structures and real estate requirements as we grow our business. We will pursue attractive acquisition, joint venture and other opportunities as they arise. As we pursue these opportunities, we will place significant emphasis on securing a meaningful percentage of any equity growth or a significant total dollar return on investment. The acquisition market and the specifics of any particular deal will influence each transaction’s structure. We believe our flexibility should allow us greater access to strategically important hotels and other opportunities. Joint ventures with management agreements should provide us with enhanced return on investment through management and other fee income and access to strategically important hotels and other opportunities. For example, we have demonstrated our ability to partner effectively through, among others, our restaurant joint venture with Jeffrey Chodorow and the joint venture structures through which we own our interests in St Martins Lane, Sanderson and Hard Rock.

We also believe we have a proven track record of expansion into new regions, new types of markets, international operations and operations in larger formats. We believe that this demonstrated expansion expertise gives us a broad range of possible options with respect to future development. Moreover, we believe our flexibility with respect to the physical configuration of buildings gives us more options to grow in any given market as compared to many of our competitors who require very particular specifications so that their hotels will all look the same. In addition, the destination nature of our hotels has enabled us in the past to acquire assets in locations that are less established and, therefore, more attractively priced, due to our ability to create a destination hotel rather than be located directly adjacent to existing popular destinations.

2007 Transactions and Developments

Mondrian Scottsdale Renovation. We acquired the James Hotel Scottsdale in May 2006 for approximately $47.8 million. Subsequent to the acquisition, we re-branded the hotel as Mondrian Scottsdale and undertook a significant renovation of the guest rooms, common areas, restaurants and bars. The renovation of the Mondrian Scottsdale was completed in January 2007.

Hard Rock Hotel & Casino. We completed the acquisition of the Hard Rock and related assets for approximately $770.0 million in February 2007, together with an affiliate of DLJ Merchant Banking Partners, or DLJMB. We funded one-third of the equity, or approximately $57.5 million, and DLJMB funded two-thirds of the equity, or approximately $115.1 million, through a joint venture. The remainder of the purchase price was financed through borrowings under a secured credit agreement entered into by the joint venture, which agreement was amended as of November 6, 2007. See Note 5 to the Consolidated Financial Statements. The amended credit agreement provides for a secure term loan facility consisting of $760.0 million for the acquisition, including $35.0 million for renovation costs, $48.2 million for financing costs and $56.3 million for cash reserves and working capital, and a loan of up to $620.0 million for the expansion, with the total amount available under the financing not to exceed $1.4 billion as of December 31, 2007.

In March 2007, we announced a large-scale expansion project at the Hard Rock. The expansion is expected to include the addition of approximately 875 guest rooms, including an all-suite tower with upgraded amenities, approximately 60,000 square feet of meeting and convention space, and approximately 30,000 square feet of casino space. The project also includes an expansion of the hotel’s pool, several new food and beverage outlets, a new and larger “The Joint” live entertainment venue, a new spa and exercise facility and additional retail space. Renovations to the existing property also began during 2007 and include upgrades to existing suites, restaurants and bars, retail shops, and common areas, and a new ultra lounge and poker room. These renovations are scheduled to be completed in 2008. We expect the expansion to be complete by late 2009.

We manage Hard Rock pursuant to a 20-year contract with two 10-year renewals. Beginning in 2009 or 12 months following the completion of the expansion, whichever is later, we are subject to certain performance tests.

Morgans Hotel Group Europe Limited. On February 16, 2007, Royalton Europe Holdings LLC, one of our indirect subsidiaries, and Walton MG London Investors V, L.L.C., or Walton, an affiliate of Walton Street Capital, LLC, a real estate investment company, entered into a joint venture agreement for the ownership and operation of Morgans Hotel Group Europe Limited, or Morgans Europe. Morgans Europe owns, through a subsidiary company, the Sanderson and St Martins Lane hotels in London, England. We manage both of these hotels under separate hotel management agreements.

The joint venture agreement was executed by the parties upon the sale by Burford Hotels Limited, or Burford, of its equity interest in Morgans Europe to Walton. Walton purchased Burford’s interest in the joint venture for the equivalent of approximately $52.0 million, implying a gross value for the assets of over $300.0 million. For facilitating the transaction, we received approximately $6.1 million in cash at closing.

We continue to indirectly own a 50% equity interest in Morgans Europe and continue to have equal representation on the Morgans Europe board of directors. Beginning any time after February 9, 2010, either party has the right to buy all the shares of the other party in Morgans Europe or, if its offer is rejected, require the other party to buy all of its shares at the same offered price per share in cash.

Mondrian SoHo. We contributed $5.0 million for a 20% equity interest in a joint venture with Cape Advisors Inc. in June 2007 to develop a Mondrian hotel in the SoHo neighborhood of New York City. Mondrian SoHo is currently expected to have 270 rooms, a restaurant, bar, meeting space, exercise facility and a penthouse suite with outdoor space. We expect to open Mondrian SoHo in 2009.

Mondrian Chicago. We formed a joint venture with M Development in June 2007 to lease and develop a Mondrian hotel in Chicago. We have a 49% equity interest in the joint venture and expect to contribute approximately $15.0 million to the project. Mondrian Chicago is currently expected to have 216 rooms and feature a restaurant and bar, meeting space and an exercise facility. We expect to open Mondrian Chicago in 2010.

July 2007 Equity Offering. On July 25, 2007, we completed an equity offering of 12,210,840 shares of common stock, of which 2,777,495 new shares of common stock were sold by the Company and 9,433,345 previously issued shares of common stock were sold by certain selling stockholders. Net proceeds to us as a result of the offering were approximately $58.9 million.

Departure of Chief Executive Officer. On September 19, 2007, pursuant to a mutual agreement with the Company, W. Edward Scheetz resigned as president and chief executive officer and director of the Company in order to permit him to address personal issues. Fred J. Kleisner, one of the Company’s directors, was named as the Company’s interim president and chief executive officer. Upon assuming responsibility as interim president and chief executive officer, Mr. Kleisner resigned from the audit committee of our board and the board designated Robert Friedman, one of our directors, as a member of the audit committee and Thomas L. Harrison, currently a member of the audit committee, as the chairman of the audit committee. Mr. Kleisner also resigned from the corporate governance and nominating committees of the board of directors.

Mr. Scheetz entered into a separation agreement and release with the Company. Pursuant to the agreement, Mr. Scheetz retained his vested and unvested stock options, restricted stock units and long-term incentive plan awards. To the extent that these awards are not yet vested, they will remain subject to the existing vesting provisions, but all unvested awards will be fully vested by September 19, 2009 (certain awards which are subject to performance conditions will remain subject to those conditions). Mr. Scheetz did not receive any additional payment in connection with the separation.

Appointment of Chief Executive Officer. On December 10, 2007, the board of directors appointed Fred J. Kleisner as president and chief executive officer. In connection with his service as president and chief executive officer of the Company, Mr. Kleisner and the Company entered into an employment agreement effective as of December 10, 2007.

Stockholder Protection Rights Agreement. On October 9, 2007, our board of directors adopted a Stockholder Protection Rights Agreement, or Rights Agreement. The Rights Agreement was not adopted in response to any specific effort to obtain control of our company. By its terms, the Rights Agreement will expire on October 9, 2008, unless extended. In connection with the adoption of the Rights Agreement, our board of directors declared a dividend of one right per outstanding share of our common stock. The rights were distributed to the record holders as of October 19, 2007.

October 2007 Convertible Debt Offering. On October 17, 2007, we completed an offering of $172.5 million aggregate principal amount of 2.375% Senior Subordinated Convertible Notes, or the Notes, in a private offering, which included an additional issuance of $22.5 million in aggregate principal amount of Notes as a result of the initial purchasers’ exercise in full of their over allotment option. The Notes are the senior subordinated unsecured obligations of the Company and are guaranteed on a senior subordinated basis by our operating company, Morgans Group. The Notes are convertible into shares of our common stock under certain circumstances and upon the occurrence of specified events.

In connection with the private offering, the Company entered into certain convertible note hedge and warrant transactions. These transactions are intended to reduce the potential dilution to the holders of our common stock upon conversion of the Notes and will generally have the effect of increasing the conversion price of the Notes to approximately $40.00 per share, representing a 82.23% premium based on the last reported sale price of our common stock of $21.95 per share on October 11, 2007. The net proceeds to us from the sale of the Notes was approximately $166.8 million (of which approximately $24.1 million was used to fund the note call options and warrant transactions discussed in Note 7 of the Consolidated Financial Statements).

Common Stock Repurchase Plan. On December 10, 2007, our board of directors authorized the repurchase of up to $25.0 million of our common stock, or approximately 4% percent of our outstanding shares based on the then current market price. This repurchase authorization was in addition to the $50.0 million that was authorized by our board of directors on December 7, 2006 and expired on December 6, 2007.

As of December 31, 2007, we had repurchased 332,207 shares for approximately $5.9 million under this new plan, and repurchased an additional 1,156,828 shares for approximately $19.2 million in January 2008, thereby completing our purchases under the new plan.

Recent Developments

Mondrian Palm Springs. On January 14, 2008, we announced a new joint venture with Re:Loft Partners Palm Springs, LLC to develop Palm Springs Hotel & Residences, or the Resort, in downtown Palm Springs, California. The Resort plans call for a Mondrian hotel with approximately 200 rooms, as well as residences available for sale. The Resort is targeted to open in 2011. Upon completion, we expect to operate the hotel under a 10-year management contract with two five-year extension options and have an ownership percentage.

Approval of Gaming License in Nevada. In January 2008, we received approval from the Nevada Gaming Commission to operate the casino at Hard Rock. We began operating the casino on March 1, 2008.

Management and Operations of Our Portfolio

Overview of Management

We manage and operate each of our hotels which are staffed by our employees and the employees of our joint venture operating companies with personnel dedicated to each of the properties, including a general manager, controller, director of sales and marketing, director of human resources and other employees. The personnel in each hotel report to the general manager of the hotel. Each general manager reports to our executive vice president of operations. The corporate office provides support directly to certain functions at the hotel such as sales, revenue management and human resources. This organizational structure allows for each property to operate in a responsive and dynamic fashion while ensuring integrity of our guest experience and core values. As the Company has expanded in its existing markets, we have begun to regionalize certain operational, finance and sales functions. Our management team is headquartered in New York City and coordinates management and operations of the Company. The management team reviews business contracts, oversees the financial budgeting and forecasting for our hotels, performs internal accounting and audit functions, administers insurance plans and identifies new systems and procedures to employ within our hotels to improve efficiency and profitability. In addition, the management team is responsible for coordinating the sales and marketing activities at each of our hotels, designing sales training programs, tracking future business prospects and identifying, employing and monitoring marketing programs. The management team is also responsible for the design of our hotels and overall product and service quality levels.

Our Engaging Dynamic Guest Experience, or EDGE, service program has been implemented across our portfolio, with the exception of Hard Rock which was acquired in February 2007, as discussed above. This program is designed to enhance employee initiative and responsiveness which we believe results in high customer satisfaction. Our EDGE initiative further allows the sharing of best practices and expertise across our employee base, creating a culture that we believe is more service-oriented than many of our competitors. At Hard Rock, comparable service initiatives were already in place and will continue to be assessed to ensure they meet the Company’s brand standards.

Restaurant Joint Ventures

As a central element of our operating strategy, we focus significant resources on identifying exciting and creative restaurant concepts. Consistent with this objective and to further enhance the dining experience offered by our hotels, we have established joint venture relationships with well-known restaurateur Jeffrey Chodorow to develop, own and operate restaurants and bars at hotels operated by the Company. Currently, the joint ventures operate the restaurants (including in-room dining, banquet catering and other food and beverage operations) at Morgans, Hudson, Delano Miami, Mondrian Los Angeles, Clift, St Martins Lane and Sanderson as well as the bars in Delano Miami, St Martins Lane and Sanderson. Additionally, in January 2007, we opened Asia de Cuba at the newly renovated Mondrian Scottsdale. This restaurant is owned by us but is operated by Jeffrey Chodorow pursuant to license and management agreements.

Marketing, Sales and Public Relations

Strong direct sales has been an integral part of our success. We employ a sales force of greater than 100 people with multiple sales managers stationed in each of our markets. The sales force is responsible for sourcing new corporate accounts in the United States and Europe. We have also opened sales offices in other markets. These offices are deployed by industry focus and geography. In 2007, we derived approximately 30.6% of our business from corporate transient and group accounts. Our core corporate business comes from the entertainment, fashion, retail, finance, advertising, automotive, technology, insurance and consumer goods industries. Approximately 55% of our guests are traveling on business.

Unlike many hotel companies, our sales managers are trained to sell the experience, not simply the rate. Our objective is to create differentiation by selling an “experience” and “brand.”

While marketing initiatives are customized in order to account for local preferences and market conditions, consistent major campaign and branding concepts are utilized throughout all our marketing activities. These concepts are developed by our central sales and marketing teams, but a significant amount of discretion is left to the local sales managers who are often more able to promptly respond to local changes and market trends and to customize marketing concepts to meet each hotel’s specific needs.

We place significant emphasis on our public relations promotional strategy, which we believe is a highly cost-effective marketing tool for our Company. Through highly publicized events, prospective guests are more likely to be made aware of our hotels through word-of-mouth or magazine and newspaper articles and high-profile events rather than direct advertising. This publicity is supplemented with focused marketing activities to our existing customers. Our in-house professionals coordinate the efforts of third-party public relations firms to promote our properties through travel magazines and various local, national and international newspaper travel sections. We regularly host events that attract celebrity guests and journalists generating articles in newspapers and magazines around the world. Our marketing efforts also include hosting other special events which have included the ESPY awards and opening events for Art Basel Miami.

Integration and Centralization Efforts

We have centralized certain aspects of our operations in an effort to provide further revenue growth and reduce operating costs. Beginning in 2002, we embarked on a number of technological and process initiatives including the launch of a new website, www.morganshotelgroup.com , which during 2007 generated approximately 13.3% of our total bookings and approximately 16.5% of our total rooms revenue. In an effort to reduce expenses and to drive revenue growth, we employ what we believe to be the state-of-the-art systems available to the hospitality industry. These include our:


• Property Management System — Our property management system provides management solutions to improve operations and profitability for a global hotel organization. Our property management system is designed for comprehensive guest management by, among other things, allowing the user to track and retrieve information pertaining to guests, groups and company accounts. Additional features of this system allow the user to extract information on a customized basis from its customer database. We believe that this increases the possibility of maximizing revenue by allowing us to efficiently respond and cater to guest demands and trends and decreases expenses by centralizing the information database in an easy to use format.

• Central Reservations System — Our central reservations system and related distribution and reservations services provide hotel reservations-related services and technology.

• Central Reservations Office — Our central reservations office provides contact management solutions. It is managed by a third-party out of its facility in New Brunswick, Canada.

• Sales and Catering — Our sales and catering system is a strategic tool specifically designed to maximize the effectiveness of the sales process, increase revenues and efficiency, and reduce costs.

• Revenue Management — Our revenue management system is a proprietary system which provides hospitality focused pricing and revenue optimization solutions.

• Accounting and Reporting — Our accounting and reporting is performed under The Uniform System of Accounts for the Lodging Industry and utilizes a widely used international accounting system that allows for customizing and analyzing data while ensuring consistent controls.

• Customer Relationship Management — Our customer relationship management system is designed specifically for the hospitality industry and provides personalized guest recognition, high service quality, improved guest satisfaction and loyalty, which we believe results in increased revenues. This centralized database tracks guest sales history and guest preferences to provide our staff in our hotels and sales agents with a method of efficiently responding to and targeting guest needs.

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 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 quality of service, convenience of location, quality of the property, pricing and range and quality of food services and amenities offered. 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.

CEO BACKGROUND

David T. Hamamoto has been the Chairman of our Board of Directors since February 2006. In 1997, Mr. Hamamoto co-founded NorthStar Capital Investment Corp. with W. Edward Scheetz. Prior to that time, Mr. Hamamoto was a partner, co-head and co-founder of the Real Estate Principal Investment Area at Goldman, Sachs & Co. Additionally, Mr. Hamamoto serves on the boards of NorthStar Realty Finance Corp., where he serves as Chairman of the Board, and Koll Development Co. Since 2004, Mr. Hamamoto has also served as the President and Chief Executive Officer of NorthStar Realty Finance Corp., a NYSE-listed commercial real estate company. He is a Trustee of the Brearly School, where he served as President from 2005 to 2007, and is also currently Vice Chair of the Parents Advisory Board at Stanford University and is on the Major Gifts Committee for The Stanford Challenge. Mr. Hamamoto received a Bachelor of Science degree from Stanford University and a Master of Business Administration from the Wharton School of the University of Pennsylvania.

Fred J. Kleisner is our President, Chief Executive Officer and one of our Directors. Mr. Kleisner has been one of our Directors since February 2006 and has been our President and CEO (including interim President and CEO) since September 2007. From March 2000 to August 2005, Mr. Kleisner was the Chief Executive Officer of Wyndham International, a hotel company that owned, leased, managed and franchised hotels and resorts in the U.S., Canada, Mexico, the Caribbean and Europe. Mr. Kleisner also served as the Chairman of Wyndham International’s Board from October 13, 2000. From August 1999 to October 2000, Mr. Kleisner served as President and from July 1999 to March 2000, Mr. Kleisner also served as Chief Operating Officer. From March 1998 to August 1999, he served as President and Chief Operating Officer of The Americas for Starwood Hotels & Resorts Worldwide, Inc. Hotel Group. His experience in the industry also includes senior positions with Westin Hotels and Resorts, where he served as President and Chief Operating Officer from 1995 to 1998; Interstate Hotels Company where he served as Executive Vice President and Group President of Operations from 1990 to 1995; The Sheraton Corporation, where he served as Senior Vice President, Director of Operations, North America Division—East from 1985 to 1990; and Hilton Hotels, where for 16 years he served as General Manager of several landmark hotels, including The Waldorf Astoria and The Waldorf Towers in New York, The Capital Hilton in Washington, D.C., and The Hilton Hawaiian Village in Honolulu. Mr. Kleisner, who holds a B.A. degree in Hotel Management from Michigan State University, completed advanced studies at the University of Virginia and Catholic University of America.

Robert Friedman is a Co-Chairman of our Compensation Committee and Chairman of our Corporate Governance and Nominating Committee, and has been one of our Directors since February 2006. Mr. Friedman is President of Media & Entertainment for @radical thinking. From 1991 to 2003, Mr. Friedman held a variety of senior positions at AOL Time Warner, including as Head of Corporate Marketing for Time Warner and President of AOL, Interactive Marketing & TV. Mr. Friedman was President of New Line TV and Co-Chairman of Worldwide Theatrical Marketing, Licensing and Merchandising. Mr. Friedman was a member of the original development team of MTV Networks from 1981 to 1989. Mr. Friedman serves on the Board of Directors of Vassar College, Columbia Business School, The Mount Sinai Medical Center and The Big Apple Circus. Mr. Friedman also serves on the International Advisory Board for New Zealand. Mr. Friedman received a Bachelor of Arts from Vassar College and a Master of Business Administration from Columbia University.

Jeffrey M. Gault is a member of our Corporate Governance and Nominating Committee, our Audit Committee and our Compensation Committee and has been one of our Directors since December 2007. Since August 2007, Mr. Gault has served as the Chief Executive Officer of LandCap Partners, a national residential land company. He previously served as Division President of KB Urban, a division of KB Home, from September 2005 to June 2007. His more than 30 years of experience in real estate development and investment activities also includes senior positions with Empire Companies, a Southern California land developer, where he was President and Chief Operating Officer from May 2002 to March 2005; Helios Partners, an affiliate of the Pritzker family interests of Chicago, where he was managing partner from 1994 to 1998; Sun America Realty Partners, an affiliate of Sun America, Inc., where he was managing principal from 1990 to 1994; and Home Savings of America, F.A., where he was Executive Vice President and Director of Real Estate from 1985 to 1990. Mr. Gault earned a Bachelor’s Degree in Architecture from the University of California at Berkeley and has a Master’s Degree in Environmental Design from Yale University’s School of Architecture. Mr. Gault is a licensed architect and general building contractor in the State of California, a member of the American Institute of Architects, American Institute of Certified Planners, and Urban Land Institute, and the Chairman of the University of California at Berkeley Fisher Center for Urban Economics and Real Estate Policy Advisory Board.

Thomas L. Harrison is a Co-Chairman of our Compensation Committee and Chairman of our Audit Committee, and has been one of our Directors since February 2006. Mr. Harrison is Chairman and Chief Executive Officer of Diversified Agency Services (“DAS”), a group of marketing services companies. A division of the Omnicom Group, DAS provides a broad range of marketing communication services. Mr. Harrison has been the President of DAS since 1997 and was named Chairman and Chief Executive Officer in 1998. Prior to joining DAS, Mr. Harrison was Co-founder and Chairman of Harrison & Star Business Group. Mr. Harrison serves on the boards of The Children’s Hospital at Montefiore and is a fellow at the New York Academy of Medicine. He is a member of the President’s council at Tulane University School of Medicine and was a member of the Dean’s council at Tulane School of Public Health and Tropical Medicine. He is also the chairman of the Dean’s council of The Steinhardt School at New York University. He has served as co-chairman of the New York Chapter of the U.S. Olympic Committee. Mr. Harrison holds an advanced degree in cell biology and physiology from West Virginia University and will receive an Honorary Doctorate from that University.

Edwin L. Knetzger, III is a member of our Audit Committee and has been one of our Directors since February 2006. Mr. Knetzger is one of the co-founders and is the current Vice Chairman of Greenwich Capital Markets, Inc., a leading fixed income institutional investor, where he previously served at various times as President, Chief Executive Officer and Chairman from 1981 to 2003. Prior to joining Greenwich Capital Markets, Inc., Mr. Knetzger was employed by Kidder Peabody & Company where he served as Co-Manager and Head Trader of the Government Bond Trading Department from 1975 to 1980. Since 2005, Mr. Knetzger has held the position of Chief Operating Officer of Divco West Real Estate Services, located in San Francisco. Additionally, Mr. Knetzger serves on the boards of Paul Newman’s The Hole In The Wall Gang Camp and The Hole In The Wall Gang Association, which are non-profit organizations for children and families afflicted by cancer and serious blood diseases. Mr. Knetzger received a Bachelor of Arts and a Master of Business Administration from University of Virginia.

Michael D. Malone is a member of our Corporate Governance and Nominating Committee and our Audit Committee and has been one of our Directors since January 2008. He currently serves as the Managing Director of Fortress Investment Group LLC. Mr. Malone retired from Bank of America in November 2007, after nearly 24 years of service as Senior Executive Banker and Managing Director. Over those years Mr. Malone worked in and ran a number of investment banking businesses for the bank and its subsidiary, Banc of America Securities. Those included: real estate, gaming, lodging, leisure, and the financial sponsors businesses. Mr. Malone received a Bachelor of Science degree in General Studies from the University of Kentucky.

MANAGEMENT DISCUSSION FROM LATEST 10K

Overview

We are a fully integrated hospitality company that operates, owns, acquires, develops and redevelops boutique hotels primarily in gateway cities and select resort markets in the United States and Europe. Over our 24-year history, we have gained experience operating in a variety of market conditions.

The historical financial data presented herein is the historical financial data for:


• our Owned Hotels;

• our joint venture hotels, consisting of the London hotels (Sanderson and St Martins Lane), Shore Club and Hard Rock, or the Joint Venture Hotels;

• our investments in hotels under development, such as Mondrian Las Vegas, Delano Las Vegas, Mondrian Chicago and Mondrian SoHo;

• our investment in certain joint ventures food and beverage operations at our Owned Hotels and Joint Venture Hotels, discussed further below;

• our management company subsidiary, MHG Management Company; and

• the rights and obligations contributed to Morgans Group in the formation and structuring transactions described in Note 1 to the Consolidated Financial Statements, included elsewhere in this report.

We consolidate the results of operations for all of our Owned Hotels. Certain food and beverage operations at five of our Owned Hotels are operated under 50/50 joint ventures with restaurateur Jeffrey Chodorow. The Asia de Cuba restaurant at Mondrian Scottsdale is operated under license and management agreements with China Grill Management, a company controlled by Jeffrey Chodorow. We believe that we are the primary beneficiary of these entities because we are responsible for the majority of the entities’ expected losses or residual returns. Therefore, these entities are consolidated in our financial statements with our partner’s share of the results of operations recorded as minority interest in the accompanying consolidated financial statements. This minority interest is based upon 50% of the income of the applicable entity after giving effect to rent and other administrative charges payable to the hotel.

We own partial interests in the Joint Venture Hotels and certain food and beverage operations at two of the Joint Venture Hotels, Sanderson and St Martins Lane. We account for these investments using the equity method as we believe we do not exercise control over significant asset decisions such as buying, selling or financing nor are we the primary beneficiary of the entities. Under the equity method, we increase our investment in unconsolidated joint ventures for our proportionate share of net income and contributions and decrease our investment balance for our proportionate share of net losses and distributions.

On February 2, 2007, we began managing the hotel operations at the Hard Rock. We also have signed agreements to manage the Mondrian South Beach, Mondrian Las Vegas, Delano Las Vegas, Mondrian Chicago and Mondrian SoHo once development is complete. As of December 31, 2007, we operated the following Joint Venture Hotels under management agreements which expire as follows:


• Sanderson — April 2010 (with two 10-year extensions at our option);

• St Martins Lane — September 2009 (with two 10-year extensions at our option);

• Shore Club — July 2022; and

• Hard Rock — February 2027 (with two 10-year extensions).

These agreements are subject to early termination in specified circumstances.

We generated net losses for the years ended December 31, 2007, 2006 and 2005. Revenues increased by $41.1 million in 2007 compared to 2006 and by $18.7 million in 2006 compared to 2005. The loss for the years ended December 31, 2007 and 2006 is primarily due to non-cash charges related to income taxes and stock compensation and the recognition of our share of losses of unconsolidated subsidiaries in 2007 as compared to income in 2006. Stock compensation was introduced in February 2006 when the Company completed its IPO. The stock compensation expense increased $11.6 million in 2007 compared to 2006 and $7.9 million in 2006 compared to 2005. Further, the Company purchased the Hard Rock through a joint venture in 2007. The Company’s proportionate share of Hard Rock’s loss for the year ended 2007 was $22.1 million. We did not own any interest in Hard Rock in 2006. The loss for the year ended December 31, 2005 was primarily due to our interest expense exceeding our operating income, including prepayment fees related to a June 2005 refinancing of the debt on five hotels and increased interest due to additional mortgage debt on those five hotels. With the refinancing of our debt on our five jointly financed United States hotel properties in June 2005 and then again in October 2006, and after giving effect to the formation and structuring transactions related to our IPO (see Note 1 to the Consolidated Financial Statements), we experienced a reduction of $20.7 million in our interest expense for the year ended December 31, 2006 as compared to December 31, 2005 and a further reduction in interest expense of $8.3 million for the year ended December 31, 2007 as compared to 2006.

Factors Affecting Our Results of Operations

Revenues. Changes in our revenues are most easily explained by three performance indicators that are commonly used in the hospitality industry:


• occupancy;

• ADR; and

• RevPAR, which is the product of ADR and average daily occupancy; but does not include food and beverage revenue, other hotel operating revenue such as telephone, parking and other guest services, or management fee revenue.

Substantially all of our revenue is derived from the operation of our hotels. Specifically, our revenue consists of:


• Rooms revenue. Occupancy and ADR are the major drivers of rooms revenue.

• Food and beverage revenue. Most of our food and beverage revenue is earned by our 50/50 restaurant joint ventures and is driven by occupancy of our hotels and the popularity of our bars and restaurants with our local customers.

• Other hotel revenue. Other hotel revenue, which consists of ancillary revenue such as telephone, parking, spa, entertainment and other guest services, is principally driven by hotel occupancy.

• Management fee — related parties revenue. We earn fees under our management agreements ranging from 5.5% to 7% of defined revenues. These fees may include management fees as well as reimbursement for allocated chain services.

Fluctuations in revenues, which tend to correlate with changes in gross domestic product, are driven largely by general economic and local market conditions but can also be impacted by major events, such as terrorist attacks or natural disasters, which in turn affect levels of business and leisure travel.

The seasonal nature of the hospitality business can also impact revenues. We experience some seasonality in our business. For example, our Miami hotels are generally strongest in the first quarter, whereas our New York hotels are generally strongest in the fourth quarter.

In addition to economic conditions, supply is another important factor that can affect revenues. Room rates and occupancy tend to fall when supply increases, unless the supply growth is offset by an equal or greater increase in demand. One reason why we focus on boutique hotels in key gateway cities is because these markets have significant barriers to entry for new competitive supply, including scarcity of available land for new development and extensive regulatory requirements resulting in a longer development lead time and additional expense for new competitors. A recent trend among hotel owners is the conversion of hotel rooms to condominium apartments which further reduces the available supply of hotel rooms resulting in increased demand for the remaining hotels.

Finally, competition within the hospitality industry can affect revenues. Competitive factors in the hospitality industry include name recognition, quality of service, convenience of location, quality of the property, pricing, and range and quality of food services and amenities offered. In addition, all of our hotels, restaurants and bars are located in areas where there are numerous competitors, many of whom have substantially greater resources than us. New or existing competitors could offer significantly lower rates or more convenient locations, services or amenities or significantly expand, improve or introduce new service offerings in markets in which our hotels compete, thereby posing a greater competitive threat than at present. If we are unable to compete effectively, we would lose market share, which could adversely affect our revenues.

Operating Costs and Expenses. Our operating costs and expenses consist of the costs to provide hotel services, including:


• Rooms expense. Rooms expense includes the payroll and benefits for the front office, housekeeping, concierge and reservations departments and related expenses, such as laundry, rooms supplies, travel agent commissions and reservation expense. Like rooms revenue, occupancy is a major driver of rooms expense, which has a significant correlation with rooms revenue.

• Food and beverage expense. Similar to food and beverage revenue, occupancy of our hotels and the popularity of our restaurants and bars are the major drivers of food and beverage expense, which has a significant correlation with food and beverage revenue.

• Other departmental expense. Occupancy is the major driver of other departmental expense, which includes telephone and other expenses related to the generation of other hotel revenue.

• Hotel selling, general and administrative expense. Hotel selling, general and administrative expense consist of administrative and general expenses, such as payroll and related costs, travel expenses and office rent, advertising and promotion expenses, comprising the payroll of the hotel sales teams, the global sales team and advertising, marketing and promotion expenses for our hotel properties, utility expense and repairs and maintenance expenses, comprising the ongoing costs to repair and maintain our hotel properties.

• Property taxes, insurance and other. Property taxes, insurance and other consist primarily of insurance costs and property taxes.

• Corporate expenses. Corporate expenses consist of the cost of our corporate office, net of any cost recoveries, which consists primarily of payroll and related costs, stock-based compensation expenses, office rent and legal and professional fees and costs associated with being a public company.

• Depreciation and amortization expense. Hotel properties are depreciated using the straight-line method over estimated useful lives of 39.5 years for buildings and five years for furniture, fixtures and equipment.

Other Items


• Interest expense, net. Interest expense, net includes interest on our debt and amortization of financing costs and is presented net of interest income and interest capitalized.

• Equity in (income) loss of unconsolidated joint ventures . Equity in (income) loss of unconsolidated joint ventures constitutes our share of the net profits and losses of our United Kingdom hotel joint venture, our United Kingdom food and beverage joint venture (both of which are 50% owned by us); Shore Club (in which we have a 7% ownership interest); since August 8, 2006, Mondrian South Beach (in which we have a 50% ownership interest and which is currently under development); and since February 2, 2007, Hard Rock (in which we had a 33.3% ownership interest as of December 31, 2007).

• Minority interest. Minority interest expense constitutes the third-party food and beverage joint venture partner’s interest in the profits of the restaurant ventures at certain of our hotels.

• Other non-operating (income) expenses include gains and losses on sale of assets and asset restructurings, costs of abandoned development projects and financings, gain on early extinguishment of debt and other items that do not relate to the ongoing operating performance of our assets.

• Income tax expense. The United States entities included in our Predecessor’s combined financial statements are either partnerships or limited liability companies, which are treated similarly to partnerships for tax reporting purposes. Accordingly, Federal and state income taxes have not been provided for in the accompanying combined financial statements for the year ended December 31, 2005 as the partners or members are responsible for reporting their allocable share of our Predecessor’s income, gains, deductions, losses and credits on their individual income tax returns. One of our foreign subsidiaries is subject to United Kingdom corporate income taxes. Income tax expense is reported at the applicable rate for the periods presented. Certain of our Predecessor’s subsidiaries were subject to the New York City Unincorporated Business Tax. Income tax expense in our Predecessor’s financial statements comprises the income taxes paid in the United Kingdom on the management fees earned by our wholly-owned United Kingdom subsidiary. Subsequent to the IPO, the Company is subject to Federal and state income taxes. Income taxes for the period from February 17, 2006 to December 31, 2006 and year ended December 31, 2007 were computed using our calculated effective tax rate. We also recorded net deferred taxes related to cumulative differences in the basis recorded for certain assets and liabilities in the amount of $10.6 million at the time of our conversion from a partnership to a C corporation.

Most categories of variable operating expenses, such as operating supplies and certain labor such as housekeeping, fluctuate with changes in occupancy. Increases in RevPAR attributable to increases in occupancy are accompanied by increases in most categories of variable operating costs and expenses. Increases in RevPAR attributable to improvements in ADR typically only result in increases in limited categories of operating costs and expenses, primarily credit card and travel agent commissions. Thus, improvements in ADR have a more significant impact on improving our operating margins than occupancy.

Notwithstanding our efforts to reduce variable costs, there are limits to how much we can accomplish because we have significant costs that are relatively fixed costs, such as depreciation and amortization, labor costs and employee benefits, insurance, real estate taxes and other expenses associated with owning hotels that do not necessarily decrease when circumstances such as market factors cause a reduction in our hotel revenues.

Recent Trends and Developments

Recent Trends. We believe that the economic drivers that impact underlying lodging fundamentals, such as growth in GDP, business investment and employment, are likely to weaken in 2008. The expected decline in these drivers will likely result in a significantly lower revenue growth rate for our hotels than was experienced in 2006 and 2007. While demand growth could moderate as a result of slowing economic drivers, projections for new supply in the markets in which we own hotels suggest that supply growth will also continue to fall short of long-term historical averages. Although the pace of new lodging supply in various phases of development has increased over the past several quarters, the majority of new projects scheduled for completion in the near-term are largely concentrated in the economy and mid-scale segments and are located outside of major urban markets. Therefore, we do not expect most of the new hotel supply to directly compete with our core portfolio. We also believe the timing of some of these projects may be affected by increased building costs and the reduced availability of financing. These factors may further dampen the pace of new supply development beyond 2008.

As we believe the trends in the lodging industry provide less opportunity for improvements in our business in 2008, there can be no assurances that any increases in hotel revenues or earnings at our properties will continue for any number of reasons, including, but not limited to, slower than anticipated growth in the economy and changes in travel patterns.

Recent Developments. In addition to the recent trends described above, we expect that a number of recent events will cause our future results of operations to differ from our historical performance. For a discussion of these recent events, see “Business — Recent Developments.”

Operating Results

Comparison of Year Ended December 31, 2007 To Year Ended December 31, 2006

The following table presents our operating results for the year ended December 31, 2007 and the year ended December 31, 2006, including the amount and percentage change in these results between the two periods. The operations presented for the period from January 1, 2006 through February 16, 2006 are those of our Predecessor. We completed our IPO on February 17, 2006, therefore the period from February 17, 2006 through December 31, 2006, represents our results of operations. The combined periods in 2006 are comparable to our results for the year ended December 31, 2007 with the exception of the addition of the Mondrian South Beach development project in August 2006, the purchase of Hard Rock in February 2007, the addition of Mondrian Scottsdale in May 2006, which was under renovation during the year ended December 31, 2006, and the renovation of Royalton, which was closed for four months during 2007. Mondrian South Beach was operating as an apartment building at the time of its purchase in August 2006 and is in the development phases of converting into a hotel and condominium. Our investment in Mondrian South Beach and Hard Rock is accounted for using the equity method and our share of losses is recorded in the consolidated results of operations for the years ended December 31, 2006 and 2007. The combined operating results are as follows:

Rooms revenue increased 10.8% to $186.8 million in 2007 compared to $168.6 million in 2006 driven by comparable Owned Hotels RevPAR growth partially offset by revenue declines at hotels under renovation. The comparable Owned Hotel RevPAR increase of 14.2% was primarily driven by Delano Miami which produced RevPAR growth of 20.2% and Clift which produced RevPAR growth of 14.0%. The growth at Delano Miami was primarily driven by the growth in rate experienced as a result of the rooms renovation that began in late 2006 and was completed in 2007. The growth at Clift is primarily attributable to an increased number of tourists and convention groups returning to San Francisco.

Food and beverage revenue increased 17.0% to $104.3 million in 2007 compared to $89.1 million in 2006. The increase in food and beverage revenue is primarily due to Mondrian Scottsdale and Hudson. During 2006, the restaurant and bars at Mondrian Scottsdale were operating on a limited service basis while the entire hotel was under renovation. The restaurant and bars at Mondrian Scottsdale opened in late January 2007 resulting in an increase of $5.7 million,for the year ended December 31, 2007 as compared to 2006. The food and beverage revenues at Hudson increased $5.4 million for the year ended December 31, 2007 as compared to 2006. The growth in the food and beverage revenues at the Hudson was primarily attributable to catering that was previously outsourced being performed in-house beginning in February 2007. Beginning in February 2007, Hudson began recording food and beverage revenues and expense for the catering department. Further, contributing to the overall increase in food and beverage revenues, the Company’s restaurants and bars are destinations in their own right, with a local customer base in addition to hotel guests; accordingly their revenue performance is driven by local market factors in the restaurant and bar business.

Other hotel revenue decreased by $1.7 million to $13.8 million in 2007 compared to $15.4 million in 2006. The decline is primarily due to the decline in telephone revenues of 15.7% in 2007 compared to 2006. The decline in telephone revenues is an industry-wide issue primarily caused by the increased use of cell phones.

Management Fee — Related Parties. Management fee — related parties increased by 107.3% to $18.2 million in 2007 compared to $8.8 million in 2006 due primarily to management fees earned relating to Hard Rock.

Operating Costs and Expenses

Rooms expense increased 14.7% to $49.4 million in 2007 compared to $43.1 million in 2006. The increase is primarily due to the increase in rooms expenses at Mondrian Scottsdale of $1.8 million which was primarily due to increased wages. Mondrian Scottsdale was acquired in May 2006 and was not fully staffed during the period from acquisition to December 31, 2006, as it was undergoing substantial renovation. When the hotel renovation was completed in January 2007, the hotel began operating with a full staff. Additionally, an increase in rooms expenses, which was not consistent with an increase of rooms revenue, was experienced at Mondrian Los Angeles and Delano Miami, primarily due to increased housekeeping wages and related costs.

Food and beverage expense increased 19.5% to $70.0 million in 2007 compared to $58.6 million in 2006. The increase in food and beverage expense is primarily due to Mondrian Scottsdale and Hudson. During 2006, the restaurant and bars at Mondrian Scottsdale were operating on a limited service basis while the hotel was under renovation. The restaurant and bars at Mondrian Scottsdale opened in late January 2007 resulting in an increase in food and beverage expenses of $3.8 million for the year ended December 31, 2007 as compared to 2006. The food and beverage expense at Hudson increased $4.7 million for the year ended December 31, 2007 as compared to 2006 as catering, previously outsourced, was performed in-house beginning in February 2007.

Other departmental expense increased an immaterial amount in 2007 compared to 2006, primarily due to the inclusion of Mondrian Scottsdale and increased costs associated with long distance telephone calls, offset by a change in the Delano Miami valet parking contract. The inclusion of Mondrian Scottsdale accounts for $0.6 million of the increase and is due to the hotel being fully operational after completion of the renovation in January 2007. Additionally, telephone expenses have increased across our portfolio by 5.0% or $0.1 million in 2007 compared to 2006 due to increased costs associated with long distance telephone calls. Offsetting these increases is a decrease of $0.8 million in parking costs resulting from the outsourcing of parking valet services at Delano Miami in June 2006.

Hotel selling, general and administrative expense increased 8.8% to $60.2 million in 2007 compared to $55.4 million in 2006. The inclusion of Mondrian Scottsdale accounts for $2.6 million of this $4.9 million increase from 2006 to 2007 with the remaining increase attributable to general inflation rates.

Property taxes, insurance and other expense increased 18.9% to $19.0 million in 2007 compared to $16.0 million in 2006. This increase was primarily due to the renovation of Royalton where the Company incurred nonrecurring pre-opening expenses as a result of the completion of the renovation and re-launch of the hotel, restaurant and bar in October 2007. Additionally, both hotels in California, Mondrian Los Angeles and Clift, experienced increases in earthquake insurance costs in 2007 as compared to 2006.

Corporate expenses increased by 63.9% to $44.7 million in 2007 compared to $27.3 million in 2006. This increase is due primarily to the increase in stock compensation expense of $11.6 million due to additional expense recognized in connection with the resignation of our former president and chief executive officer in September 2007 and additional annual stock-based compensation granted to non-employee directors, officers and employees during 2007. Further, this increase is due to increased payroll and payroll related costs incurred as a result of the hiring of additional employees due to the expansion of the Company’s hotel portfolio and development efforts, as well as increased legal fees and Sarbanes-Oxley compliance costs.

Depreciation and amortization increased 13.6% to $21.7 million in 2007 compared to $19.1 million in 2006. This increase is a result of the renovations at Delano Miami, which took place in late 2006 and during 2007, and at Royalton, which took place during 2007.

Interest Expense, net. Interest expense, net decreased 19.8% to $41.3 million in 2007 compared to $51.6 million in 2006. The $10.2 million decrease in interest expense, net is primarily attributable to:


• decreased interest expense of $4.7 million resulting from the February 2006 payoff and October 2006 refinancing of the mortgage and mezzanine debt, including prepayment fees, secured by five of our wholly-owned hotels;

• decreased amortization of deferred financing costs, including the write-off of costs associated with the above mentioned repaid loans of $10.5 million; offset by

• an increase of $2.4 million in interest expense due to changes in the value of an interest rate cap, which does not qualify for hedge accounting under SFAS No. 133;

• an increase in interest expense of $0.9 million related to the issuance of convertible notes in October 2007; and

• an increase in interest expense of $2.6 million related to the issuance of notes to a subsidiary issuing trust preferred securities in August 2006.

The weighted average interest rates in 2007 and 2006 were 5.8% and 6.1%, respectively.

Equity in loss (income) of unconsolidated joint ventures was a loss of $24.6 million for the year ended 2007 compared to income of $1.5 million for the year ended 2006. The loss recorded in 2007 was primarily driven by the Company’s share of losses from Hard Rock, which resulted primarily due to interest expense.

Other non-operating expense increased 37.5% to $4.8 million in 2007 as compared to $3.5 million in 2006. The expense recognized during 2007 primarily relates to expenses incurred in connection with the resignation of our former president and chief executive officer in September 2007 as well as legal expenses related to the Shore Club litigation. Further, as a result of the renovation at Royalton, a loss on the disposal of assets was recorded during 2007. This was partially offset by a $6.1 million fee earned in facilitating the transfer of our former joint venture partner’s interest of the London hotels to Walton in February 2007. In 2006, the other non-operating expenses are primarily due to expenses incurred in connection with the Shore Club litigation discussed in Note 8 of the Consolidated Financial Statements and the write-off of certain assets in connection with hotel renovations.

Income tax (benefit) expense resulted in a benefit of $9.1 million in 2007 compared to an expense of $11.2 million in 2006. The 2007 income tax benefit was due primarily to the recording of deferred tax assets from the unconsolidated subsidiaries losses and stock compensation expense. The expense recognized in 2006 was due primarily to the recording of a deferred tax liability as a result of difference in basis of assets and liabilities as part of the Formation and Structuring Transaction. We are subject to corporate Federal and state income taxes effective February 17, 2006.

MANAGEMENT DISCUSSION FOR LATEST QUARTER

Operating Results
Comparison of Three Months Ended March 31, 2008 to March 31, 2007
The following table presents our operating results for the three months ended March 31, 2008 and the three months ended March 31, 2007, including the amount and percentage change in these results between the two periods. The consolidated operating results for the three month period ended March 31, 2007 is comparable to the Company’s consolidated operating results for the three month period ended March 31, 2008, with the exception of the addition of the Hard Rock in February 2007 and the renovation of Mondrian Los Angeles during the three months ended March 31, 2008. The consolidated operating results are as follows:

Total Hotel Revenues. Total hotel revenues increased 2.3% to $76.2 million for the three months ended March 31, 2008 compared to $74.5 million for the three months ended March 31, 2007. RevPAR from our comparable Owned Hotels, which includes our Owned Hotels that were fully operational during the three months ended March 31, 2008 and 2007, thereby excluding Mondrian Los Angeles which was under renovation during 2008, increased by 5.6% to $252 for the three months ended March 31, 2008 compared to $239 for the same period in 2007. The components of RevPAR from our comparable Owned Hotels for the three months ended March 31, 2008 and 2007 are summarized as follows:

Rooms revenue increased 2.0% to $46.2 million for the three months ended March 31, 2008 as compared to $45.3 million for the three months ended March 31, 2007, which is directly attributable to the increase in ADR and RevPAR shown above. The comparable Owned Hotels RevPAR increase of 5.6% was driven primarily by the strength of the market in New York, which experienced RevPAR growth of 6.6% and ADR growth of 10.5% for the three month period ended March 31, 2008 as compared to the three month period ended March 31, 2007. This increase was primarily driven by the newly renovated Royalton, which reopened in October 2007. Furthermore, Mondrian Scottsdale experienced RevPAR growth of 9.7% and ADR growth of 15.6% for the three month period ended March 31, 2008 as compared to the three month period ended March 31, 2007, primarily due to effects of the Super Bowl in Phoenix in January 2008 and the renovations completed in January 2007. These increases were offset by a decrease in RevPAR at Mondrian Los Angeles and Delano Miami. The decrease at Mondrian Los Angeles is due to the hotel being currently under renovation. The decrease experienced at Delano Miami was primarily due to the occurrence of the Super Bowl in Miami in February 2007. The RevPAR at Delano Miami decreased 0.5% for the three months ended March 31, 2008 as compared to the same period in 2007. Excluding the impact of the five-day Super Bowl event in 2007, RevPAR at Delano Miami increased 9.4% for the three months ended March 31, 2008 as compared to the same period in 2007
Food and beverage revenue increased 4.0% to $26.6 million for the three months ended March 31, 2008 as compared to $25.6 million for the three months ended March 31, 2007. Increases in food and beverage revenues of 27.8% and 33.6% were experienced at Mondrian Scottsdale and Royalton, respectively. The restaurant and bars at Mondrian Scottsdale have benefitted from the additional popularity gained during the year since opening in January 2007, resulting in an increase for the three months ended March 31, 2008 as compared to the same period in 2007. The increase in revenues at Royalton is due primarily to the new restaurant, Brasserie 44 and the recently renovated bar, both of which opened in October 2007 when the newly renovated hotel reopened. Offsetting these increases, the food and beverage revenues at Mondrian Los Angeles have decreased 22.4% for the three months ended March 31, 2008 as compared to the same period in 2007 due to the renovations currently underway.
Other hotel revenue decreased by 4.7% to $3.5 million for the three months ended March 31, 2008 as compared to $3.6 million for the three months ended March 31, 2007. Our Owned Hotels experienced a 16.6% decline in telephone revenues for the three months ended March 31, 2008 as compared to the same period in 2007 which is consistent across the industry due to increased cell phone usage. Slightly offsetting this decline, Mondrian Scottsdale had an increase in other hotel revenues primarily due to the effect of the Super Bowl in January 2008 and the hotel being fully operational during the three months ended March 31, 2008 as compared to the same period in 2007 when the hotel’s renovation was completed.
Management Fee—Related Parties. During the first three months of 2008 and 2007, management fee—related parties was comprised of fee income from our contracts to manage our Joint Venture Hotels. The increase in management fees during the three months ended March 31, 2008 as compared to the same period in 2007 relates to three months of management fees earned in managing the Hard Rock in 2008 as compared to two months in 2007 (February 2, 2007 through March 31, 2007).
Operating Costs and Expenses
Rooms expense increased 4.3% to $13.2 million for the three months ended March 31, 2008 as compared to $12.6 million for the three months ended March 31, 2007. This increase was primarily due to increased costs at Royalton for the three months ended March 31, 2008 as compared to the same period in 2007 which are related to the newly renovated hotel rooms, increased guest supplies costs and housekeeping related costs. The remaining increase was driven primarily by additions of guest relations employees as part of the Company’s continued emphasis on its customer relationship management initiatives and travel agent commissions due to higher revenues.
Food and beverage expense increased 10.4% to $19.4 million for the three months ended March 31, 2008 as compared to $17.5 million for the three months ended March 31, 2007. The food and beverage expense increase was generally in line with increases in food and beverage revenue, with the exception of Royalton and Hudson. The increase in food and beverage expense at Royalton of 47.5% for the three months ended March 31, 2008, as compared to the same period in 2007 was primarily due to higher payroll and benefits costs in the new restaurant, Brasserie 44. The increase in food and beverage expense at Hudson of 18.2% for the three months ended March 31, 2008, as compared to the same period in 2007, was primarily due to payroll related costs which have increased in 2008 due to union wage increases and a fully staffed management team.
Other departmental expense increased 2.9% to $2.1 million for the three months ended March 31, 2008 as compared to $2.0 million for the three months ended March 31, 2007. This increase is primarily due to increased expenses at Mondrian Scottsdale, which was opened after renovations and repositioning in January 2007.
Hotel selling, general and administrative expense increased 2.7% to $15.8 million for the three months ended March 31, 2008 as compared to $15.4 million for the three months ended March 31, 2007. The increase is primarily attributed to increased administrative and general expenses which are consistent with increases attributable to general inflation rates.
Property taxes, insurance and other expense decreased 28.8% to $4.1 million for the three months ended March 31, 2008 as compared to $5.7 million for the three months ended March 31, 2007. The decrease is primarily related to preopening expenses incurred during January 2007 related to the repositioning and opening of Mondrian Scottsdale.
Corporate expense increased by 14.2% to $10.3 million for the three months ended March 31, 2008 as compared to $9.1 million for the three months ended March 31, 2007. This increase is primarily due to a $0.6 million increase in stock compensation expense due to additional grants in 2007. Further, this increase is due to increased payroll and payroll related costs incurred as a result of the hiring of additional employees due to the expansion of the Company’s hotel portfolio and development efforts.
Depreciation and amortization increased 26.7% to $6.1 million for the three months ended March 31, 2008 as compared to $4.8 million for the three months ended March 31, 2007. This increase is a result of the renovations at Delano Miami and Royalton, which both took place during 2007.
Interest Expense, net. Interest expense, net decreased 0.9% to $10.5 million for the three months ended March 31, 2008 as compared to $10.6 million for the three months ended March 31, 2007.
Equity in loss of unconsolidated joint ventures increased 72.9% to $8.0 million for the three months ended March 31, 2008 as compared to $4.7 million for the three months ended March 31, 2007. This increase was primarily driven by the Company’s share of losses from Hard Rock for the three months ended March 31, 2008 as compared to the period from February 2, 2007 to March 31, 2007. The losses incurred at Hard Rock are primarily due to interest expense.

CONF CALL

Jennifer Foley – Public Relation Director

Good afternoon, thank for joining us on our first quarter 2008 conference call. Joining us for today's conference call are David Hamamoto, Chairman of the board, Fred Kleisner, President and Chief Executive Officer, Rich Szymanski, Chief Financial Officer, and Marc Gordon, Chief Investment Officer of Morgans Hotel Group.

Before we begin, I need to remind everyone that part of our discussion this afternoon will include forward-looking statements. They are not guarantees of future performance and therefore undue reliance should not be placed upon them. We refer all of you to the Company's filings with the Securities and Exchange Commission for a more detailed discussion of the risks that may have a direct bearing on the Company's operating results, performance and financial condition. With that, I will pass the call on to David.

David Hamamoto – Chairman of the Board

Thank you, Jen, and thank you, everyone, for joining today's conference call. Before I turn the call over to Fred to discuss the Company's results, I wanted to make a few brief comments. Morgans Hotel Group has continued to perform extremely well and deliver strong results despite the challenging economic environment, as Fred will discuss later. We have high value brands in some of the best markets and a clear strategy to grow these brands through minority equity investments with partners, coupled with long-term management contracts.

Our financial position is strong, with $81 million of cash at the end of the quarter and three unencumbered hotels. We have the resources to finance our current joint venture commitments in our pipeline of projects in 2008. Consistent with our model for new hotels, we are exploring selling interest in our existing hotels and operating them under long-term management agreements to further accelerate the growth of the Company.

While the financing environment is challenging today, we remain confident that in the long-term we have the right locations and brands to attract potential investors. As Fred will discuss, we are pleased with our results and with our renovation projects underway and new properties under development. We believe we are well positioned for future growth. With that, I'd like to turn the call over to Fred.

Fred Kleisner – President and Chief Executive Officer

Thank you, David, and thank you, everyone, for joining us today to discuss our first quarter results. Before I begin, I'd like to note that we reported our fourth quarter and year-end earnings for 2007 just two months ago. And we covered, at that time, some of our early 2008 highlights. Today we'll walk through our first quarter results and then provide a short update on our recent activities. I'll then turn the call over to Rich for a detailed financial results and after that we'll be happy to take your questions.

Our first quarter results were in line with our expectations. Adjusted EBITDA was $21.6 million, an increase of 1.5% from the prior year period. And noting excluding Mondrian, which was under full renovation in the first quarter of this year, adjusted EBITDA increased by 12.5%. The diverse sources of demand in our markets along with strong cost containment, resulting from our contingency plans implemented in the quarter, enabled us to deliver a strong performance for the quarter. RevPAR at owned comparable hotels increased 5.6% from the first quarter of 2007 and RevPAR for system-wide comparable hotels increased 1.5% over the comparable period in 2007.

Excluding the impact of the Super Bowls in Miami in 2007 and Phoenix in 2008, RevPAR for system-wide comparable hotels increased by 5.4% from the first quarter of 2007, which is in excess -- well in excess of the domestic industry averages. Super Bowl returns to Miami in 2010, at which time we anticipate having four hotels open in South Beach to benefit from this event. Our results in the first quarter of 2008 were also affected by the negative impact of the timing of Easter, which occurred in March of 2008 as compared to April in 2007. We benefited significantly international travel to our hotels, which increased by 32% over the prior year's quarter to 31.7% of our total room revenues at system-wide comparable hotels in the U.S. This helped offset declines in domestic demand. We believe this is a clear illustration of our competitive advantage. Our irreplaceable locations, along with a unique experience that inspires our guests. It's the vibe we create that enables us to attract an extremely broad- based and loyal clientele.

Anticipating the slowdown in the economy, we implemented a cost containment plan during the quarter. This focused on costs which do not impact our guest experience and consisted primarily of limits on new and replacement positions and a reduction in discretionary expenses. As a result, operating expense growth at system-wide comparable hotels was limited to 2%, which kept our operating margins even with last year. As we've said, our greatest asset at Morgans Hotel Group is our unique portfolio of properties.

Let me take a moment to discuss what defines our unique offering, the Morgans experience. While our brands each have their own distinctive characteristic, each property shares some key attributes. Our properties are defined by sophisticated and dynamic atmosphere that aims to engage and inspire our guests. Cutting edge design and popular restaurants and bars that foster hip and inclusive social scenes. As the originator of the boutique hotel sector, we have remained the leader in our sector, not only by developing new properties, but by continually innovating our existing ones through renovations. That has enabled us to directly increase RevPAR for individual hotels and, correspondingly, their results.

At Delano we generated a 29% return on invested capital in 2007. And we continued to achieve strong results. The Florida Room by Lenny Kravitz has exceeded all of our expectations and is one of the hottest night spots in South Beach. At Royalton we are very encouraged by a 25.5% increase in average daily rate and an increase in profits at our Lobby Bar during a seasonally slow period. Royalton's restaurant revenues were also up by 69% over the prior year, although higher introductory costs along with some one-time marketing expenses related to the restaurant resulted in profits at the hotel that were lower than last year.

Currently we have full renovations underway at Mondrian LA, which will be – and will begin a full renovation at Morgans in New York the end of this month. We are on track to complete these total renovations by the end of the third quarter this year. As we completed floors, we're placing the new Mondrians back in service and our guest feedback has been, quite simply, outstanding. At Morgans we recently announced we'll be closing the hotel for the summer, which, similar to the Royalton last year, should enable us to complete that renovation on time, on quality and on budget.

Turning to our development projects, we currently have seven new hotels under development and one major expansion in Las Vegas; South Beach; New York, Soho; Chicago and Palm Springs. We're keenly focused on transforming these projects into EBITDA producing assets. Of these projects, Mondrian South Beach, Mondrian Soho, Hard Rock in Las Vegas and the Gale in South Beach have all financing in place. Mondrian South Beach is on track to open in late 2008. We've begun construction at Mondrian Soho and are making progress toward -- on the owned projects, like the Gale in South Beach across from Delano, and the conversion of unused space at Hudson into productive banquet -- high margin banquet revenue-producing space.

We look forward to the EBITDA growth that we expect these projects to generate in coming years. We began construction work last year on the Hard Rock expansion, which is expected to exceed -- to include 875 rooms and suites and additional meetings, additional convention space, doubling the size of the casino as well as beverage and entertainment facilities. We expect to have this completed in late 2009. As we've said, we do not anticipate making any additional equity contributions at the Hard Rock moving forward. Earlier this year we received approval from the Nevada Gaming Commission to operate the casino at Hard Rock. And we've been operating the casino since March. We're pleased that we have already generated year-over-year revenue growth of 9.7% at the Hard Rock Casino in April of 2008.

With regard to our Echelon project, we already have approximately 200 million in equity commitments from both ourselves and our partner, Boyd Gaming. We currently do not intend to contribute additional equity to this project and are diligently pu and additional equity financing to complete the project.

With that, I'd like to turn the call over to Rich, who can run through our financial results in greater detail.

Rich Szymanski – Chief Financial Officer

Thank you, Fred. To summarize our results, our system-wide comparable hotel RevPAR for the first quarter of 2008 was $278, an increase of 1.5% over the comparable period in 2007. As Fred mentioned, the results for the quarter and the comparison to the first quarter of 2007 were affected by the Super Bowl in Miami in 2007 and Phoenix in 2008. And excluding the impact of these events in both years, RevPAR at system-wide comparable hotels increased by 5.4% in the first quarter of 2008 compared to the same period last year.

Adjusted EBITDA growth was adversely affected by the Mondrian LA, which was under renovation in the first quarter of 2008. However, our cost control programs had a very positive impact as we limited expense growth at system-wide comparable hotels to 2% over the prior year.

Strong international business along with positive market trends drove results in San Francisco, New York and Miami. RevPAR at the Clift in San Francisco rose by 12% and RevPAR at our New York hotels increased by 6.6% over the same period in the prior year, despite a shift in the Easter holiday.

Excluding the impact of the Super Bowl, RevPAR at Delano and Shore Club in South Beach rose by 9.4% and 4.8% respectively. The increase in business from our international guests offset declines in domestic travel. And for the first quarter of 2008, international visitors to our system-wide comparable hotels in the United States represented 31.7% of our room revenues, as compared to 24.1% in the prior year's quarter. And this illustrates the strength of our markets and the diversity of our customer base.

We recorded a net loss of 7 million for the first quarter of 2008 compared to net income of $400,000 for the first quarter of 2007. And this was primarily due to a one-time non-operating income item in 2007 and an increase in equity and losses at unconsolidated joint ventures.

As of March 2008, consolidated debt, which includes long term debt and capital lease obligations was 729.5 million, and that included 80.5 million of lease obligations related to the Clift. In addition, we had cash and cash equivalents of 81.3 million. There were no borrowings outstanding under our $225 million revolving credit facility, which is secured by three of our owned hotels – Delano, Royalton and Morgans.

All of our debt at March 31st, 2008 was at fixed rates, either directly or as a result of hedging arrangements. As of March 2008 we had approximately 269 million invested in non-EBITDA producing assets. This includes consolidated assets, equity investments and joint ventures, and our proportionate share of joint venture debt. And these projects included Mondrian South Beach, the excess land and branding rights at Hard Rock and Mondrian and Delano in Las Vegas, the Gale in South Beach, Mondrian Soho and Mondrian Chicago.

While we have made significant investments in growth, we also believe that repurchasing our stock at the current prices was an excellent investment. During the quarter we repurchased 1.2 million shares of our company's stock for $19.2 million.

Based on our first quarter results, we are pleased to reiterate our guidance for 2008, which is 5% to 7% RevPAR growth at our system-wide comparable hotels and adjusted EBITDA of 110 million to 115 million. This guidance anticipates approximately $12 million to $15 million in EBITDA displacement, due to the renovations planned at Mondrian LA, Morgans and Hard Rock. Due to these renovations, we believe that the 2008 adjusted EBITDA level is not indicative of the normalized run rate adjusted EBITDA of the portfolio. And in analyzing the valuation of our company, we believe it is important to consider both the run rate adjusted EBITDA along with the significant investment in non-EBITDA producing assets.

Based on our current estimates, in 2008 we continue to plan to spend approximately $75 million to fund equity investment in unconsolidated joint ventures, of which approximately $50 million relates to the Echelon joint venture. We also plan to spend approximately $50 million in 2008 on renovations at existing hotels and expansion opportunities at our owned assets.

Our guidance assumes a 33% interest in the Hard Rock joint venture. Our ownership interest, based on cash contributed, was 32% at March 2008 and is expected to decrease further over time resulting in a lower proportionate share of both adjusted EBITDA and also adjusted debt.

We do not currently anticipate funding our pro rata share of future Hard Rock equity requirements. We plan to fund the above expenditures from our cash and cash equivalents and cash flow from operations after maintenance capital expenditures.

Based on our current projections, we do not need to borrow or sell assets to fund committed projects in 2008. As David mentioned, with a cash balance of $81 million and three unencumbered assets in attractive locations, we believe we have the resources for growth. I would like now to turn it over to Fred for closing remarks.

Fred Kleisner – President and Chief Executive Officer

Thanks, Rich. In conclusion, our continued strong results reflect the enduring appeal of our brands, the strength of our markets, despite the challenges of the current economic environment.

We will continue to target the 24- hour gateway cities, both in the U.S. and internationally, where we see the greatest opportunities. And we will provide an unparalleled and engaging experience to our guests in every market we serve. The past two month, Marc Gordon and I have spent time in Europe and the Middle East and are totally encouraged by the opportunities we see in those regions.

We'll continue to leverage our brand to take advantage of further opportunities for growth and explore the selling of interest in our assets while retaining the branding rights and long-term management agreements. We'll continue to carefully evaluate our use of capital. We're very focused on successfully completing the renovation projects and launching our new projects and believe we have set the stage for growth in 2009 and beyond. With that, we'd like to turn the call open for questions.

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