HOTELS

Derek Gale

Morgans Looks To Grow Amid Uncertain Future
November 8, 2007

A year ago, New York City-based Morgans Hotel Group was set to embark on a major expansion of the company’s brands from Las Vegas to South Beach and beyond. There were questions from Wall Street analysts about the company’s purchase of the Hard Rock Hotel & Casino, the amount of debt that added, and the company’s financial health, but CEO Ed Scheetz, a numbers guy, was confident about the company’s future and not afraid to answer critics. He pointed to increasing demand in the boutique sector and a cluster strategy in hot markets. He talked about the financing flexibility he helped create via various money moves.

But now the numbers guy is gone, resigning in September to address personal issues (3 weeks prior to the resignation announcement, he found a 24-year-old woman that police said he called his girlfriend dead of an apparent overdose in a condo where he was staying in Las Vegas), and questions are once again swirling around Morgans’ future.

While Ian Schrager, the founder of the company, has been gone for some time now, his former right hand man, brand guru Tim Miller, had rejoined Morgans last year to help the company further develop its brands. But now Miller is gone too, leaving Fred Kleisner, a director on the company’s board, to run the business as interim CEO, with the help of Chief Marketing Officer Scott Williams, who is new to Morgans as of July. Meanwhile, the company has retained a search firm to assist in finding a permanent replacement for Scheetz.

The good news for Morgans is Kleisner has extensive experience running a public hotel company—he was CEO of Wyndham International from 2000 to 2005 and before that was president and COO of the Americas for Starwood Hotels & Resorts Worldwide. And CMO Williams has trend-setting brand experience as well, having previously served as chief creative officer and SVP of advertising at Starwood since 1999. Also, Williams’ most recent move of retaining brand development consultancy The Ito Partnership should help Morgans more effectively grow its brands in the absence of the individuals who started them and drove their initial success.

The bad news, of course, is that Schrager and Miller were, for a long time, the heart and soul of this boutique hotel company. Schrager is widely credited with establishing the boutique sector in the 1980s, and “no Schrager and boutique focus imply brand risk,” say CIBC World Markets analysts in an earnings note released today. “We believe the fact that he is no longer involved impairs investor confidence in management’s ability to maintain the brands’ reputation during its growth efforts.”

Also, just because two industry veterans—Kleisner and Williams—have stepped in at a critical time doesn’t mean the company can expect smooth sailing through its near-term growth. Scheetz had planned to nearly double the size of Morgans over the next three years, and had the company operating with debt of twice the industry average. As a safeguard, he had joint-venture partners on most new projects, but it remains to be seen whether those partners will hang in and whether those projects will come to fruition.

Morgans Chairman David Hamamoto says in the company’s third quarter earnings release that the partnering strategy remains in place and is expected to key the company’s future success (“We believe our business model of growing through minority equity investments with partners coupled with long-term management agreements should generate high returns on investment.”), but one has to wonder how much of what he says is the standard company line, stated to comfort investors at the time of quarterly results while the company lacks a permanent chief executive.

Meanwhile, you can bet shareholders will be holding their collective breath to see what happens with the company’s leadership and expansion plans. So far, the biggest news under the interim Kleisner reign has been the unveiling of the newly rehabbed Royalton in New York City, the first large-scale renovation in Morgans’ history. Analysts look at any renovations as positives, as they can drive RevPAR growth, such as has been the case at the Delano (RevPAR up 15.9% and ADR up 9.3% for the third quarter). Morgans currently is planning further renovations at the Los Angeles Mondrian and the namesake Morgans hotel, and will need to continue on that track to maintain “a fresh, appealing aesthetic, without which the hotels will likely suffer gradual rate degradation due to decreasing popularity,” CIBC analysts say.

Another positive for the company is that two of its key cluster markets, New York and Miami, are both traditionally and currently strong markets. But ultimately Morgans’ future success depends on stable leadership with a solid understanding of the boutique market and a vision and plan for growing the company as consumers continue to discover and select these types of hotels over the big brands.

Depending how the CEO search turns out, a permanent change at the top could ultimately prove a positive, despite current uncertainty. But no doubt there’s going to be a lot riding on the new chief, so the board had better choose wisely.

Posted by Derek Gale on November 8, 2007 | Comments (0)