Morgans Hotel Group Company

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Morgans Hotel Group Company

475 10th Avenue
New York, New York 10018
U.S.A.
Telephone: (212) 277-4100
Toll Free: (800) 697-1791
Fax: (212) 277-4260
Web site: http://www.morganshotelgroup.com

Public Company
Founded: 1984
Employees: 2000
Sales: $260.3 million (2005)
Stock Exchanges: NASDAQ
Ticker Symbol: MHGC
NAIC: 721110 Hotels (Except Casino Hotels) and Motels

Based in New York City, Morgans Hotel Group Company operates nine luxury boutique hotels, five owned by the company and four under a management agreement. Each property is unique and theatrical in its presentation, taking into account the locale—unlike the endlessly duplicated models of major hotel chains. Each Morgans hotel also boasts trendy bars, nightclubs, and restaurants. Morgans owns three New York properties, including the company's first hotel, Morgans, as well as the Royalton and the Hudson. The company also owns the Mondrian in Los Angeles and the Delano in Miami. Managed hotels include the Clift in San Francisco, the Shore Club in Miami, and London's St. Martins Lane and the Sanderson (in which Morgans holds a 50-percent interest). Morgans is a public company, having completed an initial public offering (IPO) in 2006, and is listed on the NASDAQ.

FOUNDERS: DISCO-ERA KINGPINS

Morgans was founded by Steve Rubell and Ian Schrager, the infamous owners of New York's Studio 54, a nightclub that defined the disco era of the 1970s. Both were Jewish and Brooklyn born, Rubell the older and more flamboyant of the two. His parents had fled persecution in the Soviet Union to come to America. Once a rabbi, Rubell's father went to work for the post office while his mother taught high school Latin. His father also played tennis, a game that would provide the young Rubell with a partial scholarship to Syracuse University, where he earned bachelor's and master's degrees in finance. It was also at Syracuse that he first met Schrager, four years younger, who joined Rubell's fraternity. Schrager's background was less certain than his future business partner's. According to a 1969 New York Times article, his father, Louis Schrager, ran an illegal gambling operation—"numbers," an underground lottery—and was an important member of the notorious Meyer Lansky organized crime syndicate. As a matter of public record, he served time in prison for conspiracy in the 1950s. Schrager would later claim that he did not recall his father's absence, but later admitted to the New York Times Magazine, "I always knew my father wasn't a 9-to-5 guy."

Graduating college in the 1960s, Rubell served a stint in the National Guard in an intelligence unit before attempting to launch a Wall Street career, which he quickly realized did not appeal to him. Instead he borrowed money from his father and friends to become a restaurateur, opening the Steak Loft in Rockville Centre, Long Island, in the early 1970s. Success came rapidly, so that by 1974 he opened a dozen more Steak Lofts in New York, Connecticut, and Florida. He also owned stakes in a pair of Queens' discotheques. It was at this point that he turned to Schrager, who had become a real estate lawyer, to help him run his enterprise and provide the kind of organizational skills he lacked. Together they opened a successful disco, only to have it shut down when disgruntled neighbors sued them. They now turned their attention to Manhattan and looked for a locale where late-noise was more acceptable. They found it in a former CBS television studio on West 54th Street. As they would later do with their hotels, Rubell and Schrager bucked conventional wisdom, hiring sound and lighting engineers who had no disco experience. Their new club, Studio 54, opened on April 26, 1977, and from the beginning it became a magnet for celebrities, lorded over by the likes of Truman Capote, Andy Warhol, and Mick and Bianca Jagger. Others who wanted to join the party had to pass muster at the velvet-roped entrance where often five-foot-five Rubell, flanked by beefy body guards, decided on who was worthy to enter, intent on selecting the right mix of people for the raucous party inside. This casting approach would also be duplicated later when Rubell and Schrager hired hotel staff. Rubell once turned away the King of Cyprus, according to Rubell, because "he looked like somebody from Queens."

Studio 54 became a sensation, known for its celebrities, drugs, and frolics in the dark balcony. It also generated piles of cash, which the partners made a habit of skimming before counting it. On December 14, 1978, 32 months after Studio 54 opened, 30 Internal Revenue Service agents raided the club. Above some ceiling panels in the basement they found garbage bags containing $600,000 and a second set of account books. There was also the matter of five ounces of cocaine. Rubell and Schrager were arrested and ultimately convicted, fined $20,000, and sentenced to 3.5 years in prison. In addition, they were saddled with back taxes of about $750,000 and lawyer bills in the $1 million range. In February 1980 they were incarcerated and began cooperating with the authorities in their investigation of other city club owners. As a result, their prison terms were reduced to 20 months and they were moved from a New York City facility to a minimum security prison in Alabama for the final six months of their sentence. Here Rubell used his winning personality to become like "the mayor of jail," as Schrager described it. Together they also began to plot their business comeback when released. Instead of nightclubs they decided to direct their attention to hotels, determined to return glamour to a tired industry, to in essence reinvent hotels as theater.

While still in prison, in January 1981, Rubell and Schrager sold the lease to Studio 54 to hotel and restaurateur Mark Fleischman, who took over a club that was past its glory and would close two years later. The building that housed Studio 54 was sold to real estate developer Philip Pilevsky. As a result, the partners were able to pay off their bills and were not destitute when they were released from prison later in the year. They flew back to New York and immediately paid a visit to the hot new hotels in town, the Helmsley Palace and Grand Hyatt. To enter the hotel business they needed funds, and while they turned down offers of help from friends, they were rejected by banks and other investors, who might have backed Rubell and Schrager if they had wanted to open a new club, which would have undoubtedly benefited from tremendous press build up and attracted a celebrity clientele. But they were more than reluctant to invest in their concept of a hotel.

COMPANY PERSPECTIVES

We want the experience of visiting one of our hotels to be more like seeing a great movie, reading a wonderful book, or watching a memorable place—not just as a place to sleep, but a place where you feel an honest, emotional connection—where he feel like you are an integral part of the magical story that is unfolding around you—because you are.

Fleischman was the key to Rubell and Schrager's entry into the hotel business. They still held notes from Fleischman from the sale of the Studio 54 lease and when he mentioned that he was interested in unloading the Executive Hotel he owned at 37th Street and Madison, they struck a deal to buy the property from him, paying $60,000 as a down payment and granted several months time to raise the rest. They continued to have difficulty finding backers. They approached Pilevsky, who saw an opportunity. For half ownership in the hotel, he invested no money but agreed to act as the front man, opening the door to his banking connections. Rubell and Schrager now had the money they needed to turn the fleabag Executive into the exclusive Morgans Hotel.

MORGANS HOTEL OPENS: 1985

French designer Andree Putmen was put in charge of the renovation. The lobby was eliminated, the marquee removed, and the bed legs cut off to make the small rooms look larger than they were. Rubell did the hiring—in effect, casting (he even thought about hiring a Hollywood director)—preferring people with glamorous looks and no prior experience in the hotel business. Morgans opened to no announcement on October 1, 1985. With no marquee the new hotel could have easily been mistaken for an apartment building. But among the Morgans' first guests were Bianca Jagger and Cher, the news was fed to the gossip columns, and in short order the 113-room Morgans, which charged $200 a night, had a 91 percent occupancy rate, the highest in the city.

Once again Rubell and Schrager were in the limelight and the darlings of the tony set, having reinvented themselves as cutting-edge hoteliers. They took their hotel-as-theater concept a step further in 1988 when they opened their second property, the 205-room Royalton, located across the street from the famous Algonquin on 44th Street. According to the Wall Street Journal in a 1989 article, "The help is gorgeous, the décor stainless-steel surreal. No comfy overstuffed chairs there; everything is very sharp-edged. Visitors to the Royalton's public mens' room encounter no ordinary urinals; there is, however, a waterfall activated by electric eye. To reach their rooms, guests first navigate dark corridors because as the Royalton's designer Philippe Starck puts it, 'before the opera starts, the place is dark.'"

With two successful properties in the stable of their hotel management company, which they called the Morgans Hotel Group—as well as other real estate investments and the creation of the Palladium, the club of the year in Manhattan in 1985—Rubell and Schrager next turned their attention to Times Square, a once glamorous neighborhood gone to seed but about to enjoy a rebirth. They bought the massive 610-room Century Paramount hotel, that like the area had seen better days, now reduced to offering rooms in the heart of Manhattan at less than $50 a night on average. The idea for the Paramount was to offer a less expensive hotel experience for a market that had similar tastes as the people who stayed at the Morgans and the Royalton but whose pockets were not as deep. Room rates were capped at $100 per night. Rubell would not see the third property open, however. In July 1989, at the age of 45, Rubell died from septic shock and hepatitis, presumed now to be the results of AIDS, although not acknowledged at the time. His gravestone was inscribed, "The Quintessential New Yorker."

The more reserved Schrager was now left on his own to run Morgans Hotel Group. He was able to open the Paramount in October 1990, and like the Morgans and Royalton it was an immediate hit. But beneath the glittery surface all was not well with the company, which had taken on too much debt in its rise to prominence and was unable to generate sufficient cash flow as a recession adversely impacted the hotel industry. The Morgans hotel filed for bankruptcy in 1991, followed by the Royalton in 1994.

Schrager managed to hold onto his properties, however, and soon returned to expansion mode. For several years he had his eye on the Miami market, and in 1993 Morgans bought the 328-room Delano hotel in Miami Beach, having it redesigned as a contemporary family resort. It opened to considerable acclaim in 1995. In that same year, Schrager brought in some executive help, hiring Steven A. Hicks, a former Marriott hand, to serve as director of operations, and William Sheehan, former Omni chairman, to serve as chief financial officer. Schrager was now free to look for new opportunities. He set his sights on Los Angeles, acquiring the 237-room Mondrian hotel, located on Sunset Boulevard, and reopening it in 1996. Also in 1996 Morgans acquired the venerable 375-room Clift in San Francisco.

KEY DATES

1976:: Founders Steve Rubell and Ian Schrager open Studio 54.
1984:: After serving a prison sentence, Rubell and Schrager open the Morgans hotel.
1989:: Rubell dies of AIDS.
1998:: Northstar Capital Investment Corporation gains majority stake.
1999:: First London property opens.
2005:: Schrager resigns as CEO.
2006:: Morgans is taken public.

NORTHSTAR INVESTS: 1998

To fund his growing portfolio of boutique hotels, Schrager took on new partners in 1998, joining forces with Northstar Capital Investment Corporation, a New York real estate investment trust. The hotels were consolidated under a new company, Ian Schrager Hotels. While Northstar held a 84 percent interest, at a cost of more than $250 million, Schrager was given a free hand to grow the company, and a spate of deals quickly followed as he looked to spread the Morgans' vision to other major U.S. cities and around the world. In April 1998 Schrager acquired the faded St. Moritz on Central Park South in Manhattan, followed a month later by the addition of the Barnizon, a former women's hotel that was well situated in the shopping district of the Upper East Side, and the Empire, located in the Lincoln Center area. Schrager also took over the Miramar in Montecito, California, in March 1998, converting it into a resort, and took his first steps overseas. In 1999 he opened the 204—room St. Martin's Lane in London, followed by the 150—room Sanderson, located in the city's trendy Soho district. Other Schrager deals in the late 1990s included the acquisition of the Henry Hudson, located on West 57th Street in Manhattan. Once renovated it offered more than 800 rooms after it opened as more of an economy hotel in 2000. Another addition was the McAlpin on West 34th Street, another large property, reopened in 2000.

Schrager's ambitions continued to grow in the new century. The company opened the Shore Club in Miami in 2001, holding a modest stake in the oceanside resort for which it served as a manager. Schrager was also especially interested in making Morgan's into a lifestyle brand. There was even talk of launching a retail chain of stores called "Shop" to market a wide variety of goods, many designed by Philippe Starck. The idea was supposed to be launched in the Morgans' hotels in 2001, but other events intervened to derail the plans: the economy soured and, more importantly, the terrorist attacks of September 11, 2001, had a dramatic impact on New York City's hotels and tourist industry. Business began to pick up in 2002, and now Schrager was turning his attention to Las Vegas, putting down a deposit on the Maxim casino-hotel.

Once again a period of expansion resulted in overbearing debt for Schrager, who in 2003 breached bank covenants of $355 million and the Clift was forced to file for bankruptcy protection. Aside from a drop in travel that hurt occupancy rates across the board in the hotel industry, he also had to contend with imitators, like the W hotels that opened in 1998 and drew on elements developed by the Morgans' hotels, such as (according to the New York Times Magazine ) "arty black-and-white photographs, large mirrors leaning against walls, [and] a staff of fashionistas." The stable of hotel properties was trimmed to nine: the original Morgans, Royalton, Hudson, Delano, Mondrian, Clift, St. Martin's Lane, Sanderson, and the Shore Club.

In July 2005 the 58-year-old Schrager stepped down as CEO of Morgans Hotel Group, which had lost money since the start of the 2000s. He retained an ownership stake and consulting contract, but now devoted his attention to the development of apartments and condominiums. Replacing him was W. Edward Scheetz, North Star's co-chief executive officer, who looked to grow Morgans. In February 2006 he took the company public, netting approximately $275 million. The stock did not fare well once it debuted on the Nasdaq, however, quickly dropping below its IPO price. Apparently, investors were not sufficiently impressed with the projects in Morgans' pipeline, which included the development of a new Miami property located across the street from the Delano, the acquisition of the James Hotel in Scottsdale, Arizona, the development of a pair of hotels in Las Vegas. In May 2006 investors bid down the price of Morgans' stock even further, to a new low around $16, a response to the company's announcement that it had agreed to pay $770 million in cash for the Hard Rock Hotel & Casino in Las Vegas. In the opinion of Wall Street analysts Morgans had overpaid and already had too much debt to contend with. In some ways, the Hard Rock property was in keeping with Morgans' desire to be perceived as a hip venue. It could be certainly argued, however, that it was not boutique in spirit and nothing like the original vision of Rubell and Schrager that had caused people to seek out a hotel with no name out front, one that even New York cab drivers did not know existed. Whether that experience, like that of Studio 54, could ever be duplicated was another question.