Ed Scheetz: architect of disaster
It was with great swagger that Morgans Hotel Group captured the Hard Rock Hotel & Casino in 2006. Newbies to the Vegas market, Morgans has had a rough education during the intervening years. Its most recent quarterly report shows how losing less money doesn’t mean you’re necessarily doing better. Casino revenue, never the strongest pillar of the HRH, was down 18%. Not only that, Morgans found itself flinging 849 new hotel rooms — a 130% increase — into a market that wasn’t exactly starved for new capacity. The local dailies put a positive spin on the story but Casino City Times cut to the chase.
A company whose self-proclaimed first order of business at the Hard Rock was to boost cash flows by increasing ADRs saw them decline 29% last year and is going into 2010 offering rooms at newest, HRH Tower (midweek) at $29/night. Between the $770 million purchase price and $750 million in expansions, Morgans and majority owner DLJ Merchant Partners — Morgans basically gave 87% of the HRH back to the bank in lieu of repayment — have spent the budgetary equivalent of a Strip resort … in a locale where the nearest rival casino is grind joint Terrible’s.
Devolution of Morgan’s role from owner to possessor of a glorified management contract means it earned a puny $7 million in management fees last year; not the kind of money you’d expect to earn from running a top Vegas hotel. As for Hard Rock cash flow, the return on Morgans initial investment has declined from 5% in 2008 to 3% last year. All in all, a dreadful performance by a company whose stock now trades at a fifth of its IPO price.
Morgans execs are talking about selling some of the land behind the hotel, acreage that was the graveyard of former owner Peter Morton‘s condo-building aspirations. That may be difficult for several reasons, starting with the fact that 11 acres are pledged as security against a rolling series of loan extensions. Also, the land’s commercial value is — how shall one put it? — extremely difficult to discern, as it’s cut off from Harmon Avenue and only accessible from Paradise Road via a long, winding driveway. In short, it’s an isolated parcel without “curb appeal” because it has no curb. One presumes the bankers accepted it as collateral because everything of value had already been pledged.
Following the tragic suicide of HRH President Randy Kwasniewski, one is retrospectively shocked by the preponderance of disaster and disgrace that has fallen upon executives connected with the Morgans/DLJ takeover. A sex scandal forced DLJ Merchant-in-chief Steven Rattner out of office. The drug-induced death of then-Morgans CEO Ed Scheetz‘s girlfriend sent the executive’s career into eclipse, though he seems to have ridden the crisis out nicely. Unfortunately, the same cannot be said for the hotel on which he chose to risk his company’s future.
Wow…a 29% plunge in ADR’s? That is just amazing even given the horrible year. Has any other property in Las Vegas declined that much or more? One thing is sure, at $29 a night it’s one heck of a bargain and it’s on anybodys list of the top ten pools anywhere. It seems like about five years ago the Hard Rock and the Palms were the latest and greatest places in the latest and soon to be greatest city of the 21st Century, and not without reason. I’m a bargain hunter and the Hard Rock will be number one the next time I look to stay in Las Vegas.
Thanks for the update on the Hard Rock. I thought they were doing better than this but considering their main competition The Palms has also had a tough time the last 18 months or so I guess it’s not that surprising.
Cosmopolitan is supposed to be opening by the end of 2010. It will be interesting to see how that $3.9 billion dollar Cosmopolitan does in this challenging market. By the time Fontainebleau opens (I will predict June of 2014) hopefully the economy in Las Vegas will be doing a lot better than it is doing currently.
Well if Harrahs does pursue the Palms, maybe Morgans can sell to George Maloof and he can run the property as it needs to be run.
Jinx-
That’s an interesting observation. I think if Harrahs ever did ever buy The Palms they would want to keep George Maloof around. But would he want to stay? If George Maloof left The Palms he might consider buying The Hard Rock.
Is the Seminole tribe kicking the tires? They’re really in expansion mode and need a presence in Vegas.
http://www.sun-sentinel.com/business/fl-hard-rock-expands-20100318,0,6773283.story
Paul, certainly a possibility that he could be kept around, but I would expect they’d force him out, as they likely will do with Robert Earl. Again, still just speculation that they are moving on the Palms, and according to Steve Friess conversation with George, where was rather vocal that they weren’t going to take his property, I’m hoping he’s able to retain the Palms. It’s really too bad with the Hard Rock, considering that the Morton’s did such a good job of raising the buzz on such a small off strip property and turning it into a destination.
Sadly, if Harrah’s buys the Palms, Maloof’s hands would probably be tied by the same sort of “consulting” deal Robert Earl has at Planet Ho. The HRH was never quite the same after Maloof, with his showbiz and spots connections, came along and ate its lunch. Also, Peter Morton’s alleged tendencies to micromanage and fret about the volatility of high-end gambling meant frequent upper-management turnover at the Hard Rock.
As for the Seminoles, they’d certainly be able to attach a big cash spigot to the property. However, the original terms of the sale gave Morgans sole IP rights to Hard Rock name west of Mississippi (unless Kleisner or Scheetz frittered that away, too), so the Seminoles would have to buy out that “intangible asset” as well as Morgans’ management contract. But could MHGC get even $100 million for its 13% share of the property? (Such are the consequences of paying Strip-sized EBITDA multiples for an off-Strip property.) Right now, color me dubious.
Once the Palms opened at the end of 2001 it definitely took plenty of business from the Hard Rock. Interesting comment about Peter Morton and how there were some problems with him and upper management at the Hard Rock.
I always thought it was kind of strange that Peter Morton never hired his younger brother Michael Morton to run his nightclubs and restaurants at the Hard Rock. Michael Morton opened The Drink Nightclub in 1995 (the same year the Hard Rock opened) about a mile west of the Hard Rock at the corner of Harmon and Koval and it was pretty successful until all the casinos decided to start opening nightclubs a couple of years later. Instead Michael Morton went to the Palms in 2001 and to this day his N9ne Group run most of the nightclubs and restaurants at the Palms.
It’s so sad to see HRH in such a hot mess. I just wonder how much longer they can keep operating like this. Now we don’t really know the financial situation The Palms is in since it’s not owned by a publicly traded company, but the Maloofs keep saying they don’t need Harrah’s salvation… I’m now wondering if Harrah’s is looking on the wrong side of the 15.
One thing about the HRH going back to the early days of the property, it’s always seemed to me that they had a greater than usual room rate disparity between mid-week and weekend. That leads me to believe that they are just a little too focused on the drive-in/LA market and need to concentrate more on fly-ins.