Investor Presentation. Acquisition of the Hard Rock Hotel & Casino

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1 Investor Presentation Acquisition of the Hard Rock Hotel & Casino

2 Disclaimer Certain statements in this presentation and our response to various questions may constitute forward-looking statements. Such forward-looking statements are made on the basis of management s views and assumptions regarding future events and business performance as of the time the statements are made and the Company does not undertake any obligation to update its disclosure relating to forward looking matters. Actual results may differ materially from those expressed or implied. Such differences may result from actions taken by the Company or the Company s failure to achieve certain objectives described in this presentation, including failure to consummate the transactions described herein, failure to successfully integrate the operations of the Hard Rock Hotel & Casino with the Company s current operations, failure to come to satisfactory agreement with gaming operators, failure to reach a mutually satisfactory agreement for the management of the hotel, failure to syndicate the equity through a joint venture or otherwise, and a decline in Las Vegas tourism generally. Additional information concerning factors that could cause actual results to differ materially from those in the forward-looking statements is contained in the Company s filings with the Securities and Exchange Commission, including the information set forth under "Risk Factors" in our Annual Report on Form 10-K and our Quarterly Reports on Form 10-Q. 1

3 Transaction Overview On May 11 th, Morgans Hotel Group announced the signing of definitive agreements to acquire the following assets from Peter Morton for an aggregate purchase price of $770 million in cash Hard Rock Hotel & Casino: An 11-story tower with 647 rooms and suites, a 30,000 sf casino, world famous pool, Body English nightclub, The Joint concert hall, five restaurants including Nobu, three cocktail lounges, several retail stores, an 8,000 sf spa, salon, and fitness center and a parking garage Land: An adjacent 23-acre land parcel fully entitled for an expansion of the existing resort with an addition of 50,000 sf of meeting space, an 8,000 sf expansion of the casino, a 20,000 sf Joint, a 36,000 sf spa, and multiple bars and restaurants, including a pending lease with Mr. Chow. The plan also includes the development of 5 towers with over 1,400 condominium units and 32 bungalow units. The plans, designed by Chad Oppenheim, are included in our purchase. We have not yet determined whether and to what extent we will pursue these plans Intellectual Property: The acquisition includes exclusive, perpetual, royalty-free license to use the Hard Rock Hotel and Hard Rock Casino trademarks in connection with casinos and hotel/casinos in the following territories: 1) states and possessions of the US west of the Mississippi river, 2) Illinois and Louisiana, 3) the greater Houston area (but not other parts of Texas) and 3) Australia, Brazil, Israel and Venezuela and the greater Vancouver, Canada area. Also included are the other brands such as The Joint, RockSpa, Rehab, Love Jones, and other retail and restaurant brands Hard Rock Cafe: The Hard Rock Cafe on the corner (leased to Hard Rock/Rank) and the associated 1.15 acre land parcel Credit Suisse has provided us with a financing commitment for $700 million We intend to bring in equity partners for up to 2/3 of the equity before the closing, which is expected to occur in 6 to 9 months We expect to manage the hotel under a long term incentive management agreement and we will lease the casino to a licensed operator 2

4 Location Premier location 2 miles from McCarran Airport and the Las Vegas Convention Center and approximately a half mile east of the Strip on the corner of South Paradise Road and East Harmon Avenue Harmon Avenue is second only to the Strip as a location and is expected to see significant development over the next several years. The property is accessible from both Harmon Avenue and Paradise Road, which makes it more accessible than properties on the Strip 3

5 Resort Map 4

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8 Existing Expansion Plan 7

9 A Strategic Acquisition The acquisition of the Hard Rock is a major step forward toward achieving our long-term growth plan An authentic boutique hotel with a casino amenity Located in a gateway city, one of our key target markets Considerable upside potential 8

10 Strategic Benefits For Morgans Target Market and Target Customers Las Vegas is a critical market for Morgans It is the largest hotel market in the country with strong performance characteristics 2005 ADR growth of 14.9%, vs. national average of 5.3%. Occupancy over 90% vs. national average of 63% Las Vegas is about fun and entertainment and offering that to our guests has been and continues to be a hallmark of our operating philosophy Second only to LA, Las Vegas is one of the pre-eminent cities for the entertainment industry Presence in Las Vegas will enable us to build a customer base for the Las Vegas Delano and Mondrian which are scheduled to open in 2010 As HRH s customers get older they will graduate to Delano and Mondrian Competitors in Vegas are all planning to target our customers Our customers are affluent, free-spending and loyal Getting into the market immediately is a key strategic advantage With our three Las Vegas offerings, we will lead this attractive segment at various price points Our strong presence and customer base in LA, San Francisco and now Scottsdale all will benefit HRH and vice-versa A Las Vegas presence benefits all of MHG as it enables us to create and develop unique strategic relationships restaurant and club operators, retailers, corporate sponsorships, entertainment industry Acquisition of operating property provides us with immediate EBITDA impact at closing without development risk 9

11 Irreplaceable, Trophy Asset This is a once-in-a-lifetime opportunity to acquire an operating asset in Las Vegas The Vegas market is extraordinarily difficult to enter Only other way to get in is to develop Land costs and construction costs are very high These factors make existing assets more valuable and desirable if they can be acquired This is the only operating asset of quality that is available for purchase in this market at this time Irreplaceable, landmark asset with a world-renowned name The location has become one of the best in Las Vegas Harmon is the best off-strip location Access is easier and more efficient off-strip currently has access from two streets and may have a third when the Howard Hughes Parkway is extended 10

12 Hard Rock Las Vegas is an Excellent Fit with our Strategy Morgans is the original, authentic boutique hotel company HRH Las Vegas is the original boutique hotel/casino in Las Vegas We offer our guests a lively, fun, entertaining experience Our hotels are gathering places and encourage interaction in the lobby, bars, restaurants, and pools HRH stands out in this regard in a market where everyone tries to offer this experience HRH has the best pool scene in Vegas and the casino is a unique and intimate offering in the center of the lobby We focus on major gateway markets and 24 hour cities We emphasize fun and profitable food and beverage outlets to drive rate and occupancy Las Vegas is the largest hotel market in the US and one of the most vibrant cities in the world Non-gaming revenues (rooms, food and beverage, entertainment) now exceed gaming revenues in Las Vegas We are a multi-brand company and successfully operate multiple properties in our markets (3 in NY, 2 in Miami, 2 in London) by differentiating by price and experience HRH will complement the Delano and Mondrian LV when they open and will be a lower priced alternative. With 3 properties in LV we will be able to lead the market for our customers We apply our management style and extensive infrastructure to drive rate, occupancy and to deliver high quality service HRH is a one hotel company, as was James Scottsdale. Morgans infrastructure will be implemented to enhance marketing and drive margins 11

13 Upside Potential We estimate that adjusted 2005 EBITDA is approximately $50 million Reported 2005 EBITDA was $40 million (1) Fees, expenses and special events related to Morton s ownership were approximately $12 million Estimated cost of leasing vs. owning the casino on an interim basis is roughly $3 million We believe that we can: Eliminate expenses the property incurs by virtue of being a one-property asset by utilizing MHG s infrastructure, i.e. eliminating most on-site reservationists, marketing, merchandising and accounting functions Increase the hotel s current ADR as it is well below its competitive set Use our food and beverage management expertise to extract value from existing and/or new outlets Apply our successful management of such properties as the Hudson (800 rooms) and the Paramount (600 rooms) to increase profitability at the existing property without significant capital expenditures Upgrade rooms and suites to achieve a higher rate and through repositioning the retail Note (1) EBITDA calculated as Operating Income of $26.8MM plus Depreciation and Amortization of $12.0MM plus Loss on Disposal of $0.6MM, plus Pre-Opening Expense of $0.3MM (as reported in the Hard Rock Hotel, Inc. 10K for 2005) 12

14 Upside Potential Land We are acquiring a 23-acre development site as part of this transaction. The existing hotel sits on 17 acres, so we are acquiring a total of 40 acres in a prime Las Vegas location We will maximize not only the development site but the entire 40 acres The previous owner of the project had plans and entitlements to build out a $1.2 billion expansion and development project on the adjacent land parcel, including residential condominiums for sale. We will acquire these plans in this transaction but have not yet concluded whether and to what extent we will pursue these plans Plans include an expansion of the existing resort with an addition of 50,000 sf of meeting space, an 8,000 sf expansion of the casino, a 20,000 sf Joint, a 36,000 sf spa, and multiple bars and restaurants, including a pending lease with Mr. Chow The plan also includes the development of 5 towers with over 1,400 condominium units and 32 bungalow units We believe that expansion of the hotel and ancillary space makes sense. We are re-evaluating the optimal utilization of the entire site Intellectual Property We will look to monetize the IP rights through a sale or a joint venture with a strategic partner in order to maximize the value the brand rights Reported revenue from the Hard Rock Casinos in Florida is approximately $1 billion. Rank plc, who owns the trademark in Florida, earns a licensing fee, based on a percentage of gross revenues, in excess of $15 million per year 13

15 Business Plan We currently intend to retain the Hard Rock brand on the hotel and casino We expect to significantly improve the operations at the property by exploiting our systems and infrastructure The existing management team is strong and is a key asset we are obtaining as part of this transaction. Adding our backbone to the existing team will make a meaningful difference in profitability We believe we can increase the rates at the property which, at $169, lag the comp set average of ~$230 Our revenue management system and customer lists will enable us to attract a more affluent clientele, which will spend more money throughout the property We will be able to increase profitability by bringing margins in line with our other properties by eliminating existing inefficiencies We will improve existing food, beverage and retail outlets so as to maximize value We intend to pursue the expansion of the hotel/casino and plan on selling or entering into a joint venture with respect to excess land 14

16 Allocation of Purchase Price Total Transaction Consideration $770 million While we acquired all of the assets in a package deal for $770 million, the allocated purchase prices as outlined in the merger and acquisition documents are as follows: Hotel & Casino: $421 million Reported 2005 EBITDA was approximately $40 million. Adjusted for the following, pro forma EBITDA in 2005 would be approximately $50 million 1) Fees, expenses, special events and other charges that were for the benefit of the prior owner and not necessary for property operations totaled approximately $12.8 million 2) Offsetting this savings will be the cost of leasing the casino, estimated at $3.0 million 3) This does not include the operational improvements we expect to achieve at the property Land: Hard Rock Café Site: $259 million, or approximately $11 million per acre $20 million The existing structure is leased to Hard Rock Café (parent, Rank plc) for approximately $800,000 per year. Building sits on a 1.15 acre site the corner of Harmon and Paradise Intellectual Property: Condo Project Related Documents: (Plans, approvals, etc.) $69 million $1 million 15

17 Land Sale Comparable Analysis We believe the land is worth $10 to $12 million per acre Our understanding is that the adjacent site is being financed at $9 million per acre based on a $12 million per acre appraisal The bidding war for Aztar Corp, owner of the Tropicana, is indicative of the desirability and value of prime Las Vegas sites The implied value of the Tropicana site is now approximately $30 million per acre Our deal with Boyd Gaming, also on the Strip, was announced in January at $15 million per acre Land values in Las Vegas continue to increase dramatically and prime sites are in tremendous demand Therefore, we believe our land valuation is in line with comparables and justifiable 16

18 Structure is Consistent with our Business Plan We plan to significantly improve the overall return on by utilizing the JV structure we employ in other transactions and which is consistent with our business plan The JV plus incentive management contract approach substantially enhances our ROE and reduces our risk. This is the structure we employ at Echelon Place in Las Vegas, Shore Club, St Martins Lane and Sanderson With an equity partner reducing our ownership interest and a management fee to MHG, we estimate that by 2007, the debt-to-ebitda ratio on this transaction will be approximately 5.0x, in line with our current leverage levels 17

19 Conclusion The transaction presents a once-in-a-lifetime opportunity to acquire a unique asset that is complementary to Morgans existing clientele and consistent with its strategy Gives Morgans immediate entry and ultimately critical mass in Las Vegas, the largest and one of the most attractive hotel markets Clear path to improved rates and operational efficiency Immediate opportunity to increase both EBITDA of Hard Rock assets and MHG EBITDA Plans to monetize adjacent land and intellectual property assets Will be leverage neutral based upon the business plan Substantially advances our growth plans and paves the way for future acquisition/development projects 18