Four Seasons Hotels Inc. reports first quarter 2005 results
TORONTO, May 5 /PRNewswire-FirstCall/ -- Four Seasons Hotels Inc.
(TSX Symbol "FSH.SV"; NYSE Symbol "FS") today reported its results
for the first quarter ended March 31, 2005. As previously
announced, effective the first quarter of 2005, we have adopted US
dollars as our reporting currency. All amounts disclosed in this
news release (including amounts for prior periods) are in US
dollars unless otherwise noted.(1) Highlights of the First Quarter
of 2005 As described in greater detail in the accompanying
Management's Discussion and Analysis for the three months ended
March 31, 2005, in each case as compared to the same period in
2004: - RevPAR(2) of worldwide Core Hotels(3) increased 13.8%. -
Gross operating margins(4) at worldwide Core Hotels and at our US
Core Hotels increased 210 basis points to 29.0% and 25.8%,
respectively. - Revenues under management increased 13.5%. -
Management fee revenues (excluding reimbursed costs(5) and the
impact of forward exchange contracts(6))(7) increased 28.4%,
including incentive fees which increased 33.2%. - Earnings before
other operating items(8) increased 28.4%, and by 78.4%, excluding
the impact of the forward exchange contracts. Additionally, during
the quarter we sold approximately 80% of our equity interest in
Four Seasons Residence Club Scottsdale at Troon North. Subsequent
to the end of the first quarter, we sold approximately 53% of our
interest in Four Seasons Hotel Shanghai. We also entered into a
currency and interest rate swap of our convertible senior notes in
order to reduce our net interest costs over the near-term. "We are
very pleased with the operating results in the first quarter, which
reflect continued strong travel demand at the majority of the
properties under our management. While we have had six consecutive
quarters of RevPAR growth in our worldwide Core Hotels, the
increase in our incentive fees during this quarter is evidence that
the revenue increases are translating into greater profitability,
with gross operating margins up 210 basis points in the first
quarter," commented Isadore Sharp, Chairman and Chief Executive
Officer. "Also during the quarter, we opened Four Seasons Hotel
Hampshire in England and Four Seasons Resort Langkawi in Malaysia,
and more recently, Four Seasons Hotel Doha. During the remainder of
this year, we expect to open six more new Four Seasons properties.
There continues to be strong interest on the part of our financial
partners to develop and own Four Seasons properties, which gives us
tremendous confidence in the value of the Four Seasons brand and
our ability to translate it into long-term shareholder value."
"Excluding the effects of reimbursed costs and the impact of the
forward exchange contracts that were in place in 2004, our
financial results for the quarter were very strong, with management
fee revenue growth of 28.4%, and our earnings before other
operating items increasing 78%, as compared to the first quarter
last year," said Douglas L. Ludwig, Chief Financial Officer and
Executive Vice President. "In order to reduce the impact of US
dollar fluctuations relative to the Canadian dollar on our reported
financial results, effective this quarter, we have changed our
reporting currency to US dollars. We believe US dollar-reported
results will give a clearer indication of the relative strength of
our management operations as it will reduce the impact of currency
fluctuations on reported revenues from that business. From an
economic perspective, we monitor our cash inflows and outflows to
ensure our true economic exposure to currency fluctuations is
carefully managed." FIRST QUARTER OF 2005 MANAGEMENT'S DISCUSSION
AND ANALYSIS This Management's Discussion and Analysis ("MD&A")
for the three months ended March 31, 2005 is provided as of May 4,
2005. It should be read in conjunction with the interim
consolidated financial statements for that period and the MD&A
for the year ended December 31, 2004 and the audited consolidated
financial statements for that period. Except as disclosed in this
MD&A, as of May 4, 2005, there has been no material change in
the information disclosed in the MD&A for the year ended
December 31, 2004. A summary of consolidated revenues, management
earnings, ownership and corporate operations earnings and net
earnings for the past eight quarters can be found in note 9.
Effective for the quarter ended March 31, 2005, we have adopted US
dollars as our reporting currency. We have not changed our
functional currencies. All amounts disclosed in this MD&A
(including amounts for prior periods) are in US dollars unless
otherwise noted. Operating Environment ---------------------
Seasonality Four Seasons hotels and resorts are affected by
normally recurring seasonal patterns and demand is usually lower in
the period from December through March than during the remainder of
the year for most of our urban properties. However, December
through March is typically a period of relatively strong demand at
our resorts. As a result, our management operations are affected by
seasonal patterns, both in terms of revenues and operating results.
Urban hotels generally experience lower revenues and operating
results in the first quarter. This negative impact on management
revenues from those properties is offset to some degree by
increased travel to our resorts in the period. Our ownership
operations are particularly affected by seasonal fluctuations, with
lower revenue, higher operating losses and lower cash flow in the
first quarter, as compared to the other quarters. Hotel Operating
Results
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Three months ended March 31, 2005 increase over (decrease from)
three months ended March 31, 2004 (percentage change, on US dollar
basis)
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Gross Operating Gross Operating Region RevPAR Revenue (GOR) Profit
(GOP)
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Worldwide Core Hotels 13.8% 11.4% 20.2%
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US Core Hotels 12.8% 10.1% 20.0%
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Other Americas/Caribbean Core Hotels 19.2% 15.3% 25.3%
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Europe Core Hotels 5.3% 6.9% 2.9%
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Middle East Core Hotels 25.6% 32.6% 59.1%
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Asia/Pacific Core Hotels 18.7% 12.0% 17.8%
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Underlying these operating results: - RevPAR for worldwide Core
Hotels increased 13.8% in the first quarter of 2005, as compared to
the same period in 2004, reflecting improvements in demand and
achieved room rates in most markets. Revenue improvements and cost
management efforts at the properties under management resulted in
the significant increases in gross operating profits (an increase
of 20.2% as compared to the first quarter of 2004) and gross
operating margins (an increase of 210 basis points as compared to
the first quarter of 2004), despite continued pressure on
profitability due to higher costs relating primarily to labour
(including health care, benefits and worker's compensation) and
energy. - During the quarter, group meetings and travel demand
improved in the majority of the markets relative to the same period
last year. Business and leisure demand remained strong during the
quarter. - Virtually all of the US Core Hotels under management
realized RevPAR improvements in the first quarter of 2005, as
compared to the same period in 2004, resulting in a 12.8% increase
in RevPAR in that region. The only exception was Houston, which saw
stronger than usual demand due to the Super Bowl in the first
quarter of 2004 and a subsequent general decline in occupancy
levels in the city due to lower demand levels and the opening of a
large hotel in Houston during 2004. Properties under management in
Jackson Hole, Boston, Miami, Palm Beach, New York, Aviara and
Austin realized particularly strong improvements in RevPAR and
gross operating profits, relative to the average for the region. -
The Other Americas/Caribbean Core Hotels experienced improved
demand and higher achieved room rates, with RevPAR improving 19.2%
in the first quarter of 2005, as compared to the first quarter of
2004. The increases in RevPAR and gross operating profits were
primarily attributable to strong improvements at the properties in
the region, including Buenos Aires, Carmelo, Exuma and Nevis. The
hotels under management in Canada had more modest RevPAR
improvements relative to the overall results for the region. - For
the first quarter of 2005, RevPAR increases in the Europe Core
Hotels reflected strong operating results at the hotels under
management in Istanbul and Prague relative to the other hotels in
the region. The hotels under management in Lisbon and Canary Wharf
experienced relatively large RevPAR and gross operating profit
declines in the quarter due to lower business and group demand and
an increase in supply in Canary Wharf. This resulted in a
relatively modest gross operating profit increase for the region.
Overall demand in Europe was less robust than in the other regions
in which we manage hotels, in part as a result of a strong Euro
relative to the US dollar. - RevPAR improvements in the first
quarter of 2005 at the Middle East Core Hotels were primarily
driven by a 15.7% increase in achieved room rates, as compared to
the same period in 2004. All of the hotels in the region
experienced improved demand, particularly the hotels under
management in Riyadh and Sharm el Sheikh. The 59.1% improvement in
gross operating profit was driven by a 32.6% increase in revenues,
as well as lower cost pressures relative to other regions. - All of
the Asia/Pacific Core Hotels had RevPAR improvements. The
properties under management in Jakarta, Bali, Chiang Mai, Singapore
and Shanghai had very strong RevPAR improvements as a result of
gains in both occupancy and achieved room rates. Most of the
properties in the region had increases in gross operating profit.
Financial Review and Analysis ----------------------------- Three
months ended March 31, 2005 compared to three months ended
----------------------------------------------------------------
March 31, 2004 -------------- Management Operations Management fee
revenues (excluding reimbursed costs and the $2.7 million impact of
forward exchange contracts) increased 28.4%, or $6.4 million, to
$29 million in the first quarter of 2005, as compared to $22.6
million in the first quarter of 2004. This increase was the result
of the improvement in revenues under management stemming from
RevPAR and other revenue increases at the worldwide Core Hotels and
an increase in fees from recently opened hotels. Management fee
revenues (including reimbursed costs and the impact of forward
exchange contracts) increased 15.7%, or $5.9 million, to $43.6
million in the first quarter of 2005, as compared to $37.6 million
in the first quarter of 2004. Incentive fees increased 33.2% in the
first quarter of 2005, as compared to the same period in 2004, with
36 of the hotels and resorts under management accruing incentive
fees, as compared to 31 during the same period last year. The
increase in incentive fees was attributable to the improvement in
gross operating profit at the properties under management in each
of the geographic regions in which we operate. All five of our
properties under management in the Middle East accrued incentive
fees during the first quarter of 2005, as compared to three in the
first quarter last year. Several of the hotels and resorts under
our management are and will be undergoing significant renovations
during this year. At the end of the first quarter of 2005, the most
significant portion of renovations at Four Seasons Resort
Scottsdale at Troon North, Four Seasons Hotel New York and Four
Seasons Hotel Newport Beach were completed. We expect the
renovations at Four Seasons hotels in Washington and Las Vegas and
the resort in the Maldives to be completed by the end of 2005.
Significant renovation programs at other hotels under management,
including Boston, Santa Barbara, Philadelphia and The Regent
Beverly Wilshire are expected to be substantially completed in
2006. The impact of the renovation programs on management fees in
the first quarter of 2005 was not material, in part as a result of
seasonality, in that the first quarter at many of the properties
under renovation is a period of weaker demand relative to the
remainder of the year. Based on the scheduling and staging of these
renovations, we do not expect there to be a material effect on fee
revenues on the subsequent quarters of 2005. General and
administrative expenses (excluding reimbursed costs) increased
18.2% to $9.7 million in the first quarter of 2005, as compared to
$8.2 million for the same period in 2004. General and
administrative expenses (including reimbursed costs) increased
18.1% to $24.3 million in the first quarter of 2005, as compared to
$20.6 million for the same period in 2004. The majority of these
costs are in Canadian dollars and, accordingly, a portion of this
increase is attributable to the US dollar having declined relative
to the Canadian dollar since the first quarter of 2004. On a
Canadian dollar basis, general and administrative expenses
(excluding reimbursed costs) increased 10% during the quarter, as
compared to the same period last year. The increase in these costs
related primarily to an increase in the number of employees at our
corporate offices to handle the significant unit growth in our
portfolio and to cost of living increases for corporate employees
that were implemented during the first quarter of 2005. As a result
of the items described above, our management operations earnings
before other operating items (excluding reimbursed costs and the
impact of forward exchange contracts) for the first quarter of 2005
increased 34.3% to $19.3 million, as compared to $14.4 million in
the first quarter of 2004. Our management operations profit
margin(10) (excluding reimbursed costs and the impact of forward
exchange contracts) was 66.5% in the first quarter of 2005, as
compared to 63.6% in the first quarter of 2004. Our management
operations earnings before other operating items (including
reimbursed costs and the impact of forward exchange contracts) for
the first quarter of 2005 increased 12.9% to $19.3 million, as
compared to $17.1 million in the first quarter of 2004. Our
management operations profit margin (including reimbursed costs and
the impact of forward exchange contracts) was 44.3% in the first
quarter of 2005, as compared to 45.4% in the first quarter of 2004.
Ownership and Corporate Operations(11) Operating results from
ownership and corporate operations before other operating items
improved 7.5% or $0.6 million to a loss of $6.8 million in the
first quarter of 2005, as compared to a loss of $7.4 million in the
first quarter of 2004. The Pierre RevPAR at The Pierre increased
23.3% in the first quarter of 2005, as compared to the same period
in 2004, as a result of an 8.7% improvement in occupancy and a 9.8%
increase in achieved room rates. These increases reflected the
higher travel demand in New York, particularly in leisure travel,
during the quarter. As a result, operating results at The Pierre
improved by $0.6 million to a loss of $2 million in the first
quarter of 2005, as compared to a loss of $2.6 million in first
quarter of 2004. As previously disclosed, Four Seasons has been in
discussions with the landlord of The Pierre to explore alternatives
whereby we could modify or restructure our leasehold interest in
the hotel. Despite these discussions, the parties have not been
able to agree on any modification or restructuring of the lease
arrangements. In recent months, the landlord retained professional
advisers to assist with the evaluation of alternatives, including
the possibility of identifying a replacement lessee and operator
for The Pierre. We understand that the landlord is now in exclusive
negotiations with a potential successor to Four Seasons in both
capacities. No definitive agreement has yet been reached, and any
agreement involving an assignment of our leasehold interest in The
Pierre is subject to the approval of the shareholders of the
landlord. Therefore, there can be no assurance at this time that
acceptable arrangements with this potential successor will be
concluded. Four Seasons Hotel Vancouver RevPAR at Four Seasons
Hotel Vancouver increased 13.2% for the three months ended March
31, 2005, as compared to the same period in 2004, primarily as the
result of an improvement in occupancy and a modest increase in
achieved room rates. Operating results at the hotel remained
relatively flat, with a loss of $2.1 million in the first quarter
of 2005, as compared to a loss of $2.0 million in the first quarter
of 2004, mainly due to an offsetting reduction in banquet revenue.
We continue to review our options in respect of Four Seasons Hotel
Vancouver to determine what, if any, alternatives may be available
to modify or restructure our operation of, or investment in, this
hotel. There can be no assurance that acceptable alternative
arrangements can be found with respect to this hotel or as to the
terms of any such alternative arrangements. Corporate Costs,
including Compliance Costs During the first quarter of 2005, our
corporate and compliance costs, including the ongoing
implementation of the substantive changes to governance and
disclosure requirements applicable to public companies in the US
and Canada, were essentially unchanged at $2.4 million, as compared
to the same period in 2004. Other Income/Expense, Net Other
expense, net for the first quarter of 2005 was $2.7 million, as
compared to other income, net of $3.3 million for the same period
in 2004. Disposition of Hotel Investments In March 2005, we sold
approximately 80% of our equity interest in Four Seasons Residence
Club Scottsdale at Troon North for proceeds approximating book
value. As a result of the sale, our equity interest in Four Seasons
Residence Club Scottsdale at Troon North is approximately 14% and
as such, we will account for this investment on a cost basis in the
future. Subsequent to the end of the first quarter, we sold
approximately 53% of our equity interest in Four Seasons Hotel
Shanghai, which reduced our interest to approximately 10% and as
such, we will account for this investment on a cost basis in the
future. As a result of the sale, we revalued this US dollar
investment at March 31, 2005 at current exchange rates and recorded
a loss of $1.9 million. There will not be any further material
impact on our earnings as a result of this sale. Foreign Exchange
Other income for the first quarter of 2005 included a $0.4 million
foreign exchange loss, as compared to a $3.5 million foreign
exchange gain for the same period in 2004. Foreign exchange gains
and losses arose primarily from the translation to Canadian dollars
(using current exchange rates at the end of each quarter) of our
foreign currency-denominated net monetary assets, which are not
included in our designated foreign self-sustaining subsidiaries.
They also reflected local currency foreign exchange gains and
losses on net monetary assets incurred by our designated foreign
self-sustaining subsidiaries. Net monetary assets is the difference
between our foreign currency-denominated monetary assets and our
foreign currency-denominated monetary liabilities, and consists
primarily of cash and cash equivalents, accounts receivable,
long-term receivables and long-term obligations, as determined
under Canadian generally accepted accounting principles ("GAAP").
In the first quarter of 2004, the majority of the foreign exchange
gain was attributable to the weakening of the Canadian dollar
relative to the pound sterling, whereas in the first quarter of
2005 the Canadian dollar was generally stable relative to the pound
sterling. Ongoing fluctuations in rates of exchange between
currencies will likely result in future foreign exchange gains or
losses. Net Interest Income During the first quarter of 2005, we
had net interest income of $0.4 million, as compared to $0.9
million in the first quarter of 2004. Net interest income is a
combination of approximately $3.9 million in interest income and
approximately $3.5 million in interest expense in the first quarter
of 2005, as compared to $3.1 million and $2.2 million,
respectively, for the same period in 2004. The increase in interest
income for the first quarter of 2005, as compared to the same
period in 2004, was primarily attributable to increased cash and
cash equivalents as a result of the issuance of our convertible
senior notes in June 2004 and higher deposit interest rates. The
increase in interest expense was primarily attributable to the
variance in interest expense relating to the convertible senior
notes issued during the second quarter of 2004, as compared to the
interest costs relating to our previously outstanding Liquid Yield
Option Notes ("LYONs") during 2004. As discussed below in
"Liquidity and Capital Resources", although the rate of interest
payable pursuant to the terms of the convertible senior notes is
1.875% per annum, for accounting purposes the convertible senior
notes are bifurcated into debt and equity components under Canadian
GAAP, and a notional interest rate is applied to the portion that
is allocated to the debt component. While the notional interest
rate of 5.33% per annum (4.6% per annum after taking into account
the impact of the interest rate swap agreement that terminated in
October 2004 and is described below under "Financing Activities")
that is applied to the debt component of the convertible senior
notes (as described below under "Financing Activities") is lower
than the notional rate of 9.2% per annum that was applied to the
LYONs, a larger component of the convertible senior notes is
allocated to debt than was the case with the LYONs. As a result,
for accounting purposes the interest expense associated with the
convertible senior notes is higher than was the case for the LYONs.
Income Tax Expense Our effective tax rate in the first quarter of
2005 was 27%, as compared to an effective tax rate of 22% in the
first quarter of 2004. The variation from our expected 24% tax rate
is the result of certain items not being tax effected, including a
portion of the foreign exchange gains and losses, since they will
never be realized for tax purposes. Excluding these items, our tax
rate would have been our expected 24%. Stock Option Expense Stock
option expense for the first quarter of 2005 was $0.5 million, as
compared to $0.3 million for the same period in 2004. In the first
quarters of 2005 and 2004, stock option expense was allocated
between Management Operations ($0.2 million and $0.1 million,
respectively) and Ownership and Corporate Operations ($0.3 million
and $0.2 million, respectively). Net Earnings and Earnings per
Share Net earnings for the quarter ended March 31, 2005 were $5.2
million ($0.14 basic and diluted earnings per share), as compared
to net earnings of $8.7 million ($0.25 basic earnings per share and
$0.24 diluted earnings per share) for the quarter ended March 31,
2004. As described above, net earnings for the quarter ended March
31, 2005 included $2.3 million loss related to a $0.4 million
foreign exchange loss and a $1.9 million loss related to the
revaluation of our equity interest in the Four Seasons Hotel
Shanghai as a result of the sale of the majority of that interest.
For the quarter ended March 31, 2004, net earnings included $6.2
million gain related to a $3.5 million foreign exchange gain and a
$2.7 million gain on forward exchange contracts included in
management fee revenues. Liquidity and Capital Resources
------------------------------- Financing Activities During the
second quarter of 2004, we issued $250 million principal amount of
convertible senior notes. For details relating to the terms of the
convertible senior notes, please refer to our MD&A for the year
ended December 31, 2004. In accordance with Canadian GAAP, the
convertible senior notes are bifurcated on our financial statements
into a debt component (representing the principal value of a bond
of $211.8 million as at June 18, 2004, which was estimated based on
the present value of a $250 million bond maturing in 2009, yielding
5.33% per annum, compounded semi-annually, and paying interest at a
rate of 1.875% per annum) and an equity component of $39 million
(representing the value of the conversion feature of the
convertible senior notes) as at June 18, 2004. For further details,
see note 10(a) to our annual consolidated financial statements for
the year ended December 31, 2004. In connection with the offering
of the convertible senior notes, we entered into a five-year
interest rate swap agreement with an initial notional amount of
$211.8 million, pursuant to which we agreed to receive interest at
a fixed rate of 5.33% per year and pay interest at six-month LIBOR,
in arrears, plus 0.4904%. In October 2004, we terminated the
interest rate swap agreement and received proceeds of $9 million.
The recognition of the resulting gain was deferred and is being
amortized through to July 30, 2009, which would have been the
maturity date of the swap. This has resulted in an effective
interest rate on the convertible senior notes for accounting
purposes of 4.6% for the first quarter of 2005. In April 2005, we
entered into a new currency and interest rate swap agreement to
July 30, 2009, pursuant to which we have agreed to receive interest
at a fixed rate of 5.33% per annum on an initial notional amount of
$215.8 million (C$269.2 million ) and pay interest at a floating
rate of six-month Canadian Bankers Acceptances ("BA") in arrears
plus 1.1% per annum. On July 30, 2009, we will pay C$311.8 million
and receive $250 million under the swap. We have designated the
swap as a fair value hedge of our convertible senior notes. Any
future translation differences on our convertible senior notes from
US dollars to Canadian dollars should not have a material impact on
our net earnings. This swap will allow us to take advantage of
lower floating interest rates, which should result in an economic
and accounting savings of approximately 139 basis points at current
six-month BA rates, or approximately $3.0 million on an annualized,
pre-tax basis. As at March 31, 2005, no amounts were borrowed under
our $125 million bank credit facility. However, approximately $10.9
million of letters of credit were issued under that facility. No
amounts have been drawn under these letters of credit. We believe
that, absent unusual opportunities or developments, this credit
facility, when combined with cash on hand and internally generated
cash flow, should be more than adequate to allow us to finance our
normal operating needs and anticipated investment commitments
related to our current growth objectives. Our cash and cash
equivalents were $198.2 million as at March 31, 2005, as compared
to $226.4 million as at December 31, 2004. Long-term obligations
(as determined under Canadian GAAP) increased from $256.8 million
as at December 31, 2004 to $258.6 million as at March 31, 2005,
primarily as a result of the accretion of interest on the
convertible senior notes. Contractual Obligations and Other
Commitments We have provided certain guarantees and have other
similar commitments typically made in connection with properties
under our management totalling a maximum of $40.9 million. These
contractual obligations and other commitments are more fully
described in the MD&A for the year ended December 31, 2004.
Since year-end, we have reduced one of our bank guarantees and
extended a new commitment to one property under our management,
resulting in a net decrease in guarantees and other commitments of
$4.6 million. In addition to funding relating to our management
opportunities described under "Investing/Divesting Activities"
below, we expect a net increase in guarantees and other commitments
of approximately $7.0 million over the remainder of the current
year. Cash From Operations During the first quarter of 2005, we
expended $4.6 million in cash in operations, as compared to
generating $3.7 million in cash from operations for the same period
in 2004. This decrease in cash from operations of $8.3 million
resulted primarily from an increase in non-cash working capital of
$7.7 million, primarily caused by the settlement of incentive
compensation accrued as at December 31, 2004 and a $2.9 million
increase in current income tax paid, partially offset by an
increase in cash contributed by management operations of $2.4
million and a decrease in cash expended in ownership and corporate
operations of $0.7 million. Investing/Divesting Activities Part of
our business strategy is to invest a portion of available cash to
obtain management agreements or enhance existing management
arrangements. These investments in, or advances in respect of or to
owners of, properties are made where we believe that the overall
economic return to Four Seasons justifies the investment or
advance. During the quarter, we funded $27.4 million to properties
under development or management, including amounts advanced as
loans receivable to properties in Geneva, Toronto and Washington,
and minor equity interests in properties in Damascus and Jackson
Hole. This level of investment was consistent with our business
plan. During the remaining three quarters of 2005, we expect to
fund up to $75 million in respect of investments in, or advances in
respect of or to owners of, various projects, including properties
in Buenos Aires, Punta Mita and Exuma and a new resort in the
Maldives, plus additional funding for the property in Geneva and
the expansion of corporate office facilities. Cash used in capital
investments for the three months ended March 31, 2005 is net of the
proceeds received on the sale of our equity interest in Four
Seasons Residence Club Scottsdale at Troon North (as discussed in
"Other Income/Expense, Net"). Outstanding Share Data
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Outstanding as at Designation April 29, 2005
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Variable Multiple Voting Shares(a) 3,725,698
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Limited Voting Shares 32,883,188
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Options to acquire Limited Voting Shares:
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Outstanding 4,575,143
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Exercisable 2,808,761
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Convertible Senior Notes issued June 2004 and due 2024(b) $251.2
million(c)
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(a) Convertible into Limited Voting Shares at any time at the
option of the holder on a one-for-one basis. (b) Details on the
convertible senior notes are more fully in our annual MD&A for
the year ended December 31, 2004. (c) This amount is equal to the
issue price of the convertible senior notes issued June 2004 and
due 2024 plus accrued interest calculated at 1.875% per annum.
Looking Ahead ------------- If the travel trends that we
experienced in 2004 and the first quarter of 2005 continue, and
based on current demand reflected in our reservation activity, we
expect RevPAR for worldwide Core Hotels in the second quarter of
2005 and the full year 2005 to increase by more than 12% and by
more than 11%, respectively, as compared to the corresponding
periods in 2004. We expect that this improvement will result from
occupancy and pricing improvements in all geographic regions. If
current trends continue, we expect gross operating margins of our
worldwide Core Hotels to increase more than 220 basis points for
the full year of 2005, as compared to the full year of 2004. Change
in Reporting Currency to US Dollars
------------------------------------------ Effective the first
quarter of 2005, we have adopted US dollars as our reporting
currency. All amounts disclosed in this MD&A (including amounts
for prior periods) are in US dollars unless otherwise noted. The
consolidated financial statements in Canadian dollars have been
translated to US dollars using the foreign exchange rates
applicable at each balance sheet date for assets and liabilities,
and the weighted average exchange rates of the corresponding
quarters for the consolidated statements of operations,
consolidated statements of cash provided by operations and
consolidated statements of cash flow. Equity transactions have been
translated to US dollars at the historical exchange rates for 2005
and 2004 with opening equity accounts on January 1, 2004 translated
at the exchange rate on that date. These exchange rates are
disclosed in notes 1 and 9. Any resulting exchange gain or loss was
charged or credited to "Equity adjustment from foreign currency
translation", which is included as a separate component of
shareholders' equity. We have not changed the functional currencies
of our entities. As a result, while US dollar reporting will
minimize the currency fluctuations related to the majority of our
US dollar management fee revenues, it will not eliminate foreign
currency fluctuations related to our management fees in other
currencies, or the majority of our management operations general
and administrative expenses, which are incurred in Canadian
dollars. It will also not eliminate foreign currency gains and
losses related to unhedged net monetary asset and liability
positions. Changes in Accounting Policies
------------------------------ During the three months ended March
31, 2005, we adopted The Canadian Institute of Chartered
Accountants' ("CICA") new accounting standards on variable interest
entities and temporary controlled investments, as discussed in note
1 to the interim consolidated financial statements. The adoption of
these changes did not have a material impact on our consolidated
financial statements. Additional Information ----------------------
Additional information about us (including our most recent annual
information form, annual MD&A and our audited financial
statements for the year ended December 31, 2004) is available on
SEDAR at http://www.sedar.com/. -------------------------- 1. The
following Canadian/US dollar foreign exchange rates were used to
translate the specified periods:
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Average foreign Foreign Average foreign Foreign exchange exchange
exchange exchange rate used for rate as at rate used for rate as at
First Quarter March 31, First Quarter December 31, 2005 2005 2004
2004
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1.22652 1.2096 1.31785 1.2036
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2. RevPAR is defined as average room revenue per available room. It
is a non-GAAP measure. We use RevPAR because it is a commonly used
indicator of market performance for hotels and resorts and
represents the combination of the average daily room rate and the
average occupancy rate achieved during the period. RevPAR does not
include food and beverage or other ancillary revenues generated by
a hotel or resort. RevPAR is the most commonly used measure in the
lodging industry to measure the period-over-period performance of
comparable properties. Our calculation of RevPAR may be different
than the calculation used by other lodging companies. 3. The term
"Core Hotels" means hotels and resorts under management for the
full year of both 2005 and 2004. However, if a "Core Hotel" has
undergone or is undergoing an extensive renovation program in one
of those years that materially affects the operation of the
property in that year, it ceases to be included as a "Core Hotel"
in either year. Changes from the 2004/2003 Core Hotels are the
additions of Four Seasons Resort Jackson Hole, Four Seasons Hotel
Miami, Four Seasons Resort Great Exuma at Emerald Bay, Four Seasons
Hotel Prague, Four Seasons Hotel Riyadh and Four Seasons Hotel
Jakarta, and the deletion of Four Seasons Resort Maldives at Kuda
Huraa (which closed for repairs in December 2004 following damage
from the tsunami in southeast Asia). 4. Gross operating margin
represents gross operating profit as a percentage of gross
operating revenue. 5. Reimbursed costs includes the reimbursement
of all out-of-pocket costs, including sales and marketing and
advertising fees. 6. Effective January 1, 2004, we ceased
designating our US dollar forward contracts as hedges of our US
dollar fee revenues. These contracts were entered into during 2002,
and all of these contracts matured during 2004. The foreign
exchange gains on these contracts of $11.2 million, which were
deferred prior to January 1, 2004, were recognized in 2004 as an
increase of fee revenues over the course of the year. Foreign
exchange gains on forward exchange contracts were recorded as
increases in management fee revenues in the quarters of 2004 and
2003 as follows:
---------------------------------------------------------------------
First Second Third Fourth (In millions of US dollars) Quarter
Quarter Quarter Quarter
---------------------------------------------------------------------
2004 $2.7 $2.8 $2.6 $3.1
---------------------------------------------------------------------
2003 $0.5 $1.5 $1.4 $2.3
---------------------------------------------------------------------
7. Including the reimbursed costs and forward exchange contracts,
management fee revenues increased 15.7%, or $5.9 million, to $43.6
million in the first quarter of 2005, as compared to $37.6 million
for the same period in 2004. We provide the information excluding
the above items because the foreign exchange contracts applied only
to the period in 2004 and the reimbursed costs have no net impact
on earnings from management operations. 8. Earnings before other
operating items is equal to net earnings plus (i) income tax
expense plus (ii) interest expense less (iii) interest income plus
(iv) other expense less (v) other income plus (vi) depreciation and
amortization. Earnings before other operating items is not intended
to represent cash flow from operations, as defined by Canadian
GAAP, and it should not be considered as an alternative to net
earnings, cash flow from operations or any other measure of
performance prescribed by GAAP. Our earnings before other operating
items may also not be comparable to earnings before other operating
items used by other companies, which may be calculated differently.
We consider earnings before other operating items to be a
meaningful indicator of operations and use it as a measure to
assess our operating performance. It is included because we believe
it can be useful in measuring our ability to service debt, fund
capital expenditures and expand our business. Earnings before other
operating items is also used by investors, analysts and our lenders
as a measure of our financial performance. 9. Eight Quarter
Summary:
-------------------------------------------------------------------------
(In millions of US dollars except per share amounts) First Quarter
Fourth Quarter Third Quarter Second Quarter
-------------------------------------------------------------------------
2005 2004 2004 2003(a) 2004 2003(a) 2004 2003(a)
-------------------------------------------------------------------------
Consolidated revenues(b) $63.1 $57.1 $69.5 $66.8 $63.3 $52.6 $71.4
$57.7
-------------------------------------------------------------------------
Earnings (loss) before other operating items:
-------------------------------------------------------------------------
Management operations 19.3 17.1 18.2 15.7 20.1 13.7 22.1 14.6
-------------------------------------------------------------------------
Ownership and corporate operations (6.8) (7.4) (3.1) (1.5) (4.9)
(6.8) (1.3) (3.9)
-------------------------------------------------------------------------
Net earnings (loss):
-------------------------------------------------------------------------
Total $5.2 $8.7 $12.8 $8.9 $(8.5) $3.2 $12.8 $(1.0)
-------------------------------------------------------------------------
Basic earnings (loss) per share(c) $0.14 $0.25 $0.35 $0.25 $(0.24)
$0.09 $0.36 $(0.03)
-------------------------------------------------------------------------
Diluted earnings (loss) per share(c) $0.14 $0.24 $0.34 $0.24
$(0.24) $0.09 $0.34 $(0.03)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Average Canadian/ US foreign exchange rate used for specified
quarter 1.22652 1.31785 1.22033 1.3155 1.30758 1.37927 1.3586
1.39863
-------------------------------------------------------------------------
(a) In December 2003, the CICA amended Section 3870 of its Handbook
to require entities to account for employee stock options using the
fair value-based method, beginning January 1, 2004. In accordance
with one of the transitional alternatives permitted under amended
Section 3870, in the fourth quarter of 2003 we prospectively
adopted the fair value-based method with respect to all employee
stock options granted on or after January 1, 2003. Accordingly,
options granted prior to that date continue to be accounted for
using the settlement method. In accordance with the new standard,
however, the reported results for the first three quarters of 2003
are required to be restated. The prospective application of
adopting the fair value-based method effective January 1, 2003
resulted in the following restatements: Second Quarter 2003 -
increase in net loss of $0.1 million and no effect on basic and
diluted loss per share; Third Quarter and Fourth Quarter 2003 - in
each quarter, a decrease in net earnings of $0.3 million and a
decrease in basic and diluted earnings per share of $0.01 for each
quarter. (b) As a result of adopting Section 1100, "Generally
Accepted Accounting Principles", which was issued by the CICA in
July 2003 and was effective January 1, 2004, we have included the
reimbursement of all out-of-pocket expenses in both revenues and
expenses, instead of recording certain reimbursed costs as a "net"
amount. As a result of this change, consolidated revenues have been
restated as follows: Second Quarter 2003 - increase of $7.8
million; Third Quarter 2003 - increase of $7.5 million; Fourth
Quarter 2003 - increase of $9.6 million. Consolidated revenues is
comprised of the following:
-------------------------------------------------------------------------
First Fourth Third Second Quarter Quarter Quarter Quarter (In
millions --------------------------------------------------------
of US dollars) 2005 2004 2004 2003 2004 2003 2004 2003
-------------------------------------------------------------------------
Revenues from Management Operations $43.6 $37.6 $44.3 $40.6 $41.9
$33.8 $44.2 $34.3
-------------------------------------------------------------------------
Revenues from Ownership and Corporate Operations 20.5 20.3 26.6
27.4 22.4 19.6 28.1 24.6
-------------------------------------------------------------------------
Distributions from hotel investments 0.0 0.0 0.0 0.0 0.0 0.1 0.3
0.0
-------------------------------------------------------------------------
Fees from Ownership and Corporate Operations to Management
Operations (1.0) (0.9) (1.4) (1.2) (1.0) (0.9) (1.2) (1.1)
-------------------------------------------------------------------------
$63.1 $57.1 $69.5 $66.8 $63.3 $52.6 $71.4 $57.7
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(c) Quarterly computations of per share amounts are made
independently on a quarter-by-quarter basis and may not be
identical to annual computations of per share amounts. 10. The
management operations profit margin represents management
operations earnings before other operating items, as a percent of
management operations revenue. 11. Included in ownership and
corporate operations are the consolidated revenues and expenses
from our 100% leasehold interests in The Pierre in New York, Four
Seasons Hotel Vancouver and Four Seasons Hotel Berlin (until the
Berlin lease termination on September 26, 2004), distributions from
other ownership interests in properties that Four Seasons manages
and corporate overhead expenses related, in part, to these
ownership interests. (x) (x) (x) All dollar amounts referred to in
this news release are US dollars unless otherwise noted. The
financial statements are prepared in accordance with Canadian
generally accepted accounting principles. (x) (x) (x) This news
release contains "forward-looking statements" within the meaning of
applicable securities laws, including RevPAR, profit margin and
earnings trends; statements concerning the number of lodging
properties expected to be added in this and future years; expected
investment spending; and similar statements concerning anticipated
future events, results, circumstances, performance or expectations
that are not historical facts. These statements are not guarantees
of future performance and are subject to numerous risks and
uncertainties, including those described in our annual information
form and in this news release. Those risks and uncertainties
include adverse factors generally encountered in the lodging
industry; the risks associated with world events, including war,
terrorism, international conflicts, natural disasters, extreme
weather conditions, and infectious diseases; general economic
conditions, supply and demand changes for hotel rooms and
residential properties, competitive conditions in the lodging
industry, relationships with clients and property owners, currency
fluctuations and the availability of capital to finance growth.
Many of these risks and uncertainties can affect our actual results
and could cause our actual results to differ materially from those
expressed or implied in any forward-looking statement made by us or
on our behalf. All forward-looking statements in this news release
are qualified by these cautionary statements. These statements are
made as of the date of this news release and, except as required by
applicable law, we undertake no obligation to publicly update or
revise any forward-looking statement, whether as a result of new
information, future events or otherwise. (x) (x) (x) We will hold a
conference call today at 11 a.m. (Eastern Daylight Time) to discuss
the first quarter financial results. The details are: To access the
call dial: 1 (800) 289-6406 (U.S.A. and Canada) 1 (416) 641-6653
(outside U.S.A. and Canada) To access a replay of the call, which
will be available for one week after the call, dial: 1 (800)
558-5253, Reservation Number 21242956. A live web cast will also be
available by visiting http://www.fourseasons.com/investor. This web
cast will be archived for one month following the call. (x) (x) (x)
Dedicated to continuous innovation and the highest standards of
hospitality, Four Seasons invented luxury for the modern traveller.
From elegant surroundings of the finest quality, to caring, highly
personalised 24- hour service, Four Seasons embodies a true home
away from home for those who know and appreciate the best. The
deeply instilled Four Seasons culture is personified in its
employees - people who share a single focus and are inspired to
offer great service. Founded in 1960, Four Seasons has followed a
targeted course of expansion, opening hotels in major city centers
and desirable resort destinations around the world. Currently with
66 hotels in 29 countries, and 25 properties under development,
Four Seasons will continue to lead luxury hospitality with
innovative enhancements, making business travel easier and leisure
travel more rewarding. For more information on Four Seasons, visit
http://www.fourseasons.com/. FOUR SEASONS HOTELS INC. CONSOLIDATED
STATEMENTS OF OPERATIONS (Unaudited) Three months ended (In
thousands of US dollars March 31, except per share amounts) 2005
2004
-------------------------------------------------------------------------
Consolidated revenues (note 4) $ 63,097 $ 57,121
------------------------- ------------------------- MANAGEMENT
OPERATIONS Revenues: Fee revenues (note 4(a)) $ 29,027 $ 25,327
Reimbursed costs 14,544 12,319 ------------------------- 43,571
37,646 ------------------------- Expenses: General and
administrative expenses (9,734) (8,238) Reimbursed costs (14,544)
(12,319) ------------------------- (24,278) (20,557)
------------------------- 19,293 17,089 -------------------------
OWNERSHIP AND CORPORATE OPERATIONS Revenues 20,517 20,332 Expenses:
Cost of sales and expenses (26,351) (26,854) Fees to Management
Operations (991) (857) ------------------------- (6,825) (7,379)
------------------------- Earnings before other operating items
12,468 9,710 Depreciation and amortization (3,029) (2,751) Other
income (expense), net (notes 4(a) and 5) (2,710) 3,279
------------------------- Earnings from operations 6,729 10,238
Interest income, net 382 871 ------------------------- Earnings
before income taxes 7,111 11,109 ------------------------- Income
tax expense: Current (1,924) (2,116) Future 15 (288)
------------------------- (1,909) (2,404) -------------------------
Net earnings $ 5,202 $ 8,705 -------------------------
------------------------- Basic earnings per share (note 3(a)) $
0.14 $ 0.25 ------------------------- -------------------------
Diluted earnings per share (note 3(a)) $ 0.14 $ 0.24
------------------------- ------------------------- See
accompanying notes to consolidated financial statements. FOUR
SEASONS HOTELS INC. CONSOLIDATED BALANCE SHEETS As at As at
(Unaudited) March 31, December 31, (In thousands of US dollars)
2005 2004
-------------------------------------------------------------------------
ASSETS Current assets: Cash and cash equivalents $ 198,164 $
226,377 Receivables 79,940 81,541 Inventory 1,418 1,439 Prepaid
expenses 5,564 2,981 ------------------------- 285,086 312,338
Long-term receivables 198,180 179,060 Investments in hotel
partnerships and corporations 129,967 131,338 Fixed assets 61,963
59,939 Investment in management contracts 177,512 181,273
Investment in trademarks and trade names 4,363 4,424 Future income
tax assets 3,707 3,711 Other assets 28,855 30,064
------------------------- $ 889,633 $ 902,147
------------------------- ------------------------- LIABILITIES AND
SHAREHOLDERS' EQUITY Current liabilities: Accounts payable and
accrued liabilities $ 47,492 $ 60,415 Long-term obligations due
within one year 3,744 3,766 ------------------------- 51,236 64,181
Long-term obligations (note 2) 254,893 253,066 Shareholders' equity
(note 3): Capital stock 248,995 248,980 Convertible notes 36,920
36,920 Contributed surplus 8,581 8,088 Retained earnings 197,331
192,129 Equity adjustment from foreign currency translation 91,677
98,783 ------------------------- 583,504 584,900
------------------------- Subsequent events (notes 5 and 9) $
889,633 $ 902,147 -------------------------
------------------------- See accompanying notes to consolidated
financial statements. FOUR SEASONS HOTELS INC. CONSOLIDATED
STATEMENTS OF CASH PROVIDED BY OPERATIONS Three months ended
(Unaudited) March 31, (In thousands of US dollars) 2005 2004
-------------------------------------------------------------------------
Cash provided by (used in) operations: MANAGEMENT OPERATIONS
Earnings before other operating items $ 19,293 $ 17,089 Items not
requiring an outlay of funds 585 390 -------------------------
Working capital provided by Management Operations 19,878 17,479
------------------------- OWNERSHIP AND CORPORATE OPERATIONS Loss
before other operating items (6,825) (7,379) Items not requiring an
outlay of funds 276 165 ------------------------- Working capital
used in Ownership and Corporate Operations (6,549) (7,214)
------------------------- 13,329 10,265 Interest received, net
1,667 2,831 Current income tax paid (3,106) (164) Change in
non-cash working capital (16,413) (8,762) Other (113) (447)
------------------------- Cash provided by (used in) operations $
(4,636) $ 3,723 ------------------------- -------------------------
See accompanying notes to consolidated financial statements. FOUR
SEASONS HOTELS INC. CONSOLIDATED STATEMENTS OF CASH FLOWS Three
months ended (Unaudited) March 31, (In thousands of US dollars)
2005 2004
-------------------------------------------------------------------------
Cash provided by (used in): Operations: $ (4,636) $ 3,723
------------------------- Financing: Long-term obligations
including current portion 132 88 Issuance of shares 5,617 3,060
Dividends paid (1,558) (1,391) ------------------------- Cash
provided by financing 4,191 1,757 ------------------------- Capital
investments: Long-term receivables (20,465) 665 Hotel investments
(7,180) (970) Disposal of hotel investment (note 5) 5,346 - Fixed
assets (3,607) (3,308) Investments in trademarks and trade names
and management contracts (131) (278) Other assets (51) (842)
------------------------- Cash used in capital investments (26,088)
(4,733) ------------------------- Increase (decrease) in cash and
cash equivalents (26,533) 747 Increase (decrease) in cash and cash
equivalents due to unrealized foreign exchange gain (loss) (1,680)
133 Cash and cash equivalents, beginning of period 226,377 132,099
------------------------- Cash and cash equivalents, end of period
$ 198,164 $ 132,979 -------------------------
------------------------- See accompanying notes to consolidated
financial statements. FOUR SEASONS HOTELS INC. CONSOLIDATED
STATEMENTS OF RETAINED EARNINGS Three months ended (Unaudited)
March 31, (In thousands of US dollars) 2005 2004
-------------------------------------------------------------------------
Retained earnings, beginning of period $ 192,129 $ 169,364 Net
earnings 5,202 8,705 ------------------------- Retained earnings,
end of period $ 197,331 $ 178,069 -------------------------
------------------------- See accompanying notes to consolidated
financial statements. FOUR SEASONS HOTELS INC. NOTES TO THE
CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (In thousands of US
dollars except share amounts)
-------------------------------------------------------------------------
In these interim consolidated financial statements, the words "we",
"us", "our", and other similar words are references to Four Seasons
Hotels Inc. and its consolidated subsidiaries. These interim
consolidated financial statements do not include all disclosures
required by Canadian generally accepted accounting principles
("GAAP") for annual financial statements and should be read in
conjunction with our most recently prepared annual consolidated
financial statements for the year ended December 31, 2004. 1.
Significant accounting policies: The significant accounting
policies used in preparing these interim consolidated financial
statements are consistent with those used in preparing our annual
consolidated financial statements for the year ended December 31,
2004, except as disclosed below: (a) Change in reporting currency:
We have historically prepared our consolidated financial statements
in Canadian dollars. Effective for the three months ended March 31,
2005, we have adopted US dollars as our reporting currency. With
the majority of our management fee revenues in US dollars,
reporting in US dollars should reduce the volatility on reported
results relating to the impact of fluctuations in the rate of
exchange between the US and Canadian dollar relating to these
revenues and, as a result, we believe it will provide our financial
statement users with more meaningful information. We have not
changed the functional currency of Four Seasons Hotels Inc., which
remains Canadian dollars, or the functional currencies of any of
its subsidiaries. The consolidated financial statements in Canadian
dollars have been translated to US dollars using the foreign
exchange rates applicable at each balance sheet date for assets and
liabilities, and the weighted average exchange rates of the
corresponding quarters for the consolidated statements of
operations, consolidated statements of cash provided by operations
and consolidated statements of cash flows. Equity transactions have
been translated to US dollars at the historical exchange rates with
opening equity accounts on January 1, 2003 translated at the
exchange rate on that date. Any resulting exchange gain or loss was
charged or credited to "Equity adjustment from foreign currency
translation" included as a separate component of shareholders'
equity. (b) Variable interest entities: The Canadian Institute of
Chartered Accountants ("CICA") issued Accounting Guideline No. 15,
"Consolidation of Variable Interest Entities" ("AcG-15"), which
establishes criteria to identify variable interest entities ("VIE")
and the primary beneficiary of such entities. Entities that qualify
as VIEs must be consolidated by their primary beneficiary.
Effective January 1, 2005, we adopted AcG-15 and have concluded
that we do not have to consolidate any interest under AcG-15. (c)
Investments in hotel partnerships and corporations: In conjunction
with the issuance of Section 3475, "Disposal of Long- Lived Assets
and Discontinued Operations", the CICA eliminated the exception
from consolidation for a temporary controlled subsidiary. Beginning
January 1, 2005, we were required to either equity account or
consolidate our temporary investments in which we have over a 20%
equity interest. In March 2005, we sold the majority of our equity
interest in Four Seasons Residence Club Scottsdale at Troon North
(note 5), and in April 2005, we sold the majority of our equity
interest in Four Seasons Hotel Shanghai. As a result of the sales,
our equity interests in each property was reduced to less than 20%.
The change in accounting for these temporary investments did not
have a material impact on our consolidated financial statements for
the three months ended March 31, 2005. 2. Bank credit facility: We
have a committed bank credit facility of $125,000, which expires in
September 2007. As at March 31, 2005, no amounts were borrowed
under this credit facility. However, approximately $10,900 of
letters of credit were issued under this credit facility as at
March 31, 2005. No amounts have been drawn under these letters of
credit. 3. Shareholders' equity: As at March 31, 2005, we have
outstanding Variable Multiple Voting Shares ("VMVS") of 3,725,698,
outstanding Limited Voting Shares ("LVS") of 32,883,188 and
outstanding stock options of 4,575,143 (weighted average exercise
price of C$59.33 ($49.05)). (a) Earnings per share: A
reconciliation of the net earnings and weighted average number of
VMVS and LVS used to calculate basic and diluted earnings per share
is as follows: Three months ended (Unaudited) March 31, (In
thousands of US dollars) 2005 2004
---------------------------------------------------------------------
Net Net earnings Shares earnings Shares
---------------------------------------------------------------------
Basic earnings per share amounts $ 5,202 36,608,763 $ 8,705
35,289,622 Effect of assumed dilutive conversions: Stock option
plan - 1,535,543 - 1,435,122
---------------------------------------------------------------------
Diluted earnings per share amounts $ 5,202 38,144,306 $ 8,705
36,724,744
---------------------------------------------------------------------
---------------------------------------------------------------------
The diluted earnings per share calculation excluded the effect of
the assumed conversions of 9,000 stock options to LVS, under our
stock option plan, during the three months ended March 31, 2005
(2004 - 1,407,796 stock options), as the inclusion of these
conversions would have resulted in an anti-dilutive effect. There
was no dilution relating to the convertible senior notes issued in
2004, as the contingent conversion price was not reached during the
period. In addition, the dilution relating to the conversion of our
convertible notes (issued in 1999 and redeemed in September 2004)
to 3,463,155 LVS, by application of the "if-converted method", has
been excluded from the calculation as the inclusion of this
conversion would have resulted in an anti-dilutive effect for the
three months ended March 31, 2004. (b) Stock-based compensation: We
use the fair value-based method to account for all employee stock
options granted on or after January 1, 2003. Accordingly, options
granted prior to that date continue to be accounted for using the
settlement method. There were no stock options granted in the three
months ended March 31, 2005. The fair value of stock options
granted in the three months ended March 31, 2004 was estimated
using the Black-Scholes option pricing model with the following
assumptions: risk-free interest rates ranging from 2.96% to 3.81%;
semi-annual dividend per LVS of C$0.055; volatility factor of the
expected market price of our LVS of 30%; and expected lives of the
options ranging between four and seven years, depending on the
level of the employee who was granted stock options. For the
options granted in the three months ended March 31, 2004, the
weighted average fair value of the options at the grant dates was
C$27.00 ($20.49). For purposes of stock option expense and pro
forma disclosures, the estimated fair value of the options is
amortized to compensation expense over the options' vesting period.
Pro forma disclosure is required to show the effect of the
application of the fair value-based method to employee stock
options granted on or after January 1, 2002 and not accounted for
using the fair value-based method. For the three months ended March
31, 2005 and 2004, if we had applied the fair value-based method to
options granted from January 1, 2002 to December 31, 2002, our net
earnings and basic and diluted earnings per share would have been
adjusted to the pro forma amounts indicated below: (Unaudited)
Three months ended (In thousands of US dollars March 31, except per
share amounts) 2005 2004
---------------------------------------------------------------------
Stock option expense included in compensation expense $ (494) $
(313) ------------------------ ------------------------ Net
earnings, as reported $ 5,202 $ 8,705 Additional expense that would
have been recorded if all outstanding stock options granted during
2002 had been expensed (691) (652) ------------------------ Pro
forma net earnings $ 4,511 $ 8,053 ------------------------
Earnings per share: Basic, as reported $ 0.14 $ 0.25 Basic, pro
forma 0.12 0.23 Diluted, as reported 0.14 0.24 Diluted, pro forma
0.12 0.22 ------------------------ 4. Consolidated revenues: Three
months ended (Unaudited) March 31, (In thousands of US dollars)
2005 2004
-------------------------------------------------------------------------
Revenues from Management Operations(a) $ 43,571 $ 37,646 Revenues
from Ownership and Corporate Operations 20,517 20,332 Fees from
Ownership and Corporate Operations to Management Operations (991)
(857) ------------------------ $ 63,097 $ 57,121
------------------------ ------------------------ (a) Effective
January 1, 2004, we ceased designating our US dollar forward
contracts as hedges of our US dollar fee revenues. These contracts
were entered into during 2002, and all of these contracts matured
during 2004. The foreign exchange gains on these contracts of
$11,201, which were deferred prior to January 1, 2004, were
recognized in 2004 as an increase of fee revenues over the course
of the year. During the three months ended March 31, 2004, we
recognized $2,720 of the deferred gain in fee revenues. We did not
hedge any of our US dollar fee revenues during the three months
ended March 31, 2005. In addition, effective January 1, 2004, the
US dollar forward contracts were marked-to-market on a monthly
basis with the resulting changes in fair values being recorded as a
foreign exchange gain or loss and was included in other income
(expense), net. This resulted in a $428 foreign exchange loss for
the three months ended March 31, 2004. 5. Other income (expense),
net: Included in other income (expense), net for the three months
ended March 31, 2005 is a net foreign exchange loss of $393 (2004 -
net foreign exchange gain of $3,513) related to the foreign
currency translation gains and losses on unhedged net monetary
asset and liability positions, primarily in US dollars, euros,
pounds sterling and Australian dollars, and foreign exchange gains
and losses incurred by our designated foreign self-sustaining
subsidiaries. In March 2005, we sold the majority of our equity
interest in Four Seasons Residence Club Scottsdale at Troon North
for gross proceeds of $5,346, which approximated book value. As a
result of the sale, our equity interest in the residence club was
reduced to approximately 14%. Subsequent to March 31, 2005, we sold
approximately 53% of our equity interest in Four Seasons Hotel
Shanghai, which reduced our interest to approximately 10%. As a
result of the sale, we revalued this US dollar investment at March
31, 2005 at current exchange rates and recorded a loss of $1,930,
which is included in other income (expense), net, during the three
months ended March 31, 2005. 6. Pension benefit expense: The
pension benefit expense, after allocation to managed properties,
for the three months ended March 31, 2005 was $621 (2004 - $575).
7. Guarantees and other commitments: We have provided certain
guarantees and have other similar commitments typically made in
connection with properties under our management totalling a maximum
of $40,900. These contractual obligations and other commitments are
more fully described in the consolidated financial statements for
the year ended December 31, 2004. Since December 31, 2004, we have
reduced one of our bank guarantees and extended a new commitment to
one property under our management, resulting in a net decrease in
guarantees and other commitments of $4,600. 8. Seasonality: Our
hotels and resorts are affected by normally recurring seasonal
patterns and demand is usually lower in the period from December
through March than during the remainder of the year for most of our
urban properties. However, December through March is typically a
period of relatively strong demand at our resorts. As a result, our
management operations are affected by seasonal patterns, both in
terms of revenues and operating results. Urban hotels generally
experience lower revenues and operating results in the first
quarter. This negative impact on management revenues from those
properties is offset to some degree by increased travel to our
resorts in the period. Our ownership operations are particularly
affected by seasonal fluctuations, with lower revenue, higher
operating losses and lower cash flow in the first quarter, as
compared to the other quarters. 9. Currency and interest rate swap:
In April 2005, we entered into a currency and interest rate swap
agreement to July 30, 2009, pursuant to which we have agreed to
receive interest at a fixed rate of 5.33% per annum on an initial
notional amount of $215,842 and pay interest at a floating rate of
six-month Canadian Bankers Acceptance in arrears plus 1.1% per
annum on an initial notional amount of C$269.2 million. On July 30,
2009, we will pay C$311.8 million and receive $250,000 under the
swap. We have designated the swap as a fair value hedge of our
convertible senior notes, which were issued in 2004. FOUR SEASONS
HOTELS INC. SUMMARY OF HOTEL OPERATING DATA - CORE HOTELS(1) Three
months ended March 31, (Unaudited) 2005 2004 Variance
-------------------------------------------------------------------------
Worldwide No. of Properties 53 53 - No. of Rooms 14,003 14,003 -
Occupancy(2) 67.2% 62.9% 4.3pts. ADR(3) - in US dollars $356 $331
7.8% RevPAR(4) - in US dollars $224 $197 13.8% Gross operating
margin(5) 29.0% 26.9% 2.1pts. United States No. of Properties 21 21
- No. of Rooms 6,475 6,475 - Occupancy(2) 71.4% 67.5% 3.9pts.
ADR(3) - in US dollars $374 $352 6.3% RevPAR(4) - in US dollars
$264 $234 12.8% Gross operating margin(5) 25.8% 23.7% 2.1pts. Other
Americas/Caribbean No. of Properties 8 8 - No. of Rooms 1,724 1,724
- Occupancy(2) 65.0% 60.4% 4.6pts. ADR(3) - in US dollars $411 $375
9.6% RevPAR(4) - in US dollars $269 $225 19.2% Gross operating
margin(5) 36.1% 33.2% 2.9pts. Europe No. of Properties 8 8 - No. of
Rooms 1,492 1,492 - Occupancy(2) 54.7% 57.9% (3.2)pts. ADR(3) - in
US dollars $497 $456 9.0% RevPAR(4) - in US dollars $292 $278 5.3%
Gross operating margin(5) 27.3% 28.3% (1.0)pts. Middle East No. of
Properties 4 4 - No. of Rooms 847 847 - Occupancy(2) 72.7% 65.8%
6.9pts. ADR(3) - in US dollars $219 $189 15.7% RevPAR(4) - in US
dollars $157 $125 25.6% Gross operating margin(5) 48.0% 40.0%
8.0pts. Asia/Pacific No. of Properties 12 12 - No. of Rooms 3,465
3,465 - Occupancy(2) 64.3% 56.9% 7.4pts. ADR(3) - in US dollars
$241 $227 6.0% RevPAR(4) - in US dollars $117 $98 18.7% Gross
operating margin(5) 30.0% 28.5% 1.5pts.
----------------------------------------------- (1) The term "Core
Hotels" means hotels and resorts under management for the full year
of both 2005 and 2004. However, if a "Core Hotel" has undergone or
is undergoing an extensive renovation program in one of those years
that materially affects the operation of the property in that year,
it ceases to be included as a "Core Hotel" in either year. Changes
from the 2004/2003 Core Hotels are the additions of Four Seasons
Resort Jackson Hole, Four Seasons Hotel Miami, Four Seasons Resort
Great Exuma at Emerald Bay, Four Seasons Hotel Prague, Four Seasons
Hotel Riyadh and Four Seasons Hotel Jakarta, and the deletion of
Four Seasons Resort Maldives at Kuda Huraa (which closed for
repairs in December 2004 following damage from the tsunami in
southeast Asia). (2) Occupancy percentage is defined as the total
number of rooms occupied divided by the total number of rooms
available. (3) ADR is defined as average daily room rate calculated
as straight average for each region. (4) RevPAR is defined as
average room revenue per available room. It is a non-GAAP measure.
We use RevPAR because it is a commonly used indicator of market
performance for hotels and resorts and represents the combination
of the average daily room rate and the average occupancy rate
achieved during the period. RevPAR does not include food and
beverage or other ancillary revenues generated by a hotel or
resort. RevPAR is the most commonly used measure in the lodging
industry to measure the period-over-period performance of
comparable properties. Our calculation of RevPAR may be different
than the calculation used by other lodging companies. (5) Gross
operating margin represents gross operating profit as a percentage
of gross operating revenue. FOUR SEASONS HOTELS INC. SUMMARY OF
HOTEL OPERATING DATA - ALL MANAGED HOTELS As at March 31,
(Unaudited) 2005 2004 Variance
-------------------------------------------------------------------------
Worldwide No. of Properties 65(1) 62 3 No. of Rooms 16,602(1)
15,977 625 United States No. of Properties 24 24 - No. of Rooms
7,109 7,109 - Other Americas/Caribbean No. of Properties 10 10 -
No. of Rooms 2,162 2,101 61 Europe No. of Properties 11 10 1 No. of
Rooms 1,919 1,811 108 Middle East No. of Properties 5(1) 4 1 No. of
Rooms 1,212(1) 847 365 Asia/Pacific No. of Properties 15 14 1 No.
of Rooms 4,200 4,109 91
----------------------------------------------- (1) Since March 31,
2005, we commenced management of Four Seasons Hotel Doha, which has
232 rooms. The property is not reflected in this table. FOUR
SEASONS HOTELS INC. REVENUES UNDER MANAGEMENT - ALL MANAGED HOTELS
Three months ended (Unaudited) March 31, (In thousands of US
dollars) 2005 2004
-------------------------------------------------------------------------
Revenues under management(1) $ 601,563 $ 530,190
------------------------ ------------------------
------------------------- (1) Revenues under management consist of
rooms, food and beverage, telephone and other revenues of all the
hotels and resorts which we manage. Approximately 63% of the fee
revenues (excluding reimbursed costs) we earned were calculated as
a percentage of the total revenues under management of all hotels
and resorts. FOUR SEASONS HOTELS INC. SCHEDULED OPENING OF
PROPERTIES UNDER CONSTRUCTION OR IN ADVANCED STAGES OF DEVELOPMENT
Hotel/Resort/Residence Club and Location(1),(2) Approximate Number
of Rooms Scheduled 2005/2006 openings ----------------------------
Four Seasons Hotel Alexandria, Egypt(x) 125 Four Seasons Hotel
Damascus, Syria 305 Four Seasons Hotel Florence, Italy 120 Four
Seasons Hotel Geneva, Switzerland 100 Four Seasons Hotel Hong Kong,
People's Republic of China(x) 395 Four Seasons Resort Lanai at
Koele, HI, USA 100 Four Seasons Resort Lanai at Manele Bay, HI, USA
250 Four Seasons Resort Maldives at Landaa Giraavaru, Maldives 115
Four Seasons Hotel Mumbai, India(x) 235 Four Seasons Residence Club
Punta Mita, Mexico 35 Four Seasons Hotel Silicon Valley at East
Palo Alto, CA, USA 200 Four Seasons Hotel Westlake Village, CA, USA
270 Four Seasons Private Residences Whistler, B.C., Canada 35
Beyond 2006 ----------- Four Seasons Hotel Baltimore, MD, USA(x)
200 Four Seasons Hotel Beijing, People's Republic of China 325 Four
Seasons Hotel Beirut, Lebanon 235 Four Seasons Resort Bora Bora,
French Polynesia 105 Four Seasons Hotel Dubai, UAE(x) 250 Four
Seasons Hotel Istanbul at the Bosphorus, Turkey 170 Four Seasons
Hotel Kuwait City, Kuwait 225 Four Seasons Hotel Moscow, Russia(x)
210 Four Seasons Hotel Moscow Kamenny Island, Russia(x) 80 Four
Seasons Resort Puerto Rico, Puerto Rico(x) 250 Four Seasons Hotel
Seattle, WA, USA(x) 150 Four Seasons Resort Vail, CO, USA(x) 120
(x) Expected to include a residential component.
------------------------- (1) Information concerning hotels,
resorts and Residence Clubs under construction or under development
is based upon agreements and letters of intent and may be subject
to change prior to the completion of the project. The dates of
scheduled openings have been estimated by management based upon
information provided by the various developers at the time of this
report. There can be no assurance that the date of scheduled
opening will be achieved or that these projects will be completed.
In particular, in the case where a property is scheduled to open
near the end of a year, there is a greater possibility that the
year of opening could be changed. The process and risks associated
with the management of new properties are dealt with in greater
detail in our 2004 Annual Report. (2) We have made an investment in
Orlando, in which we expect to include a Four Seasons Residence
Club and/or a Four Seasons branded residential component. The
financing for this project has not yet been completed and therefore
a scheduled opening date cannot be established at this time.
DATASOURCE: Four Seasons Hotels and Resorts CONTACT: Douglas L.
Ludwig, Chief Financial Officer and Executive Vice President, (416)
441-4320; Barbara Henderson, Vice President, Corporate Finance,
(416) 441-4329
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