TORONTO, Nov. 9 /PRNewswire-FirstCall/ -- Four Seasons Hotels Inc.
(TSX Symbol "FSH"; NYSE Symbol "FS") today reported its results for
the third quarter and nine months ended September 30, 2006. All
amounts disclosed in this news release are in US dollars unless
otherwise noted. The consolidated financial statements are prepared
in accordance with Canadian generally accepted accounting
principles. Endnotes can be found at the end of this news release.
Highlights of the Third Quarter and Nine Months ended September 30,
2006 For the third quarter and nine months ended September 30,
2006, as compared to the same periods in 2005: Hotel and Resort
Operating Results: - For the third quarter, RevPAR(1) increased at
our worldwide Core Hotels(2) by 9.7% and at our US Core Hotels by
8.3%. For the nine months ended September 30, 2006, RevPAR
increased at our worldwide Core Hotels by 11.2% and at our US Core
Hotels by 10.9%. - For the third quarter, gross operating
margins(3) increased at our worldwide Core Hotels by 120 basis
points to 30.4% and our US Core Hotels gross operating margins
increased by 140 basis points to 28.5%. For the nine months ended
September 30, 2006, gross operating margins increased at our
worldwide Core Hotels by 180 basis points to 32.3% and our US Core
Hotels gross operating margins also increased by 180 basis points
to 30.5%. - For the third quarter, revenues under management
increased 15.8% to $699.2 million from $603.8 million. For the nine
months ended September 30, 2006, revenues under management
increased 13.8% to $2.1 billion from $1.9 billion. We had
approximately 17,500 rooms under management in the nine months
ended September 30, 2006, as compared to approximately 17,200 rooms
in the same period in 2005. We had approximately 14,300 rooms under
management in our Core Hotels for the third quarter and nine months
ended September 30, 2006 and 2005. "Four Seasons offers an
experience that is truly one of a kind, because employees in the
Company share a very specific focus: to meet the needs,
expectations, even the dreams of one type of consumer - the luxury
traveler," said Isadore Sharp, Chairman and Chief Executive
Officer. "The trust our guest places in us to provide exceptional
experiences is reflected in the strong operational and financial
results we are announcing this quarter. We remain committed to
further solidifying our distinct competitive position in the
industry." Company Operating Results: - As a result of improved
results at properties under our management and, to a lesser extent,
an increase in the number of rooms under management, hotel
management fees increased 20.7% in the third quarter of 2006. For
the nine months ended September 30, 2006, hotel management fees
increased 19.9%. - Base fees increased 12.1% to $20.0 million in
the third quarter and 12.6% to $61.4 million for the nine months
ended September 30, 2006, principally as a result of RevPAR
improvements at our Core Hotels and the contribution from recently
opened properties under management. - As a result of improved
profitability and the addition of new properties under our
management, incentive fees increased 52.9% to $7.2 million for the
third quarter and 38.5% to $29.3 million for the nine months ended
September 30, 2006. - Other fees were essentially unchanged for the
third quarter, but improved 33.2% to $13.3 million for the nine
months ended September 30, 2006, primarily as a result of an
increase in branded residential royalty fees, which will vary from
period to period based on the volume of sales closing in those
periods, and these fluctuations may be significant. - Operating
earnings before other items(4) increased 41.9% to $16.6 million for
the third quarter and 38.5% to $60.8 million for the nine months
ended September 30, 2006. - For the third quarter, net earnings
were $10.9 million ($0.30 basic earnings per share and $0.29
diluted earnings per share), compared to a net loss of $11.4
million ($0.31 basic and diluted loss per share) for the third
quarter of 2005. In the third quarter of 2005, net loss included
foreign exchange losses and asset provisions and write downs
totaling approximately $21.1 million. - For the nine months ended
September 30, 2006, net earnings were $33.4 million ($0.91 basic
earnings per share and $0.89 diluted earnings per share), as
compared to net earnings of $9.5 million for the same period in
2005 ($0.26 basic earnings per share and $0.25 diluted earnings per
share). Adjusted Net Earnings and Adjusted Earnings per Share(x): -
In the third quarter of 2006, other income, net of $0.6 million
related primarily to foreign exchange gains, which were offset
partially by asset provisions and write downs. In the third quarter
of 2005, other expenses, net of $21.1 million related primarily to
foreign exchange losses and asset provisions and write downs.
Adjusting for other income (expenses), net and the applicable
income taxes, adjusted net earnings were as follows:
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(in millions of dollars except per share amounts) Third quarter
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2006 2005
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Net earnings (loss) $ 10.9 $ (11.4)
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Adjustments - Other (income) expenses, net (0.6) 21.1
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Tax effect related to foregoing adjustments 0.6 (1.6)
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Adjusted net earnings $ 10.9 $ 8.1
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------------------------ Adjusted basic earnings per share $ 0.30 $
0.22
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------------------------ Adjusted diluted earnings per share $ 0.29
$ 0.22
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------------------------ - In the nine months ended September 30,
2006, other expenses, net of $7.0 million related primarily to
foreign exchange losses. In the nine months ended September 30,
2005, other expenses, net of $32.4 million related primarily to
foreign exchange losses, losses on the disposition of assets, and
asset provisions and write downs. Adjusting for other expenses, net
and the applicable income taxes, adjusted net earnings were as
follows:
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Nine months ended (in millions of dollars except per share amounts)
September 30,
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2006 2005
-------------------------------------------------------------------------
Net earnings $ 33.4 $ 9.5
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Adjustments - Other expenses, net 7.0 32.4
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Tax effect related to foregoing adjustments 1.8 (12.6)(xx)
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Adjusted net earnings $ 42.2 $ 29.3
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------------------------ Adjusted basic earnings per share $ 1.15 $
0.80
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------------------------ Adjusted diluted earnings per share $ 1.13
$ 0.77
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------------------------ (x) Adjusted net earnings is a non-GAAP
financial measure and does not have any standardized meaning
prescribed by GAAP. It is, therefore, unlikely to be comparable to
similar measures presented by other issuers and should not be
considered as an alternative to net earnings, cash flow from
operating activities or any other measure of performance prescribed
by Canadian GAAP. Our adjusted net earnings may also not be
comparable to adjusted net earnings used by other lodging
companies, which may be calculated differently. We consider
adjusted net earnings to be a meaningful indicator of our
operations, and management uses it as a measure to assess our
operating performance. Adjusted net earnings is also used by
investors, analysts, and our lenders as a measure of our financial
performance. As a result, we have chosen to provide this
information. (xx) In connection with the disposition of The Pierre
in the second quarter of 2005, we recorded a tax benefit of
approximately $9.2 million in the nine months ended September 30,
2005. "The financial results reflect both the strong operating
environment and our continued efforts to control costs," said John
Davison, Chief Financial Officer. "We are very pleased to see these
efforts translate into strong earnings growth." Expanding the
Portfolio - New Four Seasons Projects Our announced pipeline of new
Four Seasons properties include thirty- three projects around the
world, including nine in the Americas, five in Europe, nine in the
Middle East/Africa and ten in Asia/Pacific. Since the beginning of
the year, we have added eleven new projects to this list, including
Barbados; Cham Island, Vietnam; a second property in Doha, Qatar;
Hangzhou, People's Republic of China; Koh Samui, Thailand; Kuwait
City, Kuwait; Macau, Special Administrative Region of the People's
Republic of China; Seychelles; Shanghai, People's Republic of
China; St. Petersburg, Russia and Taipei, Taiwan. "We believe our
development pipeline is the most robust in the luxury sector," said
Kathleen Taylor, President Worldwide Business Operations. "Our
owners and development partners continue to present us with
opportunities for extraordinary projects around the globe, which
speaks to the strength of the Four Seasons brand worldwide."
------------------------------------ (1) RevPAR is defined as
average room revenue per available room. It is a non-GAAP financial
measure and does not have any standardized meaning prescribed by
GAAP. It is, therefore, unlikely to be comparable to similar
measures presented by other issuers. 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. (2) The term "Core Hotels" means hotels
and resorts under management for the full year of both 2006 and
2005. 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
2005/2004 Core Hotels are the additions of Four Seasons Resort
Scottsdale at Troon North, Four Seasons Resort Whistler, Four
Seasons Resort Costa Rica at Peninsula Papagayo, Four Seasons Hotel
Gresham Palace Budapest, Four Seasons Resort Provence at Terre
Blanche and Four Seasons Hotel Cairo at Nile Plaza, and the
deletion of The Regent Kuala Lumpur. (3) Gross operating margin
represents gross operating profit as a percentage of gross
operating revenue. (4) Operating earnings before other items is
equal to net earnings plus (i) income tax expense less (ii) income
tax recovery plus (iii) interest expense less (iv) interest income
plus (v) other expenses less (vi) other income plus (vii)
depreciation and amortization. Operating earnings before other
items is a non-GAAP financial measure and does not have any
standardized meaning prescribed by GAAP. It is, therefore, unlikely
to be comparable to similar measures presented by other issuers. We
consider operating earnings before other 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. Operating earnings before
other items is also used by investors, analysts and our lenders as
a measure of our financial performance. We will hold a conference
call today at 11 a.m. (Eastern Standard Time) to discuss the third
quarter financial results. The details are: To access the call
dial: 1 (800) 377-5794 (U.S.A. and Canada) 1 (416) 641-6708
(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 21305677. A live web cast of the call
will also be available by visiting
http://www.fourseasons.com/investor. This web cast will be archived
for no more than one month following the call. Four Seasons is
dedicated to perfecting the travel experience through continuous
innovation and the highest standards of hospitality. 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 centres and desirable
resort destinations around the world. Currently with 71 hotels in
31 countries, and more than 25 properties under development, Four
Seasons will continue to lead the hospitality industry with
innovative enhancements, making business travel easier and leisure
travel more rewarding. For more information on Four Seasons, visit
http://www.fourseasons.com/. This document contains
"forward-looking statements" within the meaning of applicable
securities laws, including RevPAR, profit margin and earning
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. Various factors and assumptions were
applied or taken into consideration in arriving at these
statements, which do not take into account the effect that
non-recurring or other special items announced after the statements
are made may have on our business. These statements are not
guarantees of future performance and, accordingly, you are
cautioned not to place undue reliance on these statements. These
statements are subject to numerous risks and uncertainties,
including those described in our annual information form and
management's discussion and analysis for the year ended December
31, 2005 and in this document. (See discussion under "Operating
Risks" beginning on page 17 of our Annual Information Form and page
45 of our Management's Discussion and Analysis for the year ended
December 31, 2005, which are available on our website at
http://www.fourseasons.com/ and on SEDAR at http://www.sedar.com/.)
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, fluctuations in relative
exchange rates of various currencies, supply and demand changes for
hotel rooms and residential properties, competitive conditions in
the lodging industry, the risks associated with our ability to
maintain and renew management agreements and expand the portfolio
of properties that we manage, relationships with clients and
property owners 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 document 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. Additionally, we undertake
no obligation to comment on analyses, expectations or statements
made by third parties in respect of Four Seasons, its financial or
operating results or its securities or any of the properties that
we manage or in which we may have an interest. MANAGEMENT'S
DISCUSSION AND ANALYSIS THIRD QUARTER AND NINE MONTHS ENDED
SEPTEMBER 30, 2006 This Management's Discussion and Analysis
("MD&A") for the third quarter and nine months ended September
30, 2006 is provided as of November 9, 2006. It should be read in
conjunction with the interim unaudited consolidated financial
statements for those periods, the audited consolidated financial
statements for the year ended December 31, 2005 and the MD&A
for that year, including the discussion of risks and uncertainties
associated with forward- looking statements. Except as disclosed in
this MD&A, as of November 9, 2006, and the MD&A for the
quarter ended March 31, 2006 and six months ended June 30, 2006,
there has been no material change in the information disclosed in
the MD&A for the year ended December 31, 2005. A summary of
total revenues, net earnings or loss in total and on a per share
basis for the past eight quarters can be found under "Eight Quarter
Summary". All amounts disclosed in this MD&A are in US dollars
unless otherwise noted. The consolidated financial statements are
prepared in accordance with Canadian generally accepted accounting
principles. Endnotes can be found at the end of this document.
Operational and Financial Review and Analysis Hotel and Resort
Operating Results For the third quarter of 2006, RevPAR(1) at our
worldwide Core Hotels(2) increased 9.7%, as compared to the third
quarter of 2005, reflecting improvements in each of the regions in
which we manage hotels and resorts. This increase in RevPAR was
attributable to a 12.0% improvement in achieved room rates, offset
by a 150 basis point decline in overall occupancy. For the nine
months ended September 30, 2006, RevPAR of our worldwide Core
Hotels increased 11.2%, as compared to the same period in 2005,
reflecting improvements in each of the regions in which we manage
hotels and resorts. This increase in RevPAR was attributable to a
10.2% improvement in achieved room rates and a 60 basis point
increase in overall occupancy over the same period in 2005. Gross
operating revenues of our worldwide Core Hotels increased 8.9% for
the third quarter of 2006 and 9.2% for the nine months ended
September 30, 2006, as compared to the same periods in 2005. The
improvements in revenue, combined with continued cost management
efforts at the properties under our management, resulted in a 13.4%
and 120 basis point increase in gross operating profits(3) and
gross operating margins(4), respectively, for the third quarter of
2006, as compared to the same period in 2005, and a 15.5% and 180
basis point increase in gross operating profits and gross operating
margins, respectively, for the nine months ended September 30,
2006, as compared to the same period in 2005. With respect to our
Core Hotels, the United States represented the most significant
geographic area. In the third quarter of 2006, properties in the
United States contributed 49.8% of revenues under management,
followed by Europe (19.3%), Asia/Pacific (12.7%), Other
Americas/Caribbean (12.1%) and the Middle East (6.1%). For the nine
months ended September 30, 2006, properties in the United States
contributed 49.9% of revenues under management, followed by Europe
(16.7%), Other Americas/Caribbean (14.9%), Asia/Pacific (12.4%) and
the Middle East (6.1%). The following tables highlight the results
of operations for our Core Hotels in each of these regions. United
States Region
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Results for periods in 2006, as compared to the same periods in
2005
-------------------------------------------------------------------------
Gross Gross Operating Operating Gross Revenue Profit Operating
RevPAR (GOR) (GOP) Margin
-------------------------------------------------------------------------
Basis Point $ Percentage Percentage Percentage Improve- Increase
Increase Increase Margin ment
-------------------------------------------------------------------------
Third quarter 292 8.3% 8.2% 13.9% 28.5% 140
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Nine months ended Sept- ember 30 299 10.9% 9.6% 16.3% 30.5% 180
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The increase in RevPAR in the third quarter in the region was
primarily attributable to a 9.3% increase in achieved room rates in
the region, with the average occupancy levels essentially
unchanged. During the third quarter of 2006, the majority of the
Core Hotels in this region experienced RevPAR improvements. Four
Seasons properties under management in Austin, Chicago, Kona, New
York and Philadelphia and the Beverly Wilshire had strong RevPAR
improvements, relative to the average for the region for the third
quarter primarily as a result of an increase in achieved room
rates. Excluding the impact of the resort in Maui, which is
undergoing an extensive renovation program, the increase in RevPAR
in the third quarter in this region would have been 9.2%. The
increase in RevPAR in the nine months ended September 30, 2006 was
primarily attributable to a 9.9% increase in achieved room rates as
occupancy levels were essentially unchanged in the region.
Properties under management in Atlanta, Austin, Boston, Houston,
Kona, Maui, New York and Scottsdale had strong RevPAR improvements
relative to the average for the region for the nine-month period
primarily as a result of an increase in achieved room rates. The
improvement in gross operating profits and gross operating margins
in the region in the third quarter and nine months ended September
30, 2006 was primarily the result of the improvement in gross
operating revenues. Excluding the results of the Maui property in
the third quarter, the gross operating margin would have increased
170 basis points in this region.
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Other Americas/Caribbean Region
-------------------------------------------------------------------------
Results for periods in 2006, as compared to the same periods in
2005
-------------------------------------------------------------------------
Gross Gross Operating Operating Gross Revenue Profit Operating
RevPAR (GOR) (GOP) Margin
-------------------------------------------------------------------------
Basis Point $ Percentage Percentage Percentage Improve- Increase
Increase Increase Margin ment
-------------------------------------------------------------------------
Third quarter 188 3.4% 3.7% (15.1)% 14.1% (310)
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Nine months ended Sept- ember 30 246 12.0% 10.3% 12.4% 28.1% 50
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For the third quarter of 2006, the RevPAR results for the
properties under management in this region were mixed. Demand
declined at certain of the resort properties in the region
primarily due to travel concerns related to weather. In addition,
demand was reduced in Mexico City, whose market experienced a
period of political unrest following its elections. The third
quarter RevPAR improvement was entirely attributable to a 10.9%
increase in achieved room rates, as average occupancy levels
declined 450 basis points. On a local currency basis, RevPAR was
essentially unchanged in the quarter although achieved room rates
improved 7.9%. The RevPAR increase for the nine months ended
September 30, 2006 was the result of a 12.3% increase in achieved
room rates as occupancy levels were essentially unchanged. On a
local currency basis, RevPAR improved 10.0% in the nine-month
period, reflecting a 10.3% increase in achieved room rates on a
local currency basis. In the nine months ended September 30, 2006,
properties under management in Buenos Aires, Carmelo, Costa Rica
and Punta Mita had particularly strong RevPAR improvements,
relative to the average for the region primarily as a result of an
increase in achieved room rates. The decline in gross operating
profits and gross operating margin in the third quarter of 2006 was
due primarily to reduced revenues in certain properties,
particularly at the Caribbean resorts, that have a relatively high
fixed cost base. Excluding the properties under management in
Exuma, Nevis and Mexico City, gross operating margins would have
been flat in the third quarter of 2006. For the nine months ended
September 30, 2006, gross operating profits and gross operating
margins increased only modestly relative to the RevPAR improvement
in the region primarily as a result of the reasons noted for the
third quarter. Excluding the properties under management in Exuma,
Nevis and Mexico City, gross operating margins would have increased
460 basis points in the nine months ended September 30, 2006.
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Europe Region
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Results for periods in 2006, as compared to the same periods in
2005
-------------------------------------------------------------------------
Gross Gross Operating Operating Gross Revenue Profit Operating
RevPAR (GOR) (GOP) Margin
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Basis Point $ Percentage Percentage Percentage Improve- Increase
Increase Increase Margin ment
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Third quarter 458 19.6% 13.7% 19.3% 38.1% 180
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Nine months ended Sept- ember 30 404 17.1% 8.0% 15.2% 34.3% 220
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All of the properties under management in the region had RevPAR
improvements during the third quarter and nine months ended
September 30, 2006, reflecting modest occupancy increases and
strong rate improvements. During the third quarter of 2006, on a
local currency basis, RevPAR increased 14.7%, reflecting a 10.8%
increase in achieved room rates in local currency, versus a 15.5%
increase in achieved room rates on a US dollar basis. For the nine
months ended September 30, 2006, on a local currency basis, RevPAR
increased 18.0%, reflecting a 9.7% increase in achieved room rates
on a local currency basis, versus an 8.9% increase in achieved room
rates on a US dollar basis. Properties under management in Lisbon
and Terre Blanche and the Four Seasons Hotel London had strong
RevPAR improvements, relative to the average of the other
properties in the region, during the third quarter and nine months
ended September 30, 2006. The improvements in gross operating
profits and gross operating margins for the region were offset in
part by the impact on the profitability performance at the Four
Seasons Hotel Dublin, which is undergoing a conversion of 62 hotel
rooms into residential units.
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Middle East Region
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Results for periods in 2006, as compared to the same periods in
2005
-------------------------------------------------------------------------
Gross Gross Operating Operating Gross Revenue Profit Operating
RevPAR (GOR) (GOP) Margin
-------------------------------------------------------------------------
Basis Point $ Percentage Percentage Percentage Improve- Increase
Increase Increase Margin ment
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Third quarter 174 26.3% 25.4% 41.7% 49.5% 570
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Nine months ended Sept- ember 30 175 20.0% 20.9% 30.3% 50.4% 360
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During both the third quarter and nine months ended September 30,
2006, all of the properties under management in the Middle East
region had RevPAR improvements, with the exception of Four Seasons
Resort Sharm El Sheikh. In Sharm El Sheikh, RevPAR was essentially
unchanged for the third quarter, but declined 5.5% for the nine
months ended September 30, 2006 as a result of lower occupancy
levels, as business was adversely affected by the continuing impact
of terrorist bombings. In the third quarter of 2006, the increase
in RevPAR for the region was driven by a 25.2% increase in achieved
room rates (23.9% on a local currency basis) and a 60 basis point
improvement in occupancy levels. In the nine months ended September
30, 2006, the increase in RevPAR for the region was driven by a
17.0% increase in achieved room rates (15.5% on a local currency
basis) and a 170 basis point improvement in occupancy levels.
During both the third quarter and nine months ended September 30,
2006, Four Seasons Hotel Cairo Nile Plaza had particularly strong
RevPAR improvements, as compared to the average for the region. The
very strong improvements in gross operating profits and gross
operating margins were the result of strong revenue growth, offset
somewhat by the results in Sharm El Sheikh. Asia/Pacific Region
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Results for periods in 2006, as compared to the same periods in
2005
-------------------------------------------------------------------------
Gross Gross Operating Operating Gross Revenue Profit Operating
RevPAR (GOR) (GOP) Margin
-------------------------------------------------------------------------
Basis Point $ Percentage Percentage Percentage Improve- Increase
Increase Increase Margin ment
-------------------------------------------------------------------------
Third quarter 129 1.0% 3.4% 2.2% 32.4% (40)
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Nine months ended Sept- ember 30 130 2.5% 3.0% 7.1% 33.1% 120
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During both the third quarter and nine months ended September 30,
2006, RevPAR changes in the Asia/Pacific region were mixed. During
the third quarter of 2006, achieved room rates increased 7.7% (5.0%
increase on a local currency basis), and occupancy decreased 400
basis points primarily as the result of reduced demand at our two
properties in Bali, where the market is continuing a gradual
recovery from the impact of terrorist bombings. During the nine
months ended September 30, 2006, the RevPAR improvement was driven
by a 5.5% improvement in achieved room rates (5.4% improvement on a
local currency basis), with overall occupancy levels essentially
unchanged. During both the third quarter and nine months ended
September 30, 2006, properties under management in Singapore and
Sydney experienced strong RevPAR improvements relative to the
region average, while the resorts in Bali, for the reason noted,
experienced a RevPAR decline. The decline in gross operating
margins for the region in the third quarter was due in large part
to reduced profitability at the property under management in
Bangkok, which completed extensive renovations in the third quarter
and the significant decline in occupancy at the resorts in Bali.
Excluding these three properties, gross operating margins for the
region would have increased 280 basis points for the third quarter,
and 310 basis points for the nine months ended September 30, 2006.
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Company Operating Results Our strategy is to focus on hotel
management rather than hotel ownership. Four Seasons Hotel
Vancouver is our only remaining hotel whose results we consolidate.
As a result, commencing January 1, 2006, corporate expenses are
reflected in our results as general and administrative expenses in
the consolidated statements of operations. Corporate expenses for
the third quarter and nine months ended September 30, 2005 that
previously were included in our Ownership Operations segment have
been included in general and administrative expenses in the
consolidated statements of operations. Revenues
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(in millions Dollar Percentage of dollars) Third quarter Change
Change
-------------------------------------------------------------------------
2006 over 2006 over 2006 2005 2005 2005
-------------------------------------------------------------------------
Hotel management fees Base $ 20.0 $ 17.8 $ 2.2 12.1% Incentive 7.2
4.7 2.5 52.9%
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Subtotal 27.2 22.5 4.7 20.7%
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Other fees 3.6 3.5 0.1 2.8%
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Subtotal 30.8 26.0 4.8 18.3%
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Hotel ownership revenues 8.8 9.7 (0.9) (9.9)%
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Reimbursed costs(5) 18.6 16.5 2.1 13.5%
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Total revenues $ 58.2 $ 52.2 $ 6.0 11.5%
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--------------------------------------------------
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(in millions Nine months ended Dollar Percentage of dollars)
September 30, Change Change
-------------------------------------------------------------------------
2006 over 2006 over 2006 2005 2005 2005
-------------------------------------------------------------------------
Hotel management fees Base $ 61.4 $ 54.5 $ 6.9 12.6% Incentive 29.3
21.1 8.2 38.5%
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Subtotal 90.7 75.6 15.1 19.9%
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Other fees 13.3 10.0 3.3 33.2%
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Subtotal 104.0 85.6 18.4 21.4%
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Hotel ownership revenues 24.7 58.0 (33.3) (57.3)%
-------------------------------------------------------------------------
Reimbursed costs 55.0 46.3 8.7 18.8%
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Total revenues $ 183.7 $ 189.9 $ (6.2) (3.3)%
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-------------------------------------------------- Hotel Management
Fees Base Fees Base fees are dependent on total revenues of all
managed hotels and resorts, which consist of rooms, food and
beverage and other revenues. For more information regarding base
fees, see our MD&A for the year ended December 31, 2005. For
the third quarter of 2006, base fees increased $2.2 million to
$20.0 million, as compared to the third quarter of 2005. Of the
$2.2 million increase in base fees, base fees from Core Hotels
contributed $1.3 million or 58.2% of the increase. The increase in
base fees from Core Hotels in the third quarter of 2006 represented
a 7.8% increase over the base fees generated from Core Hotels in
the third quarter of 2005. Properties that opened in 2005 and 2006
contributed base fees of $1.6 million in the third quarter of 2006,
as compared to $0.4 million in the same period in 2005. The
increase in base fees in the third quarter of 2006 was moderated by
a $0.6 million reduction in base fees from properties no longer
under management. For the nine months ended September 30, 2006,
base fees increased $6.9 million to $61.4 million, as compared to
the same period in 2005. Of the $6.9 million increase in base fees,
base fees from Core Hotels contributed $4.5 million or 64.7% of the
increase. The increase in base fees from Core Hotels in the nine
months ended September 30, 2006 represented a 9.0% increase over
the base fees generated from Core Hotels in the same period of
2005. Properties that opened in 2005 and 2006 contributed base fees
of $4.5 million in the nine months ended September 30, 2006, as
compared to $0.6 million in the same period in 2005. The increase
in base fees in the nine months ended September 30, 2006, was
moderated by a $1.6 million reduction in base fees from properties
no longer under management. Incentive Fees Our incentive fees are
typically earned based on the profitability of each property that
we manage, but may vary depending on the specific terms of the
relevant management agreement. For more information regarding
incentive fees, see our MD&A for the year ended December 31,
2005. For the third quarter of 2006, incentive fees increased $2.5
million to $7.2 million, as compared to the same period in 2005.
The incentive fees earned from properties that opened in 2005 and
2006 represented $1.1 million of the increase. The remaining $1.4
million of the increase came from improvements in incentive fees
from our Core Hotels. Incentive fees were earned from 40 of the 70
hotels and resorts under management for the third quarter of 2006,
as compared to 37 of the 65 hotels and resorts under management in
the same period in 2005. During the third quarter ended September
30, 2006, the overall improvement in incentive fees was moderated
by a $1.5 million reversal in our incentive fees which was accrued
earlier in the year from certain of our resorts (see discussion
below related to the accrual of incentive fees). Typically, the
incentive fees we receive from the properties under our management
are reconciled on an annual basis to the actual full year operating
results at a particular property. On a quarterly basis, we
recognize incentive fees that would be calculated under the
incentive fee formula as if the particular management contract was
terminated at the relevant reporting date. If a property's
profitability decreases in a subsequent quarter (due mainly to
seasonal differences), the incentive fee accrued in a previous
quarter may be reduced or eliminated. The overall improvement in
incentive fees in the third quarter of 2006 was reduced by the
reversal of approximately $1.5 million ($1.1 million in the third
quarter of 2005) of incentive fees accrued earlier this year,
primarily related to resorts under management. For the nine months
ended September 30, 2006, incentive fees increased $8.2 million to
$29.3 million, as compared to the same period in 2005. The
incentive fees earned from properties that opened in 2005 and 2006
represented $3.3 million of the increase. The remaining $4.9
million of the increase came from improvements in incentive fees
from our Core Hotels. Incentive fees were earned from 45 of the 70
hotels and resorts under management for the nine months ended
September 30, 2006, as compared to 42 of the 65 hotels and resorts
under management in the same period in 2005. The overall
improvement in our incentive fees for the nine months ended
September 30, 2006 was moderated by lower incentive fees in Nevis
and in our resort in Maldives, which remained closed until
September 2006 for renovation and repair of damage from the tsunami
in late 2004. Although the Maldives resort was closed during the
first nine months of 2005, we received fees during that period from
payments in respect of business interruption insurance. Other Fees
Other fees include royalty and management fees from our residential
business, fees we earn during the development of our hotels and
resorts, capital procurement fees and other miscellaneous fees. For
more information on other fees, please see our MD&A for the
year ended December 31, 2005. For the third quarter of 2006, other
fees increased 2.8%, or $0.1 million, to $3.6 million, as compared
to the third quarter of 2005. For the nine months ended September
30, 2006, other fees increased 33.2% or $3.3 million, to $13.3
million, as compared to the same period in 2005. The increase in
other fees for the nine months ended September 30, 2006, as
compared to the same period in 2005, was primarily attributable to
royalty fees related to the sale of branded residences in Miami.
Royalty fees earned on the sale of branded residences will vary
from period to period based on the volume of sales closing in those
periods. These fluctuations may be significant. Hotel Ownership
Revenues We have a 100% leasehold interest in the Four Seasons
Hotel Vancouver and, as a result, we consolidate the results of
that hotel. During the first six months of 2005, we also had a 100%
leasehold interest in The Pierre and consolidated the results of
that property until June 30, 2005 as well. We assigned the lease of
The Pierre to a third party at the end of June 2005 and, as a
result, we ceased to consolidate that property at that time. Our
investment strategy is not to hold any majority interests in
properties. However, Four Seasons Hotel Vancouver is a long-term
leasehold interest that was established at an earlier stage in our
development. We currently expect that we will continue to operate
the Vancouver hotel under the existing lease agreement, until its
expiry on January 31, 2020. In the nine months ended September 30,
2006, the decline in hotel ownership revenues was primarily related
to our owning and consolidating 100% of The Pierre until June 30,
2005 and our not owning and not consolidating it during 2006. Hotel
ownership revenues for the third quarter and nine months ended
September 30, 2006 primarily relates to the Four Seasons Hotel
Vancouver. Revenue at that property increased by 8.9% relative to
the third quarter of 2005, primarily as the result of the decline
in the US dollar relative to the Canadian dollar, as Canadian
dollar revenues were translated into US dollars. Revenue at that
property increased by 21.1% relative to the nine months ended
September 30, 2005, primarily as the result of an 11.0% improvement
in RevPAR and the decline in the US dollar relative to the Canadian
dollar. We have seven units of residential inventory at two
resorts, which we acquired with the intent to resell at our book
value cost during the next several years as a combination of
fractional and whole home ownership residences. We do not intend
for this to be an ongoing business activity and expect that over
time the costs related to the sales process to be approximately
equal to the proceeds from the sale of these units. During the nine
months ended September 30, 2006, we sold inventory for gross
proceeds of $1.5 million (nil proceeds in the third quarter of
2006). The revenue associated with the sales is included in Hotel
Ownership Revenues for both the third quarter and nine months ended
September 30, 2006, and the cost of the sales is included in Hotel
Ownership Cost of Sales and Expenses. There were no sales in 2005.
Reimbursed Costs Reimbursed costs, which primarily represent sales,
marketing, advertising and central reservation expenses for which
hotels and resorts under management reimburse us, are generally
incurred on a cost-recovery basis to us and are a function of the
revenues under management. For the third quarter of 2006,
reimbursed costs increased $2.1 million or 13.5%, as compared to
the corresponding period in 2005. For the nine months ended
September 30, 2006, reimbursed costs increased $8.7 million or
18.8%, as compared to the corresponding period in 2005. The
increase in both the third quarter and nine months ended September
30, 2006 was due primarily to an increase in the number of
properties in the portfolio and increased costs related to
increased activity due to volume, as compared to the same periods
in 2005. Expenses General and Administrative Expenses As discussed
previously, general and administrative expenses include amounts
that were previously classified as corporate expenses. The majority
of our general and administrative expenses are incurred in Canadian
dollars. For the third quarter of 2006, general and administrative
expenses decreased C$1.9 million (approximately 9.8%) on a Canadian
dollar basis to C$17.0 million from C$18.9 million in the same
period in 2005. During the third quarter of 2005, we accrued a
retirement allowance of approximately C$1.1 million, as compared to
nil for the same period in 2006. As reported in US dollars, general
and administrative expenses decreased 2.9% to $15.2 million, from
$15.6 million in the third quarter of 2005. Adjusting for the
effect of the US dollar having declined relative to the Canadian
dollar (average Canadian/US foreign exchange rate: third quarter
2006 - 1.121; 2005 - 1.207), general and administrative expenses
would have declined $1.5 million instead of $0.4 million. As noted,
the majority of our general and administrative expenses are
incurred in Canadian dollars, while the majority of hotel
management fee revenues and cash balances are in US dollars. We
also incur Canadian dollar capital funding requirements, which are
primarily attributable to our corporate office expansion.
Accordingly, in December 2005, we began selling forward US dollars
for conversion to Canadian dollars, to help fix the cost of our
Canadian dollar expenditures in US dollars. The foreign exchange
gains and losses arising from both the forward contracts settled
and the forward contracts outstanding as at September 30, 2006 are
included in Other Income (Expense), Net and is discussed below. For
the nine months ended September 30, 2006, on a Canadian dollar
basis, general and administrative expenses decreased C$0.9 million
(approximately 1.7%) to C$49.9 million from C$50.8 million, in the
same period in 2005. As reported in US dollars, for the nine months
ended September 30, 2006, general and administrative expenses
increased 6.2% (or $2.6 million) to $44.1 million from $41.5
million in the same period in 2005. Approximately $3.3 million or
129.1% of the reported increase in general and administrative
expenses is attributable to the US dollar decline, relative to the
Canadian dollar, in the nine-month over nine-month period. The
average Canadian/US foreign exchange rate for the nine months ended
September 30, 2006 and 2005 are 1.133 and 1.225, respectively.
Hotel Ownership Cost of Sales and Expenses As discussed above, we
consolidate 100% of the operations of Four Seasons Hotel Vancouver
and, until June 30, 2005, we also consolidated the operations of
The Pierre. Hotel ownership cost of sales and expenses declined
7.8% to $7.8 million in the third quarter of 2006, from $8.4
million in the third quarter of 2005. For the nine months ended
September 30, 2006, hotel ownership cost of sales and expenses
declined 59.1% to $23.8 million from $58.2 million in the same
period in 2005, primarily as a result of the operations of The
Pierre being consolidated, until June 30, 2005 and not being
consolidated in the same period of 2006. As noted above, costs
relating to the sale of residential units are included in Hotel
Ownership Cost of Sales and Expenses. For the third quarter and
nine months ended September 30, 2006, costs relating to the sale of
the residential units were $0.5 million and $2.0 million,
respectively. Costs of sales and expenses at Four Seasons Hotel
Vancouver increased 11.5% in the third quarter of 2006 and 10.3% in
the nine months ended September 30, 2006, both as compared to the
same periods in 2005, primarily as a result of the decline in the
US dollar relative to the Canadian dollar, as the Canadian dollar
costs are translated into US dollars for reporting purposes.
Overall, our earnings from hotel ownership operations declined from
$1.3 million in the third quarter of 2005 to $1.0 million in the
third quarter of 2006. For the nine months ended September 30,
2006, our earnings from hotel ownership operations was $0.9
million, as compared to a loss of $0.2 million for the comparable
period in 2005. Operating Earnings Before Other Items(6) As a
result of the items described above, operating earnings before
other items increased 41.9% to $16.6 million in the third quarter
of 2006, as compared to $11.7 million in the same period in 2005.
For the nine months ended September 30, 2006, operating earnings
before other items increased 38.5% to $60.8 million, as compared to
$43.9 million in the same period in 2005. Profit Margin Our profit
margin on our management business in the third quarter of 2006,
calculated including reimbursed revenues and costs of $18.6 million
($16.5 million in 2005), was 31.5% (24.4% in 2005). Excluding
reimbursed revenues and costs, our profit margin on our management
business was as follows:
-------------------------------------------------------------------------
(in millions of dollars) Third quarter
-------------------------------------------------------------------------
2006 2005
-------------------------------------------------------------------------
Hotel management fees $ 27.2 $ 22.5
-------------------------------------------------------------------------
Other fees 3.6 3.5
-------------------------------------------------------------------------
Subtotal - management fee revenues (excluding reimbursed costs)
30.8 26.0
-------------------------------------------------------------------------
General and administrative expenses (including corporate expenses
as discussed above) (15.2) (15.6)
-------------------------------------------------------------------------
Total - management operations earnings before other items $ 15.6 $
10.4
-------------------------------------------------------------------------
------------------------ Profit margin (excluding reimbursed
costs)(x) 50.7% 39.9%
-------------------------------------------------------------------------
(x) This is a non-GAAP financial measure, calculated as management
operations earnings before other items divided by management fee
revenues (excluding reimbursed costs), and does not have any
standardized meaning prescribed by GAAP. It is, therefore, unlikely
to be comparable to similar measures presented by other issuers. We
consider this measure to be a useful indicator of our operating
performance, and management uses it as a measure to assess our
operating performance. Our profit margin on our management business
for the nine months ended September 30, 2006, calculated including
reimbursed revenues and costs of $55.0 million ($46.3 million in
2005), was 37.7% (33.4% in 2005). Excluding reimbursed revenues and
costs, our profit margin on our management business was as follows:
-------------------------------------------------------------------------
Nine months ended (in millions of dollars) September 30,
-------------------------------------------------------------------------
2006 2005
-------------------------------------------------------------------------
Hotel management fees $ 90.7 $ 75.6
-------------------------------------------------------------------------
Other fees 13.3 10.0
-------------------------------------------------------------------------
Subtotal - management fee revenues (excluding reimbursed costs)
104.0 85.6
-------------------------------------------------------------------------
General and administrative expenses (including corporate expenses
as discussed above) (44.1) (41.5)
-------------------------------------------------------------------------
Total - management operations earnings before other items $ 59.9 $
44.1
-------------------------------------------------------------------------
------------------------ Profit margin (excluding reimbursed
costs)(x) 57.6% 51.5%
-------------------------------------------------------------------------
(x) This is a non-GAAP financial measure, calculated as management
operations earnings before other items divided by management fee
revenues (excluding reimbursed costs), and does not have any
standardized meaning prescribed by GAAP. It is, therefore, unlikely
to be comparable to similar measures presented by other issuers. We
consider this measure to be a useful indicator of our operating
performance, and management uses it as a measure to assess our
operating performance. Depreciation and Amortization For the third
quarter and nine months ended September 30, 2006, depreciation and
amortization was $4.4 million and $9.9 million, respectively, as
compared to $2.6 million and $8.5 million during the same periods
in 2005. The increase in depreciation and amortization in the third
quarter of 2006, as compared to the same period in 2005, is
primarily attributable to a $1.7 million increase in the
amortization of our investment in The Ritz- Carlton Chicago
management contract. We have reached an agreement with the owner of
The Ritz-Carlton Chicago. The agreement relates to the possible
sale of that property by the owner to a third party, and the
potential cessation of our management of that property, as well as
the significant refurbishment of Four Seasons Hotel Chicago (which
is owned by an affiliated owner). These arrangements provide the
owner of The Ritz-Carlton Chicago with the option to terminate our
management prior to a sale of the property, and the obligation to
terminate our management upon a sale of the property. Under this
arrangement we are entitled to payments in connection with both a
termination of our management of the property and the owner's sale
of the property. Although there is no certainty as to the date of
our termination of management, there is a possibility it could
occur in the near term and, accordingly, we are amortizing the $3.4
million difference between the expected value of the payment to be
made on termination of our management and the book value of our
investment in this management contract, over the last half of 2006.
We may subsequently record a gain following a future sale of the
property, depending on the payments we actually receive. Other
Income (Expenses), Net For the third quarter of 2006, other income,
net was $0.6 million, as compared to other expense, net of $21.1
million for the same period in 2005.
-------------------------------------------------------------------------
(in millions of dollars) Third quarter
-------------------------------------------------------------------------
2006 2005
-------------------------------------------------------------------------
Foreign exchange gain (loss) $1.3 ($16.2)
-------------------------------------------------------------------------
Loss on disposition of assets 0.0 (0.3)
-------------------------------------------------------------------------
Asset provision and write downs (0.7) (4.6)
-------------------------------------------------------------------------
Other income (expenses), net $0.6 ($21.1) ------------------------
-------------------------------------------------------------------------
For the nine months ended September 30, 2006, other expenses, net
was $7.0 million, as compared to $32.4 million for the same period
in 2005.
-------------------------------------------------------------------------
Nine months ended (in millions of dollars) September 30,
-------------------------------------------------------------------------
2006 2005
-------------------------------------------------------------------------
Foreign exchange loss ($6.6) ($19.9)
-------------------------------------------------------------------------
Loss on disposition of assets 0.0 (5.8)
-------------------------------------------------------------------------
Asset provision and write downs (0.4) (6.7)
-------------------------------------------------------------------------
Other expenses, net ($7.0) ($32.4) ------------------------
-------------------------------------------------------------------------
Foreign Exchange Other income (expenses), net for the third quarter
of 2006 included a foreign exchange gain of $1.3 million, as
compared to a loss of $16.2 million for the same period in 2005.
For the nine months ended September 30, 2006, other income
(expenses), net included a foreign exchange loss of $6.6 million,
as compared to a loss of $19.9 million for the same period in 2005.
The foreign exchange gains and losses in 2006 and 2005 related
primarily 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
local currency foreign exchange gains and losses on net monetary
assets incurred by our designated foreign self-sustaining
subsidiaries. The foreign exchange loss on the translation of
balance sheet items was reduced from what it would otherwise have
been for the nine-month period by a gain on the marked-to-market
adjustment and settlement of the forward contracts described below.
As discussed above, we have entered into a program to sell forward
US dollars into Canadian dollars to help us to predict the US
dollar cost of our Canadian dollar general and administrative
expenses and Canadian dollar capital funding requirements. All our
forward contracts are being marked-to- market with the resulting
changes in fair values being recorded as a foreign exchange gain or
loss. Other income (expenses), net included a foreign exchange loss
of $0.2 million in the third quarter of 2006 and a foreign exchange
gain of $1.3 million for the nine months ended September 30, 2006
related to the forward contracts. This program to sell forward US
dollars was not in place during the nine months ended September 30,
2005, and, as such, no amounts were realized in the third quarter
or nine months ended September 30, 2005. Included in foreign
exchange loss for the third quarter of 2006 is a $0.1 million loss
realized on the settlement of $13.6 million of forward contracts
during the third quarter ($1.1 million gain realized on the
settlement of $71.3 million of forward contracts during the nine
months ended September 30, 2006). As at September 30, 2006, we had
forward contracts in place to sell forward $44.2 million of US
dollars and received Canadian dollars at a weighted average
exchange rate of 1.114 Canadian dollars to a US dollar at various
maturities extending to March 2008. On these outstanding forward
contracts, the marked-to-market loss for the third quarter of 2006
was $0.1 million, and the marked-to-market gain for the nine months
ended September 30, 2006 was $0.2 million. These amounts are
included in the $0.2 million foreign exchange loss for the third
quarter of 2006 and $1.3 million foreign exchange gain for the nine
months ended September 30, 2006, noted above. Subsequent to
September 30, 2006, we have extended the program to sell forward an
additional $3.5 million of US dollars for conversion to Canadian
dollars with maturities extending to April 2008, at a weighted
average exchange rate of 1.129 Canadian dollars to a US dollar.
While this program of selling forward US dollars allows us to
better predict the cost in US dollars of the majority of our
Canadian dollar general and administrative expenses and capital
requirements, it will not eliminate the impact of foreign currency
fluctuations related to our management fees in currencies other
than US dollars. It will also not eliminate foreign currency gains
and losses related to un-hedged net monetary assets and liability
positions. As such, our consolidated results will continue to
include gains and losses related to foreign currency fluctuations.
The impact of foreign currency gains and losses has been material
in the past and could continue to be material in the future.
Disposition of Assets Included in the nine months ended September
30, 2005, are amounts related to an assignment of our interest in
The Pierre. On June 30, 2005, we finalized the assignment of our
lease and the sale of the related assets in The Pierre for net
proceeds of $4.5 million. The net book value of our assets in The
Pierre was $7.8 million and, after deducting disposition costs, we
recorded a loss on sale of $5.3 million. We also recorded a tax
benefit in connection with the sale of $9.2 million, which is noted
below under "Income Tax Expense". Including the tax benefit, we
realized a net gain of $3.9 million on the disposition of The
Pierre. Interest Income and Interest Expense The $1.8 million
increase in interest income for the third quarter of 2006 and the
$4.3 million increase in interest income for the nine months ended
September 30, 2006, in both cases as compared to the same periods
in 2005, were primarily attributable to higher deposits and higher
deposit interest rates. The $0.8 million increase in interest
expense for the third quarter of 2006 and the $3.0 million increase
in interest expense for the nine months ended September 30, 2006,
in both cases as compared to the same periods in 2005, were
primarily attributable to the increase in interest expense accrued
relating to the currency and interest rate swap agreement we
entered into in the second quarter of 2005 related to our
convertible senior notes. These arrangements are more fully
described in the MD&A for the year ended December 31, 2005. In
the third quarter of 2006, the effective interest rate on our
convertible senior notes was approximately 4.9%, which represents
interest expense of $2.8 million ($2.0 million in 2005). For the
nine months ended September 30, 2006, the effective interest rate
on our convertible senior notes was 5.4%, which represents interest
expense of $9.1 million ($6.3 million in 2005). Income Tax Expense
Income tax expense during the third quarter of 2006 was $4.1
million (effective tax rate of 27.2%), as compared to $0.7 million
for the same period in 2005. For the nine months ended September
30, 2006, our income tax expense was $15.1 million (effective tax
rate of 31.1%), as compared to income tax recovery of $3.4 million
for the same period in 2005. The increase in the effective tax rate
relates to certain amounts, particularly foreign exchange gains and
losses not being tax effected. During the quarter and nine months
ended September 30, 2006, we did not record approximately $0.2
million and $1.9 million, respectively, of a tax benefit related to
the foreign exchange losses, due to the uncertainty associated with
the utilization of those losses. In connection with the disposition
of The Pierre in the second quarter of 2005, we recorded a tax
benefit of approximately $9.2 million. Net Earnings and Earnings
per Share For the reasons outlined above, net earnings for the
third quarter of 2006 were $10.9 million ($0.30 basic earnings per
share and $0.29 diluted earnings per share), as compared to a net
loss of $11.4 million ($0.31 basic and diluted loss per share) for
the same period in 2005. For the nine months ended September 30,
2006, net earnings were $33.4 million ($0.91 basic earnings per
share and $0.89 diluted earnings per share), as compared to net
earnings of $9.5 million ($0.26 basic earnings per share and $0.25
diluted earnings per share) for the same period in 2005. Adjusted
Net Earnings and Adjusted Earnings per Share(x) In the third
quarter of 2006, other income, net of $0.6 million related
primarily to foreign exchange gains, which were offset partially by
asset provisions and write downs. In the third quarter of 2005,
other expenses, net of $21.1 million related primarily to foreign
exchange losses and asset provisions and write downs. Adjusting for
other income (expenses), net and the applicable income taxes,
adjusted net earnings were as follows:
-------------------------------------------------------------------------
(in millions of dollars except per share amounts) Third quarter
-------------------------------------------------------------------------
2006 2005
-------------------------------------------------------------------------
Net earnings (loss) $ 10.9 $ (11.4)
-------------------------------------------------------------------------
Adjustments - Other (income) expenses, net (0.6) 21.1
-------------------------------------------------------------------------
Tax effect related to foregoing adjustments 0.6 (1.6)
-------------------------------------------------------------------------
Adjusted net earnings $ 10.9 $ 8.1
-------------------------------------------------------------------------
------------------------ Adjusted basic earnings per share $ 0.30 $
0.22
-------------------------------------------------------------------------
------------------------ Adjusted diluted earnings per share $ 0.29
$ 0.22 ------------------------
-------------------------------------------------------------------------
In the nine months ended September 30, 2006, other expenses, net of
$7.0 million related primarily to foreign exchange losses. In the
nine months ended September 30, 2005, other expenses, net of $32.4
million related primarily to foreign exchange losses, losses on the
disposition of assets, and asset provisions and write downs.
Adjusting for other expenses, net and the applicable income taxes,
adjusted net earnings were as follows:
-------------------------------------------------------------------------
(in millions of dollars except per share amounts) Nine months ended
September 30,
-------------------------------------------------------------------------
2006 2005
-------------------------------------------------------------------------
Net earnings $ 33.4 $ 9.5
-------------------------------------------------------------------------
Adjustments - Other expenses, net 7.0 32.4
-------------------------------------------------------------------------
Tax effect related to foregoing adjustments 1.8 (12.6)(xx)
-------------------------------------------------------------------------
Adjusted net earnings $ 42.2 $ 29.3
-------------------------------------------------------------------------
------------------------ Adjusted basic earnings per share $ 1.15 $
0.80
-------------------------------------------------------------------------
------------------------ Adjusted diluted earnings per share $ 1.13
$ 0.77 ------------------------
-------------------------------------------------------------------------
(x) Adjusted net earnings is a non-GAAP financial measure and does
not have any standardized meaning prescribed by GAAP. It is,
therefore, unlikely to be comparable to similar measures presented
by other issuers and should not be considered as an alternative to
net earnings, cash flow from operating activities or any other
measure of performance prescribed by Canadian GAAP. Our adjusted
net earnings may also not be comparable to adjusted net earnings
used by other lodging companies, which may be calculated
differently. We consider adjusted net earnings to be a meaningful
indicator of our operations, and management uses it as a measure to
assess our operating performance. Adjusted net earnings is also
used by investors, analysts, and our lenders as a measure of our
financial performance. As a result, we have chosen to provide this
information. (xx) In connection with the disposition of The Pierre
in the second quarter of 2005, we recorded a tax benefit of
approximately $9.2 million in the nine months ended September 30,
2005. Eight-Quarter Summary
-------------------------------------------------------------------------
(in millions of dollars except per share amounts) Third quarter
Second quarter
-------------------------------------------------------------------------
2006 2005 2006 2005
-------------------------------------------------------------------------
Total revenues $ 58.2 $ 52.2 $ 67.8 $ 74.5
-------------------------------------------------------------------------
Operating earnings before other items $ 16.6 $ 11.7 $ 23.7 $ 20.1
-------------------------------------------------------------------------
Net earnings (loss) $ 10.9 $ (11.4) $ 9.1 $ 15.8
-------------------------------------------------------------------------
Basic earnings (loss) per share(7) $ 0.30 $ (0.31) $ 0.25 $ 0.43
-------------------------------------------------------------------------
Diluted earnings (loss) per share $ 0.29 $ (0.31) $ 0.24 $ 0.42
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Average Canadian/US dollar foreign exchange rate used for specified
quarter 1.12087 1.20687 1.12509 1.24401
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(in millions of dollars except per share amounts) First Quarter
Fourth Quarter
-------------------------------------------------------------------------
2006 2005 2005 2004
-------------------------------------------------------------------------
Total revenues $ 57.6 $ 63.1 $ 58.5 $ 69.5
-------------------------------------------------------------------------
Operating earnings before other items $ 20.5 $ 12.1 $ 12.3 $ 14.7
-------------------------------------------------------------------------
Net earnings (loss) $ 13.4 $ 5.2 $ (37.8) $ 12.8
-------------------------------------------------------------------------
Basic earnings (loss) per share(7) $ 0.36 $ 0.14 $ (1.03) $ 0.35
-------------------------------------------------------------------------
Diluted earnings (loss) per share $ 0.36 $ 0.14 $ (1.03) $ 0.34
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Average Canadian/US dollar foreign exchange rate used for specified
quarter 1.15421 1.22652 1.17478 1.22033
-------------------------------------------------------------------------
Liquidity and Capital Resources As at September 30, 2006, our cash
and cash equivalents were $254.2 million, as compared to $242.2
million as at December 31, 2005. Our investments in cash and cash
equivalents are highly liquid, with maturities of less than 90
days. These investments include bank deposits, guaranteed
investment certificates and money market funds held with major
financial institutions. We have a committed bank credit facility of
$125.0 million, which expires September 2007. Borrowings under this
credit facility bear interest at LIBOR plus a spread ranging
between 0.875% and 2.25% in respect of LIBOR-based borrowings
(prime rate plus a spread ranging between nil and 1.25% in respect
of prime rate borrowings), depending upon certain criteria
specified in the credit agreement for the facility. As at September
30, 2006, no amounts were borrowed under the credit facility.
However, approximately $1.6 million of letters of credit were
issued under the facility. No amounts have been drawn under these
letters of credit. We believe that, absent unusual opportunities or
circumstances, this bank 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. Contractual Obligations Our contractual obligations are
more fully described in the MD&A for the year ended December
31, 2005. Since December 31, 2005, our contractual obligations have
declined by $19.2 million as a result of funding $15.7 million
related to expansion of our Toronto corporate office and a $3.5
million instalment payment related to our naming rights for the
Four Seasons Centre for the Performing Arts, which was made during
the second quarter of 2006. Guarantees and Commitments As discussed
in the MD&A for the year ended December 31, 2005, we have
guarantees and other similar commitments, including certain lease
commitments. Since December 31, 2005, our guarantees and
commitments have decreased by approximately $1.3 million to
approximately $33.4 million. Cash Flows Cash from Operations We
generated $29.9 million of cash from operations during the third
quarter of 2006, as compared to $17.0 million for the same period
in 2005. The increase in cash from operations of $12.9 million in
the third quarter of 2006, as compared to the same period in 2005,
resulted primarily from changes of $13.7 million in non-cash
working capital. We generated $57.5 million of cash from operations
during the nine months ended September 30, 2006, as compared to
$36.4 million for the same period in 2005. For the nine months
ended September 30, 2006, the increase in cash from operations of
$21.1 million, as compared to the same period in 2005, resulted
primarily from higher earnings generated from our management
business and hotel ownership and changes of $12.8 million in
non-cash working capital. Investing Activities As part of expanding
our portfolio of properties under management, we make investments
in the form of long-term receivables, minority equity investments
and investments in management contracts. In making these
investments, we assess the expected overall returns to Four
Seasons, including the value created through our long-term
management agreements. Long-Term Receivables In the third quarter
of 2006, we advanced $3.8 million, in the aggregate, as long-term
receivables to properties under our management, as compared to $4.6
million in the same period in 2005. Also in the third quarter of
2006, we were repaid $4.4 million, in the aggregate, of our
long-term receivables, as compared to $0.1 million in the same
period in 2005. In the nine months ended September 30, 2006, we
advanced $21.8 million, in the aggregate, as long-term receivables
to properties under our management, as compared to $38.6 million in
the same period in 2005. Also in the nine months ended September
30, 2006, we were repaid $14.4 million, in the aggregate, of our
long-term receivables, as compared to $19.4 million in the same
period in 2005. Investments in Hotel Partnerships and Corporations
In April 2006, we sold our equity interest in one of the properties
under our management for net proceeds of $1.0 million (cash of $0.7
million and a promissory note of $0.3 million), which approximated
book value. In the third quarter of 2006, we invested $2.5 million
to fund capital requirements in these assets, as compared to $1.4
million in the same period of 2005. In the nine months ended
September 30, 2006, we invested $3.0 million to fund capital
requirements in these assets and were repaid $2.3 million relating
to our equity interest in a property under our management. We also
contributed our equity interest in a property under our management
in exchange for a management contract enhancement of approximately
the same fair value. No gain or loss was recorded in connection
with this transaction. We invested $10.8 million in the nine months
ended September 30, 2005, in equity interests and received $12.7
million relating to the sale of three of our equity interests.
Investment in Trademarks, Trade Names and Management Contracts In
the third quarters of 2006 and 2005, we funded an aggregate of $2.2
million and $0.2 million, respectively, primarily related to our
investments in management contracts. In the nine months ended
September 30, 2006 and 2005, we funded an aggregate of $16.9
million and $0.7 million, respectively, primarily related to our
investments in management contracts. Fixed Assets Our capital
expenditures were $6.3 million for the third quarter in 2006, as
compared to $4.8 million for the same period in 2005. In 2004, we
commenced construction on our Toronto corporate office expansion,
which is scheduled to be substantially completed during 2006. In
the third quarters of 2006 and 2005, capital expenditures related
to this expansion were $6.0 million and $4.4 million, respectively.
In the nine months ended September 30, 2006, our capital
expenditures were $16.1 million, as compared to $12.8 million for
the same period in 2005. In the nine months ended September 30,
2006 and 2005, capital expenditures related to our Toronto
corporate office expansion were $15.7 million and $10.2 million,
respectively. Financing Activities In the nine months ended
September 30, 2006, we issued $5.6 million in Limited Voting Shares
("LVS") related to the exercise of stock options and paid $3.4
million in dividends. In the nine months ended September 30, 2005,
we received $7.0 million from the issuance of LVS related to the
exercise of stock options and paid $3.1 million in dividends.
Outstanding Share Data
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Designation Outstanding as at November 8, 2006
-------------------------------------------------------------------------
Variable Multiple Voting Shares(1) 3,725,698
-------------------------------------------------------------------------
Limited Voting Shares 33,380,482
-------------------------------------------------------------------------
Options to acquire Limited Voting Shares(2):
-------------------------------------------------------------------------
Outstanding 3,945,375
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Exercisable 3,285,235
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Convertible Senior Notes issued June 2004 and due 2024(3) $251.3
million(4)
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(1) Convertible into Limited Voting Shares at any time at the
option of the holder on a one-for-one basis. (2) As disclosed in
note 11(a) to our annual consolidated financial statements for the
year ended December 31, 2005, pursuant to an agreement approved by
the shareholders in 1989, Four Seasons has agreed to make a payment
to Mr. Isadore Sharp on an arm's length sale of control of Four
Seasons Hotels Inc. that is calculated by reference to the
consideration received per Limited Voting Share in the transaction
and the total number of Variable Multiple Voting Shares and Limited
Voting Shares outstanding at the time of sale. (3) The terms of the
convertible senior notes are more fully described in our MD&A
for the year ended December 31, 2005. (4) This amount is equal to
the issue price of the convertible senior notes issued in June 2004
and due 2024 plus accrued interest calculated at 1.875% per annum.
Subsequent Event On November 6, 2006, we announced that our Board
of Directors had received a proposal to pursue a transaction
through which Four Seasons Hotels Inc. ("FSHI") would be taken
private for $82.00 cash per Limited Voting Shares. The Board of
Directors has established a special committee of independent
directors that will consider the proposed transaction and make
recommendations to the Board. Although there is no certainty that
the transaction contemplated by the proposal, or any other
transaction, will be completed or the terms and conditions of any
such transaction, some of our arrangements and agreements may be
impacted by certain terms in those arrangements and agreements,
including the following: 1) Convertible Senior Notes: Our
convertible senior notes issued in 2004 are convertible into
Limited Voting Shares (although at our option, we may make a cash
payment in lieu of all or some of those Limited Voting Shares) in
certain circumstances, including upon the occurrence of a
"fundamental change", as defined in the indenture pursuant to which
the notes were issued. The proposal, if completed, would result in
a fundamental change occurring, in which case a holder of notes
would be able to surrender notes for conversion and would be
entitled to receive on conversion: (a) If notes are surrendered for
conversion in connection with the fundamental change within the
time period prescribed in the indenture, the number of our Limited
Voting Shares into which the notes would be convertible (currently
13.9581 Limited Voting Shares per $1,000 principal amount of
notes), plus a make whole premium, as defined in the indenture
(estimated to be in the range of $87.00 to $98.00 per $1,000
principal amount of notes based on the proposed price of $82.00 per
Limited Voting Share pursuant to the proposal and assuming that, if
the proposal is implemented, the effective date would be between
January 1, 2007 and July 30, 2007), and an amount equal to any
accrued but unpaid interest to, but not including, the conversion
date; or (b) If notes are surrendered for conversion after the time
period prescribed in the indenture and after the fundamental
change, the consideration that the holder would have received if
the holder had held the number of Limited Voting Shares into which
the converted notes were convertible immediately before the
fundamental change ($1,144.56 per $1,000 principal amount of notes,
based on the $82.00 per Limited Voting Share in the transaction
that has been proposed). In this circumstance, no make whole
premium would be payable. The proposed transaction would constitute
a "change in control", as defined in the indenture, and as a result
we would be required to make an offer to repurchase the notes at a
purchase price equal to the principal amount of the notes plus a
make whole premium (as described above), and an amount equal to any
accrued and unpaid interest to, but not including, the date of
repurchase. We have the right to satisfy the obligations in respect
of conversion in the circumstances described in (a) above, and in
respect of a repurchase of notes as described above, with Limited
Voting Shares (or other "applicable stock", as defined in the
indenture, in the case of repurchase of notes) or at our option
cash or a combination of Limited Voting Shares and cash. Further
information regarding the terms of our convertible notes is set out
in the indenture pursuant to which the notes were issued. 2)
Long-Term Incentive Arrangement: Pursuant to an agreement approved
by the shareholders of FSHI at a special meeting in 1989, FSHI and
its principal operating subsidiary, Four Seasons Hotels Limited,
have agreed to make a cash payment to Mr. Isadore Sharp, the Chief
Executive Officer of FSHI, on an arms-length sale of control of
FSHI. If the proposed transaction is completed, Mr. Sharp would be
entitled to realize proceeds related to the incentive arrangement
estimated to be approximately $288 million (based on a proposed
price of $82.00 per Limited Voting Share pursuant to the proposal
and assuming that at the time of the completion of the proposed
transaction approximately 41.1 million Limited Voting Shares and
Variable Multiple Voting Shares, which includes Limited Voting
Shares that may be issued upon the exercise of previously granted
stock options, were outstanding). 3) Other Arrangements and
Agreements: Certain other arrangements and agreements are subject
to "change of control" provisions. These include the following: (a)
Under the terms of our current $125 million bank credit facility, a
change of control triggers a default under the bank credit
facility, and if not waived, would require the repayment of all
amounts outstanding under this credit facility and would also
result in the termination of this credit facility. As at September
30, 2006, no amounts were borrowed under this credit facility, but
approximately $1.6 million of letters of credit were issued under
this credit facility. (b) Pursuant to a cross default provision, a
default under the bank credit facility in turn would cause a
default under our currency and interest rate swap agreement. In
such circumstances, the counterparty to the swap agreement may
demand that the swap be terminated. As at September 30, 2006, the
net amount that would be required to be paid by FSHI to the
counterparty on termination was approximately $34.9 million (of
which approximately $29.1 million is included in long-term
obligations). We are continuing to evaluate the potential impact,
if any, of the proposed transaction on our other agreements and
arrangements. Looking Ahead Operating Environment Assuming the
travel trends that we have experienced to date in 2006 continue,
and based on current demand reflected in our reservation activity,
we expect RevPAR for worldwide Core Hotels in the fourth quarter of
2006 and the full year 2006 to increase in the range of 10% to 12%,
as compared to the corresponding periods in 2005. If these
anticipated trends continue and we meet our expectations for cost
management, we expect gross operating margins of our worldwide Core
Hotels to increase in the range of 190 to 210 basis points for the
full year of 2006, as compared to the full year of 2005.
Accordingly, based on the current hotel operating outlook, we
expect hotel management fee revenue to grow for the full year 2006
in the range of 15% to 20%. Changes in Accounting Policies During
the nine months ended September 30, 2006, we adopted The Canadian
Institute of Chartered Accountants' ("CICA") new accounting
standard on non- monetary transactions, as discussed in note 1 to
the interim consolidated financial statements. This standard was to
be implemented for non-monetary transactions initiated on or after
January 1, 2006. The adoption of this standard 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, 2005) is available on our website at
http://www.fourseasons.com/investor, and on SEDAR at
http://www.sedar.com/. ------------------------------- (1) RevPAR
is defined as average room revenue per available room. It is a
non-GAAP financial measure and does not have any standardized
meaning prescribed by GAAP and is therefore unlikely to be
comparable to similar measures presented by other issuers. 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. (2) The term
"Core Hotels" means hotels and resorts under management for the
full year of both 2006 and 2005. 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 2005/2004 Core Hotels are the
additions of Four Seasons Resort Scottsdale at Troon North, Four
Seasons Resort Whistler, Four Seasons Resort Costa Rica at
Peninsula Papagayo, Four Seasons Hotel Gresham Palace Budapest,
Four Seasons Resort Provence at Terre Blanche and Four Seasons
Hotel Cairo at Nile Plaza, and the deletion of The Regent Kuala
Lumpur. (3) Gross operating profit is defined as gross operating
revenues less operating expenses. (4) Gross operating margin
represents gross operating profit as a percentage of gross
operating revenue. (5) Reimbursed costs include the reimbursement
of all out-of-pocket costs, including sales and marketing and
advertising charges. (6) Operating earnings before other items is
equal to net earnings plus (i) income tax expense less (ii) income
tax recovery plus (iii) interest expense less (iv) interest income
plus (v) other expenses less (vi) other income plus (vii)
depreciation and amortization. Operating earnings before other
items is a non-GAAP financial measure and does not have any
standardized meaning prescribed by GAAP and is therefore unlikely
to be comparable to similar measures presented by other issuers. We
consider operating earnings before other 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. Operating earnings before
other items is also used by investors, analysts and our lenders as
a measure of our financial performance. (7) Quarterly and
year-to-year computations of per share amounts are made
independently. The sum of per share amounts for the quarters may
not agree with per share amounts for the year. DATASOURCE: Four
Seasons Hotels and Resorts CONTACT: John Davison, Chief Financial
Officer, (416) 441-6714; Barbara Henderson, Senior Vice President,
Corporate Finance, (416) 441-4329
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