| TORONTO, Aug. 10, 2006 - Four Seasons Hotels Inc. (TSX Symbol "FSH";
NYSE Symbol "FS") today reported its results for the second quarter and
six months ended June 30, 2006.
All amounts disclosed in this news release are in US dollars unless
otherwise noted. Endnotes can be found at the end of this news release.
Highlights of the Second Quarter and Six Months Ended June 30, 2006
For the second quarter and six months ended June 30, 2006, as compared
to the same periods in 2005:
Hotel and Resort Operating Results:
- For the second quarter, RevPAR(1) increased
at our worldwide Core
Hotels(2) by 12.1% and at
our US Core Hotels by 11.7%. For the six
months ended June 30, 2006,
RevPAR increased at our worldwide Core
Hotels by 11.9% and at our
US Core Hotels by 12.2%.
- For the second quarter, gross operating
margins(3) increased at our
worldwide Core Hotels by
150 basis points to 33.9%. At our US Core
Hotels gross operating margins
increased by 170 basis points to
32.5%. For the six months
ended June 30, 2006, gross operating
margins increased at our
worldwide Core Hotels by 200 basis points to
33.2%. At our US Core Hotels
gross operating margins increased by 190
basis points to 31.4%.
- For the second quarter, revenues under
management increased 10.8% to
$750.7 million from $677.7
million. For the six months ended June 30,
2006, revenues under management
increased 12.8% to $1.44 billion from
$1.28 billion. We had approximately
17,500 rooms under management in
the six months ended June
30, 2006, as compared to approximately
16,600 rooms in the same
period in 2005.
"Demand for luxury travel continues to be very healthy while supply
growth in most markets has been minimal, creating a very favourable dynamic
in the luxury segment of the lodging industry," said Isadore Sharp, Chairman
and Chief Executive Officer. "We believe we are in a strong competitive
position in luxury lodging and should benefit from this favourable dynamic,
both at existing hotels and resorts and at the new Four Seasons properties
we are adding to our portfolio."
Company Operating Results:
- As a result of improved results at
properties under our management
and an increase in the number
of rooms under management, hotel
management fees increased
16.4% in the second quarter of 2006. For
the six months ended June
30, 2006, hotel management fees increased
19.5%.
- Base fees increased 13.6% in the second
quarter and 12.9% for the six
months ended June 30, 2006,
generally in line with RevPAR
improvements for the respective
periods.
- As a result of improved profitability
and the addition of new
properties under our management,
incentive fees increased 22.2% for
the second quarter and 34.3%
for the six months ended June 30, 2006.
- Other fees improved 55.3% for the second
quarter and 49.3% for the
six months ended June 30,
2006, primarily as a result of an increase
in branded residential royalty
fees. 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, and these fluctuations may
be significant.
- Operating earnings before other items(4)
increased 18.1% to
$23.7 million during the
second quarter and 37.3% to $44.2 million
during the six months ended
June 30, 2006.
- For the second quarter, net earnings
were $9.1 million ($0.25 basic
earnings per share and $0.24
diluted earnings per share), compared to
net earnings of $15.8 million
($0.43 basic earnings per share and
$0.42 diluted earnings per
share) for the second quarter of 2005.
- For the six months ended June 30, 2006,
net earnings were
$22.5 million ($0.61 basic
earnings per share and $0.60 diluted
earnings per share), as
compared to net earnings of $21.0 million for
the same period in 2005
($0.57 basic earnings per share and $0.55
diluted earnings per share).
Adjusted Net Earnings and Adjusted Earnings per Share(x):
- In the second quarter of 2006, other
expenses of $6.8 million
primarily related to foreign
exchange losses. In the second quarter
of 2005, other expenses
of $8.6 million primarily related to losses
on the disposition of assets
and foreign exchange losses.
Adjusting for other expenses,
net of applicable income taxes,
adjusted net earnings were
as follows:
-------------------------------------------------------------------------
(in millions of dollars except per share
amounts)
Second quarter
-------------------------------------------------------------------------
2006 2005
-------------------------------------------------------------------------
Net earnings
$ 9.1 $
15.8
-------------------------------------------------------------------------
Adjustments - Other expenses, net
6.8 8.6
-------------------------------------------------------------------------
Tax effect related to foregoing adjustments
1.2 (10.6)(xx)
-------------------------------------------------------------------------
Adjusted net earnings
$ 17.1 $
13.8
-------------------------------------------------------------------------
--------------------------
Adjusted basic earnings per share
$ 0.47 $
0.38
-------------------------------------------------------------------------
--------------------------
Adjusted diluted earnings per share
$ 0.46 $
0.36
-------------------------------------------------------------------------
--------------------------
- In the six months ended June 30, 2006,
other expenses of $7.6 million
primarily related to foreign
exchange losses. In the six months
ended June 30, 2005, other
expenses of $11.4 million primarily
related to losses on the
disposition of assets and foreign exchange
losses.
Adjusting for other expenses,
net of applicable income taxes,
adjusted net earnings for
the six month periods were as follows:
-------------------------------------------------------------------------
(in millions of dollars except per share
Six months ended
amounts)
June 30,
-------------------------------------------------------------------------
2006 2005
-------------------------------------------------------------------------
Net earnings
$ 22.5 $
21.0
-------------------------------------------------------------------------
Adjustments - Other expenses, net
7.6 11.4
-------------------------------------------------------------------------
Tax effect related to foregoing adjustments
1.1 (11.2)(xx)
-------------------------------------------------------------------------
Adjusted net earnings
$ 31.2 $
21.2
-------------------------------------------------------------------------
--------------------------
Adjusted basic earnings per share
$ 0.85 $
0.58
-------------------------------------------------------------------------
--------------------------
Adjusted diluted earnings per share
$ 0.84 $
0.56
-------------------------------------------------------------------------
--------------------------
(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 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.
"Our financial results reflect the improved operating performance at
the hotels and resorts under our management and our continued focus on
improving profitability at the corporate level. We are pleased to have
delivered a solid improvement in our operating earnings," said John Davison,
Chief Financial Officer.
We are undertaking a series of portfolio refinements aimed at improving
our financial position and strengthening the quality of our management
portfolio through strategic divestitures and significant enhancements to
established properties and new unit additions.
Expanding the Portfolio - New Four Seasons Projects
Recent additions to our announced pipeline of properties include new
projects in Koh Samui, Thailand; St. Petersburg, Russia; Hangzhou, People's
Republic of China and a second property in Doha, Qatar. Since the beginning
of the year, we have announced new projects in nine locations, the four
above and Barbados, Macau, Seychelles, Shanghai and Taipei bringing to
32, the number of announced properties under construction or advanced stage
of development.
"We continue to work with strong development partners around the globe.
The pace of activity related to the development of new Four Seasons properties
is very healthy and, as a result, we remain confident in our ability to
meet our long term unit growth objectives," said Kathleen Taylor, President
Worldwide Business Operations.
Refining the Portfolio
As previously disclosed, we are in negotiations with the owner of The
Ritz-Carlton Chicago. The negotiations relate 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).
We currently anticipate these arrangements would 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. We also anticipate these arrangements would
entitle us to payments in connection with both a termination of our management
of the property and the owner's sale of the property. Based upon the potential
arrangements we are currently discussing, we may be required to recognize
an accounting charge of approximately $2.5 million in connection with the
termination of the management contract prior to the sale of the property
by the owner. We may subsequently record a further gain following a future
sale of the property. The amount and timing of any charge and gain will
depend upon the timing and terms of the finalization of the arrangement,
the potential date of termination of our management and the ultimate date
and sale price of any disposition of the property. For the six months ended
June 30, 2006, we have earned approximately $1.0 million of hotel management
fees from The Ritz-Carlton Chicago.
--------------------------------------------------
(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 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,
net plus (vi) 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.
SECOND QUARTER AND SIX MONTHS ENDED JUNE 30, 2006
MANAGEMENT'S DISCUSSION AND ANALYSIS
This Management's Discussion and Analysis ("MD&A") for the second
quarter and six months ended June 30, 2006 is provided as of August 10,
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
August 10, 2006, and the MD&A for the quarter ended March 31, 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. Endnotes can be found at the end of this document.
Operational and Financial Review and Analysis
Hotel and Resort Operating Results
For the second quarter of 2006, RevPAR(1) of our worldwide Core Hotels(2)
increased 12.1%, as compared to the second quarter of 2005, reflecting
improvements in each of the regions in which we manage hotels and resorts.
This increase in RevPAR was attributable to an 11.1% improvement in achieved
room rates and a 60 basis point increase in overall occupancy. For the
six months ended June 30, 2006, RevPAR of our worldwide Core Hotels increased
11.9%, 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 9.2% improvement in achieved room rates
and a 170 basis point increase in overall occupancy.
Gross operating revenues of our worldwide Core Hotels increased 9.3%
for the second quarter of 2006 and 9.4% for the six months ended June 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 14.6% and 150 basis point increase in gross
operating profits(3) and gross operating margins(4), respectively, for
the second quarter of 2006, as compared to the same period in 2005, and
a 16.5% and 200 basis point increase in gross operating profits and gross
operating margins, respectively, for the six months ended June 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 to us. In the second quarter of 2006, it contributed
49.4% of revenues under management, followed by Europe (17.7%), Other Americas/Caribbean
(14.7%), Asia/Pacific (12.2%) and the Middle East (6.0%). For the six months
ended June 30, 2006, the United States contributed 49.9% of revenues under
management, followed by Other Americas/Caribbean (16.2%), Europe (15.5%),
Asia/Pacific (12.3%) 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
-------------------------------------------------------------------------
Results for periods
in 2006, as compared to 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
-------------------------------------------------------------------------
Second
quarter 305
11.7% 9.1%
15.0% 32.5%
170
-------------------------------------------------------------------------
Six months
ended
June 30 303
12.2% 10.3%
17.4% 31.4%
190
-------------------------------------------------------------------------
The increase in RevPAR in the second quarter was primarily
attributable to an 11.9% increase in achieved room rates in
the region, with the average occupancy levels virtually
unchanged. During the second quarter of 2006, all of the
Core Hotels in this region experienced RevPAR improvements.
Properties under management in Austin, Boston, Kona, Los
Angeles and Maui had strong RevPAR improvements, relative to
the average for the region for the second quarter. The
increase in RevPAR in the six months ended June 30, 2006 was
attributable to a 10.2% increase in achieved room rates and
a 140 basis point improvement in occupancy levels in the
region. Properties under management in Atlanta, Austin,
Boston, Houston, Maui and New York had strong RevPAR
improvements relative to the average for the region for the
six-month period. The improvement in gross operating profits
and gross operating margins in the region in the second
quarter and six months ended June 30, 2006 was primarily the
result of the improvement in gross operating revenues.
-------------------------------------------------------------------------
Other Americas/Caribbean Region
-------------------------------------------------------------------------
Results for periods
in 2006, as compared to 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
-------------------------------------------------------------------------
Second
quarter 246
18.0% 11.6%
15.9% 28.8%
110
-------------------------------------------------------------------------
Six months
ended
June 30 275
15.3% 12.9%
18.2% 33.1%
150
-------------------------------------------------------------------------
During the second quarter and six months ended June 30,
2006, nearly all of the properties under management in this
region experienced RevPAR improvements. The second quarter
RevPAR improvement was primarily the result of a 17.2%
increase in achieved room rates, since the average occupancy
levels was virtually unchanged. On a local currency basis,
RevPAR improved 15.8% with achieved room rates improving
15.0%. The improvement for the six months ended June 30,
2006 was the result of an 11.8% increase in achieved room
rates and 200 basis point improvement in occupancy levels.
On a local currency basis, RevPAR improved 13.6%, reflecting
a 10.2% increase in achieved room rates on a local currency
basis. In both the second quarter and six months ended
June 30, 2006, properties under management in Buenos Aires,
Carmelo, Costa Rica, Punta Mita, Vancouver, and Whistler had
particularly strong RevPAR improvements, relative to the
average for the region. The improvements in gross operating
profits and gross operating margin in both the second
quarter and the six months ended June 30, 2006 were
primarily due to a strong operating environment in several
properties in the region, offset by lower occupancy at our
Caribbean resorts primarily due to travel concerns related
to weather.
-------------------------------------------------------------------------
Europe Region
-------------------------------------------------------------------------
Results for periods
in 2006, as compared to 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
-------------------------------------------------------------------------
Second
quarter 439
13.9% 7.0%
9.2% 36.9%
80
-------------------------------------------------------------------------
Six months
ended
June 30 375
15.3% 4.9%
12.5% 32.0%
220
-------------------------------------------------------------------------
Nearly all of the properties under management in the region
had RevPAR improvements during the second quarter and six
months ended June 30, 2006 reflecting both strong occupancy
increases and rate improvements. During the second quarter,
on a local currency basis, RevPAR increased 14.8%,
reflecting a 7.8% increase in achieved room rates in local
currency, versus 7.0% on a US dollar basis. For the six
months ended June 30, 2006, on a local currency basis,
RevPAR increased 19.8%, reflecting a 9.1% increase in
achieved room rates in local currency, versus 5.1% on US
dollar basis.
Relative to the average of the other properties in the
region, during the second quarter 2006, properties under
management in Budapest, Lisbon and the Four Seasons Hotel
London had strong RevPAR improvements. During the six months
ended June 30, 2006, Lisbon had a strong RevPAR improvement
relative to the average for the region. The improvements in
gross operating profits and gross operating margins for the
regions were offset by the impact on the profitability
performance in particular at the Four Seasons Hotel Dublin,
which is undergoing a conversion of 62 hotel rooms into
residential units. Excluding the change in gross operating
margins at that hotel, gross operating margins for the
region would have improved 200 basis points in the second
quarter and 350 basis points in the six months ended
June 30, 2006.
-------------------------------------------------------------------------
Middle East Region
-------------------------------------------------------------------------
Results for periods
in 2006, as compared to 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
-------------------------------------------------------------------------
Second
quarter 168
20.1% 23.4%
31.0% 49.5%
280
-------------------------------------------------------------------------
Six months
ended
June 30 175
17.1% 18.9%
25.5% 50.8%
270
-------------------------------------------------------------------------
During both the second quarter and six months ended June 30,
2006, all of the properties under management in the Middle
East region had RevPAR improvements, with the exception of
Sharm El Sheikh, where RevPAR was essentially unchanged for
the second quarter and declined 7.1% for the six months
ended June 30, 2006, as business was adversely affected by
the continuing impact of terrorist bombings. In the second
quarter of 2006, the increase in RevPAR for the region was
driven by an 11.7% increase in achieved room rates (10.6% on
a local currency basis) and a 490 basis point improvement in
occupancy levels. In the six months ended June 30, 2006, the
increase in RevPAR for the region was driven by a 13.2%
increase in achieved room rates (11.7% on a local currency
basis) and a 230 basis point improvement in occupancy
levels. During both the second quarter and six months ended
June 30, 2006, Four Seasons Hotel Cairo Nile Plaza and Four
Seasons Hotel Riyadh had particularly strong RevPAR
improvements, as compared to the average for the region. The
improvement in gross operating profits and gross operating
margins was the result of strong revenue growth, offset
somewhat by the results in Sharm El Sheikh.
It is not possible to determine the medium and long-term
impact, if any, of the events in Lebanon and Israel on our
business in the Middle East; however, there has not been any
measurable impact to date. Certain hotels under management
in the Middle East region have had a modest improvement in
demand, as some travel has shifted within the region.
-------------------------------------------------------------------------
Asia/Pacific Region
-------------------------------------------------------------------------
Results for periods
in 2006, as compared to 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
-------------------------------------------------------------------------
Second
quarter 129
4.0% 4.7%
10.1% 34.2%
170
-------------------------------------------------------------------------
Six months
ended
June 30 130
3.3% 2.9%
9.6% 33.4%
200
-------------------------------------------------------------------------
During both the second quarter and six months ended June 30,
2006, RevPAR changes in the Asia/Pacific region were mixed.
During the second quarter, the RevPAR improvement was driven
by a 6.9% improvement in achieved room rates (6.3%
improvement on a local currency basis), offset by a 170
basis point reduction in occupancy levels, primarily as the
result of reduced demand in Bali, which is continuing to
gradually recover from the lingering impact of terrorist
bombings in September 2005. During the six months ended
June 30, 2006, the RevPAR improvement was driven by a 4.5%
improvement in achieved room rates (5.7% improvement on a
local currency basis) with overall occupancy levels
essentially unchanged. During both the second quarter and
six months ended June 30, 2006, properties under management
in Chiang Mai, Shanghai and Singapore experienced strong
RevPAR improvements relative to the region average, while
the resorts in Bali, for the reason noted, experienced a
RevPAR decline of approximately 20%. The improvement in
gross operating profits and gross operating margins for the
region was offset primarily by the decline in profitability
levels at the resorts in Bali, as those properties recover
from the impact of the bombings. Excluding the resorts in
Bali, gross operating margins for Core Hotels in the region
would have increased 240 basis points in the second quarter
and 290 basis points for the six months ended June 30, 2006.
-------------------------------------------------------------------------
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 currently 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
second quarter and six months ended June 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
-------------------------------------------------------------------------
Dollar Percentage
(in millions of dollars)
Second quarter Change
Change
-------------------------------------------------------------------------
2006 over 2006 over
2006 2005
2005 2005
-------------------------------------------------------------------------
Hotel management fees
Base
$ 21.7 $
19.1 $ 2.6
13.6%
Incentive
11.4 9.3
2.1 22.2%
-------------------------------------------------------------------------
Subtotal
33.1 28.4
4.7 16.4%
-------------------------------------------------------------------------
Other fees
4.4 2.8
1.6 55.3%
-------------------------------------------------------------------------
Subtotal
37.5 31.2
6.3 20.0%
-------------------------------------------------------------------------
Hotel ownership revenues
10.4 27.7(x)
(17.3) (62.2)%
-------------------------------------------------------------------------
Reimbursed costs(5)
19.9 15.6
4.3 27.3%
-------------------------------------------------------------------------
Total revenues
$ 67.8 $
74.5 $ (6.7)
(9.0)%
-------------------------------------------------------------------------
---------------------------------------------------
(x) Included in 2005 were the 100% consolidated results
of The Pierre.
-------------------------------------------------------------------------
Six months ended Dollar
Percentage
(in millions of dollars)
June 30,
Change Change
-------------------------------------------------------------------------
2006 over 2006 over
2006 2005
2005 2005
-------------------------------------------------------------------------
Hotel management fees
Base
$ 41.4 $
36.7 $ 4.7
12.9%
Incentive
22.0 16.4
5.6 34.3%
-------------------------------------------------------------------------
Subtotal
63.4 53.1
10.3 19.5%
-------------------------------------------------------------------------
Other fees
9.7 6.5
3.2 49.3%
-------------------------------------------------------------------------
Subtotal
73.1 59.6
13.5 22.8%
-------------------------------------------------------------------------
Hotel ownership revenues
16.0 48.2(x)
(32.2) (66.9)%
-------------------------------------------------------------------------
Reimbursed costs
36.3 29.8
6.5 21.8%
-------------------------------------------------------------------------
Total revenues
$ 125.4 $ 137.6
$ (12.2) (8.9)%
-------------------------------------------------------------------------
---------------------------------------------------
(x) Included in 2005 were the 100% consolidated results
of The Pierre.
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, please see our MD&A for the
year ended December 31, 2005.
For the second quarter of 2006, base fees increased $2.6 million, as
compared to the second quarter of 2005. Of the $2.6 million increase in
base fees, base fees from Core Hotels contributed $1.8 million or 69.0%
of the increase. The increase in base fees from Core Hotels in the second
quarter of 2006 represented a 10.3% increase over the base fees generated
from Core Hotels in the second quarter of 2005. Properties that opened
in 2005 and 2006 contributed base fees of $1.5 million in the second quarter
of 2006, as compared to $0.3 million in the same period in 2005. The increase
in base fees in the quarter was moderated by a $0.5 million reduction in
base fees from properties no longer under management.
For the six months ended June 30, 2006, base fees increased $4.7 million,
as compared to the same period in 2005. Of the $4.7 million increase in
base fees, base fees from Core Hotels contributed $3.2 million or 67.7%
of the increase. The increase in base fees from Core Hotels in the six
months ended June 30, 2006 represented a 9.5% 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 $2.9 million in the six
months ended June 30, 2006, as compared to $0.3 million in the same period
in 2005. The increase in base fees in the six months ended June 30, 2006,
was moderated by a $1.0 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, please see our MD&A for the year ended December 31, 2005.
For the second quarter of 2006, incentive fees increased $2.1 million,
as compared to the same period in 2005. During the second quarter of 2006,
the overall improvement in incentive fees was reduced by lower incentive
fees from our resort in Nevis as a result of reduced travel to that market
due to weather concerns and from our resort in the Maldives which remained
closed during the second quarter of 2006 for renovation and repair of damage
from the tsunami in late 2004. Although the Maldives resort was also closed
during the second quarter of 2005 we received fees during that period from
payments, in respect of business interruption insurance. The incentive
fees earned from properties that opened in 2005 and 2006 represented $0.9
million of the increase. The remainder of the increase of $1.2 million
came from improvements in incentive fees from our Core Hotels. Incentive
fees were earned from 43 of the 70 hotels and resorts under management
for the second quarter of 2006, as compared to 41 of the 65 hotels and
resorts under management in the same period in 2005.
For the six months ended June 30, 2006, incentive fees increased $5.6
million, as compared to the same period in 2005. The incentive fees earned
from properties that opened in 2005 and 2006 represented $2.1 million of
the increase. Incentive fees were earned from 44 of the 70 hotels and resorts
under management for the six months ended June 30, 2006, as compared to
41 of the 65 hotels and resorts under management in the same period in
2005. As discussed above the overall improvement in our incentive fees
for the six months ended June 30, 2006 was reduced due to lower incentive
fees from Nevis and Maldives.
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 second quarter of 2006, other fees increased 55.3%, or $1.6
million, to $4.4 million as compared to the same period in 2005. For the
six months ended June 30, 2006, other fees increased 49.3% or $3.2 million,
to $9.7 million, as compared to the same period in 2005. The increase in
other fees for the second quarter and six months ended June 30, 2006, as
compared to the same periods 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, and 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
second quarter and six months ended June 30, 2005, we also had a 100% leasehold
interest in The Pierre and consolidated the results of that property 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
now expect that we will continue to operate the Vancouver hotel under the
existing lease agreement, until its expiry in 2019.
We have seven units of residential inventory at two resorts, which we
acquired with the intent to resell 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. During the second quarter of 2006,
we sold inventory for gross proceeds of $1.5 million at effectively our
cost to purchase. The $1.5 million of revenue associated with the sales
is included in Hotel Ownership Revenues for both the second quarter and
six months ended June 30, 2006, and the cost of the sales of $1.5 million
is included in Hotel Ownership Cost of Sales and Expenses. There were no
sales in 2005.
In the second quarter and six months ended June 30, 2006, the decline
in hotel ownership revenues was primarily related to our owning and consolidating
100% of The Pierre during the second quarter of 2005 and our not owning
and not consolidating it during 2006. Hotel ownership revenues for the
second quarter and six months ended June 30, 2006 primarily relate to the
Four Seasons Hotel Vancouver. Revenue at that property increased by 28.5%
relative to the second quarter of 2005, primarily as the result of a 20.8%
improvement in RevPAR and 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 29.9% relative to the
six months ended June 30, 2005, primarily as the result of a 19.3% improvement
in RevPAR and the decline in the US dollar relative to the Canadian dollar.
Reimbursed Costs
Reimbursed costs, which primarily represents 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 our management. For the second quarter,
reimbursed costs increased $4.3 million or 27.3%, as compared to the corresponding
period in 2005. For the six months ended June 30, 2006, reimbursed costs
increased $6.5 million or 21.8%, as compared to the corresponding period
in 2005. The increase in both the second quarter and six months ended June
30, 2006 was due primarily to a larger portfolio of properties and higher
revenues under management, 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 in Canadian dollars. For
the second quarter of 2006, general and administrative expenses increased
$0.1 million (approximately 0.8%) on a Canadian dollar basis to C$16.5
million from C$16.4 million in the same period in 2005. As reported in
US dollars, general and administrative expenses increased 11.5% to $14.7
million from $13.2 million in the second quarter of 2005. Approximately
$1.4 million or 93% of the reported $1.5 million increase in general and
administrative expenses is attributable to the US dollar having declined
relative to the Canadian dollar (average Canadian/US foreign exchange rate:
second quarter 2006 - 1.125; 2005 - 1.244).
As noted, the majority of our general and administrative expenses are
incurred in Canadian dollars, while the majority of 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 predict the cost of our Canadian
dollar expenditures in US dollars. During the quarter, we settled $31.0
million of forward contracts and realized approximately $1.0 million gain
on those settlements ($0.9 million gain for the six months ended June 30,
2006), which offset the majority of the increase in general and administrative
expenses. The forward contracts are being marked-to-market on a monthly
basis, with the resulting changes in fair values being recorded as a foreign
exchange gain or loss. Other expenses, net included a gain of $1.5 million
related to these contracts in the three months ended June 30, 2006.
For the six months ended June 30, 2006, on a Canadian dollar basis,
general and administrative expenses increased C$1.0 million (approximately
3.0%) to C$32.9 million from C$31.9 million, as compared to the same period
in 2005. As reported in US dollars, for the six months ended June 30, 2006,
general and administrative expenses increased 11.7% to $28.9 million from
$25.9 million in the same period in 2005. Approximately $2.2 million or
74% of the reported increase in general and administrative expenses is
attributable to the US dollar decline, relative to the Canadian dollar,
in the six month over six month period. The average Canadian/US foreign
exchange rate for the six months ended June 30, 2006 and 2005 are 1.139
and 1.235, 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 62.8%
to $9.6 million in the second quarter of 2006, from $25.7 million in the
second quarter of 2005, primarily as a result of the operations of The
Pierre being consolidated in the second quarter of 2005 and not being consolidated
in the second quarter of 2006. For the six months ended June 30, 2006,
hotel ownership cost of sales and expenses declined 67.8% to $16.1 million
from $49.8 million in the same period in 2005 for the same reason noted
above. As noted above, $1.5 million of costs relating to the sale of residential
units is included in Hotel Ownership Cost of Sales and Expenses in both
the second quarter and the six months ended June 30, 2006.
Costs of sales and expenses at Four Seasons Hotel Vancouver increased
11.7% in the second quarter of 2006 and 9.7 % in the six months ended June
30, 2006, both as compared to the same periods in 2005, primarily as a
result of higher labour costs related to the improvement in occupancy and
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, as a result of The Pierre no longer being consolidated, our
earnings from hotel ownership operations declined from $2.0 million in
the second quarter of 2005 to $0.9 million in the second quarter of 2006.
For the six months ended June 30, 2006, our loss from hotel ownership operations
was $0.1 million, as compared to a loss of $1.6 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 18.1% to $23.7 million in the second quarter of 2006,
as compared to $20.1 million in the same period in 2005. For the six months
ended June 30, 2006, operating earnings before other items increased 37.3%
to $44.2 million, as compared to $32.2 million in the same period in 2005.
Profit Margin
Our profit margin on our management business, calculated including reimbursed
revenues and costs of $19.9 million in the second quarter of 2006 ($15.6
million in 2005), was 39.8% (38.6% in 2005). Excluding reimbursed revenues
and costs, our profit margin on our management business was as follows:
-------------------------------------------------------------------------
(in millions of dollars)
Second quarter
-------------------------------------------------------------------------
2006 2005
-------------------------------------------------------------------------
Hotel management fees
$ 33.1 $
28.4
-------------------------------------------------------------------------
Other fees
4.4 2.8
-------------------------------------------------------------------------
Subtotal - management fee revenues
(excluding reimbursed costs)
37.5 31.2
-------------------------------------------------------------------------
General and administrative expenses (including
corporate expenses as discussed above)
(14.7) (13.2)
-------------------------------------------------------------------------
Total - management operations earnings
before
other items (excluding reimbursed
costs) $ 22.8
$ 18.0
-------------------------------------------------------------------------
--------------------------
Profit margin(x)
60.9% 57.9%
-------------------------------------------------------------------------
(x) This is a non-GAAP financial measure, calculated
as management
operations earnings before
other items (excluding reimbursed costs)
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, calculated including reimbursed
revenues and costs of $36.3 million for the six months ended June 30, 2006
($29.8 million in 2005) was 40.4% (37.7% in 2005). Excluding reimbursed
revenues and costs, our profit margin on our management business was as
follows:
-------------------------------------------------------------------------
Six months ended
(in millions of dollars)
June 30,
-------------------------------------------------------------------------
2006 2005
-------------------------------------------------------------------------
Hotel management fees
$ 63.4 $
53.1
-------------------------------------------------------------------------
Other fees
9.7 6.5
-------------------------------------------------------------------------
Subtotal - management fee revenues
(excluding reimbursed costs)
73.1 59.6
-------------------------------------------------------------------------
General and administrative expenses (including
corporate expenses as discussed above)
(28.9) (25.9)
-------------------------------------------------------------------------
Total - management operations earnings
before
other items (excluding reimbursed
costs) $ 44.2
$ 33.7
-------------------------------------------------------------------------
--------------------------
Profit margin(x)
60.5% 56.6%
-------------------------------------------------------------------------
(x) This is a non-GAAP financial measure, calculated
as management
operations earnings before
other items (excluding reimbursed costs)
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.
Other Expenses, Net
For the second quarter of 2006, other expenses, net was $6.8 million,
as compared to $8.6 million for the same period in 2005.
-------------------------------------------------------------------------
(in millions of dollars)
Second quarter
-------------------------------------------------------------------------
2006 2005
-------------------------------------------------------------------------
Foreign exchange loss
$ 7.4 $
3.3
-------------------------------------------------------------------------
Loss on disposition of assets
- 5.2
-------------------------------------------------------------------------
Asset provision (recovery) and write downs
(0.6) 0.1
-------------------------------------------------------------------------
Other expenses, net
$ 6.8 $
8.6
-------------------------------------------------------------------------
--------------------------
For the six months ended June 30, 2006, other expenses, net was $7.6
million, as compared to $11.4 million for the same period in 2005.
-------------------------------------------------------------------------
Six months ended
(in millions of dollars)
June 30,
-------------------------------------------------------------------------
2006 2005
-------------------------------------------------------------------------
Foreign exchange loss
$ 7.9 $
3.7
-------------------------------------------------------------------------
Loss on disposition of assets
- 5.6
-------------------------------------------------------------------------
Asset provision (recovery) and write downs
(0.3) 2.1
-------------------------------------------------------------------------
Other expenses, net
$ 7.6 $
11.4
-------------------------------------------------------------------------
--------------------------
Foreign Exchange
Other expenses, net for the second quarter of 2006 included a foreign
exchange loss of $7.4 million, as compared to a loss of $3.3 million for
the same period in 2005. For the six months ended June 30, 2006, other
expenses, net included a foreign exchange loss of $7.9 million, as compared
to a loss of $3.7 million for the same period in 2005.
The foreign exchange loss 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 by a gain on the
"marked-to-market" adjustment and settlement of the forward contracts described
below.
As at June 30, 2006, we had contracts in place to sell forward $39.7
million of US dollars and received Canadian dollars at a weighted average
exchange rate of 1.124 Canadian dollars to a US dollar at various maturities
extending to December 2007. Subsequent to June 30, 2006, we have extended
the program to sell forward an additional $6.5 million of US dollars for
conversion to Canadian dollars with maturities extending to January 2008,
at a weighted average exchange rate of 1.121 Canadian dollars to a US dollar.
Although these forward contracts were put into place to enable us to predict
the US dollar cost of our Canadian dollar general and administrative expenses
and Canadian dollar capital funding requirements, for accounting purposes
they are "marked-to-market", with the corresponding gains or losses included
in foreign exchange. The marked-to-market gain on these contracts for the
second quarter and six months ended June 30, 2006 was $0.5 million.
In addition, we realized a $1.0 million gain on the settlement of forward
contracts during the second quarter ($0.9 million for the six months ended
June 30, 2006). This program to sell forward US dollars was not in place
during the six months ended June 30, 2005, and as such no amounts were
realized in the second quarter or six months ended June 30, 2005.
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 unhedged 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
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 $5.0 million.
We also recorded a tax benefit in connection with the sale of $9.2 million,
which is discussed further under "Income Tax Expense" below. Including
the tax benefit, we realized a net gain of $4.2 million on the disposition
of The Pierre.
Interest Income and Interest Expense
The $1.9 million increase in interest income for the second quarter
and the $2.5 million increase in interest income for the six months ended
June 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 $1.5 million increase in interest expense for the second quarter
and the $2.1 million increase in interest expense for the six months ended
June 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. The effective interest rate on our convertible senior notes in the
second quarter of 2006 was approximately 5.9%, which represents $3.3 million
of interest expense for that period. For the six months ended June 30,
2006, the effective interest rate on our convertible senior notes was 5.7%,
which represents $6.3 million of interest expense.
Income Tax Expense
Income tax expense during the second quarter of 2006 was $6.6 million
(effective tax rate of 42.2%), as compared to income tax recovery of $6.0
million for the same period in 2005. For the six months ended June 30,
2006, our income tax expense was $11.0 million (effective tax rate of 32.8%),
as compared to income tax recovery of $4.1 million for the same period
in 2005. During the second quarter of 2006, we did not record approximately
$1.7 million 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 second quarter
of 2006 were $9.1 million ($0.25 basic earnings per share and $0.24 diluted
earnings per share), as compared to net earnings of $15.8 million ($0.43
basic earnings per share and $0.42 diluted earnings per share) for the
same period in 2005.
For the six months ended June 30, 2006, net earnings were $22.5 million
($0.61 basic earnings per share and $0.60 diluted earnings per share),
as compared to net earnings of $21.0 million ($0.57 basic earnings per
share and $0.55 diluted earnings per share) for the same period in 2005.
Adjusted Net Earnings and Adjusted Earnings per Share
In the second quarter of 2006, other expenses of $6.8 million primarily
related to foreign exchange losses. In the second quarter of 2005, other
expenses of $8.6 million primarily related to losses on the disposition
of assets and foreign exchange losses.
Adjusting for other expenses, net of applicable income taxes, adjusted
net earnings were as follows:
-------------------------------------------------------------------------
(in millions of dollars except per share amounts)
Second quarter
-------------------------------------------------------------------------
2006 2005
-------------------------------------------------------------------------
Net earnings
$ 9.1 $
15.8
-------------------------------------------------------------------------
Adjustments - Other expense, net
6.8 8.6
-------------------------------------------------------------------------
Tax effect related to foregoing adjustments
1.2 (10.6)(x)
-------------------------------------------------------------------------
Adjusted net earnings
$ 17.1 $
13.8
-------------------------------------------------------------------------
--------------------------
Adjusted basic earnings per share
$ 0.47 $
0.38
-------------------------------------------------------------------------
--------------------------
Adjusted diluted earnings per share
$ 0.46 $
0.36
-------------------------------------------------------------------------
--------------------------
In the six months ended June 30, 2006, other expenses of $7.6 million
primarily related to foreign exchange losses. During the six months ended
June 30, 2005, other expenses of $11.4 million primarily related to losses
on the disposition of assets and foreign exchange losses.
-------------------------------------------------------------------------
Six months ended
(in millions of dollars except per share amounts)
June 30,
-------------------------------------------------------------------------
2006 2005
-------------------------------------------------------------------------
Net earnings
$ 22.5 $
21.0
-------------------------------------------------------------------------
Adjustments - Other expense
7.6 11.4
-------------------------------------------------------------------------
Tax effect related to foregoing adjustments
1.1 (11.2)(x)
-------------------------------------------------------------------------
Adjusted net earnings
$ 31.2 $
21.2
-------------------------------------------------------------------------
--------------------------
Adjusted basic earnings per share
$ 0.85 $
0.58
-------------------------------------------------------------------------
--------------------------
Adjusted diluted earnings per share
$ 0.84 $
0.56
-------------------------------------------------------------------------
--------------------------
(x) In connection with the disposition of The Pierre
in the second
quarter of 2005, we recorded
a tax benefit of approximately
$9.2 million.
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 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.
Eight Quarter Summary
-------------------------------------------------------------------------
(in millions of
dollars except per
share amounts)
Second Quarter
First Quarter
-------------------------------------------------------------------------
2006 2005
2006 2005
-------------------------------------------------------------------------
Total revenues
$ 67.8 $
74.5 $ 57.6 $
63.1
-------------------------------------------------------------------------
Operating earnings
before other items $
23.7 $ 20.1 $
20.5 $ 12.1
-------------------------------------------------------------------------
Net earnings (loss) $
9.1 $ 15.8 $
13.4 $ 5.2
-------------------------------------------------------------------------
Basic earnings (loss)
per share(7)
$ 0.25 $
0.43 $ 0.36 $
0.14
-------------------------------------------------------------------------
Diluted earnings
(loss) per share $
0.24 $ 0.42 $
0.36 $ 0.14
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Average Canadian/US
dollar foreign
exchange rate used
for specified quarter 1.12509
1.24401 1.15421
1.22652
-------------------------------------------------------------------------
(in millions of
dollars except per
share amounts)
Fourth Quarter
Third Quarter
-------------------------------------------------------------------------
2005 2004
2005 2004
-------------------------------------------------------------------------
Total revenues
$ 58.5 $
69.5 $ 52.2 $
63.3
-------------------------------------------------------------------------
Operating earnings
before other items $
12.3 $ 14.7 $
11.7 $ 14.9
-------------------------------------------------------------------------
Net earnings (loss) $
(37.8) $ 12.8 $
(11.4) $ (8.5)
-------------------------------------------------------------------------
Basic earnings (loss)
per share(7)
$ (1.03) $ 0.35
$ (0.31) $ (0.24)
-------------------------------------------------------------------------
Diluted earnings
(loss) per share $
(1.03) $ 0.34 $
(0.31) $ (0.24)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Average Canadian/US
dollar foreign
exchange rate used
for specified quarter 1.17478
1.22033 1.20687
1.30758
-------------------------------------------------------------------------
Liquidity and Capital Resources
As at June 30, 2006, our cash and cash equivalents were $236.8 million,
as compared to $242.2 million as at December 31, 2005. Our investments
in cash and cash equivalents are highly liquid, with original 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 June 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,
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 $13.2 million as a result of funding $9.7
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.
Guarantees and Commitments
As discussed in the MD&A for the year ended December 31, 2005, we
have guarantees and other commitments, including certain lease commitments.
Since December 31, 2005, we have decreased our guarantees by approximately
$1.3 million.
Cash Flows
Cash from Operations
We generated $22.0 million of cash from operations during the second
quarter of 2006, as compared to $24.0 million for the same period in 2005.
The decrease in cash from operations of $2.0 million in the second quarter
of 2006, as compared to the same period in 2005, resulted primarily from
changes of $3.7 million in non-cash working capital, offset by higher earnings
generated from our management business and hotel ownership.
We generated $27.6 million of cash from operations during the six months
ended June 30, 2006, as compared to $19.3 million for the same period in
2005. For the six months ended June 30, 2006, the increase in cash from
operations of $8.3 million, as compared to the same period in 2005, resulted
primarily from higher earnings generated from our management business and
hotel ownership, a $1.9 million increase in net interest received, and
a $2.5 million reduction in income taxes paid.
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 second quarter of 2006, we advanced $15.7 million, in the aggregate,
as long-term receivables to properties under our management, as compared
to $13.2 million in the same period in 2005. Also in the second quarter
of 2006, we were repaid $2.2 million, in the aggregate, of our long-term
receivables, as compared to $18.9 million in the same period in 2005.
In the six months ended June 30, 2006, we advanced $17.9 million, in
the aggregate, as long-term receivables to properties under our management,
as compared to $34.0 million in the same period in 2005. Also in the six
months ended June 30, 2006, we were repaid $10.1 million, in the aggregate,
of our long-term receivables, as compared to $19.3 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.
We did not make any investments in hotel partnerships and corporations
in the second quarter of 2006. In the second quarter of 2005, we invested
$2.3 million in these assets and received $7.3 million relating to the
disposition of two of our equity interests.
In the six months ended June 30, 2006, we invested $0.5 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 $9.4 million in the six months ended June 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 second quarters of 2006 and 2005, we funded an aggregate of $10.7
million and $0.3 million, respectively, primarily related to our investments
in management contracts.
In the six months ended June 30, 2006 and 2005, we funded an aggregate
of $14.6 million and $0.5 million, respectively, primarily related to our
investments in management contracts.
Fixed Assets
Our capital expenditures were $4.3 million for the second quarter in
2006, as compared to $4.5 million for the same period in 2005. In 2004,
we commenced construction on our Toronto corporate office expansion, which
is scheduled to be completed during 2006. In the second quarters of 2006
and 2005, capital expenditures related to this expansion were $4.3 million
and $3.2 million, respectively.
In the six months ended June 30, 2006, our capital expenditures were
$9.9 million, as compared to $8.1 million for the same period in 2005.
In the six months ended June 30, 2006 and 2005, capital expenditures related
to our Toronto corporate office expansion were $9.7 million and $5.8 million,
respectively.
Financing Activities
In the six months ended June 30, 2006, we issued $5.4 million in Limited
Voting Shares ("LVS") related to the exercise of stock options and paid
$1.7 million in dividends.
In the six months ended June 30, 2005, we issued $6.8 million in LVS
related to the exercise of stock options and paid $1.6 million in dividends.
Outstanding Share Data
-------------------------------------------------------------------------
Outstanding as at
Designation
August 10, 2006
-------------------------------------------------------------------------
Variable Multiple Voting Shares(1)
3,725,698
-------------------------------------------------------------------------
Limited Voting Shares
33,068,498
-------------------------------------------------------------------------
Options to acquire Limited Voting Shares(2):
-------------------------------------------------------------------------
Outstanding
4,344,703
-------------------------------------------------------------------------
Exercisable
3,559,339
-------------------------------------------------------------------------
Convertible Senior Notes issued June 2004
and due 2024(3)
$250.1 million(4)
-------------------------------------------------------------------------
(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.
Looking Ahead
Operating Environment
Assuming the travel trends that we experienced in 2005 and the second
quarter of 2006 continue, and based on current demand reflected in our
reservation activity, we have increased our expected RevPAR improvements
for worldwide Core Hotels in the third quarter of 2006 and the full year
2006 to be 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 200 to 225 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%." instead
of "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 17% to 20%."
The Ritz-Carlton Chicago
As previously disclosed, we are in negotiations with the owner of The
Ritz-Carlton Chicago. The negotiations relate 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).
We currently anticipate these arrangements would 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. We also anticipate these arrangements would
entitle us to payments in connection with both a termination of our management
of the property and the owner's sale of the property. Based upon the potential
arrangements we are currently discussing, we may be required to recognize
an accounting charge of approximately $2.5 million in connection with the
termination of the management contract prior to the sale of the property
by the owner. We may subsequently record a further gain following a future
sale of the property. The amount and timing of any charge and gain will
depend upon the timing and terms of the finalization of the arrangement,
the potential date of termination of our management and the ultimate date
and sale price of any disposition of the property. For the six months ended
June 30, 2006, we have earned approximately $1.0 million of hotel management
fees from The Ritz-Carlton Chicago.
Changes in Accounting Policies
During the six months ended June 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.
FOUR SEASONS HOTELS INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands of
Three months ended Six
months ended
US dollars except
June 30,
June 30,
per share amounts)
2006 2005
2006 2005
-------------------------------------------------------------------------
Revenues:
Hotel management
fees
$ 33,046 $ 28,382 $
63,430 $ 53,071
Other fees
4,411 2,840
9,737 6,520
Hotel ownership
revenues
10,481 27,704
15,960 48,221
Reimbursed costs
19,880 15,613
36,315 29,824
---------------------------------------------------
67,818 74,539
125,442 137,636
---------------------------------------------------
Expenses:
General and
administrative
expenses
(14,661) (13,150) (28,901)
(25,870)
Hotel ownership
cost of sales and
expenses
(9,557) (25,685) (16,050)
(49,772)
Reimbursed costs
(19,880) (15,613) (36,315)
(29,824)
---------------------------------------------------
(44,098) (54,448) (81,266)
(105,466)
---------------------------------------------------
Operating earnings
before other items
23,720 20,091
44,176 32,170
Depreciation and
amortization
(2,799) (2,908)
(5,442) (5,937)
Other expenses,
net (note 4)
(6,794) (8,645)
(7,627) (11,355)
Interest income
5,638 3,740
10,099 7,616
Interest expense
(4,048) (2,530)
(7,758) (5,635)
---------------------------------------------------
Earnings before
income taxes
15,717 9,748
33,448 16,859
---------------------------------------------------
Income tax recovery
(expense) (note 5):
Current
(3,885) (1,390)
(7,014) (3,314)
Future
(2,748) 7,428
(3,967) 7,443
---------------------------------------------------
(6,633) 6,038
(10,981) 4,129
---------------------------------------------------
Net earnings
$ 9,084 $ 15,786
$ 22,467 $ 20,988
---------------------------------------------------
---------------------------------------------------
Basic earnings per
share (note 3(a))
$ 0.25 $
0.43 $ 0.61 $
0.57
---------------------------------------------------
---------------------------------------------------
Diluted earnings per
share (note 3(a))
$ 0.24 $
0.42 $ 0.60 $
0.55
---------------------------------------------------
---------------------------------------------------
See accompanying notes to consolidated
financial statements.
FOUR SEASONS HOTELS INC.
CONSOLIDATED BALANCE SHEETS
As at As at
(Unaudited)
June 30, December 31,
(In thousands of US dollars)
2006 2005
-------------------------------------------------------------------------
ASSETS
Current assets:
Cash and cash equivalents
$ 236,811 $ 242,178
Receivables
72,438 69,690
Inventory
3,289 7,326
Prepaid expenses
3,731 2,950
-------------------------
316,269 322,144
Long-term receivables
196,716 175,374
Investments in hotel partnerships
and
corporations (note 2)
85,932 99,928
Fixed assets
74,923 64,850
Investment in management contracts
(note 2) 193,387
164,932
Investment in trademarks and trade
names
4,334 4,210
Future income tax assets
10,992 14,439
Other assets
51,111 34,324
-------------------------
$ 933,664 $ 880,201
-------------------------
-------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued
liabilities $ 53,808
$ 54,797
Long-term obligations
due within one year
3,192 4,853
-------------------------
57,000 59,650
Long-term obligations
286,335 273,825
Shareholders' equity (note 3):
Capital stock
255,832 250,430
Convertible notes
36,920 36,920
Contributed surplus
12,173 10,861
Retained earnings
181,500 160,741
Equity adjustment from
foreign currency
translation
103,904 87,774
-------------------------
590,329 546,726
-------------------------
$ 933,664 $ 880,201
-------------------------
-------------------------
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 www.fourseasons.com/investor,
and on SEDAR at 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,
net plus (vi)
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.
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.
This news release 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 www.fourseasons.com and on SEDAR
at 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.
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 70 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 www.fourseasons.com. |
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