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Fairmont Reports Net Income of $40.1 million Up from
$28.9 million aYear Earlier; One-time Income Tax
Recovery Reduced Expenses by
$24.4 million
Hotel Statistics
Fairmont Hotels & Resorts Inc. ("FHR" or the "Company") (TSX/NYSE: FHR)
today announced its unaudited financial results for the second quarter ended
June 30, 2003. All amounts are expressed in U.S. dollars.
"The lodging industry faced an exceptionally challenging environment during
the second quarter as a result of severe acute respiratory syndrome ("SARS"),
the war in Iraq and the ongoing weakness in the U.S. and global economies. In
particular, concerns relating to SARS have significantly impacted Canadian
travel and tourism," said William R. Fatt, chief executive officer of FHR. "In
Toronto, all levels of the lodging industry have been affected. Throughout the
rest of Canada, the industry has experienced a sharp decline in international
visitors, a very important customer segment for FHR."
"The unprecedented circumstances surrounding SARS, with regards to both the
severity and speed at which it affected the Canadian industry, resulted in an
inability to replace the drop in international travelers. Although we have
taken reasonable measures to control costs during this period, our ability to
reduce expenses in line with revenue declines has been adversely affected by
these circumstances. We expect the effect of SARS to continue to have an impact
on FHR's important third quarter," continued Mr. Fatt.
On a comparable basis, revenue per available room ("RevPAR") for Fairmont's
managed hotels was down 5.9% and RevPAR at FHR's owned portfolio increased
0.4%. Favorable foreign exchange movements contributed to an improvement in
overall results.
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(In millions except EPS amounts) Three months ended Six months ended
June 30 June 30
-------------------------------------------------------------------------
2003 2002 2003 2002
-------------------------------------------------------------------------
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Operating Revenues(1) $174.4 $150.3 $342.3 $292.6
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EBITDA(2) 43.4 53.2 85.6 91.3
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Net Income 40.1 28.9 52.6 42.5
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Basic earnings per share ("EPS") $0.51 $0.37 $0.66 $0.54
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Second Quarter Consolidated Results
Operating revenues increased 16.0% to $174.4 million in 2003 while EBITDA of
$43.4 million was down 18.4% from $53.2 million in the second quarter of 2002.
Net income for the quarter was $40.1 million compared to $28.9 million in 2002
while basic EPS was $0.51 compared to $0.37 in 2002. The increase in net income
is primarily the result of a favorable tax reassessment received in June 2003.
This one-time income tax recovery reduced income tax expense by $24.4 million.
As of June 30, 2003, the Canadian dollar had appreciated approximately 17%
since December 31, 2002. When compared to the second quarter of 2002, the
average Canadian dollar exchange rate for the quarter has appreciated
approximately 10%. As a significant portion of FHR's revenues are earned in
Canadian dollars, these currency fluctuations resulted in favorable
improvements in revenues and EBITDA.
Second Quarter Ownership Operations
Revenues from hotel ownership improved 15.1% to $153.5 million compared to
2002. This increase relates primarily to the acquisitions of The Fairmont
Orchid, Hawaii and the remaining 50% interest in The Fairmont Copley Plaza
Boston, which was previously accounted for using the equity method, as well as
favorable currency fluctuations.
The Fairmont Scottsdale Princess has performed better than initially
expected despite the new hotel supply in Scottsdale in late 2002. The Fairmont
Kea Lani Maui experienced a strong second quarter, which helped offset revenue
declines at The Fairmont Chateau Whistler and The Fairmont Chateau Lake Louise.
RevPAR was relatively flat at $117.03 compared to $116.51 in the second
quarter of 2002, resulting from a 9.0% increase in average daily rate ("ADR")
offset by a 4.8 point drop in occupancy. The Canadian owned hotels experienced
a RevPAR decrease of 3.0%, resulting from an occupancy decline of 8.8 points
offset by a 12.4% improvement in ADR. RevPAR increased by 2.3% at the U.S. and
International comparable portfolio on ADR growth of 4.3% combined with a 1.2
point drop in occupancy.
Equity losses generated from FHR's investment in Legacy Hotels Real Estate
Investment Trust ("Legacy") were $0.5 million for the second quarter compared
to equity income of $4.2 million in 2002. The impact of SARS on Legacy's
portfolio was considerable given its significant exposure to Toronto and other
major Canadian cities.
On June 30, 2003, FHR completed the sale of a land block zoned for
residential use in Vancouver's Coal Harbour. FHR received gross proceeds of
$11.9 million for its 75% interest in the land, recording a $7.3 million gain
on the sale. Overall real estate activities generated $12.3 million in revenues
and $6.6 million in EBITDA compared to $7.8 million and $3.1 million,
respectively in 2002.
Second Quarter Management Operations
Fairmont
Revenues under management of $365 million increased 5.2% over 2002, mainly
from the addition of four new management contracts during the latter half of
2002. Management fee revenues increased to $10.5 million from $10.3 million in
2002, with base fees increasing in line with revenues under management.
Expenses included a charge of $1.7 million relating to future employee
benefits, which is highly unlikely to be repeated.
RevPAR was down 5.9% during the second quarter, resulting from a 6.6 point
drop in occupancy, which was offset by a 4.2% increase in ADR. RevPAR dropped
9.9% at Fairmont's Canadian comparable portfolio, largely due to an occupancy
decline of 11.8 points resulting from the impact of SARS on the Canadian travel
industry. Notwithstanding this difficult Canadian environment, strong
performance at The Fairmont Banff Springs and favorable currency fluctuations
positively impacted operating statistics for FHR's Canadian properties. The
U.S. and International portfolio experienced a RevPAR decline of 3.0% driven by
rate pressure experienced at most U.S. city center properties.
Delta
In the second quarter of 2003, revenues under management decreased 5.7% to
$81 million resulting in management fee revenues dropping slightly to $2.6
million from $2.8 million in 2002. The primary reason for the decline was the
impact of SARS on this purely Canadian portfolio. During the quarter, RevPAR
was down 5.6%, due to a 6.5 point drop in occupancy offset by a 4.7% rise in
ADR.
Six-Month Consolidated Results
For the six months ended June 30, 2003, operating revenues increased 17.0%
to $342.3 million from $292.6 million. Recent acquisition activity and foreign
currency fluctuations generated the majority of this increase. EBITDA of $85.6
million was down 6.2% from last year and included $15.9 million from real
estate activities in 2003 versus $3.6 million in the first half of 2002.
Equity losses generated from FHR's investment in Legacy were $6.8 million
compared to a loss of $0.3 million in 2002. The impact of SARS on Legacy's
portfolio in the second quarter was considerable given its significant exposure
to Toronto and other major Canadian cities.
Net income was $52.6 million compared to $42.5 million in the prior year
while basic EPS was $0.66 in 2003 compared to $0.54 in 2002. The increase in
net income is a result of a favorable tax reassessment received in June 2003.
This one-time income tax recovery reduced income tax expense by $24.4 million.
Capital Expenditures
Hotel related capital expenditures for the quarter and year-to-date totaled
$19.8 million and $35.6 million, respectively. Several projects were underway
during the quarter including:
- The renovation of two-thirds of the guestrooms at The Fairmont Copley
Plaza Boston (completed in May);
- The ongoing construction of the meeting facility at The Fairmont
Chateau Lake Louise; and
- Guestroom renovations at The Fairmont Royal Pavilion, which closed in
May for approximately six months to complete these improvements.
In addition to the ongoing projects listed above, renovations will begin at
The Fairmont Orchid, Hawaii in August, which will include the restaurant, the
refurbishment of the spa and the conversion of one guest floor to Fairmont
Gold. In October, the renovation of the meeting rooms and final phase of
guestrooms will begin at The Fairmont Copley Plaza Boston, which is expected to
finish in early 2004.
Over the past few years, FHR has invested significantly in its portfolio,
including substantial capital investments in seven of its key properties.
Attractive returns on the capital invested are expected to be achieved once the
properties realize the full benefit of these improvements, which typically
occurs two to three years after completion. FHR currently expects that total
capital expenditures in 2003 will be approximately $100 million.
Corporate Activities
On July 3, 2003, Legacy announced that it will purchase the Four Seasons
Olympic, a AAA Five Diamond hotel located in Seattle. Subject to the
satisfaction of customary closing conditions and third-party approvals, this
acquisition will close during the third quarter. Fairmont will operate the
property, which will be officially flagged "The Fairmont Olympic Hotel,
Seattle", once the transaction has been completed. Fairmont has agreed to make
a payment to Legacy to acquire the long-term management contract.
In July, Delta announced the addition of two franchise agreements. The Delta
Quebec was re-flagged on July 1, 2003 and the Delta Fredericton will be
re-branded on December 15, 2003. On June 30, 2003, Delta's management of the
Delta Pinnacle in Vancouver, B.C. ceased, for which the Company received a
modest termination fee.
On June 5, 2003, FHR entered into an agreement to manage a new $152 million
resort in Puerto Rico's Rio Grande, 25 miles east of San Juan. Discussions
regarding the financing of this development are currently underway.
During the quarter, FHR repurchased 497,700 shares at a total cost of $11.8
million. FHR has repurchased a total of 747,100 shares at a total cost of $16.8
million during 2003.
Outlook
"We are encouraged by the early signs of an apparent recovery in the United
States. Unfortunately, the Canadian lodging industry remains a significant
challenge. In particular, SARS continues to have a considerable impact on
demand at our Canadian properties in the third quarter, which is their busiest
season," commented Mr. Fatt.
"We now estimate full-year 2003 EBITDA of $155-$165 million, including
approximately $14 million from non-hotel real estate activities. This compares
to our previous expectation provided in January of $215-$225 million. We
believe that approximately 60% of the decline from this previous guidance is
attributable to the impact of SARS. The balance anticipates an ongoing weakness
generally in the North American lodging industry throughout the balance of the
year and reflects our revised outlook for several properties," continued Mr.
Fatt.
FHR estimates that EPS for the year will be between $0.81-$0.89. Excluding
the impact of the favorable tax reassessment received in June, FHR estimates
its annual tax rate to remain at 27%.
"The Fairmont Orchid was acquired in December 2002 and re-branded in
January. As a result, 2003 was planned as a repositioning year for the resort.
Although soft group demand was originally projected, individual leisure
bookings have been weaker than initially expected," said Mr. Fatt. "The Bermuda
market is experiencing weaker demand generally than was originally projected.
Consequently, performance at our two properties is expected to be in line with
2002 results although below our initial expectations for this year."
"Finally, while our expectations in Boston were modest given the extensive
renovation activities at our property, the city generally continues to be
weaker than anticipated and is currently one of the most challenging markets in
the U.S. Given the recent softness, we have elected to accelerate the meeting
room renovations to the fall of 2003 as opposed to 2004. Although this will
have a further negative effect on 2003 results, it will better position our
property for the recovery."
"We continue to manage our business based on the assumption that following
this difficult period, FHR will enjoy a sharp recovery in 2004 relative to our
current 2003 expectations. We recognize that a considerable effort will need to
be made to ensure Canada is once again considered an attractive travel
destination. In addition to company initiatives, all levels of government and
tourism groups are participating in promotional activities to stimulate
Canadian visitation," said Mr. Fatt. "Our significant investment in many of our
world-class properties and the recent acquisition of two key properties
position us well for growth next year."
About Fairmont Hotels & Resorts Inc.
FHR is one of North America's leading owner/operators of luxury hotels and
resorts. FHR's managed portfolio consists of 80 luxury and first-class
properties with more than 31,000 guestrooms in Canada, the United States,
Mexico, Bermuda, Barbados and the United Arab Emirates. It holds an 83.5%
controlling interest in Fairmont Hotels & Resorts ("Fairmont"), North America's
largest luxury hotel management company. Fairmont manages 41 distinctive city
center and resort hotels such as The Fairmont San Francisco, The Fairmont Banff
Springs, Fairmont Le Chateau Frontenac and The Fairmont Scottsdale Princess.
FHR also holds a 100% interest in Delta Hotels, Canada's largest first-class
hotel management company, which manages and franchises a portfolio of 38 city
center and resort properties in Canada. In addition to hotel management, FHR
holds real estate interests in 24 properties, two large undeveloped land blocks
and an approximate 35% investment interest in Legacy Hotels Real Estate
Investment Trust, which owns 23 properties.
FHR will hold a conference call today, July 24, 2003 at 1:30 p.m. Eastern
Time to discuss these results. To participate, please dial 416.695.5806 or
1.800.273.9672 approximately 10 minutes prior to the beginning of the call to
receive clearance from the operator. You will be requested to identify yourself
and the organization on whose behalf you are participating. A recording of this
call will be made available beginning at 3:30 p.m. Eastern Time on July 24,
2003 through to 3:30 p.m. Eastern Time on July 31, 2003 by dialing 416.695.5800
or 1.800.408.3053 using the reservation No. 1442419. A live audio webcast of
the conference call will be available via FHR's website
(http://www.fairmont.com/investor). An archived recording of the webcast will
remain available on FHR's website following the conference call.
This press release contains certain forward-looking statements relating, but
not limited to, FHR's operations, anticipated financial performance, business
prospects and strategies. Forward-looking information typically contains
statements with words such as "anticipate", "believe", "expect", "plan" or
similar words suggesting future outcomes. Such forward-looking statements are
subject to risks, uncertainties and other factors, which could cause actual
results to differ materially from future results expressed, projected or
implied by such forward-looking statements. Such factors include, but are not
limited to economic, competitive and lodging industry conditions. FHR disclaims
any responsibility to update any such forward-looking statements.
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Three months ended Six months ended
June 30 June 30
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2003 2002 Variance 2003 2002 Variance
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OWNED HOTELS
-------------------------------------------------------------------------
Worldwide
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RevPAR $117.03 $116.51 0.4% $116.15 $116.17 0.0%
-------------------------------------------------------------------------
ADR 208.08 190.95 9.0% 202.00 189.79 6.4%
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Occupancy 56.2% 61.0% (4.8 points) 57.5% 61.2% (3.7 points)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Canada
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RevPAR $85.97 $88.59 (3.0%) $86.12 $85.91 0.2%
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ADR 154.61 137.59 12.4% 147.65 133.24 10.8%
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Occupancy 55.6% 64.4% (8.8 points) 58.3% 64.5% (6.2 points)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
U.S. and
International
-------------------------------------------------------------------------
RevPAR $145.03 $141.83 2.3% $143.21 $143.62 (0.3%)
-------------------------------------------------------------------------
ADR 255.25 244.73 4.3% 252.35 246.57 2.3%
-------------------------------------------------------------------------
Occupancy 56.8% 58.0% (1.2 points) 56.8% 58.2% (1.4 points)
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FAIRMONT
MANAGED
HOTELS
-------------------------------------------------------------------------
Worldwide
-------------------------------------------------------------------------
RevPAR $107.11 $113.85 (5.9%) $99.61 $104.97 (5.1%)
-------------------------------------------------------------------------
ADR 175.85 168.78 4.2% 170.14 164.54 3.4%
-------------------------------------------------------------------------
Occupancy 60.9% 67.5% (6.6 points) 58.5% 63.8% (5.3 points)
-------------------------------------------------------------------------
Canada
-------------------------------------------------------------------------
RevPAR $82.62 $91.68 (9.9%) $74.62 $78.85 (5.4%)
-------------------------------------------------------------------------
ADR 137.95 127.89 7.9% 129.11 119.64 7.9%
-------------------------------------------------------------------------
Occupancy 59.9% 71.7% (11.8 points) 57.8% 65.9% (8.1 points)
-------------------------------------------------------------------------
U.S. and
International
-------------------------------------------------------------------------
RevPAR $134.79 $138.99 (3.0%) $127.69 $134.56 (5.1%)
-------------------------------------------------------------------------
ADR 217.21 221.84 (2.1%) 215.01 219.18 (1.9%)
-------------------------------------------------------------------------
Occupancy 62.1% 62.7% (0.6 points) 59.4% 61.4% (2.0 points)
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DELTA
MANAGED
HOTELS
-------------------------------------------------------------------------
Worldwide
-------------------------------------------------------------------------
RevPAR $56.27 $59.59 (5.6%) $51.85 $51.22 1.2%
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ADR 94.10 89.90 4.7% 88.31 84.41 4.6%
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Occupancy 59.8% 66.3% (6.5 points) 58.7% 60.7% (2.0 points)
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Comparable hotels and resorts are considered to be properties that were
fully open under FHR management for at least the entire current and prior
period. Comparable hotels and resorts statistics exclude properties under major
renovation that would have a significant adverse effect on the properties'
primary operations. Although no hotels were excluded due to the impact of major
renovations, the following properties were not included as they were not part
of the portfolio for the entire current and prior period:
Owned: The Fairmont Orchid, The Fairmont Copley Plaza Boston
Fairmont Managed: The Fairmont Orchid, The Fairmont Washington, The
Fairmont Sonoma Mission Inn & Spa, The Fairmont Dubai
Delta Managed: Delta Sun Peaks Resort, Delta St. Eugene Mission
Resort
1. Operating revenues excludes other revenues from managed and franchised
properties (consists of direct and indirect costs relating primarily
to marketing and reservation services that are reimbursed by hotel
owners on a cost recovery basis). Management considers that the
exclusion of such revenues provides a meaningful measure of operating
performance, however, it is not a defined measure of operating
performance under Canadian generally accepted accounting principles
("Canadian GAAP"). FHR's calculation of operating revenues may be
different than the calculation used by other entities.
2. EBITDA is defined as earnings before interest, taxes, amortization,
other income and expenses and reorganization and corporate expenses.
Income from investments and other is included in EBITDA. Management
considers EBITDA to be a meaningful indicator of hotel operations,
however, it is not a defined measure of operating performance under
Canadian GAAP. FHR's calculation of EBITDA may be different than the
calculation used by other entities.
Fairmont Hotels & Resorts Inc.
Consolidated Balance Sheets
(Stated in millions of U.S. dollars)
(Unaudited)
ASSETS
June 30 December 31
2003 2002
----------- -----------
Current assets
Cash and cash equivalents $ 49.7 $ 49.0
Accounts receivable 68.8 47.0
Inventory 14.3 12.5
Prepaid expenses and other 22.9 10.9
----------- -----------
155.7 119.4
Investments in partnerships and
corporations (note 3) 52.9 68.9
Investment in Legacy Hotels Real Estate
Investment Trust 102.1 96.4
Non-hotel real estate 93.8 88.8
Property and equipment 1,619.5 1,441.1
Goodwill 130.1 123.0
Intangible assets 209.7 201.7
Other assets and deferred charges 90.8 83.7
----------- -----------
$ 2,454.6 $ 2,223.0
----------- -----------
----------- -----------
LIABILITIES
Current liabilities
Accounts payable and accrued liabilities $ 107.7 $ 101.3
Taxes payable 4.2 5.3
Dividends payable 2.4 2.4
Current portion of long-term debt 73.4 72.3
----------- -----------
187.7 181.3
Long-term debt 584.5 463.2
Other liabilities 92.9 82.8
Future income taxes (note 4) 78.0 96.4
----------- -----------
943.1 823.7
----------- -----------
Shareholders' equity (note 5) 1,511.5 1,399.3
----------- -----------
$ 2,454.6 $ 2,223.0
----------- -----------
----------- -----------
Fairmont Hotels & Resorts Inc.
Consolidated Statements of Income
(Stated in millions of U.S. dollars)
(Unaudited)
Three months ended Six months ended
June 30 June 30
2003 2002 2003 2002
--------- --------- --------- ---------
Revenues
Hotel ownership operations $ 153.5 $ 133.4 $ 293.9 $ 257.2
Management operations 8.6 9.1 17.2 15.4
Real estate activities 12.3 7.8 31.2 20.0
--------- --------- --------- ---------
174.4 150.3 342.3 292.6
Other revenues from managed
and franchised properties 7.5 7.3 14.5 13.9
--------- --------- --------- ---------
181.9 157.6 356.8 306.5
Expenses
Hotel ownership operations 118.2 95.8 223.7 180.5
Management operations 7.5 4.3 11.4 8.7
Real estate activities 5.7 4.7 15.3 16.4
--------- --------- --------- ---------
Operating expenses 131.4 104.8 250.4 205.6
Other expenses from managed
and franchised properties 7.5 7.3 14.5 13.9
--------- --------- --------- ---------
138.9 112.1 264.9 219.5
Income (loss) from equity
investments and other 0.4 7.7 (6.3) 4.3
--------- --------- --------- ---------
Operating income before
undernoted items 43.4 53.2 85.6 91.3
Amortization 17.2 14.3 33.5 28.0
Other (income) expenses, net - 0.6 - (6.1)
Reorganization and
corporate expenses - 1.5 - 1.3
Interest expense, net 8.3 4.0 14.2 8.5
--------- --------- --------- ---------
Income before income tax expense
and non-controlling interest 17.9 32.8 37.9 59.6
--------- --------- --------- ---------
Income tax expense
Current 1.2 3.7 6.5 7.9
Future (note 4) (23.4) (0.3) (21.2) 8.5
--------- --------- --------- ---------
(22.2) 3.4 (14.7) 16.4
--------- --------- --------- ---------
Non-controlling interest - 0.5 - 0.7
--------- --------- --------- ---------
Net income $ 40.1 $ 28.9 $ 52.6 $ 42.5
--------- --------- --------- ---------
Weighted average number of common
shares outstanding (in millions)
(note 5)
Basic 79.4 78.6 79.3 78.6
Diluted 80.1 80.2 80.0 80.0
Basic earnings per common share $ 0.51 $ 0.37 $ 0.66 $ 0.54
Diluted earnings per common share $ 0.50 $ 0.36 $ 0.66 $ 0.53
Fairmont Hotels & Resorts Inc.
Consolidated Statements of Cash Flows
(Stated in millions of U.S. dollars)
(Unaudited)
Three months ended Six months ended
June 30 June 30
2003 2002 2003 2002
--------- --------- --------- ---------
Cash provided by (used in)
Operating activities
Net income $ 40.1 $ 28.9 $ 52.6 $ 42.5
Items not affecting cash
Amortization of property
and equipment 16.6 13.8 32.2 26.8
Amortization of
intangible assets 0.6 0.5 1.3 1.2
(Income) loss from equity
investments and other (0.4) (7.7) 6.3 (4.3)
Future income taxes (23.4) (0.3) (21.2) 8.5
Non-controlling interest - 0.5 - 0.7
Distributions from investments 4.4 5.1 4.4 5.1
Other (10.4) (2.8) (7.7) (8.0)
Change in non-hotel real estate 2.7 (4.4) 10.1 3.9
Changes in non-cash working
capital items (note 6) (22.9) (28.1) (34.6) (36.2)
--------- --------- --------- ---------
7.3 5.5 43.4 40.2
--------- --------- --------- ---------
Investing activities
Additions to property
and equipment (19.8) (21.1) (35.6) (52.3)
Acquisitions, net of cash
acquired (note 3) - - 6.0 -
Investments in partnerships
and corporations (0.6) (3.0) (0.7) (3.0)
--------- --------- --------- ---------
(20.4) (24.1) (30.3) (55.3)
--------- --------- --------- ---------
Financing activities
Issuance of long-term debt 23.2 - 146.7 39.0
Repayment of long-term debt (1.0) (1.3) (143.5) (24.7)
Issuance of common shares 0.1 0.1 0.1 0.5
Repurchase of common shares (11.8) (0.5) (16.8) (1.2)
Dividends paid - - (2.4) (1.6)
--------- --------- --------- ---------
10.5 (1.7) (15.9) 12.0
--------- --------- --------- ---------
Effect of exchange rate
changes on cash 2.0 3.6 3.5 2.2
--------- --------- --------- ---------
(Decrease) Increase in cash (0.6) (16.7) 0.7 (0.9)
Cash - beginning of period 50.3 68.5 49.0 52.7
--------- --------- --------- ---------
Cash - end of period $ 49.7 $ 51.8 $ 49.7 $ 51.8
--------- --------- --------- ---------
--------- --------- --------- ---------
Fairmont Hotels & Resorts Inc.
Consolidated Statements of Retained Earnings (Deficit)
(Stated in millions of U.S. dollars)
(Unaudited)
Three months ended Six months ended
June 30 June 30
2003 2002 2003 2002
--------- --------- --------- ---------
Balance - Beginning of period $ 49.8 $ (6.0) $ 38.5 $ (19.6)
Net income 40.1 28.9 52.6 42.5
--------- --------- --------- ---------
89.9 22.9 91.1 22.9
Repurchase of common shares
(note 5) (4.3) - (5.5) -
Dividends (2.4) (1.6) (2.4) (1.6)
--------- --------- --------- ---------
Balance - End of period $ 83.2 $ 21.3 $ 83.2 $ 21.3
--------- --------- --------- ---------
--------- --------- --------- ---------
Fairmont Hotels & Resorts Inc.
Notes to Consolidated Financial Statements
(Stated in millions of U.S. dollars)
(Unaudited)
1. Fairmont Hotels & Resorts Inc. ("FHR") has operated and owned hotels
and resorts for 115 years and currently manages properties
principally under the Fairmont and Delta brands. At June 30, 2003,
FHR managed 80 luxury and first-class hotels. FHR owns 83.5% of
Fairmont Hotels Inc. ("Fairmont"), which at June 30, 2003, managed 41
luxury Fairmont branded properties in major city centers and key
resort destinations throughout Canada, the United States, Mexico,
Bermuda, Barbados and the United Arab Emirates. Delta Hotels Limited
("Delta"), a wholly owned subsidiary of FHR, managed or franchised 38
Canadian hotels and resorts at June 30, 2003. In addition to hotel
and resort management, at June 30, 2003, FHR had hotel ownership
interests ranging from approximately 20% to 100% in 23 properties,
located in Canada, the United States, Mexico, Bermuda and Barbados.
FHR also has an approximate 35% equity interest in Legacy Hotels Real
Estate Investment Trust ("Legacy"), which owns 22 hotels and resorts
across Canada and one in the United States. FHR also owns real estate
properties that are suitable for either commercial or residential
development. Results for the three and six months ended June 30, 2003
are not necessarily indicative of the results that may be expected
for the full year due to seasonal and short-term variations. Revenues
are typically higher in the second and third quarters versus the
first and fourth quarters of the year in contrast to fixed costs such
as amortization and interest, which are not significantly impacted by
seasonal or short-term variations.
2. These interim consolidated financial statements do not include all
disclosures as required by Canadian generally accepted accounting
principles for annual consolidated financial statements and should be
read in conjunction with the audited consolidated financial
statements for the year ended December 31, 2002 presented in the
annual report. The accounting policies used in the preparation of
these interim consolidated financial statements are consistent with
the accounting policies used in the December 31, 2002 audited
consolidated financial statements, except as discussed below.
Long-lived assets
Effective January 1, 2003, FHR adopted the new recommendations of The
Canadian Institute of Chartered Accountants ("CICA") with respect to
accounting for the impairment of long-lived assets. This standard
requires that long-lived assets be reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount
of an asset may not be recoverable. Long-lived assets are grouped at
the lowest level for which identifiable cash flows are largely
independent, when testing for and measuring impairment. Under the new
standard, a two-step process will determine the impairment of
long-lived assets held for use, with the first step determining when
impairment is recognized and the second step measuring the amount of
the impairment. Impairment losses will be recognized when the
carrying amount of long-lived assets exceeds the sum of the
undiscounted cash flows expected to result from their use and
eventual disposition and will be measured as the amount by which the
long-lived asset's carrying amount exceeds its fair value. Adoption
of this new standard did not have an impact on FHR's financial
position, results of operations or cash flows.
Also effective January 1, 2003, FHR adopted the new CICA
recommendations relating to the disposal of long-lived assets and
discontinued operations. Subject to certain criteria, long-lived
assets and any associated assets or liabilities that management
expects to dispose of by sale will now be classified as held for
sale. The related results of operations from these assets classified
as held for sale will be reported in discontinued operations if
certain criteria are met, with reclassification of prior year's
related operating results. Assets to be disposed of are reported at
the lower of the carrying amount or fair value less costs to sell.
Adoption of this new standard did not have an impact on FHR's
financial position, results of operations or cash flows.
3. Acquisition
In February 2003, FHR acquired the remaining 50% equity interest in
The Fairmont Copley Plaza Boston from entities controlled by Prince
Alwaleed Bin Talal Bin Abdulaziz Al Saud of Saudi Arabia. The total
purchase price for 100% of The Fairmont Copley Plaza Boston, including
the 50% already owned, was approximately $117.0 and was satisfied by
the issuance of one million common shares at a fair market value of
$21.49 per share, the assumption of a mortgage at $64.5 and cash paid
of $30.7. FHR purchased the initial 50% equity interest in the hotel
in July 2001 for cash. The acquisition was accounted for using the
step purchase method, and 100% of the results of the hotel have been
included in the consolidated statements of income from February 10,
2003. Certain acquisition costs have been estimated in the purchase
price equation and have not yet been finalized. The mortgage, secured
by substantially all assets and an assignment of auxilliary rents of
The Fairmont Copley Plaza Boston, is due March 1, 2006 and bears
interest at floating rates based on LIBOR plus 225 basis points. In
order to hedge against exposures to increases in interest rates, FHR
has entered into an interest rate hedge to cap the LIBOR rate at 6.5%.
The total cost of the hotel, including the 50% interest already owned,
acquisition costs of $0.5 less cash acquired of $14.8, has been
allocated to the tangible assets acquired and liabilities assumed on
the basis of their respective estimated fair values on the acquisition
date, as follows:
Land $ 25.1
Building 77.8
Furniture, fixtures and equipment 2.5
Long-term debt (64.5)
Current assets 3.2
Current liabilities (6.8)
----------
$ 37.3
----------
4. A $24.4 million recovery of future income tax was recorded in
June 2003 as a result of a favorable tax reassessment.
5. Shareholders' equity
June 30, December 31,
2003 2002
------------ ------------
Common shares $ 1,201.3 $ 1,191.5
Contributed surplus 141.9 141.9
Foreign currency translation adjustments 85.1 27.4
Retained earnings 83.2 38.5
------------ ------------
$ 1,511.5 $ 1,399.3
------------ ------------
The diluted weighted-average number of common shares outstanding is
calculated as follows:
Three months ended Six months ended
June 30 June 30
2003 2002 2003 2002
--------- --------- --------- ---------
(in millions) (in millions)
Weighted-average number of common
shares outstanding - basic 79.4 78.6 79.3 78.6
Stock options 0.7 1.6 0.7 1.4
--------- --------- --------- ---------
Weighted-average number of common
shares outstanding - diluted 80.1 80.2 80.0 80.0
--------- --------- --------- ---------
Under a normal course issuer bid, FHR may repurchase for cancellation
up to approximately 7.8 million or 10% of its outstanding common
shares. The amounts and timing of repurchases are at FHR's discretion
and, under the current program, can be made until October 2, 2003.
During the six months ended June 30, 2003, FHR repurchased 747,100
shares (497,700 shares for the second quarter) for total
consideration of $16.8 ($11.8 for the second quarter), of which,
$11.3 was charged to common shares and $5.5 was charged to retained
earnings. During the six months ended June 30, 2003, FHR issued
13,794 shares (11,844 shares for the second quarter) pursuant to the
Key Employee Stock Option Plan ("KESOP"). $0.1 was credited to common
shares for options exercised. At June 30, 2003, 79,046,316 common
shares were outstanding (2002 - 78,624,010).
During the six months ended June 30, 2003, 107,000 (107,000 in the
second quarter) stock options were granted. Assuming FHR elected to
recognize the cost of its stock-based compensation based on the
estimated fair value of stock options granted after January 1, 2002,
net income and basic and diluted earnings per share would have been:
Three months ended Six months ended
June 30 June 30
2003 2002 2003 2002
--------- --------- --------- ---------
Reported net income $ 40.1 $ 28.9 $ 52.6 $ 42.5
Net income assuming fair
value method used $ 39.6 $ 28.5 $ 51.9 $ 42.1
Assuming fair value
method used
Basic earnings per share $ 0.50 $ 0.36 $ 0.65 $ 0.54
Diluted earnings per share $ 0.49 $ 0.36 $ 0.65 $ 0.53
The fair value of each option granted was calculated at the
respective grant date of each issuance using the Black-Scholes option
pricing model with the following weighted average assumptions:
Three months ended Six months ended
June 30 June 30
2003 2002 2003 2002
--------- --------- --------- ---------
Expected dividend yield 0.3% 0.2% 0.3% 0.2%
Expected volatility 36.2% 32.0% 36.2% 32.0%
Risk-free interest rate 4.16% 4.24% 4.16% 4.24%
Expected option life in years 3.6 4.0 3.6 4.0
6. Changes in non-cash working capital:
Three months ended Six months ended
June 30 June 30
2003 2002 2003 2002
--------- --------- --------- ---------
Decrease (increase)
in current assets
Accounts receivable $ (0.2) $ (12.0) $ (9.9) $ (17.8)
Inventory 0.3 (1.5) (0.5) (1.2)
Prepaid expenses and other (9.1) (8.1) (10.0) (10.8)
Increase (decrease) in
current liabilities
Accounts payable and
accrued liabilities (8.2) (5.0) (11.2) (4.3)
Taxes payable (5.7) (1.5) (3.0) (2.1)
--------- --------- --------- ---------
$ (22.9) $ (28.1) $ (34.6) $ (36.2)
--------- --------- --------- ---------
7. In February 2003, FHR completed a $120.0 financing secured by
substantially all assets and an assignment of auxillary rents of The
Fairmont Kea Lani Maui. The mortgage is due March 1, 2006 and bears
interest at the greater of 4.25% and LIBOR plus 310 basis points. FHR
has entered into an interest rate contract to cap the LIBOR rate at
9.0%.
8. Guarantees
Significant guarantees that have been provided to third parties
include the following:
Debt guarantees
FHR has provided guarantees totalling $11.6 million related to debts
incurred by hotels in which it holds a minority equity interest. In
the event that one of these hotels fails to meet certain financial
obligations, the lenders may draw upon these guarantees. The term of
these guarantees is equal to the term of the related debts, which are
all due on demand. FHR has collateral security on the underlying
hotel assets if the guarantees are drawn upon. No amount has been
recorded in the financial statements for amounts owing under these
guarantees.
Business dispositions
In the sale of all or a part of a business, we may agree to indemnify
against claims for FHR's past business practices in the areas of tax
and environmental matters. The term of such indemnification is
subject to certain actions that are under the control of the acquirer
and the amount of the indemnification is not limited. The nature of
these indemnification agreements prevents us from estimating the
maximum potential liability we could be required to pay to counter
parties. FHR has accruals in its financial statements of
approximately $9 million related to potential claims under the
indemnifications made to date.
Director and officer indemnification agreements
FHR has entered into indemnification agreements with its current and
former directors and officers to indemnify them, to the extent
permitted by law, against any and all charges, costs, expenses,
amounts paid in settlement and damages incurred by the directors and
officers as a result of any lawsuit or any other judicial,
administrative or investigative proceeding in which the directors and
officers are sued as a result of their service. These indemnification
claims will be subject to any statutory or other legal limitation
period. The nature of the indemnification agreements prevents FHR
from making a reasonable estimate of the maximum potential amount it
could be required to pay to counter parties. FHR has purchased
directors' and officers' liability insurance. No amount has been
recorded in the financial statements with respect to these
indemnification agreements as no claims are outstanding at this date.
Other indemnification agreements
In the normal course of operations, FHR may provide indemnification
agreements, other than those listed above, to counterparties that
would require FHR to compensate them for costs incurred as a result
of changes in laws and regulations or as a result of litigation
claims or statutory sanctions that may be suffered by the
counterparty as a consequence of the transaction. The terms of these
indemnification agreements will vary based upon the contract. The
nature of the indemnification agreements prevents FHR from making a
reasonable estimate of the maximum potential amount it could be
required to pay to counter parties. No amount has been recorded in
the financial statements with respect to these indemnification
agreements.
9. Derivative financial instruments such as swaps, options and forward
contracts are used by FHR in the management of its foreign currency
and interest rate exposures. The Company's policy is to not use
derivative financial instruments for trading or speculative purposes.
At the inception of a hedge, FHR documents the relationship between
the hedging instruments and the hedged items. This process includes
linking the derivatives to specific assets and liabilities on the
balance sheet or to specific firm commitments or forecasted
transactions. The Company assesses the effectiveness of the hedge at
the inception and throughout the hedge by considering factors such as
the term of the hedging instrument, the notional settlement amount of
the derivative as compared to the dollar amount of the item being
hedged and any other applicable factors. At the end of each period,
FHR records any changes in fair value related to the portion of the
derivative instruments that are no longer deemed to be effective or
do not meet the criteria of a hedge in the consolidated statement of
income.
FHR designates its interest rate hedge agreements as hedges of the
underlying debt. Interest expense on the underlying debt is adjusted
to include the payments made or received under the interest rate
swaps. Foreign exchange translation gains or losses on foreign
currency denominated derivative financial instruments used to hedge
anticipated foreign currency cash flows are recognized as an
adjustment to revenues or expenses, as applicable, when the cash
flows are recorded.
At June 30, 2003, the Company held options to sell $81.1 million
Canadian dollars at average exchange rates of $0.712 during the third
quarter of 2003. FHR acquired these options to manage exchange rate
exposures relating to the cash flows generated by the Canadian
operations. At June 30, 2003, the fair value of these options was
approximately $0.1. At June 30, 2003, FHR had outstanding, two
interest rate hedges to cap LIBOR at 6.5% on the mortgage secured by
The Fairmont Copley Plaza Boston (note 3) and to cap LIBOR at 9.0% on
the mortgage secured by The Fairmont Kea Lani Maui (note 7). At June
30, 2003, the fair market value of the interest rate hedge agreements
approximates their carrying value.
10. Certain of the prior period figures have been reclassified to conform
with the presentation adopted for 2003.
11. Segmented Information
FHR has five reportable operating segments in two core business
activities, ownership and management operations. The segments are
hotel ownership, investment in Legacy, real estate activities,
Fairmont and Delta. Hotel ownership consists of real estate interests
ranging from approximately 20% to 100% in 23 properties. The
investment in Legacy consists of an approximate 35% equity interest
in Legacy, which owns 22 hotels and resorts across Canada and one in
the United States. Real estate activities consists primarily of two
large undeveloped land blocks in Toronto and Vancouver. Fairmont is a
North American luxury hotel and resort management company and Delta
is a Canadian first-class hotel and resort management company.
The performance of all segments is evaluated primarily on earnings
before interest, taxes and amortization ("EBITDA"), which is defined
as income before interest, taxes, amortization, other income and
expenses and reorganization and corporate expenses. It includes
income (loss) from investments and other. Amortization, other income
and expenses, reorganization and corporate expenses, interest and
income taxes are not allocated to the individual segments. All
transactions among operating segments are conducted at fair market
value.
The following tables present revenues, EBITDA, total assets and
capital expenditures for FHR's reportable segments:
Three months ended June 30, 2003
-----------------------------------------------------------
Ownership Management
--------------------------- --------------
Real Inter-
Estate segment
Hotel acti- Fair- Elimina-
Ownership Legacy vities mont Delta tion (a) Total
--------- ------- --------- ------ ------- ------- --------
Operating
revenues $ 153.5 $ - $ 12.3 $ 10.5 $ 2.6 $ (4.5) $ 174.4
Other
revenues
from
managed
and
franchised
properties - - - 5.8 1.7 - 7.5
--------
181.9
Income (loss)
from
equity
investments
and other 0.9 (0.5) - - - - 0.4
EBITDA 31.7 (0.5) 6.6 3.7 1.9 - 43.4
Total assets
(b) 2,087.3 102.1 105.6 348.0 77.0 (265.4) 2,454.6
Capital ex-
penditures 19.4 - - 0.4 - - 19.8
Three months ended June 30, 2002
-----------------------------------------------------------
Ownership Management
--------------------------- --------------
Real Inter-
Estate segment
Hotel acti- Fair- Elimina-
Ownership Legacy vities mont Delta tion (a) Total
--------- ------- --------- ------ ------- ------- --------
Operating
revenues $ 133.4 $ - $ 7.8 10.3 2.8 $ (4.0) $ 150.3
Other
revenues
from
managed and
franchised
properties - - - 5.2 2.1 - 7.3
--------
157.6
Income (loss)
from equity
investments
and other 3.5 4.2 - - - - 7.7
EBITDA 37.1 4.2 3.1 6.7 2.1 - 53.2
Total assets
(b) 1,732.7 63.3 93.6 198.4 74.1 (188.5) 1,973.6
Capital ex-
penditures 19.8 - - 1.3 - - 21.1
Six months ended June 30, 2003
-----------------------------------------------------------
Ownership Management
--------------------------- --------------
Real Inter-
Estate segment
Hotel acti- Fair- Elimina-
Ownership Legacy vities mont Delta tion (a) Total
--------- ------- --------- ------ ------- ------- --------
Operating
revenues $ 293.9 $ - $ 31.2 $ 20.9 $ 5.7 $ (9.4) $ 342.3
Other
revenues
from
managed and
franchised
properties - - - 10.6 3.9 - 14.5
--------
356.8
Income (loss)
from equity
investments
and other 0.5 (6.8) - - - - (6.3)
EBITDA 61.3 (6.8) 15.9 10.8 4.4 - 85.6
Total assets
(b) 2,087.3 102.1 105.6 348.0 77.0 (265.4) 2,454.6
Capital ex-
penditures 35.0 - - 0.6 - - 35.6
Six months ended June 30, 2002
-----------------------------------------------------------
Ownership Management
--------------------------- --------------
Real Inter-
Estate segment
Hotel acti- Fair- Elimina-
Ownership Legacy vities mont Delta tion (a) Total
--------- ------- --------- ------ ------- ------- --------
Operating
revenues $ 257.2 $ - $ 20.0 $ 19.0 $ 5.0 $ (8.6) $ 292.6
Other
revenues
from
managed and
franchised
properties - - - 9.8 4.1 - 13.9
--------
306.5
Income
(loss)
from equity
investments
and other 4.6 (0.3) - - - - 4.3
EBITDA 72.6 (0.3) 3.6 11.9 3.5 - 91.3
Total assets
(b) 1,732.7 63.3 93.6 198.4 74.1 (188.5) 1,973.6
Capital ex-
penditures 49.7 - - 2.6 - - 52.3
(a) Revenues represent management fees that are charged by Fairmont
of $4.4 (2002 - $3.9) and $9.3 (2002 - $8.5) for the three and
six months ended June 30, 2003 respectively, and Delta of
$0.1 (2002 - $0.1) and $0.1 (2002 - $0.1) for the three and six
months ended June 30, 2003 respectively, to the hotel ownership
operations, which are eliminated on consolidation. Total assets
represent the elimination of inter-segment loans net of corporate
assets.
(b) Hotel ownership assets include $39.1 (2002 - $55.2) of
investments accounted for using the equity method.
SOURCE
-0- 24/07/2003
/CONTACT: CONTACT: M. Jerry Patava, Executive Vice President and Chief
Financial Officer, Tel: (416) 874-2450; Emma Thompson, Executive Director
Investor Relations, Tel: (416) 874-2485, Email: [email protected],
Website :http://www.fairmont.com/
CO: Fairmont Hotels & Resorts Inc.
ST: Ontario
IN: LEI
SU: ERN
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