Exhibit 99.3
This document contains "forward-looking statements" within the meaning of
applicable securities laws, including RevPAR, profit margin and earning
trends; statements concerning the number of lodging properties expected to be
added in this and future years; expected investment spending; and similar
statements concerning anticipated future events, results, circumstances,
performance or expectations that are not historical facts. Various factors and
assumptions were applied or taken into consideration in arriving at these
statements, which do not take into account the effect that non-recurring or
other special items announced after the statements are made may have on our
business. These statements are not guarantees of future performance and,
accordingly, you are cautioned not to place undue reliance on these
statements. These statements are subject to numerous risks and uncertainties,
including those described in our annual information form and management's
discussion and analysis for the year ended December 31, 2005 and in this
document. (See discussion under "Operating Risks" beginning on page 17 of our
Annual Information Form and page 45 of our Management's Discussion and
Analysis for the year ended December 31, 2005, which are available on our
website at 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.
MANAGEMENT'S DISCUSSION AND ANALYSIS
THIRD QUARTER AND NINE MONTHS ENDED SEPTEMBER 30, 2006
>>
This Management's Discussion and Analysis ("MD&A") for the third quarter
and nine months ended September 30, 2006 is provided as of November 9, 2006.
It should be read in conjunction with the interim unaudited consolidated
financial statements for those periods, the audited consolidated financial
statements for the year ended December 31, 2005 and the MD&A for that year,
including the discussion of risks and uncertainties associated with forward-
looking statements. Except as disclosed in this MD&A, as of November 9, 2006,
and the MD&A for the quarter ended March 31, 2006 and six months ended June
30, 2006, there has been no material change in the information disclosed in
the MD&A for the year ended December 31, 2005. A summary of total revenues,
net earnings or loss in total and on a per share basis for the past eight
quarters can be found under "Eight Quarter Summary".
All amounts disclosed in this MD&A are in US dollars unless otherwise
noted. The consolidated financial statements are prepared in accordance with
Canadian generally accepted accounting principles. Endnotes can be found at
the end of this document.
<<
Operational and Financial Review and Analysis
Hotel and Resort Operating Results
>>
For the third quarter of 2006, RevPAR(1) at our worldwide Core Hotels(2)
increased 9.7%, as compared to the third quarter of 2005, reflecting
improvements in each of the regions in which we manage hotels and resorts.
This increase in RevPAR was attributable to a 12.0% improvement in achieved
room rates, offset by a 150 basis point decline in overall occupancy. For the
nine months ended September 30, 2006, RevPAR of our worldwide Core Hotels
increased 11.2%, as compared to the same period in 2005, reflecting
improvements in each of the regions in which we manage hotels and resorts.
This increase in RevPAR was attributable to a 10.2% improvement in achieved
room rates and a 60 basis point increase in overall occupancy over the same
period in 2005.
Gross operating revenues of our worldwide Core Hotels increased 8.9% for
the third quarter of 2006 and 9.2% for the nine months ended September 30,
2006, as compared to the same periods in 2005. The improvements in revenue,
combined with continued cost management efforts at the properties under our
management, resulted in a 13.4% and 120 basis point increase in gross
operating profits(3) and gross operating margins(4), respectively, for the
third quarter of 2006, as compared to the same period in 2005, and a 15.5% and
180 basis point increase in gross operating profits and gross operating
margins, respectively, for the nine months ended September 30, 2006, as
compared to the same period in 2005.
With respect to our Core Hotels, the United States represented the most
significant geographic area. In the third quarter of 2006, properties in the
United States contributed 49.8% of revenues under management, followed by
Europe (19.3%), Asia/Pacific (12.7%), Other Americas/Caribbean (12.1%) and the
Middle East (6.1%). For the nine months ended September 30, 2006, properties
in the United States contributed 49.9% of revenues under management, followed
by Europe (16.7%), Other Americas/Caribbean (14.9%), Asia/Pacific (12.4%) and
the Middle East (6.1%). The following tables highlight the results of
operations for our Core Hotels in each of these regions.
<<
United States Region
-------------------------------------------------------------------------
Results for periods in 2006, as compared to the same periods in 2005
-------------------------------------------------------------------------
Gross Gross
Operating Operating Gross
Revenue Profit Operating
RevPAR (GOR) (GOP) Margin
-------------------------------------------------------------------------
Basis
Point
$ Percentage Percentage Percentage Improve-
Increase Increase Increase Margin ment
-------------------------------------------------------------------------
Third
quarter 292 8.3% 8.2% 13.9% 28.5% 140
-------------------------------------------------------------------------
Nine months
ended Sept-
ember 30 299 10.9% 9.6% 16.3% 30.5% 180
-------------------------------------------------------------------------
The increase in RevPAR in the third quarter in the region
was primarily attributable to a 9.3% increase in achieved
room rates in the region, with the average occupancy levels
essentially unchanged. During the third quarter of 2006,
the majority of the Core Hotels in this region experienced
RevPAR improvements. Four Seasons properties under
management in Austin, Chicago, Kona, New York and
Philadelphia and the Beverly Wilshire had strong RevPAR
improvements, relative to the average for the region for the
third quarter primarily as a result of an increase in
achieved room rates. Excluding the impact of the resort in
Maui, which is undergoing an extensive renovation program,
the increase in RevPAR in the third quarter in this region
would have been 9.2%. The increase in RevPAR in the nine
months ended September 30, 2006 was primarily attributable
to a 9.9% increase in achieved room rates as occupancy
levels were essentially unchanged in the region. Properties
under management in Atlanta, Austin, Boston, Houston, Kona,
Maui, New York and Scottsdale had strong RevPAR improvements
relative to the average for the region for the nine-month
period primarily as a result of an increase in achieved room
rates. The improvement in gross operating profits and gross
operating margins in the region in the third quarter and
nine months ended September 30, 2006 was primarily the
result of the improvement in gross operating revenues.
Excluding the results of the Maui property in the third
quarter, the gross operating margin would have increased 170
basis points in this region.
-------------------------------------------------------------------------
Other Americas/Caribbean Region
-------------------------------------------------------------------------
Results for periods in 2006, as compared to the same periods in 2005
-------------------------------------------------------------------------
Gross Gross
Operating Operating Gross
Revenue Profit Operating
RevPAR (GOR) (GOP) Margin
-------------------------------------------------------------------------
Basis
Point
$ Percentage Percentage Percentage Improve-
Increase Increase Increase Margin ment
-------------------------------------------------------------------------
Third
quarter 188 3.4% 3.7% (15.1)% 14.1% (310)
-------------------------------------------------------------------------
Nine months
ended Sept-
ember 30 246 12.0% 10.3% 12.4% 28.1% 50
-------------------------------------------------------------------------
For the third quarter of 2006, the RevPAR results for the
properties under management in this region were mixed.
Demand declined at certain of the resort properties in the
region primarily due to travel concerns related to weather.
In addition, demand was reduced in Mexico City, whose market
experienced a period of political unrest following its
elections. The third quarter RevPAR improvement was entirely
attributable to a 10.9% increase in achieved room rates, as
average occupancy levels declined 450 basis points. On a
local currency basis, RevPAR was essentially unchanged in
the quarter although achieved room rates improved 7.9%. The
RevPAR increase for the nine months ended September 30, 2006
was the result of a 12.3% increase in achieved room rates as
occupancy levels were essentially unchanged. On a local
currency basis, RevPAR improved 10.0% in the nine-month
period, reflecting a 10.3% increase in achieved room rates
on a local currency basis. In the nine months ended
September 30, 2006, properties under management in Buenos
Aires, Carmelo, Costa Rica and Punta Mita had particularly
strong RevPAR improvements, relative to the average for the
region primarily as a result of an increase in achieved room
rates. The decline in gross operating profits and gross
operating margin in the third quarter of 2006 was due
primarily to reduced revenues in certain properties,
particularly at the Caribbean resorts, that have a
relatively high fixed cost base. Excluding the properties
under management in Exuma, Nevis and Mexico City, gross
operating margins would have been flat in the third quarter
of 2006. For the nine months ended September 30, 2006, gross
operating profits and gross operating margins increased only
modestly relative to the RevPAR improvement in the region
primarily as a result of the reasons noted for the third
quarter. Excluding the properties under management in Exuma,
Nevis and Mexico City, gross operating margins would have
increased 460 basis points in the nine months ended
September 30, 2006.
-------------------------------------------------------------------------
Europe Region
-------------------------------------------------------------------------
Results for periods in 2006, as compared to the same periods in 2005
-------------------------------------------------------------------------
Gross Gross
Operating Operating Gross
Revenue Profit Operating
RevPAR (GOR) (GOP) Margin
-------------------------------------------------------------------------
Basis
Point
$ Percentage Percentage Percentage Improve-
Increase Increase Increase Margin ment
-------------------------------------------------------------------------
Third
quarter 458 19.6% 13.7% 19.3% 38.1% 180
-------------------------------------------------------------------------
Nine months
ended Sept-
ember 30 404 17.1% 8.0% 15.2% 34.3% 220
-------------------------------------------------------------------------
All of the properties under management in the region had
RevPAR improvements during the third quarter and nine months
ended September 30, 2006, reflecting modest occupancy
increases and strong rate improvements. During the third
quarter of 2006, on a local currency basis, RevPAR increased
14.7%, reflecting a 10.8% increase in achieved room rates in
local currency, versus a 15.5% increase in achieved room
rates on a US dollar basis. For the nine months ended
September 30, 2006, on a local currency basis, RevPAR
increased 18.0%, reflecting a 9.7% increase in achieved room
rates on a local currency basis, versus an 8.9% increase in
achieved room rates on a US dollar basis. Properties under
management in Lisbon and Terre Blanche and the Four Seasons
Hotel London had strong RevPAR improvements, relative to the
average of the other properties in the region, during the
third quarter and nine months ended September 30, 2006. The
improvements in gross operating profits and gross operating
margins for the region were offset in part by the impact on
the profitability performance at the Four Seasons Hotel
Dublin, which is undergoing a conversion of 62 hotel rooms
into residential units.
-------------------------------------------------------------------------
Middle East Region
-------------------------------------------------------------------------
Results for periods in 2006, as compared to the same periods in 2005
-------------------------------------------------------------------------
Gross Gross
Operating Operating Gross
Revenue Profit Operating
RevPAR (GOR) (GOP) Margin
-------------------------------------------------------------------------
Basis
Point
$ Percentage Percentage Percentage Improve-
Increase Increase Increase Margin ment
-------------------------------------------------------------------------
Third
quarter 174 26.3% 25.4% 41.7% 49.5% 570
-------------------------------------------------------------------------
Nine months
ended Sept-
ember 30 175 20.0% 20.9% 30.3% 50.4% 360
-------------------------------------------------------------------------
During both the third quarter and nine months ended
September 30, 2006, all of the properties under management
in the Middle East region had RevPAR improvements, with the
exception of Four Seasons Resort Sharm El Sheikh. In Sharm
El Sheikh, RevPAR was essentially unchanged for the third
quarter, but declined 5.5% for the nine months ended
September 30, 2006 as a result of lower occupancy levels, as
business was adversely affected by the continuing impact of
terrorist bombings. In the third quarter of 2006, the
increase in RevPAR for the region was driven by a 25.2%
increase in achieved room rates (23.9% on a local currency
basis) and a 60 basis point improvement in occupancy levels.
In the nine months ended September 30, 2006, the increase in
RevPAR for the region was driven by a 17.0% increase in
achieved room rates (15.5% on a local currency basis) and a
170 basis point improvement in occupancy levels. During both
the third quarter and nine months ended September 30, 2006,
Four Seasons Hotel Cairo Nile Plaza had particularly strong
RevPAR improvements, as compared to the average for the
region. The very strong improvements in gross operating
profits and gross operating margins were the result of
strong revenue growth, offset somewhat by the results in
Sharm El Sheikh.
Asia/Pacific Region
-------------------------------------------------------------------------
Results for periods in 2006, as compared to the same periods in 2005
-------------------------------------------------------------------------
Gross Gross
Operating Operating Gross
Revenue Profit Operating
RevPAR (GOR) (GOP) Margin
-------------------------------------------------------------------------
Basis
Point
$ Percentage Percentage Percentage Improve-
Increase Increase Increase Margin ment
-------------------------------------------------------------------------
Third
quarter 129 1.0% 3.4% 2.2% 32.4% (40)
-------------------------------------------------------------------------
Nine months
ended Sept-
ember 30 130 2.5% 3.0% 7.1% 33.1% 120
-------------------------------------------------------------------------
During both the third quarter and nine months ended
September 30, 2006, RevPAR changes in the Asia/Pacific
region were mixed. During the third quarter of 2006,
achieved room rates increased 7.7% (5.0% increase on a local
currency basis), and occupancy decreased 400 basis points
primarily as the result of reduced demand at our two
properties in Bali, where the market is continuing a gradual
recovery from the impact of terrorist bombings. During the
nine months ended September 30, 2006, the RevPAR improvement
was driven by a 5.5% improvement in achieved room rates
(5.4% improvement on a local currency basis), with overall
occupancy levels essentially unchanged. During both the
third quarter and nine months ended September 30, 2006,
properties under management in Singapore and Sydney
experienced strong RevPAR improvements relative to the
region average, while the resorts in Bali, for the reason
noted, experienced a RevPAR decline. The decline in gross
operating margins for the region in the third quarter was
due in large part to reduced profitability at the property
under management in Bangkok, which completed extensive
renovations in the third quarter and the significant decline
in occupancy at the resorts in Bali. Excluding these three
properties, gross operating margins for the region would
have increased 280 basis points for the third quarter, and
310 basis points for the nine months ended September 30,
2006.
-------------------------------------------------------------------------
Company Operating Results
Our strategy is to focus on hotel management rather than hotel ownership.
Four Seasons Hotel Vancouver is our only remaining hotel whose results we
consolidate. As a result, commencing January 1, 2006, corporate expenses are
reflected in our results as general and administrative expenses in the
consolidated statements of operations. Corporate expenses for the third
quarter and nine months ended September 30, 2005 that previously were included
in our Ownership Operations segment have been included in general and
administrative expenses in the consolidated statements of operations.
Revenues
-------------------------------------------------------------------------
(in millions Dollar Percentage
of dollars) Third quarter Change Change
-------------------------------------------------------------------------
2006 over 2006 over
2006 2005 2005 2005
-------------------------------------------------------------------------
Hotel management fees
Base $ 20.0 $ 17.8 $ 2.2 12.1%
Incentive 7.2 4.7 2.5 52.9%
-------------------------------------------------------------------------
Subtotal 27.2 22.5 4.7 20.7%
-------------------------------------------------------------------------
Other fees 3.6 3.5 0.1 2.8%
-------------------------------------------------------------------------
Subtotal 30.8 26.0 4.8 18.3%
-------------------------------------------------------------------------
Hotel ownership revenues 8.8 9.7 (0.9) (9.9)%
-------------------------------------------------------------------------
Reimbursed costs(5) 18.6 16.5 2.1 13.5%
-------------------------------------------------------------------------
Total revenues $ 58.2 $ 52.2 $ 6.0 11.5%
-------------------------------------------------------------------------
--------------------------------------------------
-------------------------------------------------------------------------
(in millions Nine months ended Dollar Percentage
of dollars) September 30, Change Change
-------------------------------------------------------------------------
2006 over 2006 over
2006 2005 2005 2005
-------------------------------------------------------------------------
Hotel management fees
Base $ 61.4 $ 54.5 $ 6.9 12.6%
Incentive 29.3 21.1 8.2 38.5%
-------------------------------------------------------------------------
Subtotal 90.7 75.6 15.1 19.9%
-------------------------------------------------------------------------
Other fees 13.3 10.0 3.3 33.2%
-------------------------------------------------------------------------
Subtotal 104.0 85.6 18.4 21.4%
-------------------------------------------------------------------------
Hotel ownership revenues 24.7 58.0 (33.3) (57.3)%
-------------------------------------------------------------------------
Reimbursed costs 55.0 46.3 8.7 18.8%
-------------------------------------------------------------------------
Total revenues $ 183.7 $ 189.9 $ (6.2) (3.3)%
-------------------------------------------------------------------------
--------------------------------------------------
Hotel Management Fees
Base Fees
>>
Base fees are dependent on total revenues of all managed hotels and
resorts, which consist of rooms, food and beverage and other revenues. For
more information regarding base fees, see our MD&A for the year ended
December 31, 2005.
For the third quarter of 2006, base fees increased $2.2 million to
$20.0 million, as compared to the third quarter of 2005. Of the $2.2 million
increase in base fees, base fees from Core Hotels contributed $1.3 million or
58.2% of the increase. The increase in base fees from Core Hotels in the third
quarter of 2006 represented a 7.8% increase over the base fees generated from
Core Hotels in the third quarter of 2005. Properties that opened in 2005 and
2006 contributed base fees of $1.6 million in the third quarter of 2006, as
compared to $0.4 million in the same period in 2005. The increase in base fees
in the third quarter of 2006 was moderated by a $0.6 million reduction in base
fees from properties no longer under management.
For the nine months ended September 30, 2006, base fees increased
$6.9 million to $61.4 million, as compared to the same period in 2005. Of the
$6.9 million increase in base fees, base fees from Core Hotels contributed
$4.5 million or 64.7% of the increase. The increase in base fees from Core
Hotels in the nine months ended September 30, 2006 represented a 9.0% increase
over the base fees generated from Core Hotels in the same period of 2005.
Properties that opened in 2005 and 2006 contributed base fees of $4.5 million
in the nine months ended September 30, 2006, as compared to $0.6 million in
the same period in 2005. The increase in base fees in the nine months ended
September 30, 2006, was moderated by a $1.6 million reduction in base fees
from properties no longer under management.
<<
Incentive Fees
>>
Our incentive fees are typically earned based on the profitability of
each property that we manage, but may vary depending on the specific terms of
the relevant management agreement. For more information regarding incentive
fees, see our MD&A for the year ended December 31, 2005.
For the third quarter of 2006, incentive fees increased $2.5 million to
$7.2 million, as compared to the same period in 2005. The incentive fees
earned from properties that opened in 2005 and 2006 represented $1.1 million
of the increase. The remaining $1.4 million of the increase came from
improvements in incentive fees from our Core Hotels. Incentive fees were
earned from 40 of the 70 hotels and resorts under management for the third
quarter of 2006, as compared to 37 of the 65 hotels and resorts under
management in the same period in 2005. During the third quarter ended
September 30, 2006, the overall improvement in incentive fees was moderated by
a $1.5 million reversal in our incentive fees which was accrued earlier in the
year from certain of our resorts (see discussion below related to the accrual
of incentive fees).
Typically, the incentive fees we receive from the properties under our
management are reconciled on an annual basis to the actual full year operating
results at a particular property. On a quarterly basis, we recognize incentive
fees that would be calculated under the incentive fee formula as if the
particular management contract was terminated at the relevant reporting date.
If a property's profitability decreases in a subsequent quarter (due mainly to
seasonal differences), the incentive fee accrued in a previous quarter may be
reduced or eliminated. The overall improvement in incentive fees in the third
quarter of 2006 was reduced by the reversal of approximately $1.5 million
($1.1 million in the third quarter of 2005) of incentive fees accrued earlier
this year, primarily related to resorts under management.
For the nine months ended September 30, 2006, incentive fees increased
$8.2 million to $29.3 million, as compared to the same period in 2005. The
incentive fees earned from properties that opened in 2005 and 2006 represented
$3.3 million of the increase. The remaining $4.9 million of the increase came
from improvements in incentive fees from our Core Hotels. Incentive fees were
earned from 45 of the 70 hotels and resorts under management for the nine
months ended September 30, 2006, as compared to 42 of the 65 hotels and
resorts under management in the same period in 2005. The overall improvement
in our incentive fees for the nine months ended September 30, 2006 was
moderated by lower incentive fees in Nevis and in our resort in Maldives,
which remained closed until September 2006 for renovation and repair of damage
from the tsunami in late 2004. Although the Maldives resort was closed during
the first nine months of 2005, we received fees during that period from
payments in respect of business interruption insurance.
<<
Other Fees
>>
Other fees include royalty and management fees from our residential
business, fees we earn during the development of our hotels and resorts,
capital procurement fees and other miscellaneous fees. For more information on
other fees, please see our MD&A for the year ended December 31, 2005.
For the third quarter of 2006, other fees increased 2.8%, or
$0.1 million, to $3.6 million, as compared to the third quarter of 2005. For
the nine months ended September 30, 2006, other fees increased 33.2% or
$3.3 million, to $13.3 million, as compared to the same period in 2005. The
increase in other fees for the nine months ended September 30, 2006, as
compared to the same period in 2005, was primarily attributable to royalty
fees related to the sale of branded residences in Miami. Royalty fees earned
on the sale of branded residences will vary from period to period based on the
volume of sales closing in those periods. These fluctuations may be
significant.
Hotel Ownership Revenues
We have a 100% leasehold interest in the Four Seasons Hotel Vancouver
and, as a result, we consolidate the results of that hotel. During the first
six months of 2005, we also had a 100% leasehold interest in The Pierre and
consolidated the results of that property until June 30, 2005 as well. We
assigned the lease of The Pierre to a third party at the end of June 2005 and,
as a result, we ceased to consolidate that property at that time. Our
investment strategy is not to hold any majority interests in properties.
However, Four Seasons Hotel Vancouver is a long-term leasehold interest that
was established at an earlier stage in our development. We currently expect
that we will continue to operate the Vancouver hotel under the existing lease
agreement, until its expiry on January 31, 2020.
In the nine months ended September 30, 2006, the decline in hotel
ownership revenues was primarily related to our owning and consolidating 100%
of The Pierre until June 30, 2005 and our not owning and not consolidating it
during 2006. Hotel ownership revenues for the third quarter and nine months
ended September 30, 2006 primarily relates to the Four Seasons Hotel
Vancouver. Revenue at that property increased by 8.9% relative to the third
quarter of 2005, primarily as the result of the decline in the US dollar
relative to the Canadian dollar, as Canadian dollar revenues were translated
into US dollars. Revenue at that property increased by 21.1% relative to the
nine months ended September 30, 2005, primarily as the result of an 11.0%
improvement in RevPAR and the decline in the US dollar relative to the
Canadian dollar.
We have seven units of residential inventory at two resorts, which we
acquired with the intent to resell at our book value cost during the next
several years as a combination of fractional and whole home ownership
residences. We do not intend for this to be an ongoing business activity and
expect that over time the costs related to the sales process to be
approximately equal to the proceeds from the sale of these units. During the
nine months ended September 30, 2006, we sold inventory for gross proceeds of
$1.5 million (nil proceeds in the third quarter of 2006). The revenue
associated with the sales is included in Hotel Ownership Revenues for both the
third quarter and nine months ended September 30, 2006, and the cost of the
sales is included in Hotel Ownership Cost of Sales and Expenses. There were no
sales in 2005.
Reimbursed Costs
Reimbursed costs, which primarily represent sales, marketing, advertising
and central reservation expenses for which hotels and resorts under management
reimburse us, are generally incurred on a cost-recovery basis to us and are a
function of the revenues under management. For the third quarter of 2006,
reimbursed costs increased $2.1 million or 13.5%, as compared to the
corresponding period in 2005. For the nine months ended September 30, 2006,
reimbursed costs increased $8.7 million or 18.8%, as compared to the
corresponding period in 2005. The increase in both the third quarter and nine
months ended September 30, 2006 was due primarily to an increase in the number
of properties in the portfolio and increased costs related to increased
activity due to volume, as compared to the same periods in 2005.
Expenses
General and Administrative Expenses
As discussed previously, general and administrative expenses include
amounts that were previously classified as corporate expenses. The majority of
our general and administrative expenses are incurred in Canadian dollars. For
the third quarter of 2006, general and administrative expenses decreased
C$1.9 million (approximately 9.8%) on a Canadian dollar basis to
C$17.0 million from C$18.9 million in the same period in 2005. During the
third quarter of 2005, we accrued a retirement allowance of approximately
C$1.1 million, as compared to nil for the same period in 2006. As reported in
US dollars, general and administrative expenses decreased 2.9% to
$15.2 million, from $15.6 million in the third quarter of 2005. Adjusting for
the effect of the US dollar having declined relative to the Canadian dollar
(average Canadian/US foreign exchange rate: third quarter 2006 - 1.121; 2005 -
1.207), general and administrative expenses would have declined $1.5 million
instead of $0.4 million.
As noted, the majority of our general and administrative expenses are
incurred in Canadian dollars, while the majority of hotel management fee
revenues and cash balances are in US dollars. We also incur Canadian dollar
capital funding requirements, which are primarily attributable to our
corporate office expansion. Accordingly, in December 2005, we began selling
forward US dollars for conversion to Canadian dollars, to help fix the cost of
our Canadian dollar expenditures in US dollars. The foreign exchange gains and
losses arising from both the forward contracts settled and the forward
contracts outstanding as at September 30, 2006 are included in Other Income
(Expense), Net and is discussed below.
For the nine months ended September 30, 2006, on a Canadian dollar basis,
general and administrative expenses decreased C$0.9 million (approximately
1.7%) to C$49.9 million from C$50.8 million, in the same period in 2005. As
reported in US dollars, for the nine months ended September 30, 2006, general
and administrative expenses increased 6.2% (or $2.6 million) to $44.1 million
from $41.5 million in the same period in 2005. Approximately $3.3 million or
129.1% of the reported increase in general and administrative expenses is
attributable to the US dollar decline, relative to the Canadian dollar, in the
nine-month over nine-month period. The average Canadian/US foreign exchange
rate for the nine months ended September 30, 2006 and 2005 are 1.133 and
1.225, respectively.
Hotel Ownership Cost of Sales and Expenses
As discussed above, we consolidate 100% of the operations of Four Seasons
Hotel Vancouver and, until June 30, 2005, we also consolidated the operations
of The Pierre. Hotel ownership cost of sales and expenses declined 7.8% to
$7.8 million in the third quarter of 2006, from $8.4 million in the third
quarter of 2005. For the nine months ended September 30, 2006, hotel ownership
cost of sales and expenses declined 59.1% to $23.8 million from $58.2 million
in the same period in 2005, primarily as a result of the operations of The
Pierre being consolidated, until June 30, 2005 and not being consolidated in
the same period of 2006. As noted above, costs relating to the sale of
residential units are included in Hotel Ownership Cost of Sales and Expenses.
For the third quarter and nine months ended September 30, 2006, costs relating
to the sale of the residential units were $0.5 million and $2.0 million,
respectively.
Costs of sales and expenses at Four Seasons Hotel Vancouver increased
11.5% in the third quarter of 2006 and 10.3% in the nine months ended
September 30, 2006, both as compared to the same periods in 2005, primarily as
a result of the decline in the US dollar relative to the Canadian dollar, as
the Canadian dollar costs are translated into US dollars for reporting
purposes.
Overall, our earnings from hotel ownership operations declined from
$1.3 million in the third quarter of 2005 to $1.0 million in the third quarter
of 2006. For the nine months ended September 30, 2006, our earnings from hotel
ownership operations was $0.9 million, as compared to a loss of $0.2 million
for the comparable period in 2005.
Operating Earnings Before Other Items(6)
As a result of the items described above, operating earnings before other
items increased 41.9% to $16.6 million in the third quarter of 2006, as
compared to $11.7 million in the same period in 2005. For the nine months
ended September 30, 2006, operating earnings before other items increased
38.5% to $60.8 million, as compared to $43.9 million in the same period in
2005.
Profit Margin
Our profit margin on our management business in the third quarter of
2006, calculated including reimbursed revenues and costs of $18.6 million
($16.5 million in 2005), was 31.5% (24.4% in 2005). Excluding reimbursed
revenues and costs, our profit margin on our management business was as
follows:
<<
-------------------------------------------------------------------------
(in millions of dollars) Third quarter
-------------------------------------------------------------------------
2006 2005
-------------------------------------------------------------------------
Hotel management fees $ 27.2 $ 22.5
-------------------------------------------------------------------------
Other fees 3.6 3.5
-------------------------------------------------------------------------
Subtotal - management fee revenues
(excluding reimbursed costs) 30.8 26.0
-------------------------------------------------------------------------
General and administrative expenses
(including corporate expenses as discussed above) (15.2) (15.6)
-------------------------------------------------------------------------
Total - management operations earnings before
other items $ 15.6 $ 10.4
-------------------------------------------------------------------------
------------------------
Profit margin (excluding reimbursed costs)(x) 50.7% 39.9%
-------------------------------------------------------------------------
(x) This is a non-GAAP financial measure, calculated as management
operations earnings before other items divided by management fee
revenues (excluding reimbursed costs), and does not have any
standardized meaning prescribed by GAAP. It is, therefore, unlikely
to be comparable to similar measures presented by other issuers. We
consider this measure to be a useful indicator of our operating
performance, and management uses it as a measure to assess our
operating performance.
Our profit margin on our management business for the nine months ended
September 30, 2006, calculated including reimbursed revenues and costs of
$55.0 million ($46.3 million in 2005), was 37.7% (33.4% in 2005). Excluding
reimbursed revenues and costs, our profit margin on our management business
was as follows:
-------------------------------------------------------------------------
Nine months ended
(in millions of dollars) September 30,
-------------------------------------------------------------------------
2006 2005
-------------------------------------------------------------------------
Hotel management fees $ 90.7 $ 75.6
-------------------------------------------------------------------------
Other fees 13.3 10.0
-------------------------------------------------------------------------
Subtotal - management fee revenues
(excluding reimbursed costs) 104.0 85.6
-------------------------------------------------------------------------
General and administrative expenses
(including corporate expenses as discussed above) (44.1) (41.5)
-------------------------------------------------------------------------
Total - management operations earnings
before other items $ 59.9 $ 44.1
-------------------------------------------------------------------------
------------------------
Profit margin (excluding reimbursed costs)(x) 57.6% 51.5%
-------------------------------------------------------------------------
(x) This is a non-GAAP financial measure, calculated as management
operations earnings before other items divided by management fee
revenues (excluding reimbursed costs), and does not have any
standardized meaning prescribed by GAAP. It is, therefore, unlikely
to be comparable to similar measures presented by other issuers. We
consider this measure to be a useful indicator of our operating
performance, and management uses it as a measure to assess our
operating performance.
>>
Depreciation and Amortization
For the third quarter and nine months ended September 30, 2006,
depreciation and amortization was $4.4 million and $9.9 million, respectively,
as compared to $2.6 million and $8.5 million during the same periods in 2005.
The increase in depreciation and amortization in the third quarter of 2006, as
compared to the same period in 2005, is primarily attributable to a
$1.7 million increase in the amortization of our investment in The Ritz-
Carlton Chicago management contract.
We have reached an agreement with the owner of The Ritz-Carlton Chicago.
The agreement relates to the possible sale of that property by the owner to a
third party, and the potential cessation of our management of that property,
as well as the significant refurbishment of Four Seasons Hotel Chicago (which
is owned by an affiliated owner). These arrangements provide the owner of The
Ritz-Carlton Chicago with the option to terminate our management prior to a
sale of the property, and the obligation to terminate our management upon a
sale of the property. Under this arrangement we are entitled to payments in
connection with both a termination of our management of the property and the
owner's sale of the property. Although there is no certainty as to the date of
our termination of management, there is a possibility it could occur in the
near term and, accordingly, we are amortizing the $3.4 million difference
between the expected value of the payment to be made on termination of our
management and the book value of our investment in this management contract,
over the last half of 2006. We may subsequently record a gain following a
future sale of the property, depending on the payments we actually receive.
Other Income (Expenses), Net
For the third quarter of 2006, other income, net was $0.6 million, as
compared to other expense, net of $21.1 million for the same period in 2005.
<<
-------------------------------------------------------------------------
(in millions of dollars) Third quarter
-------------------------------------------------------------------------
2006 2005
-------------------------------------------------------------------------
Foreign exchange gain (loss) $1.3 ($16.2)
-------------------------------------------------------------------------
Loss on disposition of assets 0.0 (0.3)
-------------------------------------------------------------------------
Asset provision and write downs (0.7) (4.6)
-------------------------------------------------------------------------
Other income (expenses), net $0.6 ($21.1)
------------------------
-------------------------------------------------------------------------
For the nine months ended September 30, 2006, other expenses, net was $7.0
million, as compared to $32.4 million for the same period in 2005.
-------------------------------------------------------------------------
Nine months ended
(in millions of dollars) September 30,
-------------------------------------------------------------------------
2006 2005
-------------------------------------------------------------------------
Foreign exchange loss ($6.6) ($19.9)
-------------------------------------------------------------------------
Loss on disposition of assets 0.0 (5.8)
-------------------------------------------------------------------------
Asset provision and write downs (0.4) (6.7)
-------------------------------------------------------------------------
Other expenses, net ($7.0) ($32.4)
------------------------
-------------------------------------------------------------------------
>>
Foreign Exchange
Other income (expenses), net for the third quarter of 2006 included a
foreign exchange gain of $1.3 million, as compared to a loss of $16.2 million
for the same period in 2005. For the nine months ended September 30, 2006,
other income (expenses), net included a foreign exchange loss of $6.6 million,
as compared to a loss of $19.9 million for the same period in 2005.
The foreign exchange gains and losses in 2006 and 2005 related primarily
to the foreign currency translation gains and losses on unhedged net monetary
asset and liability positions, primarily in US dollars, euros, pounds sterling
and Australian dollars, and local currency foreign exchange gains and losses
on net monetary assets incurred by our designated foreign self-sustaining
subsidiaries. The foreign exchange loss on the translation of balance sheet
items was reduced from what it would otherwise have been for the nine-month
period by a gain on the marked-to-market adjustment and settlement of the
forward contracts described below.
As discussed above, we have entered into a program to sell forward US
dollars into Canadian dollars to help us to predict the US dollar cost of our
Canadian dollar general and administrative expenses and Canadian dollar
capital funding requirements. All our forward contracts are being marked-to-
market with the resulting changes in fair values being recorded as a foreign
exchange gain or loss. Other income (expenses), net included a foreign
exchange loss of $0.2 million in the third quarter of 2006 and a foreign
exchange gain of $1.3 million for the nine months ended September 30, 2006
related to the forward contracts. This program to sell forward US dollars was
not in place during the nine months ended September 30, 2005, and, as such, no
amounts were realized in the third quarter or nine months ended September 30,
2005.
Included in foreign exchange loss for the third quarter of 2006 is a
$0.1 million loss realized on the settlement of $13.6 million of forward
contracts during the third quarter ($1.1 million gain realized on the
settlement of $71.3 million of forward contracts during the nine months ended
September 30, 2006). As at September 30, 2006, we had forward contracts in
place to sell forward $44.2 million of US dollars and received Canadian
dollars at a weighted average exchange rate of 1.114 Canadian dollars to a US
dollar at various maturities extending to March 2008. On these outstanding
forward contracts, the marked-to-market loss for the third quarter of 2006 was
$0.1 million, and the marked-to-market gain for the nine months ended
September 30, 2006 was $0.2 million. These amounts are included in the
$0.2 million foreign exchange loss for the third quarter of 2006 and
$1.3 million foreign exchange gain for the nine months ended September 30,
2006, noted above. Subsequent to September 30, 2006, we have extended the
program to sell forward an additional $3.5 million of US dollars for
conversion to Canadian dollars with maturities extending to April 2008, at a
weighted average exchange rate of 1.129 Canadian dollars to a US dollar.
While this program of selling forward US dollars allows us to better
predict the cost in US dollars of the majority of our Canadian dollar general
and administrative expenses and capital requirements, it will not eliminate
the impact of foreign currency fluctuations related to our management fees in
currencies other than US dollars. It will also not eliminate foreign currency
gains and losses related to un-hedged net monetary assets and liability
positions. As such, our consolidated results will continue to include gains
and losses related to foreign currency fluctuations. The impact of foreign
currency gains and losses has been material in the past and could continue to
be material in the future.
Disposition of Assets
Included in the nine months ended September 30, 2005, are amounts related
to an assignment of our interest in The Pierre. On June 30, 2005, we finalized
the assignment of our lease and the sale of the related assets in The Pierre
for net proceeds of $4.5 million. The net book value of our assets in The
Pierre was $7.8 million and, after deducting disposition costs, we recorded a
loss on sale of $5.3 million. We also recorded a tax benefit in connection
with the sale of $9.2 million, which is noted below under "Income Tax
Expense". Including the tax benefit, we realized a net gain of $3.9 million on
the disposition of The Pierre.
Interest Income and Interest Expense
The $1.8 million increase in interest income for the third quarter of
2006 and the $4.3 million increase in interest income for the nine months
ended September 30, 2006, in both cases as compared to the same periods in
2005, were primarily attributable to higher deposits and higher deposit
interest rates.
The $0.8 million increase in interest expense for the third quarter of
2006 and the $3.0 million increase in interest expense for the nine months
ended September 30, 2006, in both cases as compared to the same periods in
2005, were primarily attributable to the increase in interest expense accrued
relating to the currency and interest rate swap agreement we entered into in
the second quarter of 2005 related to our convertible senior notes. These
arrangements are more fully described in the MD&A for the year ended
December 31, 2005. In the third quarter of 2006, the effective interest rate
on our convertible senior notes was approximately 4.9%, which represents
interest expense of $2.8 million ($2.0 million in 2005). For the nine months
ended September 30, 2006, the effective interest rate on our convertible
senior notes was 5.4%, which represents interest expense of $9.1 million
($6.3 million in 2005).
Income Tax Expense
Income tax expense during the third quarter of 2006 was $4.1 million
(effective tax rate of 27.2%), as compared to $0.7 million for the same period
in 2005. For the nine months ended September 30, 2006, our income tax expense
was $15.1 million (effective tax rate of 31.1%), as compared to income tax
recovery of $3.4 million for the same period in 2005. The increase in the
effective tax rate relates to certain amounts, particularly foreign exchange
gains and losses not being tax effected. During the quarter and nine months
ended September 30, 2006, we did not record approximately $0.2 million and
$1.9 million, respectively, of a tax benefit related to the foreign exchange
losses, due to the uncertainty associated with the utilization of those
losses.
In connection with the disposition of The Pierre in the second quarter of
2005, we recorded a tax benefit of approximately $9.2 million.
Net Earnings and Earnings per Share
For the reasons outlined above, net earnings for the third quarter of
2006 were $10.9 million ($0.30 basic earnings per share and $0.29 diluted
earnings per share), as compared to a net loss of $11.4 million ($0.31 basic
and diluted loss per share) for the same period in 2005.
For the nine months ended September 30, 2006, net earnings were
$33.4 million ($0.91 basic earnings per share and $0.89 diluted earnings per
share), as compared to net earnings of $9.5 million ($0.26 basic earnings per
share and $0.25 diluted earnings per share) for the same period in 2005.
Adjusted Net Earnings and Adjusted Earnings per Share(x)
In the third quarter of 2006, other income, net of $0.6 million related
primarily to foreign exchange gains, which were offset partially by asset
provisions and write downs. In the third quarter of 2005, other expenses, net
of $21.1 million related primarily to foreign exchange losses and asset
provisions and write downs.
Adjusting for other income (expenses), net and the applicable income
taxes, adjusted net earnings were as follows:
<<
-------------------------------------------------------------------------
(in millions of dollars except per share amounts) Third quarter
-------------------------------------------------------------------------
2006 2005
-------------------------------------------------------------------------
Net earnings (loss) $ 10.9 $ (11.4)
-------------------------------------------------------------------------
Adjustments - Other (income) expenses, net (0.6) 21.1
-------------------------------------------------------------------------
Tax effect related to foregoing adjustments 0.6 (1.6)
-------------------------------------------------------------------------
Adjusted net earnings $ 10.9 $ 8.1
-------------------------------------------------------------------------
------------------------
Adjusted basic earnings per share $ 0.30 $ 0.22
-------------------------------------------------------------------------
------------------------
Adjusted diluted earnings per share $ 0.29 $ 0.22
------------------------
-------------------------------------------------------------------------
>>
In the nine months ended September 30, 2006, other expenses, net of
$7.0 million related primarily to foreign exchange losses. In the nine months
ended September 30, 2005, other expenses, net of $32.4 million related
primarily to foreign exchange losses, losses on the disposition of assets, and
asset provisions and write downs.
Adjusting for other expenses, net and the applicable income taxes,
adjusted net earnings were as follows:
-------------------------------------------------------------------------
<<
(in millions of dollars except per share amounts) Nine months ended
September 30,
-------------------------------------------------------------------------
2006 2005
-------------------------------------------------------------------------
Net earnings $ 33.4 $ 9.5
-------------------------------------------------------------------------
Adjustments - Other expenses, net 7.0 32.4
-------------------------------------------------------------------------
Tax effect related to foregoing adjustments 1.8 (12.6)(xx)
-------------------------------------------------------------------------
Adjusted net earnings $ 42.2 $ 29.3
-------------------------------------------------------------------------
------------------------
Adjusted basic earnings per share $ 1.15 $ 0.80
-------------------------------------------------------------------------
------------------------
Adjusted diluted earnings per share $ 1.13 $ 0.77
------------------------
-------------------------------------------------------------------------
(x) Adjusted net earnings is a non-GAAP financial measure and does not
have any standardized meaning prescribed by GAAP. It is, therefore,
unlikely to be comparable to similar measures presented by other
issuers and should not be considered as an alternative to net
earnings, cash flow from operating activities or any other measure
of performance prescribed by Canadian GAAP. Our adjusted net
earnings may also not be comparable to adjusted net earnings used by
other lodging companies, which may be calculated differently. We
consider adjusted net earnings to be a meaningful indicator of our
operations, and management uses it as a measure to assess our
operating performance. Adjusted net earnings is also used by
investors, analysts, and our lenders as a measure of our financial
performance. As a result, we have chosen to provide this
information.
(xx) In connection with the disposition of The Pierre in the second
quarter of 2005, we recorded a tax benefit of approximately
$9.2 million in the nine months ended September 30, 2005.
Eight-Quarter Summary
-------------------------------------------------------------------------
(in millions of dollars
except per share amounts) Third quarter Second quarter
-------------------------------------------------------------------------
2006 2005 2006 2005
-------------------------------------------------------------------------
Total revenues $ 58.2 $ 52.2 $ 67.8 $ 74.5
-------------------------------------------------------------------------
Operating earnings before
other items $ 16.6 $ 11.7 $ 23.7 $ 20.1
-------------------------------------------------------------------------
Net earnings (loss) $ 10.9 $ (11.4) $ 9.1 $ 15.8
-------------------------------------------------------------------------
Basic earnings (loss)
per share(7) $ 0.30 $ (0.31) $ 0.25 $ 0.43
-------------------------------------------------------------------------
Diluted earnings (loss)
per share $ 0.29 $ (0.31) $ 0.24 $ 0.42
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Average Canadian/US dollar
foreign exchange rate used
for specified quarter 1.12087 1.20687 1.12509 1.24401
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(in millions of dollars
except per share amounts) First Quarter Fourth Quarter
-------------------------------------------------------------------------
2006 2005 2005 2004
-------------------------------------------------------------------------
Total revenues $ 57.6 $ 63.1 $ 58.5 $ 69.5
-------------------------------------------------------------------------
Operating earnings before
other items $ 20.5 $ 12.1 $ 12.3 $ 14.7
-------------------------------------------------------------------------
Net earnings (loss) $ 13.4 $ 5.2 $ (37.8) $ 12.8
-------------------------------------------------------------------------
Basic earnings (loss)
per share(7) $ 0.36 $ 0.14 $ (1.03) $ 0.35
-------------------------------------------------------------------------
Diluted earnings (loss)
per share $ 0.36 $ 0.14 $ (1.03) $ 0.34
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Average Canadian/US dollar
foreign exchange rate used
for specified quarter 1.15421 1.22652 1.17478 1.22033
-------------------------------------------------------------------------
Liquidity and Capital Resources
>>
As at September 30, 2006, our cash and cash equivalents were
$254.2 million, as compared to $242.2 million as at December 31, 2005. Our
investments in cash and cash equivalents are highly liquid, with maturities of
less than 90 days. These investments include bank deposits, guaranteed
investment certificates and money market funds held with major financial
institutions.
We have a committed bank credit facility of $125.0 million, which expires
September 2007. Borrowings under this credit facility bear interest at LIBOR
plus a spread ranging between 0.875% and 2.25% in respect of LIBOR-based
borrowings (prime rate plus a spread ranging between nil and 1.25% in respect
of prime rate borrowings), depending upon certain criteria specified in the
credit agreement for the facility. As at September 30, 2006, no amounts were
borrowed under the credit facility. However, approximately $1.6 million of
letters of credit were issued under the facility. No amounts have been drawn
under these letters of credit. We believe that, absent unusual opportunities
or circumstances, this bank credit facility, when combined with cash on hand
and internally generated cash flow, should be more than adequate to allow us
to finance our normal operating needs and anticipated investment commitments
related to our current growth objectives.
Contractual Obligations
Our contractual obligations are more fully described in the MD&A for the
year ended December 31, 2005. Since December 31, 2005, our contractual
obligations have declined by $19.2 million as a result of funding
$15.7 million related to expansion of our Toronto corporate office and a
$3.5 million instalment payment related to our naming rights for the Four
Seasons Centre for the Performing Arts, which was made during the second
quarter of 2006.
Guarantees and Commitments
As discussed in the MD&A for the year ended December 31, 2005, we have
guarantees and other similar commitments, including certain lease commitments.
Since December 31, 2005, our guarantees and commitments have decreased by
approximately $1.3 million to approximately $33.4 million.
<<
Cash Flows
>>
Cash from Operations
We generated $29.9 million of cash from operations during the third
quarter of 2006, as compared to $17.0 million for the same period in 2005. The
increase in cash from operations of $12.9 million in the third quarter of
2006, as compared to the same period in 2005, resulted primarily from changes
of $13.7 million in non-cash working capital.
We generated $57.5 million of cash from operations during the nine months
ended September 30, 2006, as compared to $36.4 million for the same period in
2005. For the nine months ended September 30, 2006, the increase in cash from
operations of $21.1 million, as compared to the same period in 2005, resulted
primarily from higher earnings generated from our management business and
hotel ownership and changes of $12.8 million in non-cash working capital.
Investing Activities
As part of expanding our portfolio of properties under management, we
make investments in the form of long-term receivables, minority equity
investments and investments in management contracts. In making these
investments, we assess the expected overall returns to Four Seasons, including
the value created through our long-term management agreements.
Long-Term Receivables
In the third quarter of 2006, we advanced $3.8 million, in the aggregate,
as long-term receivables to properties under our management, as compared to
$4.6 million in the same period in 2005. Also in the third quarter of 2006, we
were repaid $4.4 million, in the aggregate, of our long-term receivables, as
compared to $0.1 million in the same period in 2005.
In the nine months ended September 30, 2006, we advanced $21.8 million,
in the aggregate, as long-term receivables to properties under our management,
as compared to $38.6 million in the same period in 2005. Also in the nine
months ended September 30, 2006, we were repaid $14.4 million, in the
aggregate, of our long-term receivables, as compared to $19.4 million in the
same period in 2005.
Investments in Hotel Partnerships and Corporations
In April 2006, we sold our equity interest in one of the properties under
our management for net proceeds of $1.0 million (cash of $0.7 million and a
promissory note of $0.3 million), which approximated book value. In the third
quarter of 2006, we invested $2.5 million to fund capital requirements in
these assets, as compared to $1.4 million in the same period of 2005.
In the nine months ended September 30, 2006, we invested $3.0 million to
fund capital requirements in these assets and were repaid $2.3 million
relating to our equity interest in a property under our management. We also
contributed our equity interest in a property under our management in exchange
for a management contract enhancement of approximately the same fair value. No
gain or loss was recorded in connection with this transaction.
We invested $10.8 million in the nine months ended September 30, 2005, in
equity interests and received $12.7 million relating to the sale of three of
our equity interests.
Investment in Trademarks, Trade Names and Management Contracts
In the third quarters of 2006 and 2005, we funded an aggregate of
$2.2 million and $0.2 million, respectively, primarily related to our
investments in management contracts.
In the nine months ended September 30, 2006 and 2005, we funded an
aggregate of $16.9 million and $0.7 million, respectively, primarily related
to our investments in management contracts.
Fixed Assets
Our capital expenditures were $6.3 million for the third quarter in 2006,
as compared to $4.8 million for the same period in 2005. In 2004, we commenced
construction on our Toronto corporate office expansion, which is scheduled to
be substantially completed during 2006. In the third quarters of 2006 and
2005, capital expenditures related to this expansion were $6.0 million and
$4.4 million, respectively.
In the nine months ended September 30, 2006, our capital expenditures
were $16.1 million, as compared to $12.8 million for the same period in 2005.
In the nine months ended September 30, 2006 and 2005, capital expenditures
related to our Toronto corporate office expansion were $15.7 million and
$10.2 million, respectively.
Financing Activities
In the nine months ended September 30, 2006, we issued $5.6 million in
Limited Voting Shares ("LVS") related to the exercise of stock options and
paid $3.4 million in dividends.
In the nine months ended September 30, 2005, we received $7.0 million
from the issuance of LVS related to the exercise of stock options and paid
$3.1 million in dividends.
<<
Outstanding Share Data
-------------------------------------------------------------------------
Designation Outstanding as at November 8, 2006
-------------------------------------------------------------------------
Variable Multiple Voting Shares(1) 3,725,698
-------------------------------------------------------------------------
Limited Voting Shares 33,380,482
-------------------------------------------------------------------------
Options to acquire Limited Voting Shares(2):
-------------------------------------------------------------------------
Outstanding 3,945,375
-------------------------------------------------------------------------
Exercisable 3,285,235
-------------------------------------------------------------------------
Convertible Senior Notes issued June 2004
and due 2024(3) $251.3 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.
Subsequent Event
On November 6, 2006, we announced that our Board of Directors had received
a proposal to pursue a transaction through which Four Seasons Hotels Inc.
("FSHI") would be taken private for $82.00 cash per Limited Voting Shares. The
Board of Directors has established a special committee of independent
directors that will consider the proposed transaction and make recommendations
to the Board. Although there is no certainty that the transaction contemplated
by the proposal, or any other transaction, will be completed or the terms and
conditions of any such transaction, some of our arrangements and agreements
may be impacted by certain terms in those arrangements and agreements,
including the following:
1) Convertible Senior Notes:
Our convertible senior notes issued in 2004 are convertible into Limited
Voting Shares (although at our option, we may make a cash payment in lieu
of all or some of those Limited Voting Shares) in certain circumstances,
including upon the occurrence of a "fundamental change", as defined in
the indenture pursuant to which the notes were issued. The proposal, if
completed, would result in a fundamental change occurring, in which case
a holder of notes would be able to surrender notes for conversion and
would be entitled to receive on conversion:
(a) If notes are surrendered for conversion in connection with the
fundamental change within the time period prescribed in the
indenture, the number of our Limited Voting Shares into which the
notes would be convertible (currently 13.9581 Limited Voting Shares
per $1,000 principal amount of notes), plus a make whole premium, as
defined in the indenture (estimated to be in the range of $87.00 to
$98.00 per $1,000 principal amount of notes based on the proposed
price of $82.00 per Limited Voting Share pursuant to the proposal and
assuming that, if the proposal is implemented, the effective date
would be between January 1, 2007 and July 30, 2007), and an amount
equal to any accrued but unpaid interest to, but not including, the
conversion date; or
(b) If notes are surrendered for conversion after the time period
prescribed in the indenture and after the fundamental change, the
consideration that the holder would have received if the holder had
held the number of Limited Voting Shares into which the converted
notes were convertible immediately before the fundamental change
($1,144.56 per $1,000 principal amount of notes, based on the $82.00
per Limited Voting Share in the transaction that has been proposed).
In this circumstance, no make whole premium would be payable.
The proposed transaction would constitute a "change in control", as
defined in the indenture, and as a result we would be required to make an
offer to repurchase the notes at a purchase price equal to the principal
amount of the notes plus a make whole premium (as described above), and an
amount equal to any accrued and unpaid interest to, but not including, the
date of repurchase.
We have the right to satisfy the obligations in respect of conversion in
the circumstances described in (a) above, and in respect of a repurchase of
notes as described above, with Limited Voting Shares (or other "applicable
stock", as defined in the indenture, in the case of repurchase of notes) or at
our option cash or a combination of Limited Voting Shares and cash.
Further information regarding the terms of our convertible notes is set
out in the indenture pursuant to which the notes were issued.
2) Long-Term Incentive Arrangement:
Pursuant to an agreement approved by the shareholders of FSHI at a
special meeting in 1989, FSHI and its principal operating subsidiary,
Four Seasons Hotels Limited, have agreed to make a cash payment to Mr.
Isadore Sharp, the Chief Executive Officer of FSHI, on an arms-length
sale of control of FSHI. If the proposed transaction is completed, Mr.
Sharp would be entitled to realize proceeds related to the incentive
arrangement estimated to be approximately $288 million (based on a
proposed price of $82.00 per Limited Voting Share pursuant to the
proposal and assuming that at the time of the completion of the proposed
transaction approximately 41.1 million Limited Voting Shares and Variable
Multiple Voting Shares, which includes Limited Voting Shares that may be
issued upon the exercise of previously granted stock options, were
outstanding).
3) Other Arrangements and Agreements:
Certain other arrangements and agreements are subject to "change of
control" provisions. These include the following:
(a) Under the terms of our current $125 million bank credit facility, a
change of control triggers a default under the bank credit facility,
and if not waived, would require the repayment of all amounts
outstanding under this credit facility and would also result in the
termination of this credit facility. As at September 30, 2006, no
amounts were borrowed under this credit facility, but approximately
$1.6 million of letters of credit were issued under this credit
facility.
(b) Pursuant to a cross default provision, a default under the bank
credit facility in turn would cause a default under our currency and
interest rate swap agreement. In such circumstances, the
counterparty to the swap agreement may demand that the swap be
terminated. As at September 30, 2006, the net amount that would be
required to be paid by FSHI to the counterparty on termination was
approximately $34.9 million (of which approximately $29.1 million is
included in long-term obligations).
We are continuing to evaluate the potential impact, if any, of the
proposed transaction on our other agreements and arrangements.
Looking Ahead
>>
Operating Environment
Assuming the travel trends that we have experienced to date in 2006
continue, and based on current demand reflected in our reservation activity,
we expect RevPAR for worldwide Core Hotels in the fourth quarter of 2006 and
the full year 2006 to increase in the range of 10% to 12%, as compared to the
corresponding periods in 2005. If these anticipated trends continue and we
meet our expectations for cost management, we expect gross operating margins
of our worldwide Core Hotels to increase in the range of 190 to 210 basis
points for the full year of 2006, as compared to the full year of 2005.
Accordingly, based on the current hotel operating outlook, we expect hotel
management fee revenue to grow for the full year 2006 in the range of 15% to
20%.
<<
Changes in Accounting Policies
>>
During the nine months ended September 30, 2006, we adopted The Canadian
Institute of Chartered Accountants' ("CICA") new accounting standard on non-
monetary transactions, as discussed in note 1 to the interim consolidated
financial statements. This standard was to be implemented for non-monetary
transactions initiated on or after January 1, 2006. The adoption of this
standard did not have a material impact on our consolidated financial
statements.
Additional Information
----------------------
Additional information about us (including our most recent annual
information form, annual MD&A and our audited financial statements for the
year ended December 31, 2005) is available on our website at
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 less (vi) other income plus (vii) depreciation and
amortization. Operating earnings before other items is a non-GAAP
financial measure and does not have any standardized meaning
prescribed by GAAP and is therefore unlikely to be comparable to
similar measures presented by other issuers. We consider operating
earnings before other items to be a meaningful indicator of
operations and use it as a measure to assess our operating
performance. It is included because we believe it can be useful in
measuring our ability to service debt, fund capital expenditures and
expand our business. Operating earnings before other items is also
used by investors, analysts and our lenders as a measure of our
financial performance.
(7) Quarterly and year-to-year computations of per share amounts are made
independently. The sum of per share amounts for the quarters may not
agree with per share amounts for the year.
