EXHIBIT 99.3
FOUR SEASONS HOTELS INC.
FIRST QUARTER OF 2005
MANAGEMENT'S DISCUSSION AND ANALYSIS
THIS MANAGEMENT'S DISCUSSION AND ANALYSIS ("MD&A") FOR THE THREE MONTHS ENDED
MARCH 31, 2005 IS PROVIDED AS OF MAY 4, 2005. IT SHOULD BE READ IN CONJUNCTION
WITH THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS FOR THAT PERIOD AND THE MD&A
FOR THE YEAR ENDED DECEMBER 31, 2004 AND THE AUDITED CONSOLIDATED FINANCIAL
STATEMENTS FOR THAT PERIOD. EXCEPT AS DISCLOSED IN THIS MD&A, AS OF MAY 4, 2005,
THERE HAS BEEN NO MATERIAL CHANGE IN THE INFORMATION DISCLOSED IN THE MD&A FOR
THE YEAR ENDED DECEMBER 31, 2004. A SUMMARY OF CONSOLIDATED REVENUES, MANAGEMENT
EARNINGS, OWNERSHIP AND CORPORATE OPERATIONS EARNINGS AND NET EARNINGS FOR THE
PAST EIGHT QUARTERS CAN BE FOUND IN NOTE 1.
Effective for the quarter ended March 31, 2005, we have adopted US dollars as
our reporting currency. We have not changed our functional currencies. All
amounts disclosed in this MD&A (including amounts for prior periods) are in US
dollars unless otherwise noted.(2)
OPERATING ENVIRONMENT
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SEASONALITY
Four Seasons hotels and resorts are affected by normally recurring seasonal
patterns and demand is usually lower in the period from December through March
than during the remainder of the year for most of our urban properties. However,
December through March is typically a period of relatively strong demand at our
resorts.
As a result, our management operations are affected by seasonal patterns, both
in terms of revenues and operating results. Urban hotels generally experience
lower revenues and operating results in the first quarter. This negative impact
on management revenues from those properties is offset to some degree by
increased travel to our resorts in the period.
Our ownership operations are particularly affected by seasonal fluctuations,
with lower revenue, higher operating losses and lower cash flow in the first
quarter, as compared to the other quarters.
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HOTEL OPERATING RESULTS
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Three months ended March 31, 2005
increase over (decrease from)
three months ended March 31, 2004
(percentage change, on US dollar basis)
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REGION RevPAR(3) Gross Operating Gross Operating
Revenue (GOR) Profit (GOP)
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WORLDWIDE CORE HOTELS(4) 13.8% 11.4% 20.2%
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US CORE HOTELS 12.8% 10.1% 20.0%
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OTHER AMERICAS/CARIBBEAN 19.2% 15.3% 25.3%
CORE HOTELS
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EUROPE CORE HOTELS 5.3% 6.9% 2.9%
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MIDDLE EAST CORE HOTELS 25.6% 32.6% 59.1%
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ASIA/PACIFIC CORE HOTELS 18.7% 12.0% 17.8%
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Underlying these operating results:
o RevPAR for worldwide Core Hotels increased 13.8% in the first quarter of
2005, as compared to the same period in 2004, reflecting improvements in
demand and achieved room rates in most markets. Revenue improvements and
cost management efforts at the properties under management resulted in the
significant increases in gross operating profits (an increase of 20.2% as
compared to the first quarter of 2004) and gross operating margins(5) (an
increase of 210 basis points as compared to the first quarter of 2004),
despite continued pressure on profitability due to higher costs relating
primarily to labour (including health care, benefits and worker's
compensation) and energy.
o During the quarter, group meetings and travel demand improved in the
majority of the markets relative to the same period last year. Business and
leisure demand remained strong during the quarter.
o Virtually all of the US Core Hotels under management realized RevPAR
improvements in the first quarter of 2005, as compared to the same period
in 2004, resulting in a 12.8% increase in RevPAR in that region. The only
exception was Houston, which saw stronger than usual demand due to the
Super Bowl in the first quarter of 2004 and a subsequent general decline in
occupancy levels in the city due to lower demand levels and the opening of
a large hotel in Houston during 2004. Properties under management in
Jackson Hole, Boston, Miami, Palm Beach, New York, Aviara and Austin
realized particularly strong improvements in RevPAR and gross operating
profits, relative to the average for the region.
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o The Other Americas/Caribbean Core Hotels experienced improved demand and
higher achieved room rates, with RevPAR improving 19.2% in the first
quarter of 2005, as compared to the first quarter of 2004. The increases in
RevPAR and gross operating profits were primarily attributable to strong
improvements at the properties in the region, including Buenos Aires,
Carmelo, Exuma and Nevis. The hotels under management in Canada had more
modest RevPAR improvements relative to the overall results for the region.
o For the first quarter of 2005, RevPAR increases in the Europe Core Hotels
reflected strong operating results at the hotels under management in
Istanbul and Prague relative to the other hotels in the region. The hotels
under management in Lisbon and Canary Wharf experienced relatively large
RevPAR and gross operating profit declines in the quarter due to lower
business and group demand and an increase in supply in Canary Wharf. This
resulted in a relatively modest gross operating profit increase for the
region. Overall demand in Europe was less robust than in the other regions
in which we manage hotels, in part as a result of a strong Euro relative to
the US dollar.
o RevPAR improvements in the first quarter of 2005 at the Middle East Core
Hotels were primarily driven by a 15.7% increase in achieved room rates, as
compared to the same period in 2004. All of the hotels in the region
experienced improved demand, particularly the hotels under management in
Riyadh and Sharm el Sheikh. The 59.1% improvement in gross operating profit
was driven by a 32.6% increase in revenues, as well as lower cost pressures
relative to other regions.
o All of the Asia/Pacific Core Hotels had RevPAR improvements. The properties
under management in Jakarta, Bali, Chiang Mai, Singapore and Shanghai had
very strong RevPAR improvements as a result of gains in both occupancy and
achieved room rates. Most of the properties in the region had increases in
gross operating profit.
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FINANCIAL REVIEW AND ANALYSIS
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THREE MONTHS ENDED MARCH 31, 2005 COMPARED TO THREE MONTHS ENDED MARCH 31, 2004
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MANAGEMENT OPERATIONS
Management fee revenues (excluding reimbursed costs(6) and the $2.7 million
impact of forward exchange contracts(7))(8) increased 28.4%, or $6.4 million, to
$29 million in the first quarter of 2005, as compared to $22.6 million in the
first quarter of 2004. This increase was the result of the improvement in
revenues under management stemming from RevPAR and other revenue increases at
the worldwide Core Hotels and an increase in fees from recently opened hotels.
Management fee revenues (including reimbursed costs and the impact of forward
exchange contracts) increased 15.7%, or $5.9 million, to $43.6 million in the
first quarter of 2005, as compared to $37.6 million in the first quarter of
2004.
Incentive fees increased 33.2% in the first quarter of 2005, as compared to the
same period in 2004, with 36 of the hotels and resorts under management accruing
incentive fees, as compared to 31 during the same period last year. The increase
in incentive fees was attributable to the improvement in gross operating profit
at the properties under management in each of the geographic regions in which we
operate. All five of our properties under management in the Middle East accrued
incentive fees during the first quarter of 2005, as compared to three in the
first quarter last year.
Several of the hotels and resorts under our management are and will be
undergoing significant renovations during this year. At the end of the first
quarter of 2005, the most significant portion of renovations at Four Seasons
Resort Scottsdale at Troon North, Four Seasons Hotel New York and Four Seasons
Hotel Newport Beach were completed. We expect the renovations at Four Seasons
hotels in Washington and Las Vegas and the resort in the Maldives to be
completed by the end of 2005. Significant renovation programs at other hotels
under management, including Boston, Santa Barbara, Philadelphia and The Regent
Beverly Wilshire are expected to be substantially completed in 2006. The impact
of the renovation programs on management fees in the first quarter of 2005 was
not material, in part as a result of seasonality, in that the first quarter at
many of the properties under renovation is a period of weaker demand relative to
the remainder of the year. Based on the scheduling and staging of these
renovations, we do not expect there to be a material effect on fee revenues on
the subsequent quarters of 2005.
General and administrative expenses (excluding reimbursed costs) increased 18.2%
to $9.7 million in the first quarter of 2005, as compared to $8.2 million for
the same period in 2004. General and administrative expenses (including
reimbursed costs) increased 18.1% to $24.3 million in the first quarter of 2005,
as compared to $20.6 million for the same period in 2004. The majority of these
costs are in Canadian dollars and, accordingly, a portion of this increase is
attributable to the US dollar having declined relative to the Canadian dollar
since the first quarter of 2004. On a Canadian dollar basis, general and
administrative expenses (excluding reimbursed costs) increased 10% during the
quarter, as compared to the same period last year. The increase in these costs
related primarily to an increase in the number of employees at our corporate
offices
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to handle the significant unit growth in our portfolio and to cost of living
increases for corporate employees that were implemented during the first quarter
of 2005.
As a result of the items described above, our management operations earnings
before other operating items (excluding reimbursed costs and the impact of
forward exchange contracts) for the first quarter of 2005 increased 34.3% to
$19.3 million, as compared to $14.4 million in the first quarter of 2004. Our
management operations profit margin(9) (excluding reimbursed costs and the
impact of forward exchange contracts) was 66.5% in the first quarter of 2005, as
compared to 63.6% in the first quarter of 2004.
Our management operations earnings before other operating items (including
reimbursed costs and the impact of forward exchange contracts) for the first
quarter of 2005 increased 12.9% to $19.3 million, as compared to $17.1 million
in the first quarter of 2004. Our management operations profit margin (including
reimbursed costs and the impact of forward exchange contracts) was 44.3% in the
first quarter of 2005, as compared to 45.4% in the first quarter of 2004.
OWNERSHIP AND CORPORATE OPERATIONS(10)
Operating results from ownership and corporate operations before other operating
items improved 7.5% or $0.6 million to a loss of $6.8 million in the first
quarter of 2005, as compared to a loss of $7.4 million in the first quarter of
2004.
THE PIERRE
RevPAR at The Pierre increased 23.3% in the first quarter of 2005, as compared
to the same period in 2004, as a result of an 8.7% improvement in occupancy and
a 9.8% increase in achieved room rates. These increases reflected the higher
travel demand in New York, particularly in leisure travel, during the quarter.
As a result, operating results at The Pierre improved by $0.6 million to a loss
of $2 million in the first quarter of 2005, as compared to a loss of $2.6
million in first quarter of 2004.
As previously disclosed, Four Seasons has been in discussions with the landlord
of The Pierre to explore alternatives whereby we could modify or restructure our
leasehold interest in the hotel. Despite these discussions, the parties have not
been able to agree on any modification or restructuring of the lease
arrangements. In recent months, the landlord retained professional advisers to
assist with the evaluation of alternatives, including the possibility of
identifying a replacement lessee and operator for The Pierre. We understand that
the landlord is now in exclusive negotiations with a potential successor to Four
Seasons in both capacities. No definitive agreement has yet been reached, and
any agreement involving an assignment of our leasehold interest in The Pierre is
subject to the approval of the shareholders of the landlord. Therefore, there
can be no assurance at this time that acceptable arrangements with this
potential successor will be concluded.
FOUR SEASONS HOTEL VANCOUVER
RevPAR at Four Seasons Hotel Vancouver increased 13.2% for the three months
ended March 31, 2005, as compared to the same period in 2004, primarily as the
result of an improvement in occupancy and a modest increase in achieved room
rates. Operating results at the hotel remained relatively flat, with a loss of
$2.1 million in the first quarter of 2005, as compared to a loss of $2.0 million
in the first quarter of 2004, mainly due to an offsetting reduction in banquet
revenue.
We continue to review our options in respect of Four Seasons Hotel Vancouver to
determine what, if any, alternatives may be available to modify or restructure
our operation of, or investment in, this hotel. There can be no assurance that
acceptable alternative arrangements can be found with respect to this hotel or
as to the terms of any such alternative arrangements.
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CORPORATE COSTS, INCLUDING COMPLIANCE COSTS
During the first quarter of 2005, our corporate and compliance costs, including
the ongoing implementation of the substantive changes to governance and
disclosure requirements applicable to public companies in the US and Canada,
were essentially unchanged at $2.4 million, as compared to the same period in
2004.
OTHER INCOME/EXPENSE, NET
Other expense, net for the first quarter of 2005 was $2.7 million, as compared
to other income, net of $3.3 million for the same period in 2004.
DISPOSITION OF HOTEL INVESTMENTS
In March 2005, we sold approximately 80% of our equity interest in Four Seasons
Residence Club Scottsdale at Troon North for proceeds approximating book value.
As a result of the sale, our equity interest in Four Seasons Residence Club
Scottsdale at Troon North is approximately 14% and as such, we will account for
this investment on a cost basis in the future.
Subsequent to the end of the first quarter, we sold approximately 53% of our
equity interest in Four Seasons Hotel Shanghai, which reduced our interest to
approximately 10% and as such, we will account for this investment on a cost
basis in the future. As a result of the sale, we revalued this US dollar
investment at March 31, 2005 at current exchange rates and recorded a loss of
$1.9 million. There will not be any further material impact on our earnings as a
result of this sale.
FOREIGN EXCHANGE
Other income for the first quarter of 2005 included a $0.4 million foreign
exchange loss, as compared to a $3.5 million foreign exchange gain for the same
period in 2004.
Foreign exchange gains and losses arose primarily from the translation to
Canadian dollars (using current exchange rates at the end of each quarter) of
our foreign currency-denominated net monetary assets, which are not included in
our designated foreign self-sustaining subsidiaries. They also reflected local
currency foreign exchange gains and losses on net monetary assets incurred by
our designated foreign self-sustaining subsidiaries. Net monetary assets is the
difference between our foreign currency-denominated monetary assets and our
foreign currency-denominated monetary liabilities, and consists primarily of
cash and cash equivalents, accounts receivable, long-term receivables and
long-term obligations, as determined under Canadian generally accepted
accounting principles ("GAAP"). In the first quarter of 2004, the majority of
the foreign exchange gain was attributable to the weakening of the Canadian
dollar relative to the pound sterling, whereas in the first quarter of 2005 the
Canadian dollar was generally stable relative to the pound sterling.
Ongoing fluctuations in rates of exchange between currencies will likely result
in future foreign exchange gains or losses.
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NET INTEREST INCOME
During the first quarter of 2005, we had net interest income of $0.4 million, as
compared to $0.9 million in the first quarter of 2004. Net interest income is a
combination of approximately $3.9 million in interest income and approximately
$3.5 million in interest expense in the first quarter of 2005, as compared to
$3.1 million and $2.2 million, respectively, for the same period in 2004.
The increase in interest income for the first quarter of 2005, as compared to
the same period in 2004, was primarily attributable to increased cash and cash
equivalents as a result of the issuance of our convertible senior notes in June
2004 and higher deposit interest rates.
The increase in interest expense was primarily attributable to the variance in
interest expense relating to the convertible senior notes issued during the
second quarter of 2004, as compared to the interest costs relating to our
previously outstanding Liquid Yield Option Notes ("LYONs") during 2004.
As discussed below in "Liquidity and Capital Resources", although the rate of
interest payable pursuant to the terms of the convertible senior notes is 1.875%
per annum, for accounting purposes the convertible senior notes are bifurcated
into debt and equity components under Canadian GAAP, and a notional interest
rate is applied to the portion that is allocated to the debt component. While
the notional interest rate of 5.33% per annum (4.6% per annum after taking into
account the impact of the interest rate swap agreement that terminated in
October 2004 and is described below under "Financing Activities") that is
applied to the debt component of the convertible senior notes (as described
below under "Financing Activities") is lower than the notional rate of 9.2% per
annum that was applied to the LYONs, a larger component of the convertible
senior notes is allocated to debt than was the case with the LYONs. As a result,
for accounting purposes the interest expense associated with the convertible
senior notes is higher than was the case for the LYONs.
INCOME TAX EXPENSE
Our effective tax rate in the first quarter of 2005 was 27%, as compared to an
effective tax rate of 22% in the first quarter of 2004. The variation from our
expected 24% tax rate is the result of certain items not being tax effected,
including a portion of the foreign exchange gains and losses, since they will
never be realized for tax purposes. Excluding these items, our tax rate would
have been our expected 24%.
STOCK OPTION EXPENSE
Stock option expense for the first quarter of 2005 was $0.5 million, as compared
to $0.3 million for the same period in 2004. In the first quarters of 2005 and
2004, stock option expense was allocated between Management Operations ($0.2
million and $0.1 million, respectively) and Ownership and Corporate Operations
($0.3 million and $0.2 million, respectively).
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NET EARNINGS AND EARNINGS PER SHARE
Net earnings for the quarter ended March 31, 2005 were $5.2 million ($0.14 basic
and diluted earnings per share), as compared to net earnings of $8.7 million
($0.25 basic earnings per share and $0.24 diluted earnings per share) for the
quarter ended March 31, 2004. As described above, net earnings for the quarter
ended March 31, 2005 included $2.3 million loss related to a $0.4 million
foreign exchange loss and a $1.9 million loss related to the revaluation of our
equity interest in the Four Seasons Hotel Shanghai as a result of the sale of
the majority of that interest. For the quarter ended March 31, 2004, net
earnings included $6.2 million gain related to a $3.5 million foreign exchange
gain and a $2.7 million gain on forward exchange contracts included in
management fee revenues.
LIQUIDITY AND CAPITAL RESOURCES
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FINANCING ACTIVITIES
During the second quarter of 2004, we issued $250 million principal amount of
convertible senior notes. For details relating to the terms of the convertible
senior notes, please refer to our MD&A for the year ended December 31, 2004.
In accordance with Canadian GAAP, the convertible senior notes are bifurcated on
our financial statements into a debt component (representing the principal value
of a bond of $211.8 million as at June 18, 2004, which was estimated based on
the present value of a $250 million bond maturing in 2009, yielding 5.33% per
annum, compounded semi-annually, and paying interest at a rate of 1.875% per
annum) and an equity component of $39 million (representing the value of the
conversion feature of the convertible senior notes) as at June 18, 2004. For
further details, see note 10(a) to our annual consolidated financial statements
for the year ended December 31, 2004.
In connection with the offering of the convertible senior notes, we entered into
a five-year interest rate swap agreement with an initial notional amount of
$211.8 million, pursuant to which we agreed to receive interest at a fixed rate
of 5.33% per year and pay interest at six-month LIBOR, in arrears, plus 0.4904%.
In October 2004, we terminated the interest rate swap agreement and received
proceeds of $9 million. The recognition of the resulting gain was deferred and
is being amortized through to July 30, 2009, which would have been the maturity
date of the swap. This has resulted in an effective interest rate on the
convertible senior notes for accounting purposes of 4.6% for the first quarter
of 2005.
In April 2005, we entered into a new currency and interest rate swap agreement
to July 30, 2009, pursuant to which we have agreed to receive interest at a
fixed rate of 5.33% per annum on an initial notional amount of $215.8 million
(C$269.2 million ) and pay interest at a floating rate of six-month Canadian
Bankers Acceptances ("BA") in arrears plus 1.1% per annum. On July 30, 2009, we
will pay C$311.8 million and receive $250 million under the swap. We have
designated the swap as a fair value hedge of our convertible senior notes. Any
future translation differences on our convertible senior notes from US dollars
to Canadian dollars should not have a material impact on our net earnings. This
swap will allow us to take advantage of lower floating interest rates, which
should result in an economic and accounting savings of
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approximately 139 basis points at current six-month BA rates, or approximately
$3.0 million on an annualized, pre-tax basis.
As at March 31, 2005, no amounts were borrowed under our $125 million bank
credit facility. However, approximately $10.9 million of letters of credit were
issued under that facility. No amounts have been drawn under these letters of
credit. We believe that, absent unusual opportunities or developments, this
credit facility, when combined with cash on hand and internally generated cash
flow, should be more than adequate to allow us to finance our normal operating
needs and anticipated investment commitments related to our current growth
objectives.
Our cash and cash equivalents were $198.2 million as at March 31, 2005, as
compared to $226.4 million as at December 31, 2004.
Long-term obligations (as determined under Canadian GAAP) increased from $256.8
million as at December 31, 2004 to $258.6 million as at March 31, 2005,
primarily as a result of the accretion of interest on the convertible senior
notes.
CONTRACTUAL OBLIGATIONS AND OTHER COMMITMENTS
We have provided certain guarantees and have other similar commitments typically
made in connection with properties under our management totalling a maximum of
$40.9 million. These contractual obligations and other commitments are more
fully described in the MD&A for the year ended December 31, 2004. Since
year-end, we have reduced one of our bank guarantees and extended a new
commitment to one property under our management, resulting in a net decrease in
guarantees and other commitments of $4.6 million. In addition to funding
relating to our management opportunities described under "Investing/Divesting
Activities" below, we expect a net increase in guarantees and other commitments
of approximately $7.0 million over the remainder of the current year.
CASH FROM OPERATIONS
During the first quarter of 2005, we expended $4.6 million in cash in
operations, as compared to generating $3.7 million in cash from operations for
the same period in 2004. This decrease in cash from operations of $8.3 million
resulted primarily from an increase in non-cash working capital of $7.7 million,
primarily caused by the settlement of incentive compensation accrued as at
December 31, 2004 and a $2.9 million increase in current income tax paid,
partially offset by an increase in cash contributed by management operations of
$2.4 million and a decrease in cash expended in ownership and corporate
operations of $0.7 million.
INVESTING/DIVESTING ACTIVITIES
Part of our business strategy is to invest a portion of available cash to obtain
management agreements or enhance existing management arrangements. These
investments in, or advances in respect of or to owners of, properties are made
where we believe that the overall economic return to Four Seasons justifies the
investment or advance.
- 9 -
During the quarter, we funded $27.4 million to properties under development or
management, including amounts advanced as loans receivable to properties in
Geneva, Toronto and Washington, and minor equity interests in properties in
Damascus and Jackson Hole. This level of investment was consistent with our
business plan. During the remaining three quarters of 2005, we expect to fund up
to $75 million in respect of investments in, or advances in respect of or to
owners of, various projects, including properties in Buenos Aires, Punta Mita
and Exuma and a new resort in the Maldives, plus additional funding for the
property in Geneva and the expansion of corporate office facilities.
Cash used in capital investments for the three months ended March 31, 2005 is
net of the proceeds received on the sale of our equity interest in Four Seasons
Residence Club Scottsdale at Troon North (as discussed in "Other Income/Expense,
Net").
OUTSTANDING SHARE DATA
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DESIGNATION OUTSTANDING AS AT APRIL 29, 2005
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Variable Multiple Voting Shares(a) 3,725,698
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Limited Voting Shares 32,883,188
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Options to acquire Limited Voting Shares:
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Outstanding 4,575,143
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Exercisable 2,808,761
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Convertible Senior Notes issued June 2004 and due 2004(b) $251.2 million(c)
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a) Convertible into Limited Voting Shares at any time at the option of the
holder on a one-for-one basis.
b) Details on the convertible senior notes are more fully in our annual MD&A
for the year ended December 31, 2004.
c) This amount is equal to the issue price of the convertible senior notes
issued June 2004 and due 2024 plus accrued interest calculated at 1.875%
per annum.
LOOKING AHEAD
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If the travel trends that we experienced in 2004 and the first quarter of 2005
continue, and based on current demand reflected in our reservation activity, we
expect RevPAR for worldwide Core Hotels in the second quarter of 2005 and the
full year 2005 to increase by more than 12% and by more than 11%, respectively,
as compared to the corresponding periods in 2004. We expect that this
improvement will result from occupancy and pricing improvements in all
geographic regions. If current trends continue, we expect gross operating
margins of our worldwide Core Hotels to increase more than 220 basis points for
the full year of 2005, as compared to the full year of 2004.
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CHANGE IN REPORTING CURRENCY TO US DOLLARS
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Effective the first quarter of 2005, we have adopted US dollars as our reporting
currency. All amounts disclosed in this MD&A (including amounts for prior
periods) are in US dollars unless otherwise noted.
The consolidated financial statements in Canadian dollars have been translated
to US dollars using the foreign exchange rates applicable at each balance sheet
date for assets and liabilities, and the weighted average exchange rates of the
corresponding quarters for the consolidated statements of operations,
consolidated statements of cash provided by operations and consolidated
statements of cash flow. Equity transactions have been translated to US dollars
at the historical exchange rates for 2005 and 2004 with opening equity accounts
on January 1, 2004 translated at the exchange rate on that date. These exchange
rates are disclosed in notes 1 and 2. Any resulting exchange gain or loss was
charged or credited to "Equity adjustment from foreign currency translation",
which is included as a separate component of shareholders' equity.
We have not changed the functional currencies of our entities. As a result,
while US dollar reporting will minimize the currency fluctuations related to the
majority of our US dollar management fee revenues, it will not eliminate foreign
currency fluctuations related to our management fees in other currencies, or the
majority of our management operations general and administrative expenses, which
are incurred in Canadian dollars. It will also not eliminate foreign currency
gains and losses related to unhedged net monetary asset and liability positions.
CHANGES IN ACCOUNTING POLICIES
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During the three months ended March 31, 2005, we adopted The Canadian Institute
of Chartered Accountants' ("CICA") new accounting standards on variable interest
entities and temporary controlled investments, as discussed in note 1 to the
interim consolidated financial statements. The adoption of these changes did not
have a material impact on our consolidated financial statements.
ADDITIONAL INFORMATION
- ----------------------
Additional information about us (including our most recent annual information
form, annual MD&A and our audited financial statements for the year ended
December 31, 2004) is available on SEDAR at www.sedar.com.
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1. Eight Quarter Summary:
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(IN MILLIONS OF
US DOLLARS
EXCEPT PER
SHARE AMOUNTS) First Quarter Fourth Quarter Third Quarter Second Quarter
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2005 2004 2004 2003(a) 2004 2003(a) 2004 2003(a)
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Consolidated $63.1 $57.1 $69.5 $66.8 $63.3 $52.6 $71.4 $57.7
revenues(b)
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Earnings (loss)
before other
operating items:
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Management 19.3 17.1 18.2 15.7 20.1 13.7 22.1 14.6
operations
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Ownership and
corporate (6.8) (7.4) (3.1) (1.5) (4.9) (6.8) (1.3) (3.9)
operations
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Net earnings
(loss):
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Total $5.2 $8.7 $12.8 $8.9 $(8.5) $3.2 $12.8 $(1.0)
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Basic
earnings
(loss) per $0.14 $0.25 $0.35 $0.25 $(0.24) $0.09 $0.36 $(0.03)
share(c)
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Diluted
earnings
(loss) per $0.14 $0.24 $0.34 $0.24 $(0.24) $0.09 $0.34 $(0.03)
share(c)
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Average
Canadian/US
foreign 1.22652 1.31785 1.22033 1.3155 1.30758 1.37927 1.3586 1.39863
exchange rate
used for
specified
quarter
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a) In December 2003, the CICA amended Section 3870 of its Handbook to require
entities to account for employee stock options using the fair value-based
method, beginning January 1, 2004. In accordance with one of the
transitional alternatives permitted under amended Section 3870, in the
fourth quarter of 2003 we prospectively adopted the fair value-based method
with respect to all employee stock options granted on or after January 1,
2003. Accordingly, options granted prior to that date continue to be
accounted for using the settlement method. In accordance with the new
standard, however, the reported results for the first three quarters of
2003 are required to be restated. The prospective application of adopting
the fair value-based method effective January 1, 2003 resulted in the
following restatements: Second Quarter 2003 -- increase in net loss of $0.1
million and no effect on basic and diluted loss per share; Third Quarter
and Fourth Quarter 2003 -- in each quarter, a decrease in net earnings of
$0.3 million and a decrease in basic and diluted earnings per share of
$0.01 for each quarter.
b) As a result of adopting Section 1100, "Generally Accepted Accounting
Principles", which was issued by the CICA in July 2003 and was effective
January 1, 2004, we have included the reimbursement of all out-of-pocket
expenses in both revenues and expenses, instead of recording certain
reimbursed costs as a "net" amount. As a result of this change,
consolidated revenues have been restated as follows: Second Quarter 2003 -
increase of $7.8 million; Third Quarter 2003 - increase of $7.5 million;
Fourth Quarter 2003 - increase of $9.6 million.
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Consolidated revenues is comprised of the following:
- -------------------------------------------------------------------------------------------------
(IN MILLIONS OF
US DOLLARS) First Quarter Fourth Quarter Third Quarter Second Quarter
- -------------------------------------------------------------------------------------------------
2005 2004 2004 2003 2004 2003 2004 2003
- -------------------------------------------------------------------------------------------------
Revenues from $43.6 $37.6 $44.3 $40.6 $41.9 $33.8 $44.2 $34.3
Management
Operations
- -------------------------------------------------------------------------------------------------
Revenues from
Ownership and
Corporate 20.5 20.3 26.6 27.4 22.4 19.6 28.1 24.6
Operations
- -------------------------------------------------------------------------------------------------
Distributions
from hotel 0.0 0.0 0.0 0.0 0.0 0.1 0.3 0.0
investments
- -------------------------------------------------------------------------------------------------
Fees from
Ownership and
Corporate
Operations to (1.0) (0.9) (1.4) (1.2) (1.0) (0.9) (1.2) (1.1)
Management
Operations
- -------------------------------------------------------------------------------------------------
$63.1 $57.1 $69.5 $66.8 $63.3 $52.6 $71.4 $57.7
- -------------------------------------------------------------------------------------------------
c) Quarterly computations of per share amounts are made independently on a
quarter-by-quarter basis and may not be identical to annual computations
of per share amounts.
2. The following Canadian/US dollar foreign exchange rates were used to
translate the specified periods:
-----------------------------------------------------------------------------
Average foreign
Average foreign exchange rate
exchange rate used Foreign exchange used for Foreign exchange
for rate as at March First Quarter rate as at
First Quarter 2005 31, 2005 2004 December 31, 2004
-----------------------------------------------------------------------------
1.22652 1.2096 1.31785 1.2036
-----------------------------------------------------------------------------
3. RevPAR is defined as average room revenue per available room. It is a
non-GAAP measure. We use RevPAR because it is a commonly used indicator of
market performance for hotels and resorts and represents the combination of
the average daily room rate and the average occupancy rate achieved during
the period. RevPAR does not include food and beverage or other ancillary
revenues generated by a hotel or resort. RevPAR is the most commonly used
measure in the lodging industry to measure the period-over-period
performance of comparable properties. Our calculation of RevPAR may be
different than the calculation used by other lodging companies.
4. The term "Core Hotels" means hotels and resorts under management for the
full year of both 2005 and 2004. However, if a "Core Hotel" has undergone or
is undergoing an extensive renovation program in one of those years that
materially affects the operation of the property in that year, it ceases to
be included as a "Core Hotel" in either year. Changes from the 2004/2003
Core Hotels are the additions of Four Seasons Resort Jackson Hole, Four
Seasons Hotel Miami, Four Seasons Resort Great Exuma at Emerald Bay, Four
Seasons Hotel Prague, Four Seasons Hotel Riyadh and Four Seasons Hotel
Jakarta, and the deletion of Four Seasons Resort Maldives at Kuda Huraa
(which closed for repairs in December 2004 following damage from the tsunami
in southeast Asia).
5. Gross operating margin represents gross operating profit as a percentage of
gross operating revenue.
6. Reimbursed costs includes the reimbursement of all out-of-pocket costs,
including sales and marketing and advertising fees.
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7. Effective January 1, 2004, we ceased designating our US dollar forward
contracts as hedges of our US dollar fee revenues. These contracts were
entered into during 2002, and all of these contracts matured during 2004.
The foreign exchange gains on these contracts of $11.2 million, which were
deferred prior to January 1, 2004, were recognized in 2004 as an increase of
fee revenues over the course of the year. Foreign exchange gains on forward
exchange contracts were recorded as increases in management fee revenues in
the quarters of 2004 and 2003 as follows:
----------------------------------------------------------------------------
(IN MILLIONS OF US First Second Third Fourth
DOLLARS) Quarter Quarter Quarter Quarter
----------------------------------------------------------------------------
2004 $2.7 $2.8 $2.6 $3.1
----------------------------------------------------------------------------
2003 $0.5 $1.5 $1.4 $2.3
----------------------------------------------------------------------------
8. Including the reimbursed costs and forward exchange contracts, management
fee revenues increased 15.7%, or $5.9 million, to $43.6 million in the first
quarter of 2005, as compared to $37.6 million for the same period in 2004.
We provide the information excluding the above items because the foreign
exchange contracts applied only to the period in 2004 and the reimbursed
costs have no net impact on earnings from management operations.
9. The management operations profit margin represents management operations
earnings before other operating items, as a percent of management operations
revenue.
10. Included in ownership and corporate operations are the consolidated revenues
and expenses from our 100% leasehold interests in The Pierre in New York,
Four Seasons Hotel Vancouver and Four Seasons Hotel Berlin (until the Berlin
lease termination on September 26, 2004), distributions from other ownership
interests in properties that Four Seasons manages and corporate overhead
expenses related, in part, to these ownership interests.
* * *
All dollar amounts referred to in this document are US dollars unless otherwise
noted. The financial statements are prepared in accordance with Canadian
generally accepted accounting principles.
* * *
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This document contains "forward-looking statements" within the meaning of
applicable securities laws, including RevPAR, profit margin and earnings trends;
statements concerning the number of lodging properties expected to be added in
this and future years; expected investment spending; and similar statements
concerning anticipated future events, results, circumstances, performance or
expectations that are not historical facts. These statements are not guarantees
of future performance and are subject to numerous risks and uncertainties,
including those described in our annual information form and in this document.
Those risks and uncertainties include adverse factors generally encountered in
the lodging industry; the risks associated with world events, including war,
terrorism, international conflicts, natural disasters, extreme weather
conditions, and infectious diseases; general economic conditions, supply and
demand changes for hotel rooms and residential properties, competitive
conditions in the lodging industry, relationships with clients and property
owners, currency fluctuations and the availability of capital to finance growth.
Many of these risks and uncertainties can affect our actual results and could
cause our actual results to differ materially from those expressed or implied in
any forward-looking statement made by us or on our behalf. All forward-looking
statements in this document 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.
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