TORONTO–(BUSINESS WIRE)–May 10, 2002–Four Seasons Hotels Inc. (TSE:FSH)(NYSE:FS) today reported its results for the first quarter ended March 31, 2002. Net earnings decreased to $7.7 million ($0.22 basic earnings per share and $0.21 diluted earnings per share) for the three months ended March 31, 2002, as compared to $17 million ($0.49 basic earnings per share and $0.45 diluted earnings per share) for the first quarter of 2001.
Although the operating environment is continuing to improve, overall demand levels remain well below those experienced last year, which is reflected in the decline in our quarterly earnings. Although leisure travel demand is at or approaching last year's levels, corporate business travel demand is improving more slowly, commented Isadore Sharp, Chairman and Chief Executive Officer. We are pleased that we have been able to maintain both our profitability for our hotel owners and the pace of our new property openings in the current environment. Already this year we have opened new Four Seasons properties in Shanghai and Sharm El Sheikh and our development pipeline continues to be strong. Looking out over the next eighteen months we expect to open 13 new Four Seasons properties, including new hotels in Tokyo, Budapest and Miami, and new resorts in Jackson Hole, Provence at Terre Blanche and Hampshire, England.
Four Seasons hotels and resorts are affected by normally recurring seasonal patterns and, for most of the properties, demand is lower in December through March than during the remainder of the year. The Company's ownership operations are particularly affected by seasonal fluctuations, with lower revenue, operating profit and cash flow in the first quarter; ownership operations typically incur an operating loss in the first quarter of each year. Typically the fourth quarter is the strongest quarter for the majority of the hotels.
Management operations are also seasonal in nature, as fee revenues are affected by the seasonality of hotel revenues and operating results. Urban hotels generally experience lower revenues and operating results in the first quarter which has a negative impact on management revenues. However, this negative impact on management revenues generally is offset, to some degree, by increased travel to resorts in those months. As discussed below, although the resorts under the Company's management experienced a decline in RevPAR1 during the quarter, this part of the Company's business was not as severely affected and as such, on a relative basis, offset slightly more than normal the decline experienced in the urban hotels. In the future, the negative impact of the urban hotels in this quarter may be offset to a greater extent as the portfolio of resort properties managed by Four Seasons increases.
In 2002, this normal seasonality is also heightened by the ongoing impact from the September 11th terrorist attacks, the war on terrorism and the weak US economy, which adversely affected the normal decision cycle for first quarter business travel and meetings and leisure travel.
Although travel demand is improving, RevPAR, on a US dollar basis, for worldwide Core Hotels2 decreased 12% during the first quarter of 2002, as compared to the same period in 2001. This decline is consistent with the Company's expectations of a 12% to 15% decline for the quarter. As anticipated, the RevPAR decline was primarily attributable to lower occupancy levels. The Company is continuing its strategy of maintaining the high level of product and services it has consistently provided to its customers. This strategy allows the Company to maintain its industry-leading service reputation and achieved room rates, which will set the stage for higher RevPAR results as demand strengthens. While there was a small decline in achieved room rate during the first quarter of 2002, as compared to the first quarter of 2001, as a result of a change in sales mix, with fewer suites and deluxe rooms being sold in the quarter, the Company continues to expect its achieved room rates to be at or above the levels realized in both 2000 and 2001 on a full-year basis.
RevPAR on a US dollar basis, in US Core Hotels decreased 12.8% in the first quarter of 2002, as compared to the same period in 2001. Gross operating profits for the US Core Hotels declined 23.2% in the first quarter of 2002, as compared to the first quarter of 2001, as a result of RevPAR declines and the expected significant cost increases for both insurance and health care at those hotels. The RevPAR and gross operating profits for the US Core Hotels reflect increasing improvement in operating results on a monthly basis during the quarter. The US markets that experienced the greatest RevPAR declines during the first quarter of 2002 were New York, Washington, Chicago, Newport Beach and Austin. The difficult conditions in these urban markets were partially offset by the relatively stronger RevPAR performance of certain of the Company's resort properties.
RevPAR on a US dollar basis, in Canada/Mexico/Caribbean Core Hotels decreased 11.2% in the first quarter of 2002, as compared to the same period in 2001, primarily as a result of the lower business demand levels in the Vancouver and Mexico City properties. On a US dollar basis, gross operating profits for these hotels decreased 21% in the first quarter of 2002, as compared to the first quarter of 2001.
RevPAR on a US dollar basis, in Asia/Pacific Core Hotels decreased 13.1% in the first quarter of 2002, as compared to the same period in 2001. On a local currency basis, the Asia/Pacific Core Hotels realized a RevPAR decrease of approximately 9.9%. Reduced international business travel to Tokyo, Singapore and Sydney and reduced resort travel demand for the Bali market had the largest impact on this region during the first quarter. The Asia/Pacific Core Hotels' gross operating profits decreased by 17.9%, on a US dollar basis, and 15.2%, on a local currency basis, in the first quarter of 2002, as compared to the first quarter of 2001.
RevPAR on a US dollar basis, in European Core Hotels decreased 7.8%, and gross operating profits declined 4.8% in the first quarter of 2002, as compared to the same period in 2001. On a local currency basis, RevPAR in European Core Hotels decreased by 4.4% and gross operating profits declined 1.5% in the first quarter of 2002, as compared to the first quarter of 2001. Business and leisure travel demand in London, Paris and Milan has improved more rapidly than in other regions, which contributed to the relative performance of the European Core Hotels.
The Company's resort portfolio realized a US dollar RevPAR decline of 5% in the first quarter of 2002, as compared to the first quarter of 2001. The resort occupancies declined on average by 3.1 occupancy points to 74.3% and the achieved room rates declined by 1% to US$461 in the first quarter of 2002, as compared to the first quarter of 2001.
Both the resort and urban properties experienced booking patterns with very short lead times throughout the first quarter of 2002. In most of the Company's properties, bookings were being made within one to two weeks of the guest's arrival. This pattern of business and leisure business has made it more difficult to predict future bookings at this point in the economic cycle.
Management fee revenues decreased 21.2% to $36 million in the first quarter of 2002, as compared to $45.7 million in the first quarter of 2001. As expected, RevPAR declined on a worldwide basis, largely as a result of lower occupancy levels. This reduction in RevPAR reduced profitability of the hotels under management, which negatively affected the Company's profit-based incentive fees during the first quarter of 2002, as compared to the first quarter of 2001.
A portion of the decline in fee revenues was caused by the Company ceasing to manage The Regent Hong Kong during the second quarter of 2001. During the first quarter of 2001 the fee revenues from The Regent Hong Kong were $1.3 million. The decline in fee revenues was also attributable in part to a decrease in incentive fees earned by the Company and a decline in fees from Four Seasons residential projects. The residential project sales were negatively affected by lower demand levels caused by the weak economic conditions in most markets, although average achieved selling prices of the units increased by 19% in the first quarter of 2002, as compared to the first quarter of 2001.
Four Seasons management earnings, before other operating items, for the first quarter of 2002 decreased 29.4% to $20.9 million, as compared to $29.6 million in the first quarter of 2001. The profit margin on management operations was 58.1% in the first quarter of 2002, as compared to 64.9% in the first quarter of 2001. During this quarter, the Company achieved a reduction in general and administrative expenses of 6% to $15.1 million, as compared to the same period in 2001.
Included in ownership earnings are the consolidated revenues and expenses from the Company's 100% interest in The Pierre in New York, Four Seasons Hotel Vancouver, Four Seasons Hotel Berlin, distributions from minority ownership interests in properties that Four Seasons manages and corporate overhead expenses.
Ownership operations lost $8.1 million, before other operating items, in the first quarter of 2002, as compared to a loss of $5.2 million in the first quarter of 2001. The loss in both years is due primarily to the continued weakness in the New York and Vancouver markets and normal seasonality of demand levels in the Company's ownership assets.
The weaker economic conditions in New York continued to negatively affect the Company's ownership interest in The Pierre. The Pierre's RevPAR declined by 17.4% during the first quarter of 2002, as compared to the first quarter of 2001. This RevPAR decline consisted of a decline in occupancy from 60.8% in the first quarter of 2001 to 59.4% in the first quarter of 2002. The Pierre's achieved room rates also declined by 8.2% primarily because of lower suite occupancy during the quarter. The first quarter 2002 operating loss at The Pierre increased by $1.6 million, as compared to the first quarter of 2001. Four Seasons Hotel Vancouver also experienced weak operating conditions, with RevPAR declining 21% for the first quarter of 2002, as compared to the same period in 2001. The first quarter 2002 operating loss at Four Seasons Hotel Vancouver increased by $1 million, as compared to the first quarter of 2001.
The Company incurred a net foreign exchange accounting loss of $1.1 million ($0.02 diluted loss per share) during the first quarter of 2002, as compared to a net foreign exchange accounting gain of $272,000 during the first quarter of 2001. This loss resulted from the Company's various foreign currency net monetary asset positions. Since March 31, 2002, however, the Canadian dollar has weakened against the Euro and Pound Sterling, and this trend, if it continues, is expected to result in the Company realizing a foreign exchange accounting gain in the second quarter of 2002.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization expense for the first quarter of 2002 was $3.5 million, as compared to $3.9 million for the same period in 2001. The decrease in depreciation and amortization expense is primarily attributable to a change in accounting standard relating to goodwill and other intangible assets which became effective January 1, 2002 and are discussed in note 1(a) to the first quarter consolidated financial statements. This decrease was partially offset by additional depreciation and amortization expense on new management contracts. If the new accounting standard had been in place during the first quarter of 2001, net earnings would have improved $741,000 or $0.01 per diluted earnings per share because of lower amortization expense (see reconciliation in note 1(a) to the first quarter consolidated financial statements).
NET INTEREST INCOME
During the first quarter of 2002, the Company had net interest income of $2 million, as compared to $1.5 million in the first quarter of 2001. This increase is due primarily to reduced interest expense resulting from the redemption of the Company's unsecured debentures in November of 2001, partially offset by lower interest rates earned on cash reserves.
INCOME TAX EXPENSE
The Company's effective tax rate in both the first quarter of 2002 and 2001 was 24%.
The primary change to the Company's balance sheet is caused by the new accounting standard relating to intangible assets. Under the new accounting requirements intangible assets with indefinite useful lives are no longer amortized but are subject to an annual impairment test comparing the asset's carrying value to its fair value. The previous accounting guidelines compared the asset's carrying value to its net recoverable value. During the first quarter of 2002, the Company completed its impairment test relating to its investment in the Regent trade name and determined that this investment was impaired as at January 1, 2002 under the new fair value based impairment methodology. As a result, the Company has reduced retained earnings by $26.4 million, and investment in trademarks and trade names by $27.1 million and increased future income tax assets by $0.7 million as at January 1, 2002. (see note 1(a) to the first quarter consolidated financial statements).
Cash reserves continue to be the single largest asset on the Company's balance sheet. The Company's cash reserves were $211.7 million as at March 31, 2002, as compared to $210.4 million as at December 31, 2001.
Long-term obligations increased from $119.4 million as at December 31, 2001 to $121.2 million as at March 31, 2002, primarily as a result of accrued interest on the Company's convertible notes. The Company's debt position consists primarily of its zero coupon convertible debt that matures in 2029 and that is redeemable by the Company at any time after September 2004. The convertible debt can be put to the Company at three different times beginning in September 2004. In all cases, the Company can satisfy its obligations in respect of this debt on the exercise of the put or call right by the payment of cash or the issuance of Limited Voting Shares.
Notwithstanding the continuing, challenging operating environment, the Company generated $7.7 million of cash from operations in the first quarter of 2002, as compared to $31 million in the first quarter of 2001. The Company did not fund any significant investments during the first quarter of 2002. The Company expects total capital spending and dividends in 2002 to be approximately the same as in 2001, approximately $73.2 million. During the remainder of 2002, the Company currently plans to make investments in Four Seasons projects in Amman, Jackson Hole, Costa Rica and Sao Paulo.
In addition to the obligations identified on the Company's balance sheet as at March 31, 2002, the Company's three consolidated hotels are leasehold interests subject to individual property leases. The Company's obligations in respect of two of these leases are supported by letters of credit aggregating $18.2 million. The total annual lease obligations for these three assets represent annual payments of approximately $16 million in 2002, funded by each hotel's operating cash flow. These lease expenses are treated as an expense of the Company's ownership operations and the future obligations are disclosed in the Company's 2001 Annual Report.
In connection with certain of its hotel management agreements the Company provides limited and contingent commitments in lieu of additional equity or loan commitments. The Company has eight contingent commitments that represent a maximum annual contingent commitment of $39 million for the year ended December 31, 2002. To the extent it is called upon to honour any one of these contingent commitments, the Company generally has either the right to be repaid from hotel operations and/or has various forms of security or recourse to the owner of the property. The Company has not been called upon to fund any of these commitments in the first quarter of 2002 and does not anticipate funding any amount pursuant to these commitments during 2002.
CHANGES IN ACCOUNTING POLICIES
Note 1 to the first quarter financial statements outlines the details of three new accounting standards that became effective January 1, 2002. These accounting standards relate to the accounting for intangible assets, foreign currency translation and hedging relationships and stock-based compensation and other stock-based payments.
NEW UNIT GROWTH
Four Seasons Hotels and Resorts is the world's largest operator of luxury hotels. The Company currently manages 55 hotels and resorts in 25 countries. The Company has opened two new hotels in 2002; Four Seasons Hotel Shanghai and Four Seasons Resort Sharm El Sheikh. The Company currently has 23 new Four Seasons projects under construction or in advanced stages of development. Of the 23 new properties, 14 will include a residential component within the project. Please see the schedule attached listing the properties under construction or in advanced stages of development and anticipated opening dates for these properties.
The Company is maintaining its full year RevPAR guidance of 2% to 3% growth and revising modestly upward its expected full year diluted earnings per share guidance of $1.72 to $1.76 from its previous estimate of $1.69 to $1.74. On a quarterly basis, the Company has revised its quarterly estimates to reduce the second quarter expectations and increase the fourth quarter expectations primarily due to different timing expectations for residential and incentive fee revenues.