Four Seasons Hotels Inc. Reports Second Quarter 2002 Results

For the six months ended June 30, 2002, net earnings decreased 42.8% to $25.8 million ($0.74 basic earnings per share and $0.70 diluted earnings per share), as compared to $45.2 million ($1.29 basic earnings per share and $1.17 diluted earnings per share) for the comparable period in 2001.

"Our results, as expected, continue to reflect a slowdown in the lodging industry globally and, more specifically, the continued weakness in corporate travel demand. In this challenging environment we are continuing to follow our established business model and we are doing this profitably. We believe this strategy positions us well for the expected economic recovery and the period leading up to that recovery," said Isadore Sharp, Chairman and Chief Executive Officer. "We are introducing more Four Seasons properties to new key markets, enhancing our ability to attract business to our new and existing properties and continuing to deliver the unparalleled service our customers expect."

During the quarter, those markets that are more dependent upon business travel continued to underperform relative to other markets in which the Company operates. In addition, certain of the US city centre hotels experienced reduced Middle Eastern travel demand. However, overall leisure travel demand remained relatively strong, a trend reflected in the RevPAR results of the majority of the Company's resorts, with the exception of the Company's two resorts in Bali, which were affected by reduced travel to Indonesia. Generally business travel within Europe was not as weak as that experienced in the US, and hotels such as Paris and Milan (that typically have a balance of business and leisure travel) realized RevPAR improvements during the second quarter.

"Although certain of the hotels, including Paris and Milan, and the majority of the resorts under Four Seasons management are experiencing strong demand levels, the majority of our city centre hotels, particularly within the US, continue to operate in a challenging environment," said Wolf Hengst, President Worldwide Hotel Operations. "Booking windows have stayed relatively short, making it difficult to forecast demand levels. As a result, we remain cautious in our outlook for the remainder of 2002."

RevPAR(1), on a US dollar basis, for worldwide Core Hotels(2) decreased 5.8% during the second quarter of 2002, as compared to the same period in 2001. This decline was consistent with the Company's expectation of a 4% to 6% decline for the quarter. The RevPAR decline was attributable primarily to lower occupancy levels and a 2.6% decline in average daily room rate during the second quarter of 2002, as compared to the same period in 2001. The decline in average daily room rate was a result of a change in sales mix, with fewer suites and deluxe rooms being sold in the quarter, combined with a greater proportion of negotiated rate volume business. The Company is continuing its strategy of maintaining the high level of product and services it has consistently provided to its customers without compromising room rates within a category. This strategy should allow the Company to maintain its industry-leading service reputation and average daily room rates in the near term and set the stage for improved RevPAR results as demand strengthens and as corporate business travel returns to more normal levels.

Worldwide Core Hotels gross operating margin(3) declined 2.3 percentage points from 36.6% in the second quarter of 2001 to 34.3% in the second quarter of 2002. The decline in gross operating margin was attributable, in part, to the contraction of hotel revenue, but was also influenced by increases in insurance, energy and employee benefit costs.

For the first six months of 2002, RevPAR, on a US dollar basis, for worldwide Core Hotels decreased 8.9% and the gross operating margin declined 2.8 percentage points from 35.6% to 32.8%, as compared to the same period in 2001.

During the second quarter of 2002, RevPAR for US Core Hotels, on a US dollar basis, decreased 7.7% and the gross operating margin declined 2.8 percentage points to 33% from 35.8%, as compared to the same period in 2001. New York and Boston continued to be among the most difficult markets as a result of reduced levels of business travel. For the first six months of 2002, RevPAR for US Core Hotels, on a US dollar basis, decreased 10.2%, and the gross operating margin declined 3.5 percentage points to 30.8% from 34.3%, as compared to the same period in 2001.

In the second quarter of 2002, RevPAR for Canada/Mexico/Caribbean Core Hotels, on a US dollar basis, decreased by 5.4% and the gross operating margin declined 2.2 percentage points from 35.4% to 33.2%, as compared to the same quarter in 2001. For the first six months of 2002, Canada/Mexico/Caribbean Core Hotels experienced a decrease in RevPAR, on a US dollar basis, of 8.5% and the gross operating margin declined 3.4 percentage points from 38.2% to 34.8%, as compared to the same period in 2001.

RevPAR for the Europe/Middle East Core Hotels, on a US dollar basis, was essentially flat and the gross operating margin declined 1 percentage point from 41.4% to 40.4% in the second quarter of 2002, as compared to the same period in 2001. During the quarter there was a divergence of operating performance within the Europe/Middle East Core Hotels. Four Seasons hotels in Paris and Milan both experienced occupancy levels in excess of 80% as a result of strong demand from both leisure and business travelers. Four Seasons hotels in Cairo and Istanbul experienced occupancy declines of over 15% as a result of generally weak travel demand in those markets.

For the six months ended June 30, 2002, RevPAR for the Europe/Middle East Core Hotels, on a US dollar basis, decreased 3.9% and the gross operating margin improved from 38.0% to 38.2%, as compared to the same period in 2001. The Europe/Middle East Core Hotels experienced a decrease in RevPAR of 5.1%, on a local currency basis, for the second quarter of 2002, as compared to the same period in 2001. On a local currency basis, RevPAR for Europe/Middle East Core Hotels decreased 4.7% during the first half of 2002, as compared to the same period in 2001.

For the second quarter of 2002, RevPAR for the Asia/Pacific Core Hotels, on a US dollar basis, decreased 2.2% and the gross operating margin declined 2.1 percentage points from 37.4% to 35.3%, as compared to the second quarter of 2001. The Company's properties under management in Tokyo, Sydney and Bangkok performed well relative to other Four Seasons hotels in the region during the quarter. The hotels and resorts in Singapore and Bali experienced RevPAR declines in excess of 15% as a result of weak travel demand, particularly from the US.

RevPAR for the Asia/Pacific Core Hotels decreased by 7.9%, on a US dollar basis, for the first six months of 2002, as compared to the same period in 2001, and the gross operating margin declined 2.1 percentage points from 37.7% to 35.6%, on a US dollar basis. The Asia/Pacific Core Hotels experienced a RevPAR decrease of 5.9%, on a local currency basis, during the second quarter of 2002, as compared to the same period in 2001. On a local currency basis, RevPAR for the Asia/Pacific Core Hotels decreased 8% in the first six months of 2002, as compared to the same period in 2001.

The Company's worldwide resort portfolio experienced a US dollar RevPAR decline of 3.3% in the second quarter of 2002, as compared to the same period in 2001. Resort occupancies declined on average by 2.9 occupancy points to 72.4%, while the average daily room rate of US$387 was essentially flat, as compared to the second quarter of 2001. For the six months ended June 30, 2002, the Company's resort portfolio experienced a US dollar RevPAR decline of 4.2%, as compared to the same period in 2001, as occupancies declined on average by 3 percentage points and the average daily room rate was essentially flat at US$424, as compared to the same period in 2001.

Management fee revenues decreased 18.2% to $39.9 million for the quarter ended June 30, 2002, and decreased 19.6% to $75.9 million for the six months ended June 30, 2002, as compared to the same periods in 2001. As expected, RevPAR declined on a worldwide basis, which reduced profitability of the hotels under management and negatively affected the Company's profit-based incentive fees during the second quarter of 2002, as compared to the second quarter of 2001. Incentive fees declined by 35% during the quarter, which represented $3.9 million of the fee decline experienced during the second quarter of 2002. Reduced incentive fees caused by lower profitability of the hotels under management accounted for $6.8 million of the fee decline during the first six months of 2002.

A portion of the decline in fee revenues was caused by the Company ceasing to manage The Regent Hong Kong on June 1, 2001. During the second quarter of 2001, the fee revenues from The Regent Hong Kong were $926,000. The decline in fee revenues was also attributable, in part, to a reduction in fees received from Four Seasons residential projects. The sales of residential projects were negatively affected by lower demand levels caused by the weakening economic conditions in the United States, although average achieved selling prices of the units increased by 36% in the second quarter of 2002, as compared to the second quarter of 2001.

As a result of these reductions in fee revenues and to increases in general and administrative costs, which were in line with inflation, Four Seasons' management earnings, before other operating items, for the second quarter of 2002 decreased 28.2% to $24 million, as compared to $33.5 million in the second quarter of 2001. Management earnings before other operating items for the six months ended June 30, 2002 were $44.9 million, a 28.8% decrease as compared to $63.1 million for the same period in 2001.

The management operations profit margin (4) for the quarter ended June 30, 2002 declined to 60.1%, as compared to 68.5% for the same period in 2001, and was 59.2% for the six months ended June 30, 2002, as compared to 66.8% for the same period in 2001. On a full year basis, the Company expects the profit margin on its management business to be comparable to the 59.3% profit margin achieved for the full year of 2001.

Ownership operations losses, before other operating items, were $249,000 in the second quarter of 2002, as compared to earnings of $721,000 in the second quarter of 2001. 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 18.9% during the second quarter of 2002, as compared to the second quarter of 2001, which resulted in a reduction of operating earnings at this hotel.

Ownership operations losses, before other operating items, for the first six months of 2002 were $8.4 million, as compared to losses of $4.4 million for the comparable period in 2001. The Pierre accounted for a substantial portion of this decline year over year, reflecting the particularly difficult conditions in the New York market.

Other income, net for the second quarter was $2.8 million compared to $3.4 million for the same period in 2001. The Company realized a net foreign exchange accounting gain in the second quarter of 2002 of $3.6 million, as compared to a $1.5 million loss in the second quarter of 2001. The Company attempts to minimize the impact of fluctuations in foreign currencies through the use of foreign exchange forward contracts. The gain in the second quarter of 2002 was the result of a significant strengthening of various currencies against the Canadian and US dollar, relating primarily to the Company's working capital position and other monetary assets. In light of the unusual volatility in foreign currencies experienced during the quarter, the Company increased the proportion of its working capital and other monetary assets that are hedged.

During the second quarter of 2001 the Company recognized a $4.7 million gain relating to the reversal of provisions in connection with its investment in Four Seasons Hotel Prague, the sale of which closed in the third quarter of 2001.

Depreciation and amortization expense for the second quarter of 2002 was $3.6 million and $7.1 million for the six months ended June 30, 2002, as compared to $3.7 million and $7.7 million respectively, for the same periods in 2001. The decrease in depreciation and amortization expense was primarily attributable to a change in the accounting standard relating to goodwill and other intangible assets that became effective January 1, 2002 and is discussed in note 1(a) to the second 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 second quarter of 2001, net earnings would have reflected an improvement of $729,000 ($0.03 basic earnings per share or $0.02 diluted earnings per share), as compared to the same period in 2001, due to lower amortization expense. Similarly, for the six month period ended June 30, 2001, net earnings would have reflected an improvement of $1.5 million ($0.05 basic earnings per share or $0.03 diluted earnings per share), as compared to the same period in 2001, as a result of lower amortization expense (see reconciliation in note 1(a) to the second quarter consolidated financial statements).

Net interest income for the quarter ended June 30, 2002 was $956,000, as compared to net interest income of $3.3 million for the same period in 2001, primarily due to lower interest rates earned on short-term cash deposits, offset by reduced interest expense resulting from the redemption of $100 million principal amount of unsecured debentures in November 2001. In addition, higher interest income was realized in the second quarter of 2001 from interest on receivables relating to the Prague and Scottsdale properties, which were subsequently repaid in 2001.

For the six months ended June 30, 2002, net interest income was $3 million, as compared to net interest income of $4.8 million for the same period in 2001.

The Company's effective tax rate in both the second quarter and the first six months ended June 30 of 2002 and the comparable periods in 2001 was 24%.

A part of the Company's business strategy is to invest a portion of available cash to obtain new management agreements or enhance existing management arrangements. The loans or investments will only be made where the overall economic return to Four Seasons justifies the investment. As a part of its ongoing balance sheet evaluation, the Company has reviewed each investment and has determined that the book value of none of these loans or investments is impaired as at June 30, 2002.

The Company is, however, currently in a dispute with the owner of Four Seasons Hotel Caracas regarding a variety of matters relating to the completion and ongoing operation of the Hotel, including the default on a US$5 million loan owed to the Company that is secured by a second mortgage and that is registered against the hotel. Formal notice of the default has been given to the owner. The dispute has been referred to arbitration and the Company currently has no reason to believe that its loan is not appropriately secured, provided due process of law is respected. Due to the ongoing financial difficulties of the owner of the Caracas hotel and the resulting working capital deficiencies at the hotel, Four Seasons Hotel Caracas ceased taking guest reservations as at June 12, 2002. The Company is pursuing all available remedies with the objective of protecting its management rights and its loan and allowing the hotel to resume its operations on a sound financial basis. The Company's total balance sheet exposure to the Caracas property is $10.9 million.

Cash and cash equivalents continue to be the single largest asset on the Company's balance sheet. The Company's cash and cash equivalents were $207.3 million as at June 30, 2002, as compared to $210.4 million as at December 31, 2001.

Long-term obligations were $119.4 million as at June 30, 2002 and December 31, 2001. 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 terms and conditions of the convertible notes are more fully described in the Company's 2001 Annual Report).

The Company has investment grade ratings from each of the bond rating agencies that cover the Company. Recently, Moody's confirmed its investment grade rating and changed its outlook for the Company from "negative" to "stable". Moody's has indicated that the improvement in the outlook was due to Four Seasons' rebound from the initial negative impact of the events of September 11th in line with overall industry trends, the reduction in debt levels and Moody's expectation that the Company is unlikely to face any material impairment with respect to its on or off-balance sheet hotel-related receivables or investments.

The Company generated $6.2 million of cash from operations in the second quarter of 2002 and $13.9 million during the six months ended June 30, 2002, as compared to $27.6 million and $58.6 million, respectively, for the same periods in 2001. During the quarter, the Company funded $6.8 million in new management opportunities. 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 expects to make investments in a number of Four Seasons projects, including Sedona, Jackson Hole, Costa Rica and Sao Paulo.

As discussed in the Company's 2001 Annual Report, the Company has certain lease and contingent commitments. There has been no material change to these commitments through the first six months of 2002 and the Company does not anticipate any material change in respect of these commitments over the remainder of this fiscal year.

The Company expects that the remainder of the year will continue to be challenging due to the ongoing weakness in corporate travel demand, which continues to negatively affect a number of the Company's key properties. The recent, significant declines and ongoing volatility in global equity markets are also expected to impede the recovery of the global economy and corporate profits generally. The uncertainty regarding the timing and extent of recovery makes it particularly difficult at this time to develop forward-looking information about which one can be confident.

In the current environment, the Company has revised its estimates to reduce the RevPAR and net earnings expectations over the remainder of the year. On a full-year basis, the Company expects its average daily room rates for 2002 to be comparable with both 2000 and 2001.

Based on these revised assumptions, the Company expects fee revenues on a full year basis to be approximately the same as those achieved in 2001, as compared to our initial expectation that fee revenues would increase by 5% in 2002. General and administrative expenses are expected to continue to remain generally unchanged compared to 2001 on a full year basis. Accordingly, the Company expects that the management operations profit margin for the full year 2002 also will remain comparable to the 2001 profit margin of 59.3%.

The continued weak global economic conditions, combined with delays in the start of construction of the Four Seasons Residence Club Sedona at Seven Canyons, also are expected to result in the fees from the Company's residential business being $7.4 million below the Company's business plan expectations for 2002.

With the weak economic conditions experienced through June 30, 2002 in New York and their impact on The Pierre, the Company expects ownership operations losses for the full year 2002 to be approximately $11.5 million, which is approximately $3 million greater than was anticipated at the beginning of this year.

Accordingly, the Company is revising downwards its expected full year diluted earnings per share guidance to $1.47 to $1.57 from $1.72 to $1.76.

The following table provides updated quarterly earnings guidance for the remainder of 2002:

                              Change in Worldwide RevPAR        Diluted
                                   versus prior year      Earnings Per Share
    
    First Quarter (Actual)                (12%)                  $0.21
    Second Quarter (Actual)              (5.8%)                  $0.48
    Third Quarter (Estimate)            2% to 3%             $0.24 - $0.28
    Fourth Quarter (Estimate)          15% to 17%            $0.54 - $0.60
    Full Year of 2002 (Estimate)      flat to (3%)           $1.47 - $1.57

During the quarter, the owner of the Four Seasons Olympic Hotel Seattle began marketing the hotel for sale. The owner is asserting that the hotel can be sold without the Company's management agreement. The Company strongly disagrees with the owner's assertion and does not believe the hotel can be sold unencumbered by the Company's management.

The Regent Hotel Jakarta has been closed since February 2002 as a result of damage from extensive flooding. The timing on the re-opening of the hotel is uncertain pending resolution of discussions with the insurer regarding the expenses relating to the repairs and interruption of business of the hotel.

For the year ended December 31, 2001, the management fees from Four Seasons Olympic Hotel Seattle and The Regent Hotel Jakarta represented less than 2.5% of total fee revenues for that year. For the six months ended June 30, 2002, the management fees from Four Seasons Olympic Hotel Seattle and The Regent Hotel Jakarta represented approximately 1.6% of total fee revenues for that period.

Four Seasons is continuing to expand its international presence with several new projects. To date in 2002, new Four Seasons properties have opened in Shanghai and Sharm el Sheikh. Later this year, the Company expects to open Four Seasons hotels in Amman, Riyadh and Tokyo at Marunouchi. Looking out over the next 24 months, the Company expects to open new Four Seasons hotels and resorts in Budapest, Hampshire, England, Istanbul at the Bosphorus, Jackson Hole, Exuma and Miami. A full list of the Company's properties under construction or advanced development is provided in a schedule attached to this press release.

"We continue to expect the pace of openings of our hotels and resorts over the next two years to be very strong, and are continuing to have the opportunity to consider a number of very exciting new projects," said Kathleen Taylor, President Worldwide Business Operations. "We continue to see interest in developing and building luxury projects, and our development partners have been able to continue to secure financing in connection with these new hotels."

"We believe the recent confirmation by Moody's of Four Seasons investment grade rating and a change of outlook to "stable" from "negative" is consistent with the financial strength of the Company, which combined with our new unit growth program positions Four Seasons extremely well for the ultimate recovery in business conditions internationally," said Douglas Ludwig, Chief Financial Officer and Executive Vice President.

All dollar amounts referred to in this press release are Canadian dollars unless otherwise noted. The financial statements are prepared in accordance with Canadian generally accepted accounting principles.

This press release contains "forward-looking statements" within the meaning of federal 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 and expectations that are not historical facts. These statements are not guarantees of future performance and are subject to numerous risks and uncertainties, including the duration and severity of the current economic slowdown including the impact of the equity markets decline and volatility, the pace of the lodging industry's recovery from the terrorist attacks of September 11th, 2001 and subsequent uncertainty concerning the potential for similar events; supply and demand changes for hotel rooms and residential properties; competitive conditions in the lodging industry; relationships with clients and property owners; and the availability of capital to finance growth, any of which could cause actual results to differ materially from those expressed in or implied by the statements herein. These statements are made as of the date of this press release, and the Company undertakes no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events or otherwise.

The Company will hold a conference call today at 10:00 a.m. (Eastern Daylight Time) to discuss the second quarter financial results. The details are:

    To access the call dial:  1 (800) 381-9619   (U.S.A. and Canada)
                              1 (416) 641-6701   (outside U.S.A. and Canada)

To access a replay of the call, which will be available for one week after the call, dial: 1 (800) 558-5253, Reservation Number 20741061.

A live web cast will also be available by visiting . This web cast will be archived for one month following the call.

With a history spanning four decades and a portfolio that now extends around the world, Four Seasons Hotels and Resorts is the world's leading operator of luxury hotels, currently managing 55 properties in 25 countries. In February 2002, the company opened its first Four Seasons branded property in China - Four Seasons Hotel Shanghai; and a resort in Sharm el Sheikh, Egypt in May. Four Seasons Hotels and Resorts continues to expand, with over 20 projects in development stages in choice locations around the world. Four Seasons has claimed first position on many prestigious lists; recent honours include top ranking in the J.D. Powers Guest Satisfaction Survey; AAA Five Diamond awards (receiving more than other any hotel company for the 21st consecutive year), and the Zagat Survey 2001 (ranked as "Top Hotel Chain in the U.S." and "Top Hotel Chain" internationally). Information on the Company and its 40 years of achievement in the hospitality industry can be accessed through the Four Seasons Web site at www.fourseasons.com.