Fairmont Hotels & Resorts Inc. Reports Third Quarter Results
TORONTO, Fairmont Hotels & Resorts Inc. ("FHR" or the "Company") (TSX/NYSE: FHR) today announced its unaudited financial results for the third quarter ended September 30, 2003. All amounts are expressed in U.S. dollars.
"While demand continues to improve as a result of improving U.S. and global economies, a challenging operating environment persisted throughout the third quarter. As anticipated, the lingering impact of severe acute respiratory syndrome ("SARS") had a significant effect on our Canadian business," said William R. Fatt, Chief Executive Officer of FHR. "Our Canadian properties continued to suffer from the considerable decline in international travelers during what is traditionally the strongest quarter for these hotels."
As previously announced, FHR's two owned properties in Bermuda suffered extensive damage from Hurricane Fabian in early September. The Fairmont Southampton was more seriously affected and will be closed for repairs until spring 2004. The Fairmont Hamilton Princess will operate at reduced capacity for the balance of the year. FHR has extensive insurance coverage for both property damage and business interruption. This insurance is subject to deductible amounts and uninsured items estimated at $10 - $12 million. Of this amount, the Company recorded a $7.4 million provision in the third quarter and the balance will be recorded by year-end.
On a comparable basis, revenue per available room ("RevPAR") for Fairmont's managed hotels was flat and RevPAR at FHR's owned portfolio increased 2.9%. Both the owned and managed portfolios have experienced a trend of improving monthly RevPAR for the past few months. The Fairmont Southampton has been removed from the comparable portfolios as it has been closed for extensive repairs since early September. Favorable foreign exchange movements contributed to an improvement in overall operating statistics.
Three months ended Nine months ended
(In millions except EPS amounts) September 30 September 30
2003 2002 2003 2002
Operating Revenues $179.4 $172.4 $521.7 $465.0
EBITDA(a) 46.9 74.2 132.5 165.5
Net Income(b) 11.6 39.0 64.2 81.5
Basic earnings per share ("EPS")(b) $0.15 $0.50 $0.81 $1.04
(a) EBITDA for the three and nine months ended September 30, 2003
includes a $7.4 million provision relating to hurricane damage in
Bermuda.
(b) Net income and EPS for the nine months ended September 30, 2003 also
include a one-time $24.4 million income tax recovery recorded in
June 2003.
Third Quarter Consolidated Results
Operating revenues(1) increased 4.1% to $179.4 million in 2003. This improvement relates primarily to increased revenues from the recent acquisitions of The Fairmont Copley Plaza Boston and The Fairmont Orchid, Hawaii. The appreciation in the Canadian dollar offset the decline in Canadian operating revenues in the quarter. EBITDA(2) was down $27.3 million or 36.8% to $46.9 million in the third quarter. This decline was driven by weaker results at our Canadian hotels as a result of SARS and a $7.4 million provision relating to hurricane repairs.
Third Quarter Ownership Operations
Revenues from hotel ownership improved 12.2% to $168.6 million compared to $150.3 million in 2002. This increase relates primarily to the acquisitions of The Fairmont Orchid, Hawaii and the remaining 50% interest in The Fairmont Copley Plaza Boston, which was previously accounted for using the equity method. The Fairmont Kea Lani Maui continued to produce strong operating results, while the Canadian resorts continue to be negatively affected by SARS.
RevPAR of $132.68 was up 2.9% in the third quarter of 2003, driven by a 7.8% improvement in average daily rate ("ADR") that offset a 3.1 point drop in occupancy. The Canadian owned hotels had RevPAR growth of 4.0%, driven by the appreciation in the Canadian dollar but offset by a considerable decline in occupancy, most notably from the international tour segment. Both The Fairmont Kea Lani Maui and The Fairmont Scottsdale Princess posted strong rate growth in the quarter contributing to a 1.4% RevPAR improvement at the U.S. and International comparable portfolio.
Equity income generated from FHR's investment in Legacy Hotels Real Estate Investment Trust ("Legacy") was $2.6 million compared to income of $7.2 million in 2002. The impact of SARS on Legacy's portfolio during its historically strongest quarter was considerable given its significant exposure to Toronto and other major Canadian cities.
FHR did not dispose of any real estate during the third quarter. EBITDA generated by real estate operations was down $3.1 million from the $2.1 million earned in 2002, when the Company sold a portion of its Toronto lands. FHR does not expect any further significant disposals in 2003.
Third Quarter Management Operations
Fairmont
Revenues under management of $394 million increased 9.0% over 2002, mainly from the addition of five new management contracts since the summer of 2002. Management fee revenues increased to $12.5 million from $11.3 million in 2002, with base fees increasing proportionately with revenues under management and minimal incentive fees. Due to the impact of SARS on the operations of the Canadian Fairmont hotels, targets that are typically achieved during the third quarter were not reached. Management expects that incentive fees earned in the fourth quarter will be significantly lower than last year.
For the Fairmont portfolio, RevPAR was virtually unchanged at $119.27. The Canadian comparable portfolio reported a 1.5% decrease in RevPAR resulting from the significant effects of SARS, which were offset by the considerable appreciation in the Canadian dollar. Improving results at the U.S. city center properties resulted in a 2.2% RevPAR increase at the U.S. and International properties.
Delta
In the third quarter, revenues under management of $91 million were relatively unchanged from $90 million in 2002. This exclusively Canadian hotel portfolio continued to be impacted by the lingering effects of SARS. Delta earned management fee revenues of $3.0 million down from $3.6 million in 2002. In 2002, Delta received a one-time payout from a managed property, which accounts for the higher fee income in the prior period. On July 1, 2003, Delta entered the Quebec City market with the addition of a franchise agreement at the Delta Quebec (formerly the Radisson). Also in July, Delta announced the addition of another new franchise in Fredericton, New Brunswick. The hotel will be re-flagged the Delta Fredericton upon commencement of the franchise agreement in December 2003.
Nine-Month Consolidated Results
For the nine months ended September 30, 2003, operating revenues increased 12.2% to $521.7 million from $465.0 million. Recent acquisition activity and foreign currency fluctuations generated the majority of this increase. EBITDA of $132.5 million was down 19.9% from last year and included $14.9 million from real estate activities in 2003 versus $5.7 million in the nine months ended September 30, 2002. EBITDA also included a $7.4 million provision related to the hurricane damage in Bermuda.
Equity losses generated from FHR's investment in Legacy were $4.2 million compared to equity income of $6.9 million in 2002. The impact of SARS on Legacy's portfolio in the second and third quarters was considerable given its significant exposure to Toronto and other major Canadian cities.
Net income of $64.2 million was down 21.2% compared to the prior year while basic EPS was $0.81 in 2003 compared to $1.04 in 2002. Net income included a one-time $24.4 million income tax recovery from a favorable tax reassessment recorded in June 2003 and the $7.4 million provision related to the hurricane damage.
To date in 2003, FHR has disposed of two blocks of the Coal Harbour lands in Vancouver and one block of the Southtown lands in Toronto. These sales generated cash proceeds of $30.8 million and resulted in EBITDA from real estate activities totaling $14.9 million. FHR does not expect any further significant disposals in 2003.
Capital Expenditures
Hotel related capital expenditures for the quarter and year-to-date totaled $19.9 million and $55.5 million, respectively. Several projects were underway during the quarter including:
- The renovation of two-thirds of the guestrooms at The Fairmont Copley
Plaza Boston (completed in May);
- The ongoing construction of the meeting facility at The Fairmont
Chateau Lake Louise; and
- The guestroom renovations at The Fairmont Royal Pavilion. The resort
re-opened at quarter-end following five months of extensive capital
improvements.
In addition to the ongoing projects listed above, renovations began at The Fairmont Orchid, Hawaii in late September. They include the restaurant, the refurbishment of the spa and the conversion of one guest floor to Fairmont Gold. In December, the renovation of the meeting rooms and final phase of guestrooms will begin at The Fairmont Copley Plaza Boston, which is expected to finish in early spring 2004. FHR currently expects that total capital expenditures in 2003 will be approximately $100 million, which does not include any of the Bermuda hurricane repairs.
Announcements and Corporate Activities
Effective August 1, 2003, Fairmont assumed management of The Fairmont Olympic Hotel, Seattle, which was concurrently purchased by Legacy. Built in 1924, this 450-room hotel is located in the heart of Seattle's Rainier Square neighborhood and expands Fairmont's presence in one of the key U.S. markets.
On October 17, 2003, Legacy announced a major refinancing of its corporate debt structure. Legacy's intention to enter into seven mortgage financings with varying terms of three to ten years will significantly extend Legacy's debt maturities and provide a more reliable form of long-term capital. Proceeds from the financings will be used to redeem all of Legacy's outstanding unsecured debentures and to fund the related call premium in the fourth quarter. This charge is expected to reduce FHR's fourth quarter EBITDA by an estimated $2.5 million.
During the quarter, FHR did not repurchase any shares under its previous normal course issuer bid. FHR has repurchased a total of 747,100 shares at a total cost of $16.8 million during 2003. Subsequent to the third quarter, FHR announced a new normal course issuer bid effective October 8, 2003, authorizing the Company to purchase up to 5% of its public float in the twelve-month period following the bid's effective date.
Outlook
"We are encouraged by a number of positive signs that indicate a recovery next year. Bookings for our critical group business are on pace for 2004 relative to this time last year, notwithstanding all of the issues impacting demand from this segment in 2003," commented Mr. Fatt.
"Our 2003 expectations for the Company's hotel operations continue to be consistent with our previous guidance provided in July. However, we are now lowering our guidance to reflect the $10 - $12 million provision associated with the Bermuda hurricane damage and the $2.5 million impact relating to the Legacy refinancing," continued Mr. Fatt. "Our revised full-year 2003 EBITDA range is $140 - $150 million compared to $155 - $165 million. This assumes an estimated $3 - $5 million of expenses in the fourth quarter pertaining to the hurricane damage. Our forecast anticipates ongoing weakness throughout the North American lodging industry for the balance of the year and the previously revised outlook for several properties."
FHR now estimates EPS for the year to be between $0.62 - $0.70 compared to the Company's previous guidance of $0.81 - $0.89. This estimate assumes that the hurricane related expenses are non-deductible for income tax purposes and includes the $24.4 million income tax recovery recorded in the second quarter. Excluding these two one-time items, we expect the full-year tax rate to be approximately 29%.
We continue to manage our business based on the assumption that following this difficult period, FHR will enjoy a sharp recovery in 2004 relative to our current 2003 performance. Considerable efforts are underway by governments and tourism companies alike to ensure that the pristine images of both Canada and Bermuda are restored. Our significant investment in many of our world-class properties and the recent acquisition of two key properties position us well for growth in 2004.
FHR will hold a conference call today, October 21, 2003 at 1:30 p.m. Eastern Time to discuss these results. To participate, please dial 416.695.5806 or 1.800.273.9672 approximately 10 minutes prior to the beginning of the call to receive clearance from the operator. You will be requested to identify yourself and the organization on whose behalf you are participating. A recording of this call will be made available beginning at 4:30 p.m. Eastern Time on October 21, 2003 through to October 28, 2003 by dialing 416.695.5800 or 1.800.408.3053 using the reservation No. 1481058. A live audio webcast of the conference call will be available via FHR's website (
This press release contains certain forward-looking statements relating, but not limited to, FHR's operations, anticipated financial performance, business prospects and strategies. Forward-looking information typically contains statements with words such as "anticipate", "believe", "expect", "plan" or similar words suggesting future outcomes. Such forward-looking statements are subject to risks, uncertainties and other factors, which could cause actual results to differ materially from future results expressed, projected or implied by such forward-looking statements. Such factors include, but are not limited to economic, competitive and lodging industry conditions. FHR disclaims any responsibility to update any such forward-looking statements.
Three months ended Nine months ended
September 30 September 30
2003 2002 Variance 2003 2002 Variance
OWNED
HOTELS
Worldwide
RevPAR $132.68 $128.92 2.9% $120.51 $118.83 1.4%
ADR 208.48 193.36 7.8% 201.37 187.48 7.4%
Occupancy 63.6% 66.7% (3.1 points) 59.8% 63.4% (3.6 points)
Canada
RevPAR $152.77 $146.89 4.0% $108.67 $106.46 2.1%
ADR 207.67 186.90 11.1% 171.20 153.76 11.3%
Occupancy 73.6% 78.6% (5.0 points) 63.5% 69.2% (5.7 points)
U.S. and
International
RevPAR $110.91 $109.41 1.4% $133.31 $132.27 0.8%
ADR 209.70 203.60 3.0% 238.42 231.93 2.8%
Occupancy 52.9% 53.7% (0.8 points) 55.9% 57.0% (1.1 points)
FAIRMONT MANAGED
HOTELS
Worldwide
RevPAR $119.27 $119.18 0.1% $105.49 $108.98 (3.2%)
ADR 178.18 168.37 5.8% 171.52 164.29 4.4%
Occupancy 66.9% 70.8% (3.9 points) 61.5% 66.3% (4.8 points)
Canada
RevPAR $120.15 $122.02 (1.5%) $90.12 $93.52 (3.6%)
ADR 166.60 152.72 9.1% 143.81 132.34 8.7%
Occupancy 72.1% 79.9% (7.8 points) 62.7% 70.7% (8.0 points)
U.S. and
International
RevPAR $118.20 $115.70 2.2% $124.11 $127.81 (2.9%)
ADR 195.00 194.04 0.5% 206.50 209.32 (1.3%)
Occupancy 60.6% 59.6% 1.0 points 60.1% 61.1% (1.0 points)
DELTA MANAGED
HOTELS
Worldwide
RevPAR $66.96 $65.77 1.8% $56.79 $56.34 0.8%
ADR 97.16 90.79 7.0% 91.67 86.58 5.9%
Occupancy 68.9% 72.4% (3.5 points) 62.0% 65.1% (3.1 points)
Comparable hotels and resorts are considered to be properties that were
fully open under FHR management for at least the entire current and prior
period. Comparable hotels and resorts statistics exclude properties under
major renovation that would have a significant adverse effect on the
properties' primary operations. The following properties were excluded:
Owned: The Fairmont Southampton; The Fairmont Orchid,
Hawaii; The Fairmont Copley Plaza Boston
Fairmont Managed: The Fairmont Southampton; The Fairmont Orchid,
Hawaii; The Fairmont Washington, D.C.; The
Fairmont Olympic Hotel, Seattle; The Fairmont
Sonoma Mission Inn & Spa; The Fairmont Dubai
Delta Managed: Delta Sun Peaks Resort; Delta St. Eugene Mission
Resort
(1) Operating revenues excludes other revenues from managed and
franchised properties (consists of direct and indirect costs
relating primarily to marketing and reservation services that are
reimbursed by hotel owners on a cost recovery basis). Management
considers that the exclusion of such revenues provides a meaningful
measure of operating performance, however, it is not a defined
measure of operating performance under Canadian generally accepted
accounting principles ("Canadian GAAP"). FHR's calculation of
operating revenues may be different than the calculation used by
other entities.
(2) EBITDA is defined as earnings before interest, taxes, amortization,
other income and expenses and reorganization and corporate expenses.
Income from investments and other is included in EBITDA. Management
considers EBITDA to be a meaningful indicator of hotel operations,
however, it is not a defined measure of operating performance under
Canadian GAAP. FHR's calculation of EBITDA may be different than the
calculation used by other entities.
Fairmont Hotels & Resorts Inc.
Consolidated Balance Sheets
(Stated in millions of U.S. dollars)
(Unaudited)
ASSETS
September 30 December 31
2003 2002
-----------
Current assets
Cash and cash equivalents $ 49.4 $ 49.0
Accounts receivable 58.0 47.0
Inventory 13.5 12.5
Prepaid expenses and other 34.7 10.9
-----------
155.6 119.4
Investments in partnerships and corporations
(note 3) 53.5 68.9
Investment in Legacy Hotels Real Estate
Investment Trust 105.5 96.4
Non-hotel real estate 96.6 88.8
Property and equipment 1,622.4 1,441.1
Goodwill 130.1 123.0
Intangible assets 215.0 201.7
Other assets and deferred charges (note 4) 104.0 83.7
-----------
$ 2,482.7 $ 2,223.0
-----------
-----------
LIABILITIES
Current liabilities
Accounts payable and accrued liabilities $ 108.6 $ 101.3
Taxes payable 3.4 5.3
Dividends payable - 2.4
Current portion of long-term debt (note 5) 421.0 72.3
-----------
533.0 181.3
Long-term debt 244.2 463.2
Other liabilities 94.0 82.8
Future income taxes (note 6) 87.5 96.4
-----------
958.7 823.7
-----------
Shareholders' equity (note 7) 1,524.0 1,399.3
-----------
$ 2,482.7 $ 2,223.0
-----------
-----------
Fairmont Hotels & Resorts Inc.
Consolidated Statements of Income
(Stated in millions of U.S. dollars)
(Unaudited)
Three months ended Nine months ended
September 30 September 30
2003 2002 2003 2002
--------- --------- ---------
Revenues
Hotel ownership operations $ 168.6 $ 150.3 $ 462.5 $ 407.5
Management operations 10.6 10.2 27.8 25.6
Real estate activities 0.2 11.9 31.4 31.9
--------- --------- ---------
Operating revenues 179.4 172.4 521.7 465.0
Other revenues from managed
and franchised properties 9.2 7.1 23.7 21.0
--------- --------- ---------
188.6 179.5 545.4 486.0
Expenses
Hotel ownership operations 130.0 95.0 353.7 275.6
Management operations 4.7 4.0 15.7 12.1
Real estate activities 1.2 9.8 16.5 26.2
--------- --------- ---------
Operating expenses 135.9 108.8 385.9 313.9
Other expenses from managed
and franchised properties 9.7 7.4 24.6 21.8
--------- --------- ---------
145.6 116.2 410.5 335.7
Income (loss) from equity
investments and other 3.9 10.9 (2.4) 15.2
--------- --------- ---------
Operating income before
undernoted items 46.9 74.2 132.5 165.5
Amortization 17.5 13.9 51.0 41.9
Other (income) expenses, net - 0.5 - (5.7)
Reorganization and
corporate expenses - - - 1.3
Interest expense, net 8.9 5.0 23.1 13.5
--------- --------- ---------
Income before income tax expense
and non-controlling interest 20.5 54.8 58.4 114.5
--------- --------- ---------
Income tax expense
Current 2.5 1.1 9.0 9.0
Future (note 6) 6.4 14.2 (14.8) 22.7
--------- --------- ---------
8.9 15.3 (5.8) 31.7
--------- --------- ---------
Non-controlling interest - 0.5 - 1.3
--------- --------- ---------
Net income $ 11.6 $ 39.0 $ 64.2 $ 81.5
--------- --------- ---------
Weighted average number of common
shares outstanding (in millions)
(note 7)
Basic 79.1 77.9 79.2 78.4
Diluted 79.9 79.0 80.0 79.7
Basic earnings per common share $ 0.15 $ 0.50 $ 0.81 $ 1.04
Diluted earnings per common share $ 0.15 $ 0.49 $ 0.79 $ 1.02
Fairmont Hotels & Resorts Inc.
Consolidated Statements of Cash Flows
(Stated in millions of U.S. dollars)
(Unaudited)
Three months ended Nine months ended
September 30 September 30
2003 2002 2003 2002
--------- --------- ---------
Cash provided by (used in)
Operating activities
Net income $ 11.6 $ 39.0 $ 64.2 $ 81.5
Items not affecting cash
Amortization of property
and equipment 16.9 13.4 49.1 40.7
Amortization of
intangible assets 0.6 0.5 1.9 1.2
(Income) loss from equity
investments and other (3.9) (10.9) 2.4 (15.2)
Future income taxes 6.4 14.2 (14.8) 22.7
Non-controlling interest - 0.5 - 1.3
Distributions from investments - 1.2 4.4 6.3
Other (2.8) (2.6) (9.0) (10.7)
Change in non-hotel real estate (2.7) 1.3 7.4 5.2
Changes in non-cash working
capital items (note 9) 15.1 5.4 (19.5) (30.8)
--------- --------- ---------
41.2 62.0 86.1 102.2
--------- --------- ---------
Investing activities
Additions to property and equipment (19.9) (11.6) (55.5) (63.9)
Acquisitions, net of cash acquired
(note 3) - - 6.0
Issuance of loans receivable
(note 15) (26.8) - (28.3)
Investments in partnerships
and corporations - (10.4) (0.7) (13.4)
--------- --------- ---------
(46.7) (22.0) (78.5) (77.3)
--------- --------- ---------
Financing activities
Issuance of long-term debt 14.8 58.0 161.5 97.0
Repayment of long-term debt (7.7) (13.2) (151.2) (37.9)
Issuance of common shares 0.5 - 0.6 0.5
Repurchase of common shares - (71.8) (16.8) (73.0)
Dividends paid (2.4) (1.6) (4.8) (3.2)
--------- --------- ---------
5.2 (28.6) (10.7) (16.6)
--------- --------- ---------
Effect of exchange rate
changes on cash - 0.6 3.5 2.8
--------- --------- ---------
Increase in cash (0.3) 12.0 0.4 11.1
Cash - beginning of period 49.7 51.8 49.0 52.7
--------- --------- ---------
Cash - end of period $ 49.4 $ 63.8 $ 49.4 $ 63.8
--------- --------- ---------
--------- --------- ---------
Fairmont Hotels & Resorts Inc.
Consolidated Statements of Retained Earnings (Deficit)
(Stated in millions of U.S. dollars)
(Unaudited)
Three months ended Nine months ended
September 30 September 30
2003 2002 2003 2002
--------- --------- ---------
Balance - Beginning of period $ 83.2 $ 21.3 $ 38.5 $ (19.6)
Net income 11.6 39.0 64.2 81.5
--------- --------- ---------
94.8 60.3 102.7 61.9
Repurchase of common shares
(note 7) - (30.4) (5.5) (30.4)
Dividends - - (2.4) (1.6)
--------- --------- ---------
Balance - End of period $ 94.8 $ 29.9 $ 94.8 $ 29.9
--------- --------- ---------
--------- --------- ---------
Fairmont Hotels & Resorts Inc.
Notes to Consolidated Financial Statements
(Stated in millions of U.S. dollars)
(Unaudited)
1. Fairmont Hotels & Resorts Inc. ("FHR") has operated and owned hotels
and resorts for 115 years and currently manages properties
principally under the Fairmont and Delta brands. At September 30,
2003, FHR managed or franchised 81 luxury and first-class hotels. FHR
owns 83.5% of Fairmont Hotels Inc. ("Fairmont"), which at September
30, 2003, managed 42 luxury Fairmont branded properties in major city
centers and key resort destinations throughout Canada, the United
States, Mexico, Bermuda, Barbados and the United Arab Emirates. Delta
Hotels Limited ("Delta"), a wholly owned subsidiary of FHR, managed
or franchised 38 Canadian hotels and resorts at September 30, 2003.
In addition to hotel and resort management, at September 30, 2003,
FHR had hotel ownership interests ranging from approximately 20% to
100% in 23 properties, located in Canada, the United States, Mexico,
Bermuda and Barbados. FHR also has an approximate 35% equity interest
in Legacy Hotels Real Estate Investment Trust ("Legacy"), which owns
22 hotels and resorts across Canada and two in the United States. FHR
also owns real estate properties that are suitable for either
commercial or residential development.
Results for the three and nine months ended September 30, 2003 are
not necessarily indicative of the results that may be expected for
the full year due to seasonal and short-term variations. Revenues are
typically higher in the second and third quarters versus the first
and fourth quarters of the year in contrast to fixed costs such as
amortization and interest, which are not significantly impacted by
seasonal or short-term variations.
2. These interim consolidated financial statements do not include all
disclosures as required by Canadian generally accepted accounting
principles for annual consolidated financial statements and should be
read in conjunction with the audited consolidated financial
statements for the year ended December 31, 2002 presented in the
annual report. The accounting policies used in the preparation of
these interim consolidated financial statements are consistent with
the accounting policies used in the December 31, 2002 audited
consolidated financial statements, except as discussed below.
Long-lived assets
Effective January 1, 2003, FHR adopted the new recommendations of The
Canadian Institute of Chartered Accountants ("CICA") with respect to
accounting for the impairment of long-lived assets. This standard
requires that long-lived assets be reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount
of an asset may not be recoverable. Long-lived assets are grouped at
the lowest level for which identifiable cash flows are largely
independent, when testing for and measuring impairment. Under the new
standard, a two-step process will determine the impairment of
long-lived assets held for use, with the first step determining when
impairment is recognized and the second step measuring the amount of
the impairment. Impairment losses will be recognized when the
carrying amount of long-lived assets exceeds the sum of the
undiscounted cash flows expected to result from their use and
eventual disposition and will be measured as the amount by which the
long-lived asset's carrying amount exceeds its fair value. Adoption
of this new standard did not have an impact on FHR's financial
position, results of operations or cash flows.
Also effective January 1, 2003, FHR adopted the new CICA
recommendations relating to the disposal of long-lived assets and
discontinued operations. Subject to certain criteria, long-lived
assets and any associated assets or liabilities that management
expects to dispose of by sale will now be classified as held for
sale. The related results of operations from these assets classified
as held for sale will be reported in discontinued operations if
certain criteria are met, with reclassification of prior year's
related operating results. Assets to be disposed of are reported at
the lower of the carrying amount or fair value less costs to sell.
Adoption of this new standard did not have an impact on FHR's
financial position, results of operations or cash flows.
3. Acquisition
In February 2003, FHR acquired the remaining 50% equity interest in
The Fairmont Copley Plaza Boston from entities controlled by Prince
Alwaleed Bin Talal Bin Abdulaziz Al Saud of Saudi Arabia. The total
purchase price for 100% of The Fairmont Copley Plaza Boston,
including the 50% already owned, was approximately $117.0 and was
satisfied by the issuance of one million common shares at a fair
market value of $21.49 per share, the assumption of a mortgage at
$64.5 and cash paid of $30.7. FHR purchased the initial 50% equity
interest in the hotel in July 2001 for cash. The acquisition was
accounted for using the step purchase method, and 100% of the results
of the hotel have been included in the consolidated statements of
income from February 10, 2003. Certain acquisition costs have been
estimated in the purchase price equation and have not yet been
finalized. The mortgage, secured by substantially all assets and an
assignment of auxiliary rents of The Fairmont Copley Plaza Boston, is
due March 5, 2007 and bears interest at floating rates based on LIBOR
plus 225 basis points. In order to hedge against exposures to
increases in interest rates, FHR has entered into an interest rate
hedge to cap the LIBOR rate at 6.5%.
The total cost of the hotel, including the 50% interest already
owned, acquisition costs of $0.5 less cash acquired of $14.8, has
been allocated to the tangible assets acquired and liabilities
assumed on the basis of their respective estimated fair values on the
acquisition date, as follows:
Land $ 25.1
Building 77.8
Furniture, fixtures and equipment 2.5
Long-term debt (64.5)
Current assets 3.2
Current liabilities (6.8)
$ 37.3
4. Other assets and deferred charges at September 30, 2003, includes a
cash balance of $3.1 which is in reserve pursuant to terms of certain
mortgage agreements. This cash is to be held in reserve for use
towards certain capital expenditures.
5. As at September 30, 2003, borrowings under two bank credit facilities
which mature in the third quarter of 2004 were classified as current
debt. FHR is currently negotiating the extension of one of these
facilities and reviewing proposals for the replacement of the other.
6. A $24.4 recovery of future income tax was recorded in June 2003 as a
result of a favorable tax reassessment.
7. Shareholders' equity
September 30, December 31,
2003 2002
-------------
Common shares $ 1,201.8 $ 1,191.5
Contributed surplus 141.9 141.9
Foreign currency translation adjustments 85.5 27.4
Retained earnings 94.8 38.5
-------------
$ 1,524.0 $ 1,399.3
-------------
The diluted weighted-average number of common shares outstanding is
calculated as follows:
Three months ended Nine months ended
September 30 September 30
2003 2002 2003 2002
--------- --------- ---------
(in millions) (in millions)
Weighted-average number of common
shares outstanding - basic 79.1 77.9 79.2 78.4
Stock options 0.8 1.1 0.8 1.3
--------- --------- ---------
Weighted-average number of common
shares outstanding - diluted 79.9 79.0 80.0 79.7
--------- --------- ---------
Effective October 8, 2003, FHR may repurchase for cancellation up to
approximately 3.9 million or 5% of its outstanding common shares.
The amounts and timing of repurchases are at FHR's discretion. Under
the previous issuer bid which ended on October 2, 2003, during the
nine months ended September 30, 2003, FHR repurchased 747,100 shares
(nil for the third quarter) for total consideration of $16.8 ($nil
for the third quarter), of which, $11.3 was charged to common shares
and $5.5 was charged to retained earnings. During the nine months
ended September 30, 2003, FHR issued 47,637 shares (33,843 shares for
the third quarter) pursuant to the Key Employee Stock Option Plan
("KESOP"). $0.6 ($0.5 for the third quarter) was credited to common
shares for options exercised. At September 30, 2003, 79,080,159
common shares were outstanding (2002 - 78,569,035).
During the nine months ended September 30, 2003, 107,000 (nil in the
third quarter) stock options were granted. Assuming FHR elected to
recognize the cost of its stock-based compensation based on the
estimated fair value of stock options granted after January 1, 2002,
net income and basic and diluted earnings per share would have been:
Three months ended Nine months ended
September 30 September 30
2003 2002 2003 2002
--------- --------- ---------
Reported net income $ 11.6 $ 39.0 $ 64.2 $ 81.5
Net income assuming fair
value method used $ 11.4 $ 39.0 $ 63.3 $ 81.1
Assuming fair value method used
Basic earnings per share $ 0.14 $ 0.50 $ 0.80 $ 1.03
Diluted earnings per share $ 0.14 $ 0.49 $ 0.79 $ 1.02
The fair value of each option granted was calculated at the
respective grant date of each issuance using the Black-Scholes option
pricing model with the following weighted average assumptions:
Three months ended Nine months ended
September 30 September 30
2003 2002 2003 2002
--------- --------- ---------
Expected dividend yield - 0.2% 0.3% 0.2%
Expected volatility - 32.0% 36.2% 32.0%
Risk-free interest rate - 4.24% 4.16% 4.24%
Expected option life in years - 4.0 3.6 4.0
8. In September, the two owned properties in Bermuda suffered extensive
damage from Hurricane Fabian. FHR has insurance coverage for both
property damage and business interruption. This insurance is subject
to deductible amounts and uninsured items, estimated at $10 - $12. Of
this amount, a provision of $7.4 was recorded in the third quarter.
9. Changes in non-cash working capital:
Three months ended Nine months ended
September 30 September 30
2003 2002 2003 2002
--------- --------- ---------
Decrease (increase)
in current assets
Accounts receivable $ 10.8 $ 4.1 $ 0.9 $ (13.7)
Inventory 0.8 1.2 0.3
Prepaid expenses and other 9.1 - (0.9) (10.8)
Increase (decrease) in
current liabilities
Accounts payable and accrued
liabilities (6.1) (5.3) (17.3) (9.6)
Taxes payable 0.5 5.4 (2.5) 3.3
--------- --------- ---------
$ 15.1 $ 5.4 $ (19.5) $ (30.8)
--------- --------- ---------
10. In February 2003, FHR completed a $120.0 financing secured by
substantially all assets and an assignment of auxiliary rents of The
Fairmont Kea Lani Maui. The mortgage is due March 1, 2006 and bears
interest at the greater of 4.25% and LIBOR plus 310 basis points. FHR
has entered into an interest rate contract to cap the LIBOR rate at
9.0%.
11. Guarantees
Significant guarantees that have been provided to third parties
include the following:
Debt guarantees
FHR has provided guarantees totalling $11.6 related to debts incurred
by hotels in which it holds a minority equity interest. In the event
that one of these hotels fails to meet certain financial obligations,
the lenders may draw upon these guarantees. The term of these
guarantees is equal to the term of the related debts, which are all
due on demand. FHR has collateral security on the underlying hotel
assets if the guarantees are drawn upon. No amount has been recorded
in the financial statements for amounts owing under these guarantees.
Business dispositions
In the sale of all or a part of a business, FHR may agree to
indemnify against claims for FHR's past business practices in the
areas of tax and environmental matters. The term of such
indemnification is subject to certain actions that are under the
control of the acquirer and the amount of the indemnification is not
limited. The nature of these indemnification agreements prevents FHR
from estimating the maximum potential liability that it could be
required to pay to counter parties. FHR has accruals in its financial
statements of approximately $9 related to potential claims under the
indemnifications made to date.
Director and officer indemnification agreements
FHR has entered into indemnification agreements with its current and
former directors and officers to indemnify them, to the extent
permitted by law, against any and all charges, costs, expenses,
amounts paid in settlement and damages incurred by the directors and
officers as a result of any lawsuit or any other judicial,
administrative or investigative proceeding in which the directors and
officers are sued as a result of their service. These indemnification
claims will be subject to any statutory or other legal limitation
period. The nature of the indemnification agreements prevents FHR
from making a reasonable estimate of the maximum potential amount it
could be required to pay to counter parties. FHR has purchased
directors' and officers' liability insurance. No amount has been
recorded in the financial statements with respect to these
indemnification agreements as no claims are outstanding at this date.
Other indemnification agreements
In the normal course of operations, FHR may provide indemnification
agreements, other than those listed above, to counterparties that
would require FHR to compensate them for costs incurred as a result
of changes in laws and regulations or as a result of litigation
claims or statutory sanctions that may be suffered by the
counterparty as a consequence of the transaction. The terms of these
indemnification agreements will vary based upon the contract. The
nature of the indemnification agreements prevents FHR from making a
reasonable estimate of the maximum potential amount it could be
required to be paid to counter parties. No amount has been recorded
in the financial statements with respect to these indemnification
agreements.
12. Derivative financial instruments such as swaps, options and forward
contracts are used by FHR in the management of its foreign currency
and interest rate exposures. FHR's policy is to not use derivative
financial instruments for trading or speculative purposes.
At the inception of a hedge, FHR documents the relationship between
the hedging instruments and the hedged items. This process includes
linking the derivatives to specific assets and liabilities on the
balance sheet or to specific firm commitments or forecasted
transactions. FHR assesses the effectiveness of the hedge at the
inception and throughout the hedge by considering factors such as the
term of the instrument, the notional settlement amount of the
derivative as compared to the dollar amount of the item being hedged
and any other applicable factors. At the end of each period, FHR
records any changes in fair value related to the portion of the
derivative instruments that are no longer deemed to be effective or
do not meet the criteria of a hedge in the consolidated statement of
income.
FHR designates its interest rate instruments as hedges of the
interest expense on the underlying debt. Interest expense on the
underlying debt is adjusted to include the payments made or received
under the interest rate instruments. Foreign exchange translation
gains or losses on foreign currency denominated derivative financial
instruments used to hedge anticipated foreign currency cash flows are
recognized as adjustments to revenues or expenses, as applicable,
when the cash flows are recorded.
At September 30, 2003, FHR had outstanding, two interest rate hedges
to cap LIBOR at 6.5% on the mortgage secured by The Fairmont Copley
Plaza Boston and to cap LIBOR at 9.0% on the mortgage secured by The
Fairmont Kea Lani Maui. At September 30, 2003, the fair market value
of the interest rate hedge agreements approximates their carrying
value.
13. Certain of the prior period figures have been reclassified to conform
with the presentation adopted for 2003.
14. Segmented Information
FHR has five reportable operating segments in two core business
activities, ownership and management operations. The segments are
hotel ownership, investment in Legacy, real estate activities,
Fairmont and Delta. Hotel ownership consists of real estate interests
ranging from approximately 20% to 100% in 23 properties. The
investment in Legacy consists of an approximate 35% equity interest
in Legacy, which owns 22 hotels and resorts across Canada and two in
the United States. Real estate activities consists primarily of two
large undeveloped land blocks in Toronto and Vancouver. Fairmont is a
North American luxury hotel and resort management company and Delta
is a Canadian first-class hotel and resort management company.
The performance of all segments is evaluated primarily on earnings
before interest, taxes and amortization ("EBITDA"), which is
defined as income before interest, taxes, amortization, other income
and expenses and reorganization and corporate expenses. It includes
income from investments and other. Amortization, other income and
expenses, reorganization and corporate expenses, interest and income
taxes are not allocated to the individual segments. All transactions
among operating segments are conducted at fair market value.
The following tables present revenues, EBITDA, total assets and
capital expenditures for FHR's reportable segments:
Three months ended September 30, 2003
Ownership Management
----------------------------
Inter
Real segment
Hotel Legacy estate Fairmont Delta Elimi- Total
Ownership activities nation (a)
--------- ------- -------- --------- ------- --------
Operating
revenues $ 168.6 $ - $ 0.2 $ 12.5 $ 3.0 $ (4.9) $ 179.4
Other
revenues
from
managed and
franchised
properties - - - 7.0 2.2 - 9.2
188.6
Income (loss)
from equity
investments
and other 1.3 2.6 - - - - 3.9
EBITDA 35.0 2.6 (1.0) 8.6 2.2 (0.5) 46.9
Total
assets (b) 2,121.6 105.5 100.2 351.5 73.1 (269.2) 2,482.7
Capital
expenditures 19.3 - - 0.6 - - 19.9
Three months ended September 30, 2002
Ownership Management
----------------------------
Inter
Real segment
Hotel Legacy estate Fairmont Delta Elimi- Total
Ownership activities nation (a)
--------- ------- -------- --------- ------- --------
Operating
revenues $ 150.3 $ - $ 11.9 11.3 3.6 $ (4.7) $ 172.4
Other
revenues
from
managed and
franchised
properties - - - 5.1 2.0 - 7.1
179.5
Income (loss)
from equity
investments
and other 3.7 7.2 - - - - 10.9
EBITDA 54.3 7.2 2.1 8.2 2.7 (0.3) 74.2
Total
assets (b) 1,848.7 69.7 87.1 201.5 70.4 (252.9) 2,024.5
Capital
expenditures 10.6 - - 1.0 - - 11.6
Nine months ended September 30, 2003
Ownership Management
----------------------------
Inter
Real segment
Hotel Legacy estate Fairmont Delta Elimi- Total
Ownership activities nation (a)
--------- ------- -------- --------- ------- --------
Operating
revenues $ 462.5 $ - $ 31.4 $ 33.4 $ 8.7 $(14.3) $ 521.7
Other
revenues
from
managed and
franchised
properties - - - 17.6 6.1 - 23.7
545.4
Income (loss)
from equity
investments
and other 1.8 (4.2) - - - - (2.4)
EBITDA 96.3 (4.2) 14.9 19.9 6.5 (0.9) 132.5
Total
assets (b) 2,121.6 105.5 100.2 351.5 73.1 (269.2) 2,482.7
Capital
expenditures 54.3 - - 1.2 - - 55.5
Nine months ended September 30, 2002
Ownership Management
----------------------------
Inter
Real segment
Hotel Legacy estate Fairmont Delta Elimi- Total
Ownership activities nation (a)
--------- ------- -------- --------- ------- --------
Operating
revenues $ 407.5 $ - $ 31.9 $ 30.3 $ 8.6 $(13.3) $ 465.0
Other
revenues
from
managed and
franchised
properties - - - 14.9 6.1 - 21.0
486.0
Income (loss)
from equity
investments
and other 8.3 6.9 - - - - 15.2
EBITDA 126.9 6.9 5.7 20.6 6.2 (0.8) 165.5
Total
assets (b) 1,848.7 69.7 87.1 201.5 70.4 (252.9) 2,024.5
Capital
expenditures 60.3 - - 3.6 - - 63.9
(a) Revenues represent management fees that are charged by Fairmont of
$4.8 (2002 - $4.6) and $14.1 (2002 - $13.1) for the three and nine
months ended September 30, 2003 respectively, and Delta of $0.1
(2002 - $0.1) and $0.2 (2002 - $0.2) for the three and nine months
ended September 30, 2003 respectively, to the hotel ownership
operations, which are eliminated on consolidation. EBITDA represents
expenses not reimbursed relating to marketing and reservation
services performed by FHR under the terms of its hotel management and
franchise agreements. Total assets represent the elimination of
inter-segment loans net of corporate assets.
(b) Hotel ownership assets include $41.9 (2002 - $51.9) of investments
accounted for using the equity method.
15. Related Party Transactions
In August 2003, FHR entered into a long-term incentive based
management contract with Legacy for The Fairmont Olympic Hotel,
Seattle. This transaction was recorded at the exchange value, which
is the amount established and agreed to by the related parties. In
connection with FHR securing the management contract on this property
and another under a similar arrangement, FHR has agreed to pay an
aggregate amount of $18.0 over a three-year period. These amounts
have been accounted for as intangible assets and are amortized over
the life of the management contracts. The amortization expense will
be applied to reduce revenues from management operations. The current
portion of the liability has been recorded in accounts payable and
accrued liabilities, while the long-term portion has been recorded as
other liabilities. At September 30, 2003, FHR has a liability due to