1998 Annual Report - Four Seasons Hotels and Resorts

Hotel Management OperationsFour Seasons is principally a hotel management company, with 1998 hotel management earnings representing almost 90%of total earnings before other operating items, interest and taxes. Under its management agreements, Four Seasons generallyoversees all aspects of hotel operations on behalf of the hotel owners, including hotel sales and marketing, hotel reservations,hotel accounting, purchasing, budgeting and the hiring, training and supervising of staff. For providing these services,Four Seasons receives a variety of fees, including a base fee calculated as a percentage of gross operating revenues of eachhotel. In addition, Four Seasons often receives an incentive fee based on the operating performance of each hotel.Through economies of scale, coordinated international marketing efforts, detailed labour management controls andfood and beverage purchasing systems, Four Seasons generally has enhanced the overall profitability of hotels under itsmanagement. As a result of various management tools and cost control techniques, the gross operating profit margin ofthe Core Hotels has improved from 17.1% in 1992 to 34.5% in 1998 (calculated as a percentage of hotel gross operatingrevenues). These hotel profitability improvements have, in turn, increased the incentive fees earned by the Corporation.In addition to overseeing day-to-day operations of its hotels, Four Seasons provides management services, includingdeveloping and implementing sales and marketing strategies, operating a central reservations system, assisting with sourcingthe financing of and managing the development of new hotels, providing advice with respect to the design and constructionof new or renovated hotels, assisting with the refurbishment of hotels, and providing a centralized purchasing system forhotel goods.General and administrative expenses for hotel management operations are incurred by the Corporation to provide themanagement services outlined in the previous paragraph, together with and including those items normally associated withcorporate overhead, such as operations, finance, information technology, accounting, control, planning, legal, developmentand other costs of maintaining the corporate office.The Corporation’s general and administrative expenses are relatively stable. As a result, the Corporation derivessubstantial operating profit leverage from increases in management fees from existing agreements and the addition of newmanagement controls. From 1993 to 1998, hotel management fee revenues and hotel management earnings before otheroperating items have grown at compounded annual growth rates of16.1% and 23.4%, respectively. Hotel management earnings beforeHotel Management Profit Marginother operating items as a percentage of fee revenues (hotel(percent)management profit margin) increased from 46.3% to 62.9% between 651993 and 1998. Hotel management fees and earnings are expected to60increase in 1999 and beyond as a result of (i) the addition of feerevenue from hotels added to the portfolio in 1999, (ii) anticipated55REVPAR and profitability improvements in hotels under50management, (iii) a full year of management fee revenues from theproperties acquired or opened in 1998, (iv) increased fees from45additional vacation ownership projects, (v) improved foreign currency40exchange rates, and (vi) royalty fees from new Regent branded hotels.3593 94 95 96 979833Four Seasons Hotels Inc.