1998 Annual Report - Four Seasons Hotels and Resorts

ANNUAL INFORMATION FORM(continued)M ANAGEMENT’ S D ISCUSSION AND A NALYSISFour Seasons Hotel LondonThe Corporation holds two loans receivable in the aggregate amount of £23.4 million (approximately $60 million), plus aninvestment of £4.1 million (approximately $11 million) in preferred shares, in connection with the Four Seasons HotelLondon. These amounts represent two loans to, and an investment in, a Kingdom corporation resulting from twoseparate transactions (1995 and 1998) through which Kingdom acquired an aggregate 87.5% interest in the hotel.The first loan, which has a balance of £11.2 million (approximately $29 million) as at December 31, 1998, representspart of the consideration received by the Corporation when it sold its 50% interest in the hotel to Kingdom in 1995.The loan is a cash flow bond secured by the transferred interest in the hotel and bears interest at 10% per annum.The second loan, which has an outstanding balance of £12.2 million (approximately $31 million), together with theinvestment in preferred shares, resulted from a transaction in which the other 50% owner of the hotel sold its interest toKingdom (37.5%) and the Corporation (12.5%) in the first quarter of 1998. This loan bears interest at 10% per annumand the preferred shares bear a cumulative annual dividend of 10%, both payable from the cash flow of the hotel. The loanis secured by the related interest in the hotel. Concurrent with this transaction, the Corporation’s management arrangementsfor the hotel were reorganized and improved.Other Hotel Ownership InterestsAs at December 31, 1998, Four Seasons had minority investments in two hotels and resorts under management(Aviara (7.3%) and Seattle (3.4%)) and had minority investments in three of the hotels and resorts underconstruction (Punta Mita, Mexico (31%), Nile Plaza, Cairo (9%) and Amman, Jordan (5%)). In addition,Four Seasons had a 66.7% interest in a hotel under construction in Prague, a 4.3% equity interest in a resort andvacation ownership project under construction in Scottsdale. The interest in the Four Seasons Resort Scottsdale isexpected to increase to approximately 67% as additional funds are advanced to complete construction. Both of theselatter two ownership interests are expected to be reduced prior to completion of construction of the respective projects,as the Corporation is in discussions with prospective equity partners to purchase some or all of the Corporation’sposition. Four Seasons accounts for all of these investments on a cost basis because either the percentage ownership andstructure does not give the Corporation significant influence over these investments, or the investments were made withthe intention that they be disposed of in the foreseeable future. The book value of these hotel ownership interests was$53.1 million as at December 31, 1998 ($46.5 million as at December 31, 1997). Based upon the current andbudgeted operating cash flow of each of these properties (adjusted for expected capital spending requirements) and recentcomparable luxury hotel sales, the Corporation currently estimates that the net recoverable value from each of theseinvestments at least approximates the book values of each of these investments (see note 5 to the consolidated financialstatements).36Four Seasons Hotels Inc.