1997 Annual Report - Four Seasons Hotels and Resorts

ANNUAL INFORMATION FORM(continued)M ANAGEMENT’ S D ISCUSSION AND A NALYSISHotel Ownership OperationsHotel ownership earnings in 1997 increased 73.6% to $15.1 million, compared to $8.7 million in 1996. The increase inhotel ownership earnings was attributable to the inclusion of the 100% leasehold interests in The Pierre in New York andthe Four Seasons Hotel Vancouver with effect from December 30, 1996, and the strong operating conditions in the NewYork, Chicago and Vancouver markets. This improved operating performance was offset by a decrease in distributions fromthe Corporation’s 25% interest in The Regent Hong Kong, caused by weakness in the operations of the hotel due to asignificant decline in demand in that market during the last six months of 1997. This reduction in demand is a resultof the combined effects of local conditions and the economic downturn experienced in a number of Asian markets.As a result, the distributable earnings from the hotel decreased from $9.2 million in 1996 to $6.0 million in 1997.Hotel ownership earnings are expected to decline by approximately 55% in 1998, compared to 1997, primarily as aresult of (i) the expected sale of the Corporation’s 25% ownership interest in The Ritz-Carlton Hotel Chicago which willresult in the Corporation ceasing to proportionately consolidate this interest, (ii) anticipated losses from the Corporation’sinvestment in the Four Seasons Hotel Berlin from January 1, 1998 (see “Four Seasons Hotel Berlin” on page 31), and(iii) an anticipated reduction in distributions from the Corporation’s interest in The Regent Hong Kong caused bycontinuing weakness in that market. The decline in hotel ownership earnings from these three hotels will be partially offsetby expected improvements in earnings generated by The Pierre in New York and the Four Seasons Hotel Vancouver.Other ItemsDepreciation and AmortizationDepreciation and amortization expense in 1997 was $15.8 million, compared to $14.0 million in 1996. This increase of12.6% is attributable primarily to the consolidation of The Pierre in New York and the Four Seasons Hotel Vancouver in 1997.Depreciation and amortization is expected to decline in 1998, compared to 1997, by approximately 10% primarily due tothe expected disposition of the Corporation’s 25% interest in The Ritz-Carlton Hotel Chicago in 1998, which will resultin the Corporation ceasing to consolidate its share of the depreciation and amortization expense of this hotel.Net Interest ExpenseNet interest expense in 1997 declined 52.4% to $8.9 million from $18.8 million in 1996. This decrease is attributable to:(i) lower debt levels, (ii) lower interest rates (Four Seasons’ weighted average cost of debt in 1997 was 8.4% compared to8.6% in 1996) as a result of the replacement of the 9-1/8% Notes in mid-1997 with 6% debentures (the weighted averagecost of debt on a full-year basis after the replacement was approximately 7%), and (iii) increased interest income primarilyfrom cash reserves, together with the interest income from the loan made in 1997 to the owner of the Hôtel George Vin Paris.Net interest expense is expected to decline by approximately 45% in 1998 compared to 1997, primarily as a resultof reduced interest rates and an increase in interest income.Loss on Repurchase of DebtDuring 1997, the Corporation repurchased US$101.5 million of its 9-1/8% Notes which resulted in an accounting lossof $12.0 million (see note 10(b) to the consolidated financial statements).36Four Seasons Hotels Inc.