1997 Annual Report - Four Seasons Hotels and Resorts

ANNUAL INFORMATION FORM(continued)M ANAGEMENT’ S D ISCUSSION AND A NALYSISHotel Management EarningsAs a result of the changes in fee revenues and expenses discussed above, the Corporation’s hotel management earningsincreased by $3.9 million or 7.6% to $55.7 million in 1996. Hotel management earnings represented 86.5% of theCorporation’s earnings before other operating items in 1996, compared with 77.6% in 1995.Hotel Ownership OperationsHotel ownership earnings in 1996 declined 42.0% to $8.7 million, compared to $14.9 million in 1995. This decline wasdue to the sale of the Corporation’s 50% ownership interest in the Four Seasons Hotel London in December 1995, whichpreviously had been proportionately consolidated in hotel ownership operations. The Corporation consolidated $8.7 millionof operating earnings from the London hotel in 1995.A major portion of hotel ownership operations in 1996 was dividend distributions from the Corporation’s25% ownership interest in The Regent Hong Kong, which is accounted for on a cost basis. The hotel’s REVPAR increased14.8% in 1996, due to the combination of strong occupancy improvement and increased room rates. This strong REVPARincrease resulted in a 26.5% increase in the gross operating profit for the hotel in 1996. As a result, the distributableearnings for The Regent Hong Kong were $9.2 million in 1996, representing a 52% increase over 1995.Other ItemsDepreciation and AmortizationDepreciation and amortization expense in 1996 was $14.0 million, compared to $16.9 million in 1995. This reductionof 17.1% is attributable primarily to the sale of the Four Seasons Hotel London at the end of 1995.Net Interest ExpenseNet interest expense in 1996 declined 26.9% to $18.8 million from $25.7 million in 1995. This decline is attributable to:(i) lower debt levels, (ii) lower interest rates (Four Seasons’ weighted average cost of debt in 1996 was 8.6% compared to8.9% in 1995), and (iii) $2.8 million of interest income earned in 1996 on the £12.6 million of 10% secured cash flowbonds received in 1995 as consideration on the sale of the Four Seasons Hotel London.Income Tax ExpenseThe Corporation’s effective tax rate in 1996 was 6.2%, compared with a 16.0% effective tax rate in 1995 (excluding theprovision for loss of $95 million). The low effective tax rate is due primarily to the utilization of the benefits of theunrecorded tax losses created by the write-down in hotel investment values in 1993 and 1995 and a reduction of incometax expense in the United Kingdom in 1996 as a result of the sale of the ownership interest in the Four Seasons Hotel Londonin December 1995.Net Earnings and Earnings per ShareNet earnings and earnings per share in 1996 were $29.9 million and $1.04, respectively. The net loss in 1995 was$74.6 million and the net loss per share was $2.62. Excluding the $95 million provision, normalized net earnings wouldhave been $20.4 million and normalized earnings per share would have been $0.72 in 1995. The 46.2% increase innormalized net earnings and 44.8% increase in normalized earnings per share represented strong growth in hotelmanagement operations and lower interest costs resulting from declining debt levels and lower interest rates.38Four Seasons Hotels Inc.