Four Seasons Hotels
In an industry in which the average lease is 10 years, Four Seasons Hotels' strategy is to sign management contracts for 60. And it makes sense, because you can really make a long-term commitment when you've got a prime hotel at a prime location. Naturally, this is really Foolish, since it avoids all the costs of real estate ownership and carries accordingly higher margins.
Speaking of real estate, the company has recently sold its interest in The Pierre and has finalized the sale of 53% of its interest in the Four Seasons Hotel Shanghai. These steps are getting the company closer to a state of no longer owning properties -- approximately two-thirds of its last quarterly revenues derived from management fees.
The company's typical fee structure for a managed property is 3% of gross revenue (which is nice when you're charging premium prices), plus an incentive that's 5% of gross profit (with a stipulation that the incentive can never be negative). That's a sweet deal.
Also to the company's merit, its cash balance almost entirely covers its debt-like obligations, which should provide some comfort to shareholders. Provided we were to count said obligations/agreements as debt, the company carries a debt-to-equity ratio of about 44%.
Large competitors carry debt-to-equity ratios that range from 39.2% at Marriott
Four Seasons announced second-quarter results this morning, and they were, in a word, luxurious (when compared with the comparable quarter last year). RevPAR (revenue per available room), the key metric for the hotel industry, increased 12.8% worldwide and was up an even stronger 13.6% in the U.S. Net earnings per diluted share increased 23.5%.
The company's guidance is for RevPAR to increase 11% for 2005 and for gross margins to increase 2.2%. Ah, how sweet is that? As sweet as an order of its lemon ricotta pancakes at Sunday brunch .
The bad news is that all this comes at a price: The stock trades at 33.3 times expected 2005 earnings. The good news is that the company has a number of properties under development. Using analysts' 2006 earnings estimates, the stock trades for a more modest 23.0 multiple.
Four Seasons is one of the largest luxury hotel chains in the world with 65 hotels in 29 countries. There are 20 projects under development, including one in my dream location, Bora Bora. If there was ever a dream investment conducting its business in dreamy locations, Four Seasons is it.
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