Fairmont Hotels & Resorts

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Overview

Earthquakes, floods, hurricanes and fires are nothing new for Fairmont Hotels & Resorts . The opening of the first Fairmont hotel, in 1907 in San Francisco, had been delayed for a year because of the great earthquake of 1906. In the past year, the Toronto-based group has been forced to cope with the devastation of Hurricane Fabian, which destroyed the roof of the newly renovated, 593-room Southampton Princess in Bermuda; forest fires in the Canadian Rockies; and the aftermath of the SARS outbreak in Canada--all of this on top of the general weak economy, terrorist alerts and war in Iraq that affected every hotel company.

"When it comes to the challenges that Fairmont has had in the past year, it's easier to talk about what hasn't happened to them," says

Irene Nattel

RBC Capital Markets

Despite the challenges, Nattel maintains that Fairmont is a solid stock and a solid company. "We gave Fairmont a healthy report," says Nattel. "Relative to their peers, they're doing a good job and have a good base of assets."

Fairmont, which is one of the largest luxury hotel management companies in North America, has been busy in the past year and a half snapping up properties and renovating new ones. In 2003, Fairmont bought management stakes in the Orchid in Hawaii and the Turnberry Isle Resort & Club in Florida, and purchased the remaining 50% stake in the stately Copley Plaza hotel in Boston, which has nearly completed an extensive renovation. In 2002, the Fairmont took over management (and re-branded) the Sonoma Inn Mission & Spa, as well as opened a new property in Dubai. The Southampton Princess was recently renovated, but repairs from Hurricane Fabian cost $9 million.

Despite SARS and the hurricanes, Fairmont still had a solid year. From the fourth quarter of 2002 to the fourth quarter of 2003, its revenue jumped from $590 million to $658 million. Its net income decreased from $92.5 million in 2002 to $50.7 million in 2003; the drop is largely due to an increase in operating expenses, from the numerous acquisitions, renovations and hurricane damage.

One challenge that Fairmont faces is brand recognition, and consumer awareness about what type of hotels the Fairmont manages. The brand name does not scream "luxury" the way Ritz-Carlton, a division of Marriott International , or Four Seasons Hotels does, but according to Fairmont's vice president of business development and strategy, Tom Storey, that's just fine.

"Fairmont is positioned above the pack of Sheratons and Hiltons, but just below luxury," says Storey. "There is about a $60 gap between a Sheraton and a Ritz-Carlton, and that's where we are."

Storey describes the appeal of a Fairmont hotel as being "authentically local." What he means is that most of the hotels in Fairmont's portfolio are over 100 years old, and a huge draw of the resorts is their natural surroundings. Half the reason to go to the Fairmont Banff Springs is for the beautiful surroundings, and Quebec's Chateau Frontenac is not just a hotel but also the city's landmark symbol.

"Fairmont is not a manager of towers in the sky," says Nattel. "The physical aspects of the properties are a big part of the resorts."

Storey says that Fairmont plans to open two to four new hotels a year, mostly in North America. Late last year, the company announced that groundbreaking for a Puerto Rico property would commence soon. Storey says the company will continue to focus on North American properties and the Far East, but has not ruled out other locations.

Fairmont's top moneymaking properties, known as the "Big Eleven Assets," contribute approximately 65%-70% of the company's overall EBITDA (earnings before interest, taxes, depreciation and amortization). Its top-earning properties are Banff Springs, the Fairmont Scottsdale Princess and the Fairmont Kea Lani Maui. Three key Canadian properties--Banff Springs, Chateau Lake Louise and Whistler--contributed about 20% of total EBITDA in 2003, while the two Hawaiian properties, the Kea Lani Maui and the Orchid, were expected to contribute 16%-17% of 2003 EBITDA.

One potential blip on Fairmont's radar is a new tax proposal by the Financial Accounting Standards Board (FASB), called FIN 46, that would require companies to consolidate earnings from companies in which they own a stake. Following its 1999 merger with the Canadian Pacific Hotels & Resort, Fairmont owns a 35% stake in the REIT (Real Estate Investment Trust) Legacy, which was spun out of Canadian Pacific in 1997.

Legacy's market capitalization is $485 million, and it has been a weak performer. The new proposal, which Fairmont announced during its recent fourth-quarter conference call, may force it to consolidate Legacy onto Fairmont's balance sheet. Largely based on that announcement, Goldman Sachs analyst Steven Kent downgraded Fairmont stock from "outperform" to "in-line/neutral" on Feb. 2, but industry consensus seems to be that it's too soon to see how (and if) the ruling would apply to hotels.

Kent's report details his concerns if Legacy is absorbed into Fairmont--namely, that Legacy stock has been a poor performer. "RevPAR, revenue, profit growth and return measures would all be depressed by the inclusion of this slower-growth operation," writes Kent. RevPar is revenue per available room, which is realized room rates multiplied by actual occupancy and it is how hotels benchmark their revenue. "In order to return to our bullish stance, we need to be reassured that the FASB ruling will not be applied to FHR's interest in Legacy," Kent writes.

If Legacy does not have to be absorbed into Fairmont, Goldman Sachs predicts a solid 2004 for Fairmont, despite the disasters and expenses of 2003. Kent points out that the hurricanes and fires were mainly one-time events, so the company is expected to recover.

"FHR should easily recover roughly $45 million in EBITDA in 2004," writes Kent. "With even just a modest acceleration in industry lodging trends elsewhere in FHR's portfolio, we expect to see significant RevPAR and margin improvements in 2004 for FHR as a standalone entity."

Hot Properties | Should You Buy This Stock? | Company Data

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Should You Buy This Stock?

At press time, Fairmont stock was trading at $25.31. Over the past year, its price has ranged from $19.07 to $28.30. Irene Nattel from RBC Capital Markets rates the stock "sector perform," which means it's expected to perform in line with the sector. She gives Fairmont a price target of $31.50, which means it's "at the high end of the trading range for ownership-focused lodging companies."

Like its main competitors--Four Seasons, Starwood Hotels & Resorts and Ritz-Carlton--Fairmont has been on a steady upswing since January 2003. The two largest shareholders of Fairmont stock are Janus Capital and T. Rowe Price, which own 5.1 million and 3.5 million shares, respectively. The analyst consensus on the stock is "hold."

Overview | Hot Properties | Company Data

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Company Data

2003 sales (millions): $691.4

One-year sales growth: 17.1%

2003 net income (millions): $50.7

One-year net income growth: (45.2%)

Price-to-earnings ratio (trailing 12-month): 40.82

Worldwide, RevPAR in the fourth quarter of 2003 rose 8.8% to $97.79.

ADR (average daily room rates) increased 11.7% to $184.27 from 2002 to 2003.

Worldwide occupancy was down 1.3% to 53.1% from 2002 to 2003.

Key Personnel

Chief executive officer: William R. Fatt

President and chief operating officer: Chris J. Cahill

Executive vice president and chief financial officer: M. Jerry Patava

Overview | Hot Properties | Should You Buy This Stock?