1. Archive

Four Seasons: building on a reputation

For $490 before tax, you can spend a night in the least expensive double room at the Four Seasons Hotel in Manhattan. Pretty pricey, true, but you can get your suit pressed in one hour, sleep on a custom-made mattress and enjoy countless other luxuries.

After all, this is the Four Seasons, rivaled for poshness only by the Ritz-Carlton and maybe a few other chains. At some of its resorts, sun-baking guests can even get a personal water spritzing once an hour.

But now that the Four Seasons company, based in Toronto, is selling its stock here _ it was listed on the Big Board last month _ you might want to spend that $490 on the 20 or so shares you would get at Friday's closing price of $24.

While the company would suffer in an economic downturn, just as other peddlers of luxury would do, the shares look very attractive. But be aware of one thing: Like the hotelier's rooms, the equity is far from cheap.

Four Seasons Hotels has come a long way. Like a lot of real estate companies in the early 1990s, it was burdened by high debt and occasional losses. (It also used some clever accounting techniques that put its performance in the best possible light.) But over the past three years, it has sold off its stake in properties in London, Toronto, Santa Barbara, Calif., and elsewhere, and turned itself into a relatively debt-free manager of properties owned by others.

To be sure, Four Seasons still holds minority interests in many of the hotels it runs. But the new emphasis on management means the company will most likely enjoy a better and more steady return on its investments, analysts say.

"They have gone from being a company with a huge amount of capital earning low returns to a company with a fraction of that capital earning high returns," said Joe Little, a portfolio manager for Duncan Ross Associates, which owns Four Seasons shares and is based in Vancouver, British Columbia. "And that is what the company will look like going forward."

The company's well-known name is also an asset, and not just because it translates into above-average occupancy and room rates. The brand name helps the company negotiate favorable long-term management contracts, said Neil Barsky, an analyst at Morgan Stanley, which helped underwrite Four Seasons in its U.S. offering. While the typical hotel management contract lasts five to 10 years, the average Four Seasons deal runs for 50 years, he said.

(Under its agreements, Four Seasons normally gets about 3 percent of gross revenue and in some cases an "incentive fee" of 5 percent to 20 percent of operating profits.)

The industry's prospects are bright, too. Luxury hotel bookings are up because of solid economic growth. What's more, many aging baby boomers are choosing better lodging, and a trend toward shorter vacations means that people are willing to spend more per night on accommodations.

On the supply side, few new luxury hotels are going up in the United States because it costs at least 30 percent more to build them than to buy them.

Stephen Rushmore of HVS International, a consulting firm in Mineola, N.Y., said that while luxury hotels will soon open in Asia and the Middle East, it will be several years before new ones open here. That means "a good long run for five-star hotels" now in operation, he said.

This demand-supply imbalance allowed luxury hotels here to increase room rates by 7 percent in 1996, said Frank Nardozza, the director for the national hospitality industry at KPMG Peat Marwick. He expects domestic rates to rise by at least 5 percent to 7 percent annually over the next two years. "In places like London, Paris, Hong Kong and other gateway destinations, there have been double-digit growth rates," he added.

If Four Seasons has its way, however, its earnings growth will not depend only on these economic conditions. The company, which now owns or manages 39 properties, has an ambitious plan to take on three to five new management contracts annually over the next several years. Because the company is small _ 1996 revenues were just $121-million _ each new contract may have a big impact on earnings, Barsky said.

In 1997, for example, Four Seasons will bring its version of luxury to Atlanta; Goa, India; Paris (the Hotel George V); and Bali. In 1998 it will start managing hotels or resorts in Cairo; Caracas, Venezuela; Las Vegas; and Scottsdale, Ariz.

"Within two years, George V and the Four Seasons Las Vegas alone will generate $7-million a year in management fees," Little said.

Prince Walid bin Talal of Saudi Arabia, who bought a 25 percent stake in the company in 1994 when it was on the ropes, has been solidly behind the company's expansion plan.

Using his own funds, Prince Walid often provides a good chunk of the money needed to either buy or build a luxury hotel, attracting other investors, and then usually arranging for Four Seasons to manage the property.

Prince Walid has a stake in properties to be run by Four Seasons in Cairo and Scottsdale, for example, and he owns outright the George V.

Many Wall Streeters agree that Four Seasons is strong, a belief that is reflected in its stock price.

Since the start of last year, for example, the Canadian shares are up 90 percent. And at Friday's close, the new American stock was trading at about 20 times next year's estimated earnings, at the upper end of the 15 percent to 20 percent by which many analysts believe the company's annual earnings will grow. (The Canadian and American stocks are not exchangeable, although both are of the same class of common share.)

Although some fans of the Four Seasons think its famed name should add a premium to its stock, many investors believe that shares are fully valued when they trade at multiples that are at or above their earnings-growth rates.

"I might be accumulating at this price, but I would not be aggressively picking up the stock," said Barbara Belch, a portfolio manager at Laketon Investment Management in Edmonton, Alberta. Belch is one of the analysts who believes that earnings may grow at 15 percent to 20 percent a year.

Moreover, three important management contracts are up for renewal within the next several years _ in Hong Kong; Taipei, Taiwan; and Bangkok, Thailand. No one is suggesting that Four Seasons will lose them, but the expirations point up a broader danger in the company's new role as manager: If a hotel's owners don't get the results they want from Four Seasons _ if its lavish approach, say, just is not working _ they may jettison the company. Management contracts often have cancellation clauses that take effect when business is bad.

And just as the hotelier's small size means that one new management contract may greatly improve earnings, one lost contract can similarly hurt earnings.

Also, an economic downturn would certainly cut into bookings at luxury hotels. While Four Seasons is diversified, with properties in 16 countries, any sharp regional decline would reduce its earnings.

And keep in mind that, while Four Seasons Hotels rolls out the red carpet for guests, it may be less hospitable to activist shareholders: Isadore Sharp, the company's chairman and co-founder, has locked up 67 percent of the voting power in his 15 percent of the company's shares.

Want your daiquiris really fresh?

How do high-end hotels, like the Four Seasons, try to lure you into the lap of luxury? Here is a sampling of their sometimes-odd efforts:

Hotel Inter-Continental, London. The master bed of the Royal Suite can accommodate 13 people.

Ritz-Carlton, Cancun, Mexico. It offers 120 varieties of tequila, served by a staff that takes a weeklong course in the liquor.

Victoria Jungfrau Grand Hotel, Interlaken, Switzerland. Guests have free use of a Jaguar, BMW or Range Rover for a day.

Ritz-Carlton, St. Thomas, Virgin Islands. Daiquiris are made from mangoes and bananas plucked from the hotel's trees shortly before preparation.

Hyatt Regency Cerromar, Dorado, Puerto Rico. At 1,776 feet _ 526 feet longer than the Empire State Building is high _ its freshwater swimming pool is the world's longest.

Millenium Hilton, New York. It not only has one of the city's few hotel indoor swimming pools, but its locker room offers guests a "suitmate" machine that dries swimsuits in seven seconds.