Description

Long Idea:
Fairmont Hotels & Resorts, Inc. (FHR) engages in the ownership and operation of hotels and resorts in the United States, Mexico, Bermuda, Barbados, the United Kingdom, Monaco, and the United Arab Emirates. The company also holds ownership interests in various properties located in the above. In addition, it owns real estate properties, as well as a vacation ownership product. As of May 11, 2005, FHR managed and franchised 82 luxury and first class hotels with approximately 32,000 guestrooms, and 37 Canadian hotels and resorts; and managed 46 luxury properties.

Basically, in 1879 the Canadian government gave $25 million in cash and 25 million acres of land in order to fund the construction of the Canadian Pacific Railroad. The Canadian Pacific Limited company is now Fairmont Hotels (after spinning off PanCanadian Energy – EnCana, Canadian Pacific Railroad, CP Ships, and Fording Canadian Coal Trust).

INVESTMENT THESIS
Fairmont’s assets net of liabilities should be worth approximately $3.8 billion or about $50/share. Stock currently trades around $32/share with 77 million shares outstanding.

BUSINESS MODEL
They've developed a five-step process for buying underperforming hotels, fixing them up, selling them, and maintaining long-term management contracts. The five steps are as follows

• Acquire a hotel and manage it in the short term to increase revenues;
• Rebrand the hotel as Fairmont or Delta;
• Invest some capital and fix it up;
• Aggressively manage the hotel to increase cash flows and operating margins; and
• Sell the hotel to Legacy Real Estate Investment Trust or a third party.

Legacy Real Estate Investment Trust is a publicly-traded hotel REIT. Fairmont owns almost 24% of Legacy. Legacy buys hotels from Fairmont, while Fairmont maintains long-term management contracts for those properties. Legacy pays Fairmont for hotels, and then Fairmont uses the money to buy more hotels. Besides Legacy, Fairmont has other investment and finance partners. One of them is Kingdom Hotels, a company controlled by Prince Alwaleed (the Citigroup shareholder). The Bank of Scotland also backs some of Fairmont’s endeavors (50% owner of FHR European Ventures LLP).

Fairmont directly and indirectly benefits shareholders via:

1. Share repurchase program - In 2004, Fairmont repurchased over 2.2 million shares for about $61 million. The current share repurchase authorization is for the company to buy back as many as 7,685,000 shares (or about 10% of the 77 million shares outstanding) by October 28, 2005.

2. Cash dividends - Fairmont's 12-cent dividend is small considering the stock is over $30, but it has increased every year since it started paying one in 2001. In December, 2004 the dividend was increased from 8 cents a year to 12 cents a year. Because Fairmont’s business is cyclical, it will not necessarily pay out a dividend every year. The current dividend represents only 12% of the company’s earnings.

3. Debt reduction - Total balance sheet debt dropped from $657.6 million on 12/31/03 to $402.1 million as of 12/31/04. That gives it one of the least indebted balance sheets in the industry. Debt-to-Total Capitalization stands at 17% (29% for Starwood, 31% for Hilton, and 50% for Host Marriott for comparison purposes).

Value Line:
Ratios Fairmont Hotel Industry S&P 500
Current Assets/Current Liabilities 1.29 0.90 1.70
LT Debt to Equity 0.24 1.06 0.63
Total Debt to Equity 0.24 1.15 0.79
4. Fairmont Hotels & Resorts, Inc. had a subsidiary called Fairmont Hotels, Inc. The Fairmont Hotels subsidiary is the company that manages all the Fairmont-branded hotels. Fairmont Hotels & Resorts previously owned only 83.5% of the Fairmont Hotels Inc. subsidiary. Last year, on

Catalyst