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Belmond Ltd. 10-K 2010

Table of Contents

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


 

FORM 10-K

 


 

(Mark One)

 

x  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the fiscal year ended December 31, 2009

 

OR

 

¨   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from                to               

 

Commission File Number 1-16017

 


 

ORIENT-EXPRESS HOTELS LTD.

(Exact name of registrant as specified in its charter)

 

Bermuda

 

98-0223493

(State or other jurisdiction of

 

(I.R.S. Employer

incorporation or organization)

 

Identification No.)

 

22 Victoria Street,

 Hamilton HM 12, Bermuda

(Address of principal executive offices)

 

Registrant’s telephone number, including area code: (441) 295-2244

 


 

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:

 

Title of each class

 

Name of each exchange
on which registered

 

 

 

Class A Common Shares, $0.01 par value each

 

New York Stock Exchange

Preferred Share Purchase Rights

 

New York Stock Exchange

 

SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: None.

 


 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes x  No ¨

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  Yes ¨  No x

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Act during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x  No ¨

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes ¨ No ¨

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. (Not applicable. See third paragraph under Item 1—Business on page 4.)

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company.  See definition of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Act. (Check one):

 

Large Accelerated Filer x

 

Accelerated Filer ¨

Non-Accelerated Filer ¨

 

Smaller reporting company ¨

(Do not check if a smaller reporting company)

 

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).  Yes ¨  No x

 

The aggregate market value of the Class A common shares held by non-affiliates of the registrant computed by reference to the closing price on June 30, 2009 (the last business day of the registrant’s second fiscal quarter in 2009) was approximately $647,000,000.

 

As of February 19, 2010, 90,796,005 class A common shares and 18,044,478 class B common shares of the registrant were outstanding.  All of the class B shares are owned by a subsidiary of the registrant (see Note 14(d) to the Financial Statements (Item 8)).

 


 

DOCUMENTS INCORPORATED BY REFERENCE:  None

 

 

 



Table of Contents

 

TABLE OF CONTENTS

 

 

 

 

Page

 

 

 

 

PART I

Item 1.

Business

4

 

Item 1A.

Risk Factors

25

 

Item 1B.

Unresolved Staff Comments

46

 

Item 2.

Properties

47

 

Item 3.

Legal Proceedings

47

 

Item 4.

Submission of Matters to a Vote of Security Holders

48

 

 

 

 

PART II

Item 5.

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

49

 

Item 6.

Selected Financial Data

50

 

Item 7.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

52

 

Item 7A.

Quantitative and Qualitative Disclosures About Market Risk

94

 

Item 8.

Financial Statements and Supplementary Data

96

 

Item 9.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

167

 

Item 9A.

Controls and Procedures

167

 

Item 9B.

Other Information

169

 

 

 

 

PART III

Item 10.

Directors, Executive Officers and Corporate Governance

170

 

Item 11.

Executive Compensation

176

 

Item 12.

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

181

 

Item 13.

Certain Relationships and Related Transactions and Director Independence

187

 

Item 14.

Principal Accounting Fees and Services

189

 

 

 

 

PART IV

Item 15.

Exhibits and Financial Statement Schedules

191

 

 

Signatures

193

 

 

Exhibit Index

195

 

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FORWARD-LOOKING STATEMENTS

 

Forward-looking statements concerning the operations, performance, financial condition, plans and prospects of Orient-Express Hotels Ltd. and its subsidiaries are based on the current expectations, assessments and assumptions of management, are not historical facts, and are subject to various risks and uncertainties.

 

Forward-looking statements can be identified by the fact that they do not relate only to historic or current facts, and often use words such as “anticipate”, “target”, “expect”, “estimate”, “intend”, “plan”, “goal”, “believe” or other words of similar meaning.

 

Actual results could differ materially from those anticipated in the forward-looking statements due to a number of factors, including those described in Item 1—Business, Item 1A—Risk Factors, Item 3—Legal Proceedings, Item 7—Management’s Discussion and Analysis, Item 7A—Quantitative and Qualitative Disclosures about Market Risk, and Item 12—Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters below.

 

Investors are cautioned not to place undue reliance on these forward-looking statements which are not guarantees of future performance.  Orient-Express Hotels Ltd. undertakes no obligation to update or revise publicly any forward-looking statement, whether as a result of new information, future events or otherwise.

 

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PART I

 

ITEM 1.                                                     Business

 

Orient-Express Hotels Ltd. (the “Company” and, together with its subsidiaries, “OEH”) is incorporated in the Islands of Bermuda and is a “foreign private issuer” as defined in Rule 3b-4 promulgated by the U.S. Securities and Exchange Commission (“SEC”) under the U.S. Securities Exchange Act of 1934 (the “1934 Act”) and in SEC Rule 405 under the U.S. Securities Act of 1933.  As a result, it is eligible to file its annual reports pursuant to Section 13 of the 1934 Act on Form 20-F (in lieu of Form 10-K) and to file its interim reports on Form 6-K (in lieu of Forms 10-Q and 8-K).  However, the Company elects to file its annual and interim reports on Forms 10-K, 10-Q and 8-K, including any instructions therein that relate specifically to foreign private issuers.

 

These reports and amendments to them are available free of charge on the internet website of the Company as soon as reasonably practicable after they are filed electronically with the SEC.  The internet website address is http://www.orient-express.com.  Unless specifically noted, information on the OEH website is not incorporated by reference into this Form 10-K annual report.

 

Pursuant to SEC Rule 3a12-3 under the 1934 Act regarding foreign private issuers, the proxy solicitations of the Company are not subject to the disclosure and procedural requirements of SEC Regulation 14A under the 1934 Act, and transactions in the Company’s equity securities by its officers, directors and significant shareholders are exempt from the reporting and liability provisions of Section 16 of the 1934 Act.

 

Introduction

 

OEH is a hotel and travel company focused on the luxury end of the leisure market with exposure to both mature and emerging national economies.  The Company’s predecessor began acquiring hotels in 1976 and organized the Company in 1995.  OEH currently owns or part-owns 50 properties (all of which it manages), including the two hotels in Sicily purchased in January 2010, consisting of 41 highly individual deluxe hotels, one stand-alone restaurant, six tourist trains and two river/canal cruise businesses.  These are located in 24 countries worldwide.  OEH acquires or manages only very distinctive properties in areas of outstanding cultural, historic or recreational interest in order to provide luxury lifestyle experiences for the discerning traveller.  OEH has also been active in the development of for-sale residences adjoining some of its hotels, although OEH’s current commitments in this activity are a relatively small part of its business.

 

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The locations of OEH’s 50 properties are shown in the map on page 3, where they number 46 because the Hotel Cipriani and Palazzo Vendramin are contiguous in Venice, the Hotel Splendido and Splendido Mare are both in Portofino, and three separate safari lodges operate as a unit in Botswana.  These seven properties bring the total to 50.

 

Hotels and restaurants represent the largest segment of OEH’s business, contributing 87% of revenue in 2009, 88% in 2008 and 81% in 2007.  Tourist trains and cruises accounted for 13% of revenue in 2009, 15% in 2008 and 15% in 2007.  Property development activities accounted for the remaining revenue in each year.  Property revenue in 2008 was negative because of a change of accounting treatment, as explained in Note 1(h) to the Financial Statements (Item 8 below).

 

OEH’s worldwide portfolio of hotels currently consists of 3,595 individual guest rooms and multiple-room suites, each known as a “key”.  Hotels owned by OEH in 2009 achieved an average daily room rate (“ADR”) of $407 (2008—$442) and a revenue per available room (“RevPAR”) of $204 (2008—$266).  Approximately 70% of OEH’s customers are leisure travellers, with approximately 40% of customers in 2009 originating from North America, 40% from Europe and the remaining 20% from elsewhere in the world.

 

Revenue, earnings and identifiable assets of OEH in 2009, 2008 and 2007 for its business segments and geographic areas are presented in Note 19 to the Financial Statements.

 

Owned Hotels—Europe

 

Italy

 

The Hotel Cipriani and Palazzo Vendramin—95 keys—in Venice were built for the most part in the 1950s and are located on about five acres (part on long-term lease) on Giudecca Island across from the Piazza San Marco which is accessed by a free private boat service.  Most of the rooms have views over the Venetian lagoon.  Features include fine cuisine in three indoor and outdoor restaurants, gardens and terraces encompassing an Olympic-sized swimming pool, a tennis court, a spa and a large banquet and meeting facility situated in an historic refurbished warehouse.  In 2008-2009, 16 standard rooms were converted to 11 suites.

 

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The Hotel Splendido and Splendido Mare—80 keys—overlook picturesque Portofino harbor on the Italian Riviera.  Set on four acres, the main hotel was built in 1901 and is surrounded by gardens and terraces which include a swimming pool and tennis court.  There are two open-air and enclosed restaurants as well as banquet/meeting rooms, and a shuttle bus linking the main hotel with Splendido Mare on the harbor below.

 

The Villa San Michele—46 keys—is located in Fiesole, a short distance from Florence.  Originally built as a monastery in the 15th century with a façade attributed to Michelangelo, it has stunning views over historic Florence and the Arno River Valley.  OEH has remodelled and expanded the guest accommodation to luxury standards, including the addition of a swimming pool.  A shuttle bus service is provided into Florence.  The property occupies ten acres.  The Villa San Michele also operates for hotel guests the five-bedroom main house of the Capannelle wine estate in the Chianti region owned by James Sherwood.  See Item 13—Certain Relationships and Related Transactions and Director Independence below.

 

The Hotel Caruso Belvedere—48 keys—in Ravello is located on three hill-top acres overlooking the Amalfi coast near Naples and ancient Roman and Greek archaeological sites such as Pompeii and Paestum.  Once a nobleman’s palace, parts of the buildings date back to the 11th century.  Operated as a hotel for many years, OEH rebuilt the property after acquiring it and reopened in 2005.  Amenities include two restaurants, an outdoor swimming pool, spa and extensive gardens.

 

In January 2010, OEH completed the purchase of two hotels in Taormina, Sicily.  These are the Grand Hotel Timeo—83 keys—which is widely considered the most luxurious hotel in Taormina, and the Villa Sant’Andrea—78 keys—which is a nearby hotel on the city’s Bay of Mazzaro with a private beach.  The hotels are linked by a guest shuttle service.  OEH plans to undertake a refurbishment program to upgrade both properties over three consecutive winter closures, starting with the 2009-2010 winter for reopening in May 2010.

 

With panoramic views of Mount Etna and the Gulf of Naxos from its main terrace, Grand Hotel Timeo is located in the center of Taormina next to the second century Greek Theater.  Built in 1873 on a total site of about ten acres, the hotel features a restaurant serving regional Sicilian specialties, an outdoor swimming pool and fitness center, and banqueting and conference facilities, all surrounded by six acres of parkland.

 

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Built in 1830 in Taormina’s seaside district, Villa Sant’Andrea has the atmosphere of a private villa set in lush gardens with a private beach, a total site of about two acres, with many of the guest rooms and the hotel’s seafood restaurant looking out at the Calabrian coast.  Subject to obtaining local planning permission, up to 12 keys and a swimming pool may be added to the hotel.

 

All of these Italian properties operate seasonally, closing for varying periods during the winter.

 

Portugal

 

Reid’s Palace—163 keys—is a famous hotel on the island of Madeira, situated on ten acres of semitropical gardens on a cliff top above the sea and the bay of Funchal, the main port city.  Opened in 1891, the hotel has four restaurants and banquet/meeting facilities.  Leisure and sports amenities include fresh and sea water swimming pools, a third tide-filled pool, tennis courts, ocean water sports, a spa and access to two championship golf courses.  It has year-round appeal to European leisure travellers, serving both winter escapes to the sun and regular summer holidays.  For-sale residential units may be built in the future on the grounds of the hotel.

 

In June 2009, OEH sold to a private Portuguese investor the Lapa Palace—109 keys—located in the embassy district of Lisbon.  See Note 2 to the Financial Statements.

 

Elsewhere in Europe

 

Hôtel de la Cité—61 keys—is located in the central square of the beautiful walled medieval town of Carcassonne, France near Toulouse.  Opened in 1909, the hotel incorporates one of the 50 watch towers in Carcassonne’s ancient fortifications and features two restaurants, gardens, a swimming pool and a nearby conference center, altogether occupying two acres.  One of the restaurants has been awarded one star for fine dining by the influential Michelin Guide.  The hotel also operates a canal barge on the Canal du Midi providing day excursions for guests.

 

OEH owns La Residencia—67 keys—located in the charming village of Deià on the rugged northwest coast of the island of Mallorca, Spain in the Mediterranean.  Mallorca is a popular European tourist destination throughout the year.  The core of La Residencia was originally created from two adjoining 16th and 17th century country houses set on a hillside site of 30 acres.  The hotel features three restaurants including the gastronomic El Olivio, as well as two large outdoor swimming pools, tennis courts and a spa with an indoor pool.

 

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Le Manoir aux Quat’Saisons—32 keys—is located in Oxfordshire, England about an hour’s drive west of London.  The main part of the hotel is a 16th century manor house set in 27 acres of gardens.  The property was developed by Raymond Blanc, one of Britain’s famous chef-patrons, and the hotel’s restaurant has two stars in the Michelin Guide.  Mr. Blanc has given a long-term commitment to remain the chef at the hotel.

 

OEH owns a 93.5% interest in the Grand Hotel Europe—301 keys—in St. Petersburg, Russia.  Originally built in 1875, the hotel occupies one side of an entire city block on the fashionable Nevsky Prospect in the heart of the city near the Russian Museum, Shostakovich Philharmonia and other tourist and cultural attractions as well as the business center.  There are five restaurants on the premises, popular with locals and visitors alike, as well as a grand ballroom, meeting facilities, a health club and spa and several retail shops.  OEH recently finished the renovation of ten luxury historic suites reflecting the rich history of the hotel and city.  A further 20 terrace rooms are planned for renovation in the near term. The minority interest is owned by the City of St. Petersburg.

 

Owned Hotels—North America

 

United States

 

Charleston Place—435 keys—is located in the heart of historic Charleston, South Carolina, a popular destination for tourists and business meetings.  Opened in 1986, the hotel has two restaurants, extensive banqueting and conference space including a grand ballroom, a fitness center with spa and swimming pool, and a shopping arcade of 25 retail outlets leased to unaffiliated parties.  The hotel also owns the adjacent historic Riviera Theater remodelled as additional conference space and retail shops.

 

While OEH has only a 19.9% ownership interest in Charleston Place, OEH manages the property under an exclusive long-term contract, receives interest on partnership loans which it assumed at the time of its original investment and on other loans made since then, and provides other forms of subordinated financial support.  As a result, at the end of 2008, OEH determined under U.S. generally accepted accounting principles to consolidate the assets and liabilities of the hotel in OEH’s consolidated balance sheet at December 31, 2008, and since then has consolidated the hotel’s results in OEH’s statements of consolidated operations and cash flows.  Accordingly, OEH no longer accounts for Charleston Place among its “Hotel Management Interests” described below.  See Note 3 to the Financial Statements regarding this change of accounting treatment.

 

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Keswick Hall—48 keys—is located in the rolling countryside of central Virginia, near Charlottesville.  Originally a private home dating from 1912, it is popular for weekend breaks and business meetings and, with the adjacent Keswick Club, features a spa and fitness center, tennis courts, three swimming pools and an Arnold Palmer-designed championship golf course.  The total site occupies 600 acres including vacant land around the golf course being sold by OEH in parcels for private residential development.  See “Property Development” below.

 

The Inn at Perry Cabin—80 keys—was built in 1812 as a country inn located in St. Michaels, Maryland on the eastern shore of Chesapeake Bay.  Set on 25 waterfront acres that include an outdoor swimming pool as well as boating and fishing on the Bay, it is an attractive conference and vacation destination, particularly for guests from the Washington, D.C. area.  OEH has completed a major renovation and expansion of the hotel, including a new conference facility and a spa.  Vacant available land may be developed as residences in the future.

 

OEH owns El Encanto—77 keys—in Santa Barbara, California.  The hotel is located in the hills above the restored Santa Barbara Mission, with views out to the Pacific Ocean.  Built in 1913 on a seven-acre site, the guest rooms are in cottages and low rise buildings spread throughout mature gardens with a swimming pool and tennis court.  OEH closed this hotel in late 2006 for significant renovation, including the addition of 14 keys, a new main building with spa, restaurant and meeting facilities, and a new pool and fitness center.  Due to the current economic downturn in the United States and subject to identifying a joint venture partner, OEH has rescheduled the renovation for completion in 2012.

 

In October 2009, OEH sold to third party buyers the Windsor Court—322 keys—located in the central business district of New Orleans.  See Note 2 to the Financial Statements.

 

Caribbean

 

La Samanna—83 keys—is located on the island of St. Martin in the French West Indies.  Built in 1973, the hotel consists of several buildings on ten acres of land along a 4,000-foot beach.  Amenities include two restaurants, two swimming pools, a spa, tennis courts, fitness and conference centers, boating and ocean water sports, and extensive gardens.  The hotel is open most of the year, seasonally closing during the autumn months.

 

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OEH owns about 48 acres of additional land adjoining La Samanna on both the French and Dutch sides of St. Martin, which it is developing as for-sale residential villas and apartments.  See “Property Development” below.  Unsold furnished villas provide additional room stock for the hotel.

 

Mexico

 

OEH owns the Maroma Resort and Spa—66 keys—on Mexico’s Riviera Maya on the Caribbean coast of the Yucatan Peninsula, about 30 miles south of Cancun.  The resort opened in 1995 and has 25 acres of land along a 750-foot beach with the Cozumel barrier reef offshore where guests may fish, snorkel and scuba-dive.  Important Mayan archaeological sites are also nearby.  Rooms are arranged in low-rise villas and there are three restaurants, tennis courts and extensive spa facilities.

 

In addition, OEH purchased in 2007 a 28-acre tract adjacent to Maroma on which it plans to build and sell private villas in the future.  See “Property Development” below.

 

OEH owns the Casa de Sierra Nevada—37 keys—a luxury resort in the colonial town of San Miguel de Allende.  Opened in 1952, the hotel consists of nine Spanish colonial buildings built in the 16th and 18th centuries.  OEH has renovated the hotel, including the two restaurants, and has built new suites as well as a pool, spa and garden area.  In addition to the nine owned buildings, the hotel leases two buildings for administration.  The total site is approximately two acres.  OEH also owns a nearby cooking school and retail shop operated in conjunction with the hotel.  During 2008, OEH acquired the 20% minority interest it did not previously own.

 

Owned Hotels—Rest of the World

 

South America

 

Built in the 1920s on a three-acre site facing Copacabana Beach near the central business district of Rio de Janeiro, Brazil, the Copacabana Palace—243 keys—is a famous hotel in South America and features two fine-dining restaurants, spacious function and banqueting rooms including the hotel’s refurbished former casino rooms with space for up to 1,200 persons, a 500-seat theater, a large swimming pool, spa and fitness center, and a roof-top tennis court and pool.  In 2009, OEH completed transformation of a number of suites into a combination of suites and double rooms, thereby increasing the key count, and opened a new “destination bar”.

 

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In 2007, OEH acquired a 50% interest in a company that owns beachfront land in Buzios, Brazil, a popular upmarket resort town about 100 miles east of Rio de Janeiro.  If necessary permits were issued, OEH had planned to acquire the entire property and build a small hotel and for-sale villas.  In February 2009, the Municipality of Buzios commenced a compulsory purchase process at fair value, with a view to turning the land into a public park. Accordingly, OEH’s development plan is in abeyance pending the outcome of this process.

 

In October 2007, OEH commenced operation of Hotel das Cataratas—193 keys—beside the famous Iguacu Falls in Brazil on the border with Argentina, having been awarded a 20-year lease by the Brazilian government.  It is the only hotel in the national park surrounding the falls, a World Heritage site.  First opened in 1958 on about four acres, the hotel has two restaurants, conference facilities, a swimming pool and tennis court, and tropical gardens looking out at the falls.  OEH has extensively renovated and upgraded the property in phases, with the last 64 rooms and the addition of a spa scheduled for completion in 2010.

 

The Miraflores Park Hotel—82 keys—is located in the fashionable Miraflores residential district of Lima, Peru surrounded by parkland and looking out at the Pacific Ocean, yet near the commercial and cultural center of the city.  Opened in 1997, the hotel has two restaurants, a large ballroom, rooftop outdoor pool, health and beauty facilities and a business center for guests, and occupies about one acre of land.

 

Southern Africa

 

The Mount Nelson Hotel—201 keys—in Cape Town, South Africa is a famous historic property opened in 1899.  With beautiful gardens and pools, it stands just below Table Mountain and is within walking distance of the main business, civic and cultural center of the city.  The hotel has a ballroom, two swimming pools, tennis courts, and a fitness center and spa, all situated on ten acres of grounds.  Expansion is planned through incorporation into the hotel of adjoining residential properties owned by OEH.

 

The Westcliff Hotel—117 keys—is the only garden hotel in Johannesburg, South Africa, opened in 1998 and situated on six hillside acres with views over the city’s zoo and parkland.  Laid out in village style, its resort amenities include two swimming pools, a tennis court and a health club.  The hotel attracts business guests because of its proximity to the city center.  A banquet and conference center occupies part of adjacent expansion land.

 

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OEH’s African safari experience consists of three separate game-viewing lodges in Botswana called Khwai River Lodge, Eagle Island Camp and Savute Elephant Camp—39 keys in total.  Established in 1971, OEH leases the lodge sites in the Okavango River delta and nearby game reserves, where African wildlife can be observed from open safari vehicles or boats.  Each camp has 12 or 15 twin-bedded deluxe tents under thatched roofs, and guests travel between the camps by light aircraft. Boating, fishing, hiking and swimming are offered at the various sites.

 

Australia

 

The Observatory Hotel—96 keys—is in Sydney within walking distance of the central business district.  This hotel opened in 1993 and has two restaurant and lounge areas, extensive meeting and banquet rooms, a spa and health club with indoor swimming pool, and a large parking garage on a site of about one acre.  There is also access to a nearby tennis court.

 

In January 2010, OEH completed the sale of Lilianfels Blue Mountains—85 keys—in the Blue Mountains National Park west of Sydney to an undisclosed buyer.  The hotel has been designated as held for sale and its results have been accounted for as discontinued operations.  See Note 2 to the Financial Statements.

 

French Polynesia

 

Bora Bora Lagoon Resort and Spa—76 keys—opened in 1993 and has bungalows situated over the lagoon water plus additional beach and garden bungalows, all built in traditional Tahitian style on a 12-acre site.  Guests dine in two restaurants and enjoy extensive water sports and tennis.  A recent renovation program included a new swimming pool, spa and conference facility.  On some of the resort’s available vacant land, private residential villas for sale can be developed.  As previously reported, the hotel has been designated as held for sale and its results have been accounted for as discontinued operations.  See Note 2 to the Financial Statements. In early February 2010, the hotel sustained extensive damage when it was hit by a cyclone and is not expected to re-open before September 2010. It is covered under OEH’s global insurance program.

 

Asia

 

In July 2006, OEH acquired the Pansea group of six deluxe hotels in Southeast Asia described below, each built and decorated in traditional local style.

 

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Napasai—55 keys—is located on its own beach on the north side of Koh Samui island of Thailand in the Gulf of Siam.  It originally opened in 2004 and features two restaurants, tennis courts, a swimming pool, a spa and water sports such as diving and snorkeling in the nearby coral reef.  The guest rooms are arranged in seaview cottages on a total site of about 40 acres on which 14 private villas have been built with vacant land available to develop and sell additional villas.  See “Property Development” below.  The hotel rents many of the existing villas to its guests on a revenue-sharing basis with the owners.

 

On Bali in Indonesia are two long-term leasehold properties, Jimbaran Puri Bali—64 keys—and Ubud Hanging Gardens—38 keys.  Jimbaran Puri Bali originally occupied four beachfront acres on the south coast of the island.  Guest rooms are situated in cottages and, in addition to ocean water sports, the hotel features two restaurants and a swimming pool.  In 2007, OEH acquired a long lease of about three acres of vacant land beside the hotel and built 22 one- and two-bedroom thatched villas, each with a plunge pool, that opened in 2009.

 

Ubud Hanging Gardens is located on terraces on about seven steep hillside acres above the Ayung River gorge in the interior of Bali.  The hotel opened in 2005 and offers two restaurants, a swimming pool and spa, and a free shuttle bus to the nearby town of Ubud, a cultural and arts center.  Each key has its own private plunge pool.

 

La Résidence d’Angkor—62 keys—opened in 2002 and is situated in walled gardens in Siem Reap, Cambodia.  The hotel occupies a site of about two acres under long-term lease.  The ancient Temples of Angkor, the principal tourist attraction in the area, are near the hotel which has an indoor/outdoor restaurant and swimming pool.  OEH added eight suites and a spa to this property in 2009.

 

Built in 1920, The Governor’s Residence—48 keys—in the embassy district of Rangoon, Burma (Myanmar) was originally the official home of one of the Burmese state governors in the 1920s.  It is a teak two-storey mansion surrounded by verandas overlooking lotus gardens, a long-term leased site of about two acres that opened as a hotel in 1997.  It includes a restaurant and swimming pool.  OEH originally owned a 66% interest in the property and acquired the minority interest in 2009.  See Note 4 to the Financial Statements. The hotel was damaged by the cyclone that struck Burma in May 2008 and was closed for three months for repairs.

 

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In Luang Prabang, the ancient capital of Laos, OEH owns a 69% interest in La Résidence Phou Vao—34 keys.  The hotel opened in 2001 and occupies about eight hillside acres under long-term lease.  Guest rooms are in four two-storey buildings surrounded by gardens that include a restaurant, spa and swimming pool.

 

Hotel Management Interests

 

Through a 50%/50% joint venture with a Spanish investment company, OEH owns and manages the famous Hotel Ritz—167 keys—in central Madrid near the financial district, Spanish parliament and many of the city’s well known tourist attractions.  Opened in 1910, the hotel has four spacious conference and banqueting suites, an indoor restaurant and the popular Ritz Terrace restaurant outdoors in the gardens.  OEH and its 50% partner renovated the public areas of the hotel and have plans for future refurbishment of the guest rooms including the addition of four keys.

 

OEH has a 50%/50% joint venture with local investors in Peru which, under exclusive management of OEH, operates the following four hotels under long-term renewable leases.

 

The Hotel Monasterio—126 keys—is located in the ancient Inca capital of Cuzco, an important tourist destination in Peru.  The hotel was originally built as a Spanish monastery in the 16th century, converted to hotel use in 1995, and upgraded since then.  The deluxe guest rooms and two restaurants are arranged around open-air cloisters.  Because of Cuzco’s high altitude, specially oxygenated ventilation has been added to some of the refurbished rooms.  The three acre site includes a vacant convent adjoining the hotel which OEH and its joint venture partners are currently rebuilding as 56 additional keys scheduled to be opened in 2011 as Palacio Nazarenas.

 

The Machu Picchu Sanctuary Lodge—31 keys—is the only hotel at the famous mountaintop Inca ruins at Machu Picchu.  All of the rooms have been refurbished to a high standard.  The joint venture also has a lease on seven acres at the foot of the ruins, close to the town where tourists arrive by train, for possible future expansion.

 

The Peru hotel joint venture of OEH built and opened in April 2008 a small luxury bungalow hotel called Las Casitas del Colca—20 keys—on 57 acres north of Arequipa near the 11,000 foot high rim of Colca Canyon.  The hotel features individual casitas with plunge pools, an intimate main dining room and a swimming pool and spa.  Guests enjoy tours of the scenic canyon famous for its giant condors.

 

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In December 2009, the Peru hotel joint venture acquired Hotel Rio Sagrado—23 keys—in the Sacred Valley of the Incas between Cusco and Machu Picchu.  Opened in April 2009, this new rustic hotel has 21 suites and two villas, a spa and extensive gardens beside the Urubamba River on a site of about six acres set against an imposing mountain backdrop.  The Sacred Valley is a popular part of holiday itineraries in Peru, and a station on OEH’s PeruRail train service is a short distance from the hotel.

 

Neither Machu Picchu Sanctuary Lodge nor Hotel Rio Sagrado was damaged by heavy rains in January 2010 in the Machu Picchu region of Peru, as described below under “Tourist Trains and Cruises” regarding OEH’s PeruRail joint venture, although guest numbers are currently reduced because of disruption to train services.

 

As noted under “Owned Hotels” above, OEH no longer accounts for Charleston Place in Charleston, South Carolina among its “Hotel Management Interests”.

 

Restaurants

 

OEH owns ‘21’ Club, the famous landmark restaurant at 21 West 52nd Street in mid-town Manhattan in New York City.  Originally a speakeasy during Prohibition in the 1920s, this restaurant is open to the public, occupies three brownstone buildings and features fine American cuisine.  It serves à la carte meals in the original bar restaurant and a separate dining room upstairs, and also has ten banqueting rooms used for functions, including the famous secret wine cellar.

 

OEH entered into agreements in November 2007 with the New York Public Library to acquire its Donnell Library branch site adjacent to ‘21’ Club and to construct a mixed use hotel and residential development.  In February 2009, in light of current and anticipated future economic conditions, OEH decided to suspend further payments under the agreements, as they had been amended in December 2008.  In July 2009, OEH and the New York Public Library signed agreements to spread future payments on this purchase over the next 24 months.  In addition to the $7,000,000 that OEH had already paid, OEH paid $9,000,000 upon execution of the agreements, to be followed by 16 monthly payments of $500,000 each commencing in February 2010 (the first of which has been made), and final payments of $6,000,000 and $29,000,000 in June 2011.  In the event OEH elects not to close the transaction, the final payment of $29,000,000 will not be due to the Library, in which event OEH would be required to write off its investment including its capitalized costs and associated fees.  OEH has agreed to give the Library security on unencumbered villas at La Samanna to secure the payments.

 

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OEH re-established in 2003 the famous La Cabaña steak house in Buenos Aires dating from the 1930s.  In 2009, OEH contracted to sell this stand-alone restaurant with completion scheduled by March 2010.  The restaurant has been designated as held for sale and its results have been accounted for as discontinued operations.  See Note 2 to the Financial Statements.

 

Tourist Trains and Cruises

 

OEH’s principal European tourist trains, called the Venice Simplon-Orient-Express, operate in two parts in a regularly scheduled overnight service between London and Venice and on short excursions in southern England.  OEH owns 30 railway cars originally used on historic “Orient-Express” and other famous European trains.  All have been refurbished in original 1920s/1930s décor and meet modern safety standards.  The services are marketed as a continuation of the Orient-Express trains of pre-World War II years.  One train is based in Great Britain composed entirely of Pullman cars with a capacity for up to 250 passengers.  The other train is based on the European Continent made up of Compagnie Internationale des Wagons-Lits et du Tourisme sleeping cars and day coaches with capacity for up to 180 passengers.  They operate once or twice weekly principally between London and Venice from March to November each year via Paris, Zurich and Innsbruck on a scenic route through the Alps.  Passengers travel under the English Channel by coach on the Eurotunnel shuttle train.  Occasional trips are also made from time to time to Rome, Prague, Budapest and Istanbul and other European destinations.

 

The eleven British Pullman dining cars of Venice Simplon-Orient-Express with capacity up to 220 passengers operate all year, originating out of London on short excursions to places of historic or scenic interest in southern England, including some overnight trips when passengers stay at local hotels.  Both the British and Continental trains are available for private charter.

 

The Northern Belle tourist train offers day trips and charter service principally in the north of England.  It builds on the success of OEH’s British Pullman business, which focuses on the south of England around London.  This train consists of six dining cars elegantly decorated to be reminiscent of old British “Belle” trains of the 1930s, plus related service cars, and can carry up to 250 passengers.  Full course meals are served on board and passengers stay in local hotels on overnight itineraries.

 

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OEH owns the Royal Scotsman luxury tourist train, having purchased in 2007 the 50% interest it did not previously own.  Founded in 1985, the Royal Scotsman is composed of nine Edwardian-style cars accommodating up to 36 passengers.  Each compartment in the six sleeping cars has a private bathroom.  Operating from April to October each year, the train travels on itineraries of up to seven nights through the Scottish countryside affording passengers the opportunity to visit clan castles, historic battlegrounds, famous Scotch whiskey distilleries and other points of interest.

 

PeruRail is a 50%/50% joint venture between OEH and Peruvian partners formed to operate part of the state-owned railways in Peru under a 30-year franchise awarded in 1999 and extendable every five years, upon the joint venture’s application, up to 30 additional years.  The joint venture pays the government a fee related to traffic levels which can be partially offset against investment in track improvements.  The 70-mile Cuzco-Machu Picchu line carries mainly tourists visiting the famous Inca ruins, the principal means of access because there is no convenient road, as well as local passenger traffic.  In 2009, other carriers began to operate on this line in competition with PeruRail for the first time.  A second rail line runs from Cuzco to Matarani on the Pacific Ocean (via Arequipa) and to Puno on Lake Titicaca, and principally serves freight traffic.  The Cuzco-Machu Picchu line connects three of OEH’s Peruvian hotels allowing inclusive tours served by OEH’s Hiram Bingham luxury tourist train with capacity up to 84 passengers.  OEH also operates a deluxe daytime tourist train called the Andean Explorer on the Cuzco-Puno route through the High Andes mountains.

 

In January 2010, heavy rains in the Machu Picchu region of Peru caused flooding and landslides that severely damaged PeruRail’s tracks on the Cuzco-Machu Picchu line. Train services have been suspended on part of the line, and the joint venture’s engineers currently estimate the damaged track will be repaired by early April, subject to favorable weather conditions. Management expects the cost of repairs and the disruption to rail operations to be covered by the joint venture’s insurance.

 

The Eastern & Oriental Express in Southeast Asia travels up to one round trip each week between Singapore, Kuala Lumpur and Bangkok.  The journey lasts between 48 and 72 hours each way and includes two or three nights on board and side trips to Penang in Malaysia and the River Kwai in Thailand.  Some overnight trips are also made from Bangkok to Chiang Mai and elsewhere in Thailand and to Vientiane, Laos.  Originally built in 1970, the 24 cars were substantially rebuilt to an elegant oriental style of décor and fitted with modern facilities such as air-conditioning and private bathrooms.  The train is made up of sleeping cars, three restaurant cars, a bar car and an open air observation car and can carry up to 130 passengers.  The Eastern & Oriental Express is available for charter by private groups.  OEH manages the train exclusively and has a 25% shareholding in the owning company.

 

OEH owns and operates a deluxe river cruiseship on the Irrawaddy River in central Burma, or Myanmar, called the Road To Mandalay.  The ship was a Rhine River cruiser built in 1964 which OEH bought and refurbished.  It has 43 air-conditioned

 

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cabins with private bathrooms, spacious restaurant and lounge areas and a canopied sun deck with swimming pool.  The ship travels between Mandalay and Pagan up to eight times each month and carries up to 82 passengers who enjoy sightseeing along the river and guided shore excursions to places of historic interest.  Five to eight night itineraries are offered, including airfare to and from the ship and hotel accommodation in Rangoon.  OEH also operates occasional cruises to different destinations, such as to Bhamo in the north of the country close to the China border.  The ship does not operate in the hottest summer months and occasionally when the water level of the Irrawaddy River falls too low due to lack of rainfall.  After suffering major damage in the cyclone that struck Burma in May 2008, the ship was rebuilt and resumed service in 2009 with a reduced number of cabins and an improved onboard experience.

 

OEH owns five luxury river and canal boats operating as Afloat in France in Burgundy, Provence and other rural regions of France.  In 2007, OEH acquired the 50% interest in this business that it did not previously own.  The boats accommodate between six and 12 passengers each in double berth compartments with private bathrooms, and some have small plunge pools on deck.  They operate seasonally between April and October on three to six night itineraries with guests dining on board or in nearby restaurants.  Shore excursions are organized each day.

 

Property Development

 

OEH has been pursuing opportunities to develop the real estate in its portfolio as private residences.  In addition to expansion by adding guest rooms and other facilities at the hotels, certain of OEH’s properties have adjacent vacant land suitable for construction of deluxe for-sale residential villas and apartments, as noted above under the various “Owned Hotels” headings.  In some cases, these residences may be incorporated into existing hotel operations.  OEH’s future strategy is to develop only residential projects that have been substantially pre-sold.

 

Among existing developments, OEH has completed construction of Porto Cupecoy on the Dutch side of St. Martin, on 12 acres of land adjacent to La Samanna hotel.  The development consists of 182 apartments and 35,000 square feet of retail and commercial space and a marina with for-sale pleasure craft and mega-yacht boat slips.  The apartments range from 750 to 3,000 square feet in size.  At December 31, 2009, approximately 51% of the apartments at Porto Cupecoy had been pre-sold.  In addition, OEH expects to sell the commercial space and marina.  OEH also has planning permission to build a further 60 units and a casino on an additional parcel of Porto Cupecoy land, although no works are scheduled in the near term.

 

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On the French side of St. Martin, OEH recently completed the Villas at La Samanna, the first phase of a multi-phase development of up to 37 private homes on 36 acres.  The villas consist of eight large homes in three or four bedroom configurations each with a private swimming pool and access to hotel amenities and services as well as a hotel sponsored rental program.  Marketing of these units is underway and, in December 2009, OEH entered into a deferred sale agreement on four of the villas under which a third party has the option to acquire the villas within the next three years.  The remaining four villas are currently being leased in the hotel’s rental program while they are being marketed for sale by the local affiliate of Christies International.

 

At Keswick Hall in Virginia, OEH is continuing to sell residential home sites on the Keswick Estate adjacent to the hotel and its Keswick Club championship golf course.  Subdivision of the land including roads and other infrastructure has been completed and two model homes constructed.  Most purchasers buy vacant lots and build their own custom designed homes with their own architects and contractors subject to the community’s development guidelines.  The famous architect Robert A.M. Stern has recently designed five model homes for the development.  Forty-six of the 87 plots in the Keswick Estate development have been sold through December 31, 2009.

 

When OEH acquired the Pansea hotels group in Southeast Asia in 2006, development of 14 private villas was already underway on the 40-acre site of Napasai on Koh Samui in Thailand.  Two villas were sold in 2009 and two remain for sale, and up to 40 more may be built in the future.

 

In 2007, OEH completed the purchase of about 28 acres of vacant land beside its Maroma Resort and Spa on the Riviera Maya in Mexico.  OEH has the opportunity to build up to 20 locally designed private residential villas, a project that would only be commenced on a substantially pre-sold basis.

 

Other hotels owned by OEH with suitable vacant land include Reids Palace in Madeira and Inn at Perry Cabin on the eastern shore of Maryland.  Development may include sale of residences and, in some cases, ongoing management as integral parts of the adjacent hotels or, at Keswick Hall, membership in the hotel’s golf club.  The for-sale residences are marketed by local on-site sales personnel of OEH and through third-party real estate agents with listings locally and abroad.

 

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Management Strategies

 

As the foregoing indicates, OEH has a global mix of hotel and other deluxe travel products that are geographically diverse and appeal to the high-end leisure market, reflecting an important management strategy.  As a result, leisure customers produce about 80% of annual revenue and 70% of the room nights, while corporate/business travelers account for the rest.  OEH’s properties are distinctive as well as luxurious and tend to attract guests prepared to pay higher rates for the travel experiences OEH offers compared to its competitors.

 

OEH benefits from long-term trends and developments favorably impacting the global hotel, travel and leisure markets, including growth trends in the luxury hotel market in many parts of the world, increased travel and leisure spending by consumers, favorable demographic trends in relevant age and income brackets of U.S., European and other populations, and increased online travel bookings.  These long-term trends suffered setbacks in recent years due to the present downturns in many national economies, the shock of terrorist attacks, regional conflicts in Iraq, Afghanistan and other parts of the world, and the threatened SARS and swine flu epidemics.  Management believes, however, that the public’s confidence in international travel and demand for luxury hotel and tourist products will be sustained over the long term.

 

Commencing in 2008, OEH implemented a series of initiatives geared to position OEH to navigate the then impending economic downturn.  These included reduction in fixed and variable overheads, reduction in maintenance capital expenditures to a targeted 2% of revenue, suspension of certain development projects, improved management of working capital, and suspension of cash dividends on the class A common shares.  OEH expects a large part of the savings in fixed and variable overheads will continue as the economic climate recovers.

 

During 2009, management began to implement successfully a strategy to reduce OEH’s long-term debt position.  A number of non-core assets not considered key to OEH’s portfolio of unique, individual and high valued properties were identified, and management undertook to sell these non-core assets in a measured timescale with the primary purpose of de-leveraging OEH’s balance sheet.  During 2009, OEH completed sales of Lapa Palace in Lisbon and Windsor Court in New Orleans and contracted to sell in early 2010 Lilianfels Blue Mountains in Australia and La Cabana restaurant in Buenos Aires.  See Note 2 to the Financial Statements.  Related debt secured by the

 

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properties sold has been removed from the OEH balance sheet.  In addition, OEH’s developments of residential real estate described under “Property Development” above are being progressively sold over the medium term, and are expected to generate substantial net cash proceeds which also can be used to repay debt.  See Item 7—Management Discussion and Analysis.

 

OEH management plans to grow the business in the long term by:

 

·                                          increasing RevPAR and other earnings at its established properties and recent acquisitions,

 

·                                          expanding existing hotels where land or space is available and potential investment returns are relatively high,

 

·                                          developing vacant land as residences for sale,

 

·                                          increasing the utilization of its tourist trains and cruises to add trips, and

 

·                                          acquiring additional distinctive luxury properties throughout the world that have attractive potential investment returns.

 

Factors in OEH’s evaluation of a potential acquisition include the uniqueness and deluxe nature of the property, attractions and experiences for guests in the vicinity, acceptability of financial returns, upside potential through pricing, expansion or improved marketing, limitations on nearby competition, and convenient access.  Expansion at existing properties by adding rooms and facilities such as spas and conference space can provide attractive investment returns because incremental operating costs are low.

 

OEH plans to continue owning or part-owning and managing most OEH properties, although OEH will consider contracts to manage properties without part-ownership which meet its criteria in order to facilitate entry into new markets or to preserve capital investment.  Ownership or part-ownership encourages OEH to develop the distinctive local character of its properties and allows it to benefit from current cash flow and potential future gains on sale.  Self-management or management with equity interest has enabled OEH to capture the economic benefits otherwise shared with a third-party manager, to control the operations, quality and expansion of the hotels, and to use its experience with price changes, expansions and renovations to improve cash flow and enhance asset values.

 

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Many of OEH’s individual properties, such as the Hotel Cipriani, Copacabana Palace and ‘21’ Club, have distinctive local character and brand identity.  Management believes that discerning travellers will choose an individually styled property in preference to a chain brand.  OEH links its properties together through the “Orient-Express” name which originated with the legendary luxury European train in the late 19th and early 20th centuries and which is recognizable worldwide and synonymous with sophisticated travel and refined elegance.

 

Commencing in 2009, OEH initiated a new brand strategy expected to increase the visibility of the “Orient-Express” brand globally throughout OEH’s business segments and product offerings.  This initiative is intended to position OEH as a collection of deluxe travel and hospitality experiences, each of which would be individually branded and focused on authentic local product and service.  Management is hopeful that this new brand strategy will provide OEH with public relations and commercial advantages, increase efficiencies and the effectiveness of the OEH portfolio, grow revenue and repeat business from customers, and be attractive to property owners and potential joint venture partners.

 

As indicated above under “Property Development”, OEH is continuing its deluxe for-sale residential development activities.  Management anticipates future profits both from sales of land and completed units and, in certain cases, from ongoing management for the owners as integral parts of the adjacent hotels.

 

Marketing, Sales and Public Relations

 

OEH’s sales and marketing function is primarily based upon direct sales (prioritizing electronic channels such as the internet and strategic travel agents and tour operators), cross-selling to customers, and public relations.  OEH has a corporate sales force of about 90 persons in 11 locations.  These include key account sales offices in New York, Sao Paulo, London, Paris, Cologne, Milan, Madrid, Moscow, Tokyo and Singapore, and reservations offices in Charleston (South Carolina), London and Singapore.  OEH also has local sales representatives responsible for the hotels where they are based.  OEH’s sales staff train preferred travel industry and distribution partners, negotiate with group and corporate account representatives, and conduct marketing initiatives such as direct mailings, e-commerce, trade show participation and event sponsorship.  OEH participates in a number of partner programs, such as “American Express Centurion” and “Virtuoso”.  OEH offers its top travel agents and other industry partners free participation in OEH’s “Bellini Club” providing training courses, special commissions and sales support for all OEH products worldwide.

 

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Websites and e-marketing are important direct sales and branding tools for OEH.  Through its principal website (www.orient-express.com) and the websites of the individual properties, OEH provides extensive descriptions and images of the properties and guest activities in English and other languages.  Direct online booking capability is provided as well as affiliate programs for online partners.  OEH operates other internet travel portals that direct customers to OEH’s properties, and works with other selected electronic distribution channels.

 

Because repeat customers appreciate the consistent quality of OEH’s hotels, trains, cruises and restaurants, an important part of management’s strategy is to promote OEH properties through various cross-selling efforts.  These include the inhouse “Orient-Express Traveller” directory, worldwide preferred travel agent programs, and direct communications with customers.  OEH sells luxury souvenir goods branded with the names of its travel products.

 

OEH’s marketing strategy also focuses on public relations, which management believes is a highly cost-effective marketing tool for luxury properties.  Because of the unique nature of its properties, guests are more likely to hear about OEH’s hotels and tours through word-of-mouth or published articles rather than through general advertising.  OEH has an in-house public relations office in London and representatives in 14 countries worldwide, including contracts with third-party public relations firms, to promote its properties through targeted newspapers, general interest and travel magazines, and broadcast, online and other media.

 

Industry Awards

 

OEH has gained a worldwide reputation for quality and service in the luxury segment of the leisure and business travel markets.  Over the years, OEH’s properties have won numerous national and international awards given by consumer or trade publications such as Conde Nast Traveller, Travel & Leisure and Tatler and private subscription newsletters such as Andrew Harper’s Hideaway Report, or industry bodies such as the American Automobile Association.  The awards are based on opinion polls of the publications’ readers or the professional opinion of journalists or panels of experts.  The awards are believed to influence consumer choice and are therefore highly prized.

 

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Competition

 

Some of OEH’s properties are located in areas where there are numerous competitors, some of which have greater resources than OEH has.  Competition for guests in the hospitality industry is based generally on the convenience of location, the quality of the property and services offered, room rates and menu prices, the range and quality of food services and amenities offered, types of cuisine, and reputation and name recognition.

 

OEH’s strategy is to acquire only hotels which have special locations and distinctive character.  Many are in areas with unique local history or high entry barriers because of zoning restrictions.  OEH builds its competitive advantage by offering high quality service and cuisine, usually with a local flavor.  Typically, therefore, OEH competes by providing a special combination of location, character, cuisine, service and experiential activities rather than relying on price competition.

 

OEH’s luxury tourist trains have no direct competitors.  Other trains exist on similar routes, including new services in 2009 on the Cusco-Machu Picchu line of PeruRail, but management believes OEH’s trains and onboard service are unique and of such superior quality that guests consider an OEH train journey more as a luxury experience and an end in itself rather than as a means of transport.

 

Employees

 

OEH currently employs about 7,100 persons, about 2,500 of whom are represented by labor unions.  Approximately 6,150 persons are employed in the hotels and restaurants, 850 in the trains and cruises business, and 100 in central administration and other activities.  Management believes that OEH’s ongoing labor relations are satisfactory.

 

Government Regulation

 

OEH and its properties are subject to numerous laws and government regulations such as those relating to the preparation and sale of food and beverages, liquor service, health and safety of premises, employee relationships, environmental matters, and planning and zoning rules. Management believes that OEH is in compliance in all material respects with relevant laws and regulations with respect to its business.

 

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ITEM 1A.                                            Risk Factors

 

OEH’s business is subject to various risks, including those described below.  Investors should carefully consider the “Risk Factors” below.  These are separated into three general groups:

 

·                  risks of OEH’s business,

 

·                  risks that relate to OEH’s financial condition and results of operations, and

 

·                  risks of investing in class A common shares.

 

The risks described below are only those that management considers to be the most significant.  There may be additional risks that management currently regards as less material or that are not presently known.

 

If any of these risks occurs, OEH’s business, prospects, financial condition, results of operations or cash flows could be materially adversely affected.  Any of the risks stated below may have a material adverse effect, which means the risk may have one or more of these effects.  In that case, the market price of the class A common shares could decline.

 

This report also contains forward looking statements that involve risks and uncertainties.  See “Forward Looking Statements” above.  OEH’s actual results could differ materially from those anticipated in these forward looking statements as a result of certain factors, including the risks described below and elsewhere in this report.

 

Risks of OEH’s Business

 

OEH’s operations are subject to adverse factors generally encountered in the lodging, hospitality and travel industries.

 

Besides the specific conditions discussed in the risk factors below, these adverse factors include:

 

·                  cyclical downturns arising from changes in general and local economic conditions and business activities, which impact levels of travel and demand for travel products,

 

·                  recurrence of rising travel costs such as increased air travel fares and higher fuel costs, and reduced capacities of airlines and other transport services,

 

·                  political instability of the governments of some countries where OEH’s properties are located or operate, resulting in depressed demand,

 

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·                  less disposable income of consumers and the travelling public,

 

·                  dependence on varying levels of tourism, business travel and corporate entertainment,

 

·                  changes in popular travel patterns,

 

·                  competition from other hotels and leisure time activities,

 

·                  periodic local oversupply of guest accommodation, which may adversely affect occupancy and actual rates achieved,

 

·                  increases in operating costs at OEH’s properties due to inflation and other factors which may not be offset by increased revenues, and changes in costs of materials,

 

·                  regional and local economic and political conditions affecting market demand for travel products, including recessions, civil disorder, and acts or threats of terrorism,

 

·                  expropriation or nationalization of properties by foreign governments, and limitations on repatriation of local earnings,

 

·                  foreign exchange rate movements impacting OEH’s revenues and costs,

 

·                  adverse weather conditions or destructive forces like fire or flooding that sometimes result in closure of properties,

 

·                  reduction in domestic or international travel and demand for OEH’s properties due to actual or threatened acts of terrorism or war, or the outbreak of contagious disease, and heightened travel security measures instituted in response to these events,

 

·                  travel-related accidents or industrial action, increased transportation and fuel costs, and natural disasters interfering with travel, and

 

·                  seasonality, in that many of OEH’s hotels and tourist trains are located in the northern hemisphere where they operate at low revenue or close during the winter months.

 

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The effects of many of these factors vary among OEH’s hotels and other properties because of their geographic diversity.

 

For example, civil unrest in Burma in September 2007 resulted in reservation cancellations at The Governor’s Residence and Road To Mandalay at the beginning of the seasonal high demand period for those properties.  Bookings were recovering but suffered a new setback when the hotel and ship were damaged by a cyclone hitting Burma in May 2008.

 

Also, as a result of the terrorist attacks in the United States in September 2001 and the subsequent military actions in Afghanistan and Iraq, international, regional and even domestic travel was disrupted and public concerns about travel safety increased significantly.  Demand for most of OEH’s properties declined substantially in the latter part of 2001 and in 2002. Further acts of terrorism or a military action, or the threat of either, could again reduce leisure and business travel, thereby adversely affecting OEH’s results.

 

The currently weakened economies of North America, Europe and other regions and the recent disruption of financial markets in various parts of the world have resulted in RevPAR declines at most of OEH’s properties in 2009 and in shorter lead times for reservations because of customers’ economic uncertainty.  Shorter booking lead times were also experienced in the 2001-2002 period.  As a result, OEH’s ability to forecast operating results and cash flows has been reduced.  These factors also affected OEH’s liquidity outlook.  See “Risks Relating to OEH’s Financial Condition and Results of Operations’ below.

 

If revenue decreases at OEH’s properties, its expenses may not decrease at the same rate, thereby adversely affecting OEH’s profitability and cash flow.

 

Ownership and operation of OEH’s properties involve many relatively fixed expenses such as personnel costs, interest, rent, property taxes, insurance and utilities.  If revenue declines when demand weakens, OEH may not be able to reduce these expenses to the same degree to preserve profitability.  While OEH did reduce many overhead expenses in late 2008 and 2009 during the current economic downturn in many countries, its operating margins and cash flow declined as revenue fell.

 

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The hospitality industry is highly competitive, both for customers and for acquisitions of new properties.

 

Some of OEH’s properties are located in areas where there are numerous competitors seeking to attract customers, particularly in city centers. Competitive factors in the hospitality industry include:

 

·                  convenience of location,

 

·                  the quality of the property and services offered,

 

·                  room rates and menu prices,

 

·                  the range and quality of food services and amenities offered,

 

·                  types of cuisine, and

 

·                  reputation and name recognition.

 

Demographic, geographic or other changes in one or more of OEH’s markets could impact the convenience or desirability of its hotels and restaurants, and so could adversely affect their operations.

 

Also, new or existing competitors could significantly lower rates or offer greater conveniences, services or amenities, or significantly expand, improve or introduce new facilities in the markets in which OEH operates.  For example, new passenger rail services have recently started to operate on the Cusco-Machu Picchu line of PeruRail for the first time in direct competition, which may reduce PeruRail’s profitability.  As another example, largely because of new hotel competition in Bora Bora as well as high cost structures, OEH decided in late 2007 to dispose of Bora Bora Lagoon Resort.

 

OEH competes for hotel and restaurant acquisition opportunities with others who may have greater financial resources.  These competitors may be prepared to accept a higher level of financial risk than OEH can prudently manage.  This competition may have the effect of reducing the number of suitable investment opportunities offered to OEH and increasing its acquisition costs because the bargaining power of property owners seeking to sell or to enter into management agreements is increased.

 

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The hospitality industry is heavily regulated, including with respect to food and beverage sales, employee relations, development and construction, and environmental matters, and compliance with these laws could reduce profitability of properties that OEH owns or manages.

 

OEH and its various properties are subject to numerous laws and government regulations, including those relating to the preparation and sale of food and beverages, liquor service, and health and safety of premises.  The properties are also subject to laws governing OEH’s relationship with employees in such areas as minimum wage and maximum working hours, overtime, working conditions, hiring and firing employees and work permits.

 

The success of expanding existing properties depends upon obtaining necessary building permits or zoning variances from local authorities.  Failure to obtain or delay in obtaining these permits could adversely affect OEH’s strategy of increasing revenues and earnings through expansion of existing properties.

 

OEH is also subject to U.S. and foreign laws and regulations relating to the environment and the handling of hazardous substances that may impose or create significant potential environmental liabilities, even in situations where the environmental problem or violation occurred on a property before OEH acquired it.  Existing environmental laws and regulations may be revised or new laws and regulations related to global climate change, air quality or other environmental and health concerns may be adopted or become applicable to OEH.

 

OEH’s acquisition, expansion and development strategy may be less successful than expected and, therefore, its growth may be limited.

 

Management intends to increase OEH’s revenues and earnings in the long term through acquisition of new properties and expansion of existing properties.  The ability to pursue new growth opportunities successfully will depend on management’s ability to:

 

·                  identify properties suitable for acquisition and expansion,

 

·                  negotiate purchases or construction on commercially reasonable terms,

 

·                  obtain the necessary financing and government permits,

 

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·                  build on schedule and with minimum disruption to guests, and

 

·                  integrate new properties into OEH’s operations.

 

Also, the acquisition of properties in new locations may present operating and marketing challenges that are different from those encountered in OEH’s existing locations.  OEH can give you no assurance that management will succeed in this growth strategy, in particular in the face of the current global economic uncertainty.

 

OEH plans to develop new properties in the future.  New project development is subject to such adverse factors as:

 

·                  site deterioration after acquisition,

 

·                  inability to obtain necessary government permits,

 

·                  inclement weather,

 

·                  labor or material shortages,

 

·                  work stoppages,

 

·                  availability of equity funding, construction finance and mortgage loans,

 

·                  weak economic environment before, during or after development,

 

·                  claims and disputes between OEH and other contracting parties,

 

·                  untimely opening,

 

·                  high start-up costs, and

 

·                  weak initial market acceptance of a new property.

 

For example, El Encanto in Santa Barbara was originally closed for extensive renovations in late 2006, with an expected reopening in 2008.  However, because of changes in rebuilding plans, delays in obtaining government permits, a slower pace of construction than initially expected and difficulty in obtaining financing in the current economic climate, reopening of the hotel has been delayed at least until 2012.

 

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As another example, due to the current weak economic conditions in the United States, including the problems in the credit and real estate markets, OEH has been unable at this time to obtain suitable financing and/or equity partners for its New York hotel development project adjoining the ‘21’ Club.  The purchase of the development site may be deferred until 2011, and OEH has negotiated the terms under which it may terminate its obligations to complete the purchase, in which event OEH would be required to write off its investment including capitalized costs and associated fees.

 

OEH may be unable to obtain the necessary additional capital to finance the growth of its business.

 

The acquisition, expansion and development of OEH’s properties, as well as the ongoing renovations, refurbishments and improvements required to maintain or upgrade those properties, are capital intensive.  The availability of future borrowings and access to equity capital markets to fund these acquisitions, expansions and projects depend on prevailing market conditions and the acceptability of financing terms on offer.  OEH can give no assurance that future borrowings or equity financing will be available to OEH, or available on acceptable terms, in an amount sufficient to fund its needs. Future equity financings may be dilutive to the existing holders of common shares.  Future debt financings may require restrictive covenants that would limit OEH’s flexibility in operating its business.  See also “Risks Relating to OEH’s Financial Condition and Results of Operations” below.

 

OEH’s operations may be adversely affected by extreme weather conditions and the impact of natural disasters, and insurance may not fully cover these and other risks.

 

OEH operates properties in a variety of locales, each of which is subject to local weather patterns affecting the properties and customer travel.  As OEH’s revenues are dependent on the revenues of individual properties, extreme weather conditions from time to time can have a major adverse impact upon individual properties or particular regions.  For example, hurricanes in August and October 2005 caused damage to the Windsor Court Hotel in New Orleans and Maroma Resort and Spa on Mexico’s Yucatan Peninsula, resulting in temporary closure of the hotels for repairs.  Similarly, The Governor’s Residence and Road to Manadalay cruiseship, both in Burma, were damaged by a cyclone in May 2008 and Bora Bora Lagoon Resort by a cyclone in February 2010.

 

OEH carries property, loss of earnings, liability and other kinds of insurance in amounts management deems reasonably adequate, but damages may exceed the insurance limits or be outside the scope of coverage.  Also, insurance against some risks may be unavailable to OEH on commercially reasonable terms, requiring OEH to self insure against possible loss.

 

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If the relationships between OEH and its employees were to deteriorate, OEH may be faced with labor shortages or stoppages, which would adversely affect the ability to operate its facilities.

 

OEH’s relations with its employees in various countries could deteriorate due to disputes related to, among other things, wage or benefit levels, working conditions or management’s response to changes in government regulation of workers and the workplace.  Operations rely heavily on employees’ providing a high level of personal service, and any labor shortage or stoppage caused by poor relations with employees, including unionized labor, could adversely affect the ability to provide those services, which could reduce occupancy and room revenue and even tarnish OEH’s reputation.

 

OEH’s plans to expand existing properties, develop new ones and build residential units for sale at some properties are subject to project cost, completion and resale risks.

 

Successful new project development depends on timely completion within budget and satisfactory market conditions. Risks that could affect a project include:

 

·                  construction delays or cost overruns that may increase project costs,

 

·                  delay or denial of zoning, occupancy and other required government permits and authorizations,

 

·                  write-off of development costs incurred for projects that are not pursued to completion,

 

·                  natural disasters such as earthquakes, hurricanes, floods or fires that could adversely impact a project,

 

·                  defects in design or construction that may result in additional costs to remedy, or that require all or a portion of a property to be closed during the period needed to rectify the situation,

 

·                  inability to raise capital to fund a project because of poor economic or financial conditions,

 

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·                  claims and disputes between OEH and other contracting parties resulting in delay, monetary loss or project termination,

 

·                  government restrictions on the nature or size of a project or timing of completion, or on the ownership of completed units such as by foreign nationals, and

 

·                  changes in market conditions for residences, such as credit availability and pricing terms, or oversupply that may affect OEH’s ability to sell residential units at a profit or at price levels originally anticipated.

 

Occurrence of any of these risks could adversely affect the profitability of planned expansions and new developments.

 

OEH’s owned hotels and restaurants are subject to risks generally incidental to the ownership of commercial real estate and often beyond its control.

 

OEH’s owned hotels and restaurants are subject to risks generally incidental to the ownership of commercial real estate and often beyond our control.  These include:

 

·                  fluctuating values of commercial real estate as an investment, and potential value impairments,

 

·                  changes in national, regional and local economic and political conditions,

 

·                  changes in interest rates and the availability, cost and terms of financing,

 

·                  the impact of present or future government legislation and regulation (including environmental laws),

 

·                  the ongoing need for capital improvements to maintain or upgrade properties,

 

·                  changes in property taxes and operating expenses,

 

·                  the potential for uninsured or underinsured losses, and

 

·                  limited ability to reduce the relatively high fixed costs of operating owned commercial real estate if revenue declines.

 

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For example, OEH has undertaken a program to sell owned properties that are non-core to its business, as well as continue selling its developed for-sale residential real estate.  In an unfavorable commercial real estate market, OEH may be unable to sell properties at values OEH is seeking, particularly during the current economic downturn and weakness in credit markets, or sell them at the pace OEH has planned.

 

Loss or infringement of OEH’s brand names could adversely affect its business.

 

In the competitive hotel and leisure industry in which OEH operates, trade names and trademarks are important in the marketing, promotion and revenue generation of OEH’s properties. OEH has a large number of trade names and trademarks, and expends resources each year on their surveillance, registration and protection.  OEH’s future growth is dependent in part on increasing and developing its brand identities.  The loss, dilution or infringement of any of OEH’s brand identities could have an adverse effect on its business, results of operations and financial condition.

 

Some OEH properties are geographically concentrated in countries where national economic downturns, political events or other changing local conditions beyond OEH’s control could disproportionately affect OEH’s business.

 

While OEH’s geographic diversification in 24 countries lessens the dependence of its results of operations on any particular region, OEH owns eight hotels in Italy and OEH owns one hotel in Peru and its 50/50 joint ventures in Peru own a further four hotels as well as PeruRail.  Due to this concentration of properties in these two countries, OEH’s business is more exposed to national events or conditions there than other countries where OEH operates.

 

OEH may be unable to manage effectively the risks associated with its joint venture investments, which may adversely impact the operations of those joint ventures.

 

Six of OEH’s hotels and two of its tourist trains are owned by joint venture companies in which OEH has an investment of 50% or less and shares control of at least some aspects of their businesses, such as expenditure for capital improvements.  These joint venture investments of OEH involve risks somewhat different from 100% ownership because OEH’s partners

 

·                  may be unable to meet their capital contribution obligations,

 

·                  may have business interests inconsistent with those of OEH or act contrary to OEH’s objectives and policies,

 

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·                  may cause properties to incur unplanned liabilities, or

 

·                  may take actions that impair OEH’s operation of the business.

 

If any of these possibilities occurs, OEH’s operations could be adversely affected because it may have limited ability to rectify resulting problems within the joint venture and even to dispose of its joint venture investment.  Disputes with joint venture partners may result in litigation costly to OEH.

 

Risks Relating to OEH’s Financial Condition

and Results of Operations

 

The current uncertainty in financial markets and the sustained weakening of the economies of many countries has adversely affected OEH’s financial condition and results of operations and could do so in the future.

 

Financial markets in the United States, Europe and Asia have experienced significant disruption recently, including, among other things, volatility in securities prices and diminished liquidity and credit availability.  Furthermore, the economies of the United States and other countries have slowed down, leading to economic downturns which could, among other things, reduce the amounts persons and businesses spend on travel, hotels, dining and entertainment.  OEH has experienced pressure on pricing, reduced occupancy at its properties, and fewer customers from traditional markets for OEH’s hotels and other travel products.  Largely as a result, OEH’s consolidated revenue of $502,838,000 and earnings from operations of $51,583,000 in 2008 declined to $456,956,000 and $19,699,000, respectively, in 2009.

 

OEH cannot predict the likely duration or severity of the current disruption in financial markets or the general economic uncertainty in the United States and many parts of the world.  However, if weakened economic conditions continue or worsen, they could decrease OEH’s future revenue, profitability and cash flow from operations which could adversely impact its liquidity and financial condition, including OEH’s ability to comply with financial covenants in its loan facilities.

 

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The financial uncertainty and economic weakening identified in the previous Risk Factor could adversely impact OEH’s liquidity and financial condition, in particular OEH’s ability to raise additional funds for its cash requirements for working capital, commitments and debt service.

 

During the 12 months ending December 31, 2010, OEH has approximately $30,000,000 of scheduled debt repayments including capital lease payments.  Additionally at December 31, 2009, there was $26,614,000 of Porto Cupecoy indebtedness that matures as sales of apartments are made.  In 2011, OEH has approximately $456,800,000 of scheduled debt repayments including capital lease payments.

 

OEH’s capital commitments at December 31, 2009 amounted to $54,627,000, including $43,000,000 related to the purchase of land and a building adjoining ‘21’ Club from the New York Public Library.  In July 2009, OEH and the Library signed agreements to spread and secure future payments on this purchase over 24 months.  In addition to the $7,000,000 already paid, OEH paid $9,000,000 upon execution of the agreements, to be followed by 16 monthly payments of $500,000 each commencing in February 2010, and final payments of $6,000,000 and $29,000,000 in June 2011.  In the event OEH elects not to close the transaction, the final payment of $29,000,000 will not be due to the Library.

 

Other capital commitments at December 31, 2009 included $9,300,000 to complete construction of the Porto Cupecoy development, which is being funded by a short-term bank loan and from deposits received from buyers of sold units, and a conditional commitment of $117,000,000 to purchase two hotels in Sicily, which was completed and funded in January 2010 by assumption of existing and new indebtedness relating to the hotels and part of the proceeds of the second share offering referred to in the next paragraph.

 

In May 2009, OEH completed a public offering through underwriters in the United States of 25,875,000 newly issued class A common shares of the Company, and in January 2010 completed an additional public offering through underwriters in the U.S. of 13,800,000 class A common shares of the Company.  OEH has been using the net proceeds from these offerings, totaling approximated $272,000,000, primarily for debt reduction, general corporate purposes and to fund part of the purchase price of the two Sicilian hotels.

 

OEH expects to fund its working capital requirements, debt service and capital expenditure commitments for the foreseeable future from operating cash flow, available committed borrowing facilities, the refinancing of maturing debt with new borrowing facilities, the proceeds of sales of non-core assets and developed real estate, and the proceeds from the two recent class A share sales.

 

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However, OEH can give you no assurance that, in the current economic and financial environment, additional sources of financing for its unfunded commitments will be available on commercially acceptable terms, or available at all, or that OEH will be able to refinance maturing debt or to reschedule loan repayments or capital commitments, or that other cash-saving steps management may take to enhance OEH’s liquidity and capital position will bridge any shortfall.  If additional sources of financing are unavailable, including because of possible future breach of loan financial covenants, OEH may be unable to fund its cash requirements for working capital, commitments and debt service.

 

Covenants in OEH’s financing agreements could be breached or could limit management’s discretion in operating OEH’s businesses, causing OEH to make less advantageous business decisions; OEH’s indebtedness is collateralized by substantially all of its properties.

 

OEH’s financing agreements with several commercial bank lenders contain covenants that include limits on additional debt collateralized by mortgaged properties, limits on property liens and limits on mergers and asset sales, and financial covenants requiring maintenance of minimum net worth amounts or a minimum debt service coverage, or establishing a maximum debt to equity ratio or a maximum loan to collateral value ratio.  These covenants may limit OEH’s flexibility in operating properties securing these agreements.  Indebtedness is also collateralized by substantially all of OEH’s properties. Future financing agreements may contain similar provisions and covenants or even more restrictive ones.  If OEH fails to comply with the restrictions in present or future financing agreements, a default may occur.  A default could allow the creditors to accelerate the related debt as well as any other debt to which a cross-acceleration or cross-default provision applies.  A default could also allow the creditors to foreclose on the properties collateralizing the debt.

 

Management is in regular discussions with OEH’s bankers regarding funding requirements and to ensure continued compliance with the financial covenants applicable to OEH in its existing loan facilities.  At December 31, 2009, OEH was in compliance with all financial covenants, although the Hotel Ritz, Madrid, 50% owned by OEH, was out of compliance with a debt service coverage ratio in its first mortgage loan facility which is non-recourse to and not credit-supported by OEH or its joint venture partner in that hotel.  OEH and its partner continue to service the debt and are discussing with the lender how to bring the hotel back into compliance.

 

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OEH recognizes that, in the current economic climate, there is an enhanced risk of a covenant breach if weak trading conditions lead to a deterioration of its results and the costs of implementing remedial steps reduce OEH’s earnings in any given period.  If current economic conditions, including the volatility recently experienced in foreign exchange and global debt markets, continue or worsen, management believes there is heightened risk that OEH could breach certain financial covenants that apply to it.

 

OEH’s liquidity would be adversely affected if a covenant breach occurred in a material loan facility and OEH was unable to agree with its bankers how the particular financial covenant should be amended or how the breach could be cured.  Management expects to take pro active steps to meet with OEH’s bankers to seek an amendment to any specific financial covenant if management believed that it was likely that the covenant would be breached because of adverse trading conditions or incurrence of additional costs.  OEH can give no assurance, however, that its loan facility lenders would agree to modify any affected covenant, which could impact OEH’s ability to fund its cash requirements for working capital, commitments and debt service and could cause an event of default under any affected loan facility.

 

OEH’s substantial indebtedness could adversely affect its financial health.

 

OEH has a large amount of debt in its capital structure and may incur additional debt from time to time.  As of December 31, 2009, OEH’s consolidated long-term indebtedness was $811,734,000 (including the current portion).  Additionally there was $6,757,000 of debt related to discontinued operations.  This substantial indebtedness could:

 

·                  require OEH to dedicate much of its cash flow from operations to debt service payments, and so reduce the availability of cash flow to fund working capital, capital expenditures, product and service development and other general corporate purposes,

 

·                  limit OEH’s ability to obtain additional financing for its business,

 

·                  increase OEH’s vulnerability to adverse economic and industry conditions, including the seasonality of some of OEH’s activities, or

 

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·                  limit OEH’s flexibility in planning for, or reacting to, changes in its business and industry as well as the economy generally.

 

OEH must also repay or refinance its indebtedness in the future.  Although OEH may seek to refinance its indebtedness, OEH may be unable to obtain refinancing on satisfactory terms, in particular because of the current economic uncertainty in debt markets.  OEH’s failure to repay indebtedness when due may result in a default under that indebtedness and cause cross-defaults under other OEH indebtedness.

 

Increases in prevailing interest rates may increase OEH’s interest payment obligations.

 

After taking into account OEH’s fixed interest rate swaps, approximately 44% of OEH’s consolidated long-term debt at December 31, 2009 accrued interest that fluctuates with prevailing interest rates, so that any rate increases may increase OEH’s interest payment obligations.  From time to time, OEH enters into hedging transactions in order to manage its floating interest rate exposure, but OEH can give no assurance that those hedges will lessen the impact on OEH of rising interest rates.  At December 31, 2009, approximately 56% of OEH’s long-term debt was subject to fixed interest rate swaps.

 

Fluctuations in foreign currency exchange rates may have a material adverse effect on OEH’s financial statements and/or operating margins.

 

Substantial portions of OEH’s revenue and expenses are denominated in non-U.S. currencies such as European euros, British pounds sterling, Russian rubles, South African rand, Australian dollars, Peruvian nuevos soles, Botswana pula, Brazilian reals, Mexican pesos and various South East Asian currencies.  In addition, OEH buys assets and incurs liabilities in these foreign currencies.  Foreign exchange rate fluctuations may have a material adverse effect on OEH’s financial statements and/or operating margins.

 

OEH’s financial statements are presented in U.S. dollars and can be impacted by foreign exchange fluctuations through both:

 

·                  translation risk, which is the risk that the financial statements for a particular period or as of a certain date depend on the prevailing exchange rates of the various currencies against the U.S. dollar, and

 

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·                  transaction risk, which is the risk that the currency of costs and liabilities fluctuates in relation to the currency of revenue and assets, which fluctuations may adversely affect OEH’s operating margins.

 

OEH’s ability to pay dividends on the class A common shares is limited.

 

OEH paid quarterly cash dividends on the Company’s class A and B common shares in the amount of $0.025 per share in 2004 through 2008 but suspended dividends beginning in 2009.  OEH can give no assurance that it will be able to resume dividend payments in the future because of debt repayment requirements, a downturn to OEH’s business or other reasons.

 

Under Bermuda law, the Company may not pay dividends or make other distributions on the class A and B common shares if there are reasonable grounds for believing that OEH is, or after the payment would be, unable to pay its liabilities as they become due, or if the realizable value of OEH’s assets is less than the aggregate of its liabilities, issued share capital and “share premium accounts” (share premium is defined as the amount of shareholders’ equity over and above the aggregate par value of issued shares).  OEH can give no assurance that the Company will not be restricted by Bermuda law from paying dividends.

 

OEH is subject to accounting regulations and uses certain accounting estimates and judgments that may differ significantly from actual results.

 

Implementation of existing and future standards and rules of the U.S. Financial Accounting Standards Board (“FASB”) or other regulatory bodies could affect the presentation of OEH’s financial statements and related disclosures.  Future regulatory requirements could significantly change OEH’s current accounting practices and disclosures.  These changes in the presentation of OEH’s financial statements and related disclosures could change an investor’s interpretation or perception of OEH’s financial position and results of operations.  For example, OEH became subject to the FASB’s Accounting Standards Codification (“ASC”) 740 “Income Taxes” in the first quarter of 2007 requiring it to recognize at that time a substantial initial liability with a corresponding adjustment to retained earnings.  OEH’s future income tax cost may include a tax benefit as the initial provision is released or a tax cost as new liabilities are recognized, in addition to the tax costs or benefits that relate to OEH’s trading activities and results.

 

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OEH uses many methods, estimates and judgments in applying its accounting policies.  By their nature, these are subject to substantial risks, uncertainties and assumptions, and factors may arise over time that lead OEH to change its methods, estimates and judgments which could significantly affect the presentation of OEH’s results of operations.

 

As an example of these estimates and judgments, in accordance with the ASC 350-30 “Intangibles-Goodwill and Other”, OEH evaluates goodwill at least annually, or when events or changes in circumstances, such as adverse changes in the industry or economic trends or an underperformance relative to historical or projected future operating results, indicate the carrying value may not be recoverable.  OEH’s impairment analysis incorporates various assumptions and uncertainties that management believes are reasonable and supportable considering all available evidence, such as the future cash flows of the business, future growth rates and the related discount rates.  However, these assumptions and uncertainties are, by their very nature, highly judgmental.  OEH cannot guarantee that its business will achieve the forecasted results which have been included in its impairment analysis.  If OEH is unable to meet these assumptions in future reporting periods, it may be required to record a further charge in a future statement of operations for goodwill impairment losses, in addition to the impairment charges on continuing operations of $6,107,000 recorded in 2008 and $6,500,000 recorded in 2009.

 

Risks of Investing in Class A Common Shares

 

The Company is not restricted from issuing additional class A or B common shares, and any sales could negatively affect the trading price and book value of the class A common shares outstanding.

 

The Company may in its discretion sell newly issued class A or B common shares from time to time.  There can be no assurance that the Company will not make significant sales of class A or B common shares in public offerings or private placements to raise capital, for funding future acquisitions, in employee equity compensation programs or for other corporate purposes.  Any sales could materially and adversely affect the trading price of the class A common shares outstanding or result in dilution of the ownership interests of existing shareholders.

 

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The price of the class A common shares may fluctuate significantly, which may make it difficult for shareholders to sell the class A common shares when they want or at desired prices.

 

The price of the class A common shares on the New York Stock Exchange constantly changes.  OEH management expects that the market price of the class A common shares will continue to fluctuate.  Holders of class A common shares will be subject to the risk of volatility and depressed prices.

 

The price of class A common shares can fluctuate as a result of a variety of factors, many of which are beyond OEH’s control.  These factors include:

 

·                  quarterly variations in operating results,

 

·                  operating results that vary from the expectations of management, securities analysts and investors,

 

·                  changes in expectations as to future financial performance, including financial estimates by securities analysts and investors,

 

·                  developments generally affecting OEH’s business or the hospitality industry,

 

·                  market speculation about a potential acquisition of OEH or all or part of its business,

 

·                  announcements by OEH or its competitors of significant contracts, acquisitions, joint ventures or capital commitments,

 

·                  announcements by third parties of significant claims or proceedings against OEH,

 

·                  the dividend policy for the class A and B common shares,

 

·                  future sales of equity or equity-linked securities including by holders of large positions in the outstanding class A common shares, and

 

·                  general domestic and international economic conditions.

 

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In addition, the stock market in general can experience volatility that is often unrelated to the operating performance of a particular company.  Recently this volatility has been significant because of disruption in capital markets and contraction of credit availability.  These broad market fluctuations may adversely affect the market price of the class A common shares.

 

Investors in an offering of class A common shares by the Company may pay a much higher price than the book value of the outstanding class A common shares.

 

If investors purchase class A common shares in an offering by the Company, they may incur immediate and substantial dilution representing the difference between OEH’s net tangible book value and the as-adjusted net tangible book value per share after giving effect to the offering price.  The Company may also in the future issue additional shares of its authorized and unissued class A common shares in connection with compensation of OEH’s management, future acquisitions, future public offerings or private placements of class A common shares for capital raising purposes or for other business purposes, all of which may result in the dilution of the ownership interests of holders of outstanding class A common shares.  Issuance of additional class A common shares may also create downward pressure on the trading price of outstanding class A common shares that may in turn require the Company to issue additional shares to raise funds through sales of its securities.  This may further dilute the ownership interests of holders of outstanding class A common shares.

 

OEH may have broad discretion over the use of the net proceeds from any offering of class A common shares.

 

OEH may have broad discretion as to the use of the proceeds from any offering by the Company of its class A common shares.  Accordingly, investors would be relying on the judgment of the Company’s board of directors and OEH’s management with regard to the use of these net proceeds, and may not have the opportunity, as part of the investment decision, to assess whether the proceeds are being used appropriately.  It is possible that the proceeds will be invested in a way that does not yield a favorable, or any, return for OEH.

 

A subsidiary of the Company, which has two Company directors on its board of directors, may control the outcome of most matters submitted to a vote of the Company’s shareholders.

 

A wholly-owned subsidiary of the Company, Orient-Express Holdings 1 Ltd. (“Holdings”), currently holds all 18,044,478 outstanding class B common shares in the Company representing about 67% of the combined voting power of class A and B common shares for most matters submitted to a vote of shareholders,

 

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and the directors and officers of the Company hold class A common shares representing an additional 0.3% of combined voting power.  In general, holders of class A common shares and holders of class B common shares vote together as a single class, with holders of class A common shares having one-tenth of one vote per share and holders of class B common shares having one vote per share.  Therefore, as long as the number of outstanding class B shares exceeds one-tenth the number of outstanding class A common shares, Holdings could control the outcome of most matters submitted to a vote of the shareholders.

 

Under Bermuda law, common shares of the Company owned by Holdings are outstanding and may be voted by Holdings.  The manner in which Holdings votes its shares is determined by the four directors of Holdings, two of whom, John D. Campbell and Prudence M. Leith, are also directors of the Company, consistently with the exercise by those directors of their fiduciary duties to Holdings.  Those directors, should they choose to act together, will be able to control substantially all matters affecting the Company, and to block a number of matters relating to any potential change of control of the Company.  See Item 12—Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.

 

Certain institutional shareholders (collectively owning approximately 6.7% of the class A common shares) have challenged the Company’s corporate governance structure as it relates to the ownership and voting of class B common shares, including by proposing shareholder resolutions to amend the Company’s bye-laws to treat the class B shares as “treasury shares” with no voting rights and to cancel the class B shares.  Those resolutions were rejected at the October 10, 2008 special general meeting of shareholders of the Company by a majority of the votes of the outstanding class A and class B common shares, voting together as a single class. Following the defeat of the resolutions at the special general meeting, these shareholders filed a petition in the Supreme Court of Bermuda seeking similar and related relief.  See Item 3—Legal Proceedings.

 

The Company continues to believe the Bermuda litigation is without merit and is defending the action vigorously.  The corporate governance structure of the Company has been analyzed by legal counsel, and the board of directors and management believe that the structure is valid under Bermuda law.  It enables OEH to oppose any proposals that are contrary to the best interests of the Company and its shareholders, including coercive or unfair offers to acquire the Company, and thus preserve the value of OEH for all shareholders.  This corporate governance structure has been in place since the

 

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Company’s initial public offering in 2000 and has been fully described in the Company’s public filings and clearly disclosed to investors considering buying the class A common shares.  However, the outcome of any litigation is uncertain.  Additional litigation against the Company or other future challenges of its governance structure may occur which may cause OEH to incur added costs, such as legal expenses, to defend the corporate governance structure.

 

Provisions in the Company’s charter documents, and the preferred share purchase rights currently attached to the class A and B common shares, may discourage a potential acquisition of OEH, even one that the holders of a majority of the class A common shares might favor.

 

The Company’s memorandum of association and bye-laws contain provisions that could make it more difficult for a third party to acquire OEH or to engage in another form of transaction involving a change of control of the Company without the consent of the Company’s board of directors.  These provisions include:

 

·                  a supermajority shareholder voting provision for the removal of directors from office with or without cause,

 

·                  a supermajority shareholder voting provision for “business combination” transactions with beneficial owners of shares carrying 15% or more of the votes which may be cast at any general meeting of shareholders, and

 

·                  limitations on the voting rights of such 15% beneficial owners.

 

Also, the Company’s board of directors has the right under Bermuda law to issue preferred shares without shareholder approval, which could be done to dilute the share ownership of a potential hostile acquirer.  Although management believes these provisions provide the shareholders an opportunity to receive a higher price by requiring potential acquirers to negotiate with the Company’s board of directors, these provisions apply even if the offer is favored by shareholders holding a majority of the Company’s equity.

 

The Company has in place a shareholder rights agreement providing for rights to purchase series A junior participating preferred shares of the Company.  The rights are not currently exercisable and they are attached to and trade together with the class A and B common shares on a one-to-one basis.  These rights may have anti-takeover effects on a potential acquirer holding 15% or more of the outstanding class A or B common shares.

 

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These anti-takeover provisions are in addition to the ability of Holdings and directors and officers of the Company to vote shares representing a significant majority of the total voting power of the Company’s common shares. See the risk factor immediately above.

 

A judgment of a United States court for liabilities under U.S. securities laws might not be enforceable in Bermuda, or an original action might not be brought in Bermuda against the Company for liabilities under U.S. securities laws.

 

The Company is incorporated in Bermuda, a majority of its directors and officers are residents of Bermuda, the United Kingdom and elsewhere in Europe, and most of its assets and the assets of its directors and officers are located outside the United States.  As a result, it may be difficult for shareholders to:

 

·                  effect service of process within the United States upon the Company or its directors and officers, or

 

·                  enforce judgments obtained in United States courts against the Company or its directors and officers based upon the civil liability provisions of the United States federal securities laws.

 

OEH has been advised by Appleby, its Bermuda legal counsel, that there is doubt as to:

 

·                  whether a judgment of a United States court based solely upon the civil liability provisions of the United States federal securities laws would be enforceable in Bermuda against the Company or its directors and officers, and

 

·                  whether an original action could be brought in Bermuda against the Company or its directors and officers to enforce liabilities based solely upon the United States federal securities laws.

 

ITEM 1B.               Unresolved Staff Comments

 

None.

 

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ITEM 2.                  Properties

 

OEH owns 35 hotels worldwide (including nine under long-term lease), four European tourist trains, its Burmese cruiseship and five small French canalboats, and one stand-alone restaurant in the United States, and owns interests of 50% or less in six hotels in Peru, Spain and the U.S., its Southeast Asian tourist train and PeruRail, all as described in Item 1—Business above.  A second stand-alone restaurant in Argentina is being sold and is excluded from these figures.  The small regional sales, marketing and operating offices of the hotels, tourist trains and cruise businesses are occupied under operating leases.

 

ITEM 3.            Legal Proceedings

 

There are no material legal proceedings, other than ordinary routine litigation incidental to OEH’s business and as described below, to which the Company or any of its subsidiaries is a party or to which any of their property is subject.

 

Corporate Governance Structure

 

A wholly-owned subsidiary of the Company, Orient-Express Holdings 1 Ltd. (“Holdings”), currently owns all outstanding 18,044,478 class B common shares of the Company and may vote those shares under Bermuda law, which represent about 67% of the combined voting power of the class A and B common shares for most matters submitted to a vote of the Company’s shareholders.  See Item 12—Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters below.

 

On January 12, 2009, D.E. Shaw Oculus Portfolios LLC, D.E. Shaw Valence Portfolios LLC and CR Intrinsic Investments LLC filed a petition in the Supreme Court of Bermuda.  The petition (as amended) alleges, among other things, (i) that the Company has acted unlawfully by holding and voting, directly or indirectly, its own shares, (ii) that the Company’s board of directors has exercised its fiduciary powers for an improper purpose with respect to the holding and voting of class B common shares of the Company, (iii) that the Company’s board of directors has breached its fiduciary duties to the Company and failed to act in good faith and in the best interests of the Company and (iv) that the Company’s affairs have been conducted in a manner oppressive or prejudicial to the interests of the holders of the class A common shares of the Company.

 

The named respondents in the petition are (i) the Company, (ii) Holdings and (iii) the individual members of the Company’s current board of directors (other than Mitchell C. Hochberg).

 

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The petition does not seek damages but seeks, among other relief, (i) a declaration that it is unlawful for the Company, directly or indirectly, to hold or vote the class B common shares, (ii) a declaration that the board of directors acted for an improper purpose by holding or voting the class B common shares, (iii) an amendment to the bye-laws of the Company that would have the effect of treating the class B common shares as treasury shares with no voting rights, (iv) an order requiring the cancellation of all of the class B common shares, (v) an order restraining Holdings from exercising its voting rights in respect of the class B common shares and (vi) an order authorizing the petitioners to bring proceedings in the name of the Company to have the class B common shares cancelled and/or to prevent Holdings from exercising voting rights in respect of the class B common shares.

 

The respondents filed points of defence to the petition on May 11, 2009.  After the petitioners filed points of reply on June 11, 2009 to the points of defence, the petitioners and the respondents filed with the Court on July 10 and 17, 2009 separate summonses seeking, among other matters, a trial on preliminary issues relating to the legality of the holding of class B common shares in the Company by Holdings.  The respondents also filed a summons seeking to strike out (dismiss) the petition.  A hearing before the Court was held on September 16, 2009 at which a further hearing on the substance of the summonses was scheduled in late April 2010.

 

The Company believes that the petition is without merit and intends to defend the action vigorously.  The petition does not seek damages and any remedial action against the Company would likely be limited to compliance, if ordered, with the declaratory and injunctive relief sought.  The corporate governance structure of the Company, with dual class A and class B common shares and ownership of the class B shares by Holdings, has been analyzed by legal counsel, and the Company’s management believes that the structure is valid under Bermuda law.  It enables the Company to oppose any proposals that are contrary to the best interests of the Company and its shareholders, including coercive or unfair offers to acquire the Company, and thus preserve the value of the Company for all shareholders.  This corporate governance structure has been in place since the Company’s initial public offering in 2000, and has been consistently described in the Company’s public filings and disclosed to investors considering buying the Company’s class A common shares.

 

ITEM 4.            Submission of Matters to a Vote of Security Holders

 

The Company submitted no matter to a vote of its security holders during the fourth quarter of 2009.

 

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PART II

 

ITEM 5.            Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

 

The class A common shares of the Company are traded on the New York Stock Exchange under the symbol OEH.  All of the class B common shares of the Company are owned by a subsidiary of the Company and not listed.  See Item 12Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.  The following table presents the quarterly high and low sales prices of a class A common share in 2009 and 2008 as reported for New York Stock Exchange composite transactions:

 

 

 

2009

 

2008

 

 

 

High

 

Low

 

High

 

Low

 

 

 

 

 

 

 

 

 

 

 

First quarter

 

$

9.45

 

$

2.64

 

$

58.56

 

$

40.42

 

Second quarter

 

9.05

 

4.01

 

49.71

 

39.19

 

Third quarter

 

12.98

 

6.67

 

43.28

 

23.55

 

Fourth quarter

 

11.43

 

7.63

 

24.47

 

3.80

 

 

The Company paid quarterly cash dividends at the rate of $0.025 per class A and B common share in 2008, and paid no dividends in 2009 as a cash saving measure.

 

The Islands of Bermuda where the Company is incorporated have no applicable government laws, decrees or regulations which restrict the export or import of capital or affect the payment of dividends or other distributions to non-resident holders of the class A and B common shares of the Company or which subject United States holders to taxes.

 

At February 19, 2010, the number of record holders of the class A common shares of the Company was approximately 70.

 

During 2009, the Company made no offering of its class A common shares that was not registered in the United States.  Also, during the fourth quarter of 2009, no purchases of the Company’s common shares were made by or on behalf of the Company or any affiliated person.

 

Information responding to Item 201(d) and (e) of SEC Regulation S-K is omitted because the Company is a foreign private issuer.

 

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ITEM 6.  Selected Financial Data

 

Orient-Express Hotels Ltd. and Subsidiaries

 

 

 

Year ended December 31,

 

 

 

2009

 

2008

 

2007

 

2006

 

2005

 

 

 

(In thousands except per share amounts)

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

$

456,956

 

$

502,838

 

$

528,956

 

$

431,249

 

$

373,241

 

 

 

 

 

 

 

 

 

 

 

 

 

Impairments (1)

 

$

(6,500

)

$

(29,099

)

$

 

$

 

$

 

 

 

 

 

 

 

 

 

 

 

 

 

Gain on disposal of fixed assets (2)

 

$

1,385

 

$

 

$

2,312

 

$

6,619

 

$

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings from unconsolidated companies, net of tax

 

$

4,183

 

$

16,771

 

$

16,425

 

$

11,970

 

$

11,175

 

 

 

 

 

 

 

 

 

 

 

 

 

Net (loss)/earnings from continuing operations

 

$

(19,277

)

$

1,084

 

$

53,976

 

$

35,760

 

$

42,293

 

 

 

 

 

 

 

 

 

 

 

 

 

(Loss)/earnings from discontinued operations, net of tax (3) 

 

$

(49,520

)

$

(27,635

)

$

(20,334

)

$

4,007

 

$

(754

)

 

 

 

 

 

 

 

 

 

 

 

 

Net (loss)/earnings

 

$

(68,797

)

$

(26,551

)

$

33,642

 

$

39,767

 

$

41,539

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic (loss)/earnings per share:

 

 

 

 

 

 

 

 

 

 

 

Net (loss)/earnings from continuing operations

 

$

(0.28

)

$

0.03

 

$

1.27

 

$

0.88

 

$

1.11

 

Net (loss)/earnings from discontinued operations

 

(0.73

)

(0.64

)

(0.48

)

0.10

 

(0.02

)

Net (loss)/ earnings

 

$

(1.01

)

$

(0.61

)

$

0.79

 

$

0.98

 

$

1.09

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted (loss)/earnings per share:

 

 

 

 

 

 

 

 

 

 

 

Net (loss)/earnings from continuing operations

 

$

(0.28

)

$

0.03

 

$

1.27

 

$

0.87

 

$

1.10

 

Net (loss)/earnings from discontinued operations

 

(0.73

)

(0.64

)

(0.48

)

0.10

 

(0.02

)

Net (loss)/earnings

 

$

(1.01

)

$

(0.61

)

$

0.79

 

$

0.97

 

$

1.08

 

 

 

 

 

 

 

 

 

 

 

 

 

Total assets

 

$

2,072,690

 

$

2,068,796

 

$

1,988,437

 

$

1,751,663

 

$

1,452,166

 

 

 

 

 

 

 

 

 

 

 

 

 

Long-term obligations

 

$

811,734

 

$

791,793

 

$

714,837

 

$

597,566

 

$

495,947

 

 

 

 

 

 

 

 

 

 

 

 

 

Shareholders’ equity

 

$

878,709

 

$

782,598

 

$

848,531

 

$

806,996

 

$

650,496

 

 

 

 

 

 

 

 

 

 

 

 

 

Dividends per share

 

$

 

$

0.10

 

$

0.10

 

$

0.10

 

$

0.10

 

 


(1)           The impairments in 2008 consisted of impairment of goodwill at Hôtel de la Cité, Le Manoir aux Quat’Saisons and Keswick Hall of $6,107,000, and impairment of the equity investment in Hotel Ritz in Madrid of $22,992,000. The impairments in 2009 consisted of impairment of goodwill at Miraflores Park Hotel, Casa de Sierra Nevada and Observatory Hotel amounting to $6,500,000.

 

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(2)           The gain in 2006 related to the sale of the investment in Harry’s Bar.  The gain in 2007 related to the gain on the settlement of insurance proceeds for hurricane damaged assets at Maroma Resort and Spa.  The 2009 gain is related to settlement of insurance proceeds for hurricane damaged assets on the Road to Mandalay ship.

 

(3)           The results of Lapa Palace Hotel, Windsor Court Hotel, Lilianfels Blue Mountains, Bora Bora Lagoon Resort and La Cabana have been presented as discontinued operations for all periods presented.  Included in the loss from discontinued operations is goodwill and fixed asset impairment losses of $43,695,000 in 2009, $15,616,000 in 2008 and $13,992,000 in 2007, gain on sales of Lapa Palace Hotel and Windsor Court Hotel in 2009 of $3,737,000, and an insurance loss at the Windsor Court Hotel in 2009 of $2,883,000.

 

See notes to consolidated financial statements (Item 8).

 

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ITEM 7.  Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

The following discussion includes references to non-GAAP financial measures as defined in Regulation G of the SEC.  OEH presents these measures because it believes they are of interest to the investment community by providing additional meaningful methods of evaluating certain aspects of OEH’s operating performance from period to period that may not otherwise be apparent on the basis of U.S. generally accepted accounting principles.  These financial measures should be viewed in addition to, and not in lieu of, OEH’s consolidated financial statements for the fiscal years presented in this report.

 

Introduction

 

OEH has three business segments: (1) hotels and restaurants, (2) tourist trains and cruises and (3) real estate and property development.  Hotels in 2009 consisted of 42 deluxe hotels, 36 of which were wholly or majority owned. Of the 36 hotels, as noted below, two were sold during 2009 and two others were held for sale at December 31, 2009 and were accounted for as discontinued operations.  The other 32 owned hotels are referred to in this discussion as “owned hotels”.  These figures exclude the two hotels purchased in Sicily by OEH in 2010.

 

The other six hotels, in which OEH has unconsolidated equity interests and which it operates under management contracts, are referred to in this discussion as “hotel management interests”.  This includes the Charleston Place Hotel only in 2007 and 2008 because, as noted below and in Note 3 to the Financial Statements, OEH has consolidated this hotel into its financial statements effective December 31, 2008.

 

Of the owned hotels in 2009, 12 were located in Europe, seven in North America (excluding Charleston Place Hotel) and 17 in the rest of the world.

 

In December 2007, Bora Bora Lagoon Resort in French Polynesia was designated as held for sale, and in December 2009, Lilianfels Blue Mountains in Katoomba, Australia, was also designated as held for sale. The sale of Lilianfels Blue Mountains was subsequently completed in January 2010 for $19.3 million cash.

 

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In June 2009, OEH sold its owned Lapa Palace Hotel in Lisbon, Portugal for $42.0 million of which $26.3 million was received in cash in 2009 and the remaining $15.7 million has been deferred for payment in 2010. The hotel was not considered a long-term fit with OEH’s portfolio and strategy so OEH took the opportunity to sell the property at an attractive price.

 

In October 2009, OEH sold its owned Windsor Court Hotel in New Orleans, Louisiana for $44.25 million cash. The hotel was not considered a long-term fit with OEH’s portfolio as the market in New Orleans is dominated by corporate and conference business, whereas OEH’s core market is primarily the leisure guest.

 

Of OEH’s stand alone restaurants in 2009, it currently owns and operates the ‘21’ Club in New York, New York. In December 2009, OEH signed an agreement to sell its La Cabana restaurant in Buenos Aires, Argentina for $2.7 million, to be paid on or before the end of March 2010. La Cabana was designated as held for sale at December 31, 2009.

 

Accordingly, the results of Bora Bora Lagoon Resort, Lilianfels Blue Mountains, Lapa Palace, Windsor Court Hotel and La Cabana restaurant have been reflected as discontinued operations for all periods presented.

 

OEH’s tourist trains and cruises segment operates six tourist trains — four of which are owned and operated by OEH, one in which OEH has an equity interest and an exclusive management contract, and one in which OEH has an equity investment — and a river cruise ship and five canal boats.

 

OEH’s active real estate projects are in St. Martin, French West Indies, Keswick, Virginia and Koh Samui, Thailand.

 

Revenue per available room, or RevPAR, is a performance indicator used widely within the hotel industry as it is a function of the average daily room rate, or ADR, achieved for the rooms sold and average occupancy, being the rooms sold as a proportion of the rooms available to be sold.  ADR on its own gives no indication of the relative occupancy of the hotel and could be shown as increasing while the number of rooms sold had fallen, resulting in a reduction in rooms revenue over a prior period.

 

In 2007, OEH saw same store RevPAR growth of 15% in U.S. dollars and 11% in local currency, with average occupancy of 62% and ADR of $467.  In 2008, same store RevPAR increased 5% in U.S. dollars and 4% in local currency with average occupancy of 59% and ADR of $482. In 2009, same store RevPAR decreased 23% in U.S. dollars and decreased 19% in local currency with average occupancy of 51% and ADR of $407.

 

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OEH’s longer-term strategy to grow its business includes:

 

·      RevPAR growth:  the unique nature of OEH’s individual properties and the avoidance of a chain brand have historically enabled OEH to charge premium rates for rooms;

 

·      Expansion of hotels:  the returns on investment by adding new rooms or other facilities to a hotel are high as the incremental operating costs are low;

 

·      Acquisitions:  OEH looks to invest in unique properties at reasonable prices with expansion potential and near-term upside potential in earnings through increasing room rates and/or reducing costs; and

 

·      Real estate:  OEH owns land near to or surrounding its hotels which it intends to develop over time, on a pre-sale basis, for residential real estate sales.

 

Primarily to maintain and improve its liquidity, OEH has raised equity capital in three tranches in the last 16 months, as follows:

 

·      In November 2008, OEH raised $52.5 million in cash, after fees and costs, by selling 8,490,000 newly-issued class A common shares at $6.50 each.  The proceeds were used primarily for general corporate purposes including working capital, debt service and capital investment.

 

·      In May 2009, OEH raised an additional $141.3 million in cash, after fees and costs, by selling 25,875,000 newly-issued class A common shares at $5.75 each. This included 3,375,000 shares covered by the underwriters’ over-allotment option which was exercised in full. The proceeds of this sale are being used primarily for debt reduction and general corporate purposes.

 

·      In January 2010, OEH raised $131.1 million in cash, after fees and costs, by selling 13,800,000 newly-issued class A common shares at $10.00 each.  This included 1,800,000 shares covered by the underwriters’ over-allotment option which was exercised in full.  Part of the proceeds of this sale were used to pay the cash portion of the purchase price of two hotel properties located in Taormina, Sicily, and the remainder is being used for debt reduction and general corporate purposes.

 

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In 2009, 87% of OEH’s revenue was derived from the hotels and restaurants segment and 13% from tourist trains and cruises.  In the hotels and restaurants segment, 95% of revenue was from owned hotels, 4% from restaurants and 1% from hotel management interests.

 

OEH derives revenue from owned hotel operations primarily from the sale of rooms and the provision of food and beverages.  The main factors for analyzing rooms revenue are the number of room nights sold and the ADR, and RevPAR referred to above which is a measure of both these factors.

 

Revenue from restaurants is derived from food and beverages sold to customers.

 

Revenue from hotel management interests includes fees received under management contracts, which are based upon a combination of a percentage of the revenue from operations and operating earnings calculated before specified fixed charges.

 

The revenue from the tourist trains and cruises segment primarily comprises tickets sold for travel and food and beverage sales.

 

The revenue from real estate and property development is primarily derived from the sale of land and buildings.

 

Operating costs include labor, repairs and maintenance, energy and the costs of food and beverages sold to customers in respect of owned hotel operations, restaurants, tourist trains and cruises.

 

Selling, general and administrative expenses include travel agents’ commissions, the salaries and related costs of the sales teams, advertising and public relations costs, and the salaries and related costs of management.

 

Depreciation and amortization includes depreciation of owned hotels, restaurants, tourist trains and cruise boats.

 

When OEH discusses results for a period on a “comparable” or “same store” basis, OEH is considering only the results of hotels owned and operating throughout the periods mentioned and excluding the effect of any acquisitions, dispositions or major refurbishments.

 

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Impact of Foreign Currency Exchange Rate Movements

 

As reported below in the comparisons of the 2009, 2008 and 2007 financial years under “Results of Operations”, OEH faces exposure arising from the impact of translating its global foreign currency earnings and expenses into U.S. dollars.  Nine of OEH’s owned hotels in 2009 operated with currencies linked to the European euro, two operated in South African rand, two in Australian dollars, one in British pounds sterling, three in Botswana pula, two in Mexican pesos, one in Peruvian nuevo soles, six in various Southeast Asian currencies and one in Russian rubles. Revenue of the Venice Simplon-Orient-Express, British Pullman, Northern Belle and Royal Scotsman tourist trains was primarily in British pounds sterling, but the operating costs of the Venice Simplon-Orient-Express were mainly denominated in euros. Revenue of the Copacabana Palace and Hotel das Cataratas in Brazil was recorded in U.S. dollars, but substantially all of the hotels’ expenses were denominated in Brazilian reals. Revenue derived by Maroma Resort and Spa and La Samanna was recorded in U.S. dollars, but the majority of the hotels’ expenses were denominated in Mexican pesos and European euros, respectively.

 

Except for the specific instances described above, OEH’s properties match foreign currency earnings and costs to provide a natural hedge against currency movements. The reporting of OEH’s revenue and costs translated into U.S. dollars, however, can be materially affected by foreign exchange rate fluctuations from period to period.

 

Change of Application of Accounting Policy for Porto Cupecoy

 

OEH accounts for revenue from its real estate activities in accordance with ASC 360-20-40 “Real Estate Sales-Derecognition” (formerly SFAS 66 “Accounting for Sales of Real Estate”). Revenue represents the proceeds from sales of undeveloped land and developed properties that OEH is holding for sale. Previously, revenue related to the Porto Cupecoy project still under construction has been recognized under the percentage-of-completion method.

 

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ASC 360-20-40 details five separate tests that must be met in order to use the percentage-of-completion method for condominiums still under construction, including a requirement that the aggregate sales proceeds and costs can be reasonably estimated. OEH has closely monitored each of the tests and concluded during the fourth quarter of 2008 that, because of the sustained weakening of the European and U.S. economies in particular which resulted in a slowdown in condominium sales compared to prior estimates, the aggregate sales proceeds that the project would generate could no longer be reasonably estimated with sufficient certainty to permit OEH to continue to recognize revenue under the percentage-of-completion method at this time.  Accordingly, OEH has reverted to accounting for sales proceeds received at the Porto Cupecoy project as deposits until the criteria required by ASC 360-20-40 are again met.

 

Because of this change in the application of OEH’s accounting policy, the cumulative revenue and operating costs recognized by OEH in respect of the Porto Cupecoy project were reversed through the statement of operations in the fourth quarter of 2008.

 

OEH will account for sales proceeds as deposits for Porto Cupecoy in the future until the criteria required by ASC 360-20-40 are again met.  The change of application of accounting policy in 2008 had no cash effect on OEH.

 

Market Capitalization

 

The Company’s class A common share price increased during 2009 from $7.66 at December 31, 2008 to $10.14 at December 31, 2009, an increase in OEH’s market capitalization from $390 million at December 31, 2008 to $779 million at December 31, 2009. These prices were much lower, however, than those prevailing prior to the fourth quarter of 2008.  OEH does not believe that a change in its share price or market capitalization is indicative of a change in the value of OEH’s assets over the period. OEH’s fixed assets are carried in the balance sheet on a historical depreciated cost basis, and OEH management performed impairment tests on all long-lived assets. OEH management believes the aggregate market value of these assets exceeds their carrying value, in part because many of OEH’s assets were acquired many years ago.

 

Asset and Investment Impairments

 

OEH regularly compares the carrying value of its fixed assets and goodwill to its own undiscounted and discounted cash flow projections, in order to determine whether any of these assets is impaired as required by ASC 360 “Impairment or Disposal

 

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of Long-Lived Assets” (formerly SFAS 144 “Accounting for the Impairment or Disposal of Long-Lived Assets”) and ASC 350-30 “Intangibles-Goodwill and Other” (formerly SFAS 142 “Goodwill and Other Intangible Assets”).  OEH also periodically obtains third-party valuations of fixed assets to comply with bank loan requirements.

 

During the quarter ended March 31, 2009, OEH completed its annual 2008 impairment review and has identified the following additional estimated goodwill impairments of $6.3 million and tradename impairments of $0.2 million within its continuing operations considering discounted future cash flows prepared as of the balance sheet date (dollars in millions):

 

Miraflores Park

 

$

3.2

 

Casa de Sierra Nevada

 

3.0

 

Observatory Hotel

 

0.3

 

 

 

$

 6.5

 

 

Through a 50%/50% joint venture with a Spanish partner, OEH has a 50% investment in and manages the Hotel Ritz in Madrid.  The joint venture company is highly leveraged with first mortgage debt of €75.6 million ($108.5 million) which is non-recourse to the joint venture partners and unsecured debt of €1.0 million ($1.4 million).  One half of the unsecured debt is guaranteed by each joint venture partner.  OEH management believes substantial capital expenditure is necessary to improve the hotel’s long-term profitability.  As a result of the hotel’s discounted cash flow forecasts, OEH determined in 2008 that its investment in the joint venture was impaired and reduced the carrying amount of that investment by $23.0 million in 2008.

 

These impairments have no cash effect on OEH and arose primarily because of expected reductions in future cash flows from these properties which resulted from the economic downturn in Europe, the U.S. and other parts of the world in late 2008 and in 2009.

 

Liquidity and Financial Condition

 

As reported below under “Liquidity and Capital Resources—Liquidity”, OEH has substantial scheduled debt repayments and capital commitments in 2010 and is working to improve its liquidity and capital position.  OEH plans to utilize cash from operations, sales of non-core assets and its real estate developments, sales of class A common shares, appropriate debt finance and other funding

 

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sources and, if necessary, to reschedule loan repayments and capital commitments.  Also as reported below, OEH was in compliance with the major financial covenants in relevant loan facilities that applied to it at December 31, 2009.  OEH recognizes that it is exposed to enhanced risk in the current economic climate of a covenant breach during 2010 if weak trading conditions lead to a deterioration of OEH’s results.  OEH expects to take pro-active steps with its bankers to resolve prospectively any likely breach.

 

Recent Events in Peru

 

Heavy rains in late January 2010 caused flooding in the Machu Picchu region of Peru resulting in a series of landslides which severely damaged and eroded railway tracks of OEH’s rail joint venture between Cuzco, Ollantaytambo and Machu Picchu.  Services are currently suspended and none of the joint venture’s trains have been able to operate between Ollantaytambo and Machu Picchu since late January.

 

Engineers from OEH’s rail joint venture have repaired the track between Machu Picchu and Hydroelectrica, a town upriver from Machu Picchu, and estimate that works to the damaged tracks between Ollantaytambo and Machu Picchu, the main access route for tourist and local trains from Cuzco, will be completed by early April, subject to favorable weather conditions.

 

Management expects the cost of repairs and the disruption to rail operations to be covered by the joint venture’s insurance.

 

The Machu Picchu Sanctuary Lodge, part of OEH’s hotel joint venture in Peru, was not damaged by the floods although guest numbers are reduced because train service to Cuzco is currently stopped.  Hotel Rio Sagrado in the Sacred Valley has reopened, having been evacuated when nearby river levels were very high.  The property was not damaged.

 

Recent Events at Bora Bora Lagoon Resort

 

On February 4, 2010, Bora Bora Lagoon Resort, French Polynesia, was hit by tropical Cyclone Oli, with wind speeds reaching 160km per hour.  The resort sustained damage and is not expected to re-open before September 2010.  It is covered under OEH’s global insurance program.

 

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Recent Events at Reid’s Palace, Madeira

 

While heavy rains on February 20, 2010 caused flooding on the island of Madeira, OEH’s Reid’s Palace was undamaged.  The hotel and the island’s airport are operating normally.  Hotel guests who cancel in the near term are being encouraged to re-book later in 2010.

 

Results of Operations

 

OEH’s operating results for the years 2009, 2008 and 2007, expressed as a percentage of revenue, are as follows:

 

 

 

Year ended December 31

 

 

 

2009

 

2008

 

2007

 

Revenue:

 

 

 

 

 

 

 

Hotels and restaurants

 

87

%

88

%

81

%

Tourist trains and cruises

 

13

 

15

 

15

 

Real estate and property development

 

 

(3

)

4

 

 

 

100

 

100

 

100

 

Expenses:

 

 

 

 

 

 

 

Depreciation and amortization

 

9

 

7

 

7

 

Operating

 

49

 

46

 

46

 

Selling, general and administrative

 

37

 

36

 

30

 

Impairment of goodwill and other intangible assets

 

1

 

1

 

 

Impairment of equity investment

 

 

5

 

 

Gain on sale of fixed assets or investments

 

 

 

 

Net finance costs

 

7

 

8

 

7

 

(Loss)/earnings before income taxes

 

(3

)

(3

)

10

 

Provision for income taxes

 

(2

)

 

(3

)

Earnings from unconsolidated companies

 

1

 

3

 

3

 

Net (loss)/earnings from continuing operations

 

(4

)

 

10

 

Loss from discontinued operations

 

(11

)

(5

)

(4

)

Net (loss)/earnings as a percentage of revenue

 

(15

)%

(5

)%

6

%

 

As noted above, management has determined in the fourth quarter of 2008 that the aggregate sales proceeds that the Porto Cupecoy real estate development project was expected to generate could no longer be reasonably estimated with sufficient certainty

 

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to continue accounting for the project using the percentage-of-completion method of accounting.  Accordingly, sales proceeds from the project have been accounted for as deposits beginning in the fourth quarter of 2008.  The cumulative revenue and operating costs recognized by OEH in respect of the project were reversed through the statement of operations, which resulted in negative real estate revenue for 2008.

 

Segment net earnings from continuing operations before interest expense (but after interest income from unconsolidated companies), foreign currency, tax (including tax on earnings from unconsolidated companies), depreciation and amortization (“segment EBITDA”) for the years 2009, 2008 and 2007 are analyzed as follows (dollars in millions):

 

 

 

Year ended December 31,

 

 

 

2009

 

2008

 

2007

 

Segment EBITDA:

 

 

 

 

 

 

 

Owned Hotels:

 

 

 

 

 

 

 

Europe

 

$

38.3

 

$

61.2

 

$

69.0

 

North America

 

14.5

 

9.4

 

10.3

 

Rest of the world

 

25.5

 

32.0

 

34.5

 

Hotel management and part-ownership interests

 

3.0

 

23.3

 

23.8

 

Restaurants

 

1.8

 

3.5

 

5.0

 

Tourist trains and cruises

 

20.6

 

24.3

 

25.5

 

Real estate and property development

 

(3.5

)

(6.4

)

4.1

 

Impairment of goodwill and other intangible assets

 

(6.5

)

(6.1

)

 

Impairment of equity investment

 

 

(23.0

)

 

Gain on sales of fixed assets or investments

 

1.4

 

 

2.3

 

Central overheads

 

(25.9

)

(31.1

)

(26.1

)

 

 

$

69.2

 

$

87.1

 

$

148.4

 

 

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The foregoing segment EBITDA reconciles to net (loss)/earnings from continuing operations, as follows (dollars in millions):

 

 

 

Year ended December 31,

 

 

 

2009

 

2008

 

2007

 

 

 

 

 

 

 

 

 

Net (loss)/earnings from continuing operations

 

$

(19.3

)

$

1.1

 

$

54.0

 

Add:

 

 

 

 

 

 

 

Depreciation and amortization

 

40.8

 

34.8

 

34.7

 

Interest expense, net

 

31.1

 

46.9

 

41.0

 

Foreign currency, net

 

1.1

 

(4.8

)

(0.8

)

Provision for income taxes

 

11.0

 

2.2

 

14.8

 

Share of provision for income taxes of unconsolidated companies

 

4.5

 

6.9

 

4.7

 

Total

 

$

69.2

 

$

87.1

 

$

148.4

 

 

Management evaluates the operating performance of OEH’s segments on the basis of segment EBITDA and believes that segment EBITDA is a useful measure of operating performance because segment EBITDA is not affected by non-operating factors such as leverage and the historic cost of assets.  EBITDA is a financial measure commonly used in OEH’s industry.  OEH’s segment EBITDA, however, may not be comparable in all instances to EBITDA as disclosed by other companies.  Segment EBITDA should not be considered as an alternative to earnings from continuing operations or net earnings (as determined in accordance with U.S. generally accepted accounting principles) as a measure of OEH’s operating performance, or as an alternative to net cash provided by operating, investing and financing activities (as determined in accordance with U.S. generally accepted accounting principles) as a measure of OEH’s ability to meet cash needs.

 

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Year Ended December 31, 2009 compared to

Year Ended December 31, 2008

 

Operating information for OEH’s owned hotels for the years ended December 31, 2009 and 2008 is as follows:

 

 

 

Year ended
December 31,

 

 

 

 

 

 

 

2009

 

2008

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Average Daily Rate (in dollars)

 

 

 

 

 

 

 

 

 

Europe

 

682

 

795

 

 

 

 

 

North America

 

342

 

374

 

 

 

 

 

Rest of the world

 

293

 

280

 

 

 

 

 

Worldwide

 

407

 

442

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Rooms Available (in thousands)

 

 

 

 

 

 

 

 

 

Europe

 

276

 

282

 

 

 

 

 

North America

 

271

 

269

 

 

 

 

 

Rest of the world

 

448

 

430

 

 

 

 

 

Worldwide

 

995

 

981

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Rooms Sold (in thousands)

 

 

 

 

 

 

 

 

 

Europe

 

127

 

153

 

 

 

 

 

North America

 

150

 

175

 

 

 

 

 

Rest of the world

 

221

 

262

 

 

 

 

 

Worldwide

 

498

 

590

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Occupancy (percentage)

 

 

 

 

 

 

 

 

 

Europe

 

46

 

54

 

 

 

 

 

North America

 

55

 

65

 

 

 

 

 

Rest of the world

 

49

 

61

 

 

 

 

 

Worldwide

 

50

 

60

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

RevPAR (in dollars)

 

 

 

 

 

 

 

 

 

Europe

 

313

 

432

 

 

 

 

 

North America

 

189

 

243

 

 

 

 

 

Rest of the world

 

145

 

170

 

 

 

 

 

Worldwide

 

204

 

266

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Change %

 

 

 

 

 

 

 

Dollars

 

Local
Currency

 

Same Store RevPAR (in dollars)

 

 

 

 

 

 

 

 

 

Europe

 

313

 

435

 

(28

)%

(21

)%

North America

 

272

 

359

 

(24

)%

(23

)%

Rest of the world

 

158

 

181

 

(13

)%

(12

)%

Worldwide

 

230

 

299

 

(23

)%

(19

)%

 

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Average daily rate is the average amount achieved for the rooms sold.  RevPAR is revenue per available room, which is the rooms’ revenue divided by the number of available rooms.  Same store RevPAR is a comparison based on the operations of the same units in each period, by excluding the effect of any acquisitions, dispositions (including discontinued operations) or major refurbishments.  The same store data excludes the following operations:

 

Charleston Place Hotel

 

Lapa Palace

Hotel das Cataratas

 

Windsor Court Hotel

The Governor’s Residence

 

Lilianfels Blue Mountains

La Residence d’Angkor

 

Bora Bora Lagoon Resort

 

Revenue

 

Year ended December 31,

 

2009

 

2008

 

 

 

(dollars in thousands)

 

Hotels and restaurants

 

 

 

 

 

Owned hotels

 

 

 

 

 

Europe

 

$

161,446

 

$

217,121

 

North America

 

100,486

 

64,214

 

Rest of the world

 

116,182

 

129,317

 

Hotel management/part ownership interests

 

4,616

 

10,629

 

Restaurants

 

14,436

 

18,499

 

 

 

397,166

 

439,780

 

Tourist trains and cruises

 

58,084

 

77,212

 

Real estate

 

1,706

 

(14,154

)

 

 

$

456,956

 

$

502,838

 

 

Total revenue decreased by $45.9 million, or 9%, from $502.8 million in 2008 to $456.9 million in 2009.  Hotels and restaurants revenue decreased by $42.6 million, or 10%, from $439.8 million in 2008 to $397.2 million in 2009. Revenue from tourist trains and cruises decreased by $19.1 million, or 25%, from $77.2 million in 2008 to $58.1 million in 2009.  The decrease in revenues is due to the global economic downturn and the negative impact this has had on the hotel industry.

 

Owned hotels revenue decreased by $32.6 million, or 8%, from $410.7 million in 2008 to $378.1 million in 2009, of which $24.5 million was due to exchange rate fluctuations and $8.1 million was due to hotel trading.  On a group basis, both average room rates and occupancy declined significantly.

 

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Although 22 condominiums at Porto Cupecoy were sold during 2009, no revenue was recognized following OEH’s decision in 2008 to change the application of its accounting policy for revenue in respect of the Porto Cupecoy development project to account for sales proceeds as deposits, resulting in revenue of $15.3 million recognized in 2007 being reversed in 2008. Two villas at Napasai, Koh Samui, Thailand were sold during 2009 for $1.7 million. There were no real estate sales at Napasai in 2008. Real estate revenue derived from Keswick Hall was $1.1 million in 2008. There was no real estate revenue at Keswick Hall in 2009.

 

Owned Hotels:  The decrease in owned hotels revenue of $32.6 million is analyzed by region as follows:

 

Europe

 

Year ended December 31,

 

2009

 

2008

 

Average daily rate (in dollars)

 

682

 

795

 

Rooms available (in thousands)

 

276

 

282

 

Rooms sold (in thousands)

 

127

 

153

 

Occupancy (percentage)

 

46

 

54

 

RevPAR (in dollars)

 

313

 

432

 

Same store RevPAR (in dollars)

 

313

 

435

 

 

Revenue decreased by $55.7 million, or 26%, from $217.1 million in 2008 to $161.4 million in 2009.  Had exchange rates in 2009 been the same as in 2008, Europe’s 2009 revenue would have been $18.0 million higher than reported.

 

Revenue at the Grand Hotel Europe, St. Petersburg decreased by $21.9 million, or 40%, from $55.2 million in 2008 to $33.3 million in 2009. Of the decreased revenue, $9.0 million was due to exchange rate movement and $12.9 million was due to trading. Average rate in local currency decreased by 4% and occupancy by 28% compared to 2008.

 

In Italy, revenue at the Hotel Splendido and Splendido Mare decreased by $4.3 million from $29.3 million in 2008 to $25.0 million in 2009. Revenue fell by $2.1 million at the Villa San Michele from $12.0 million in 2008 to $9.9 million in 2009, and decreased by $3.2 million at Hotel Caruso Belvedere from $13.8 million in 2008 to $10.6 million in 2009. Revenue at the Hotel Cipriani and Palazzo Vendramin decreased by $6.0 million from $34.1 million in 2008 to $28.1 million in 2009.  Altogether revenue at the six Italian hotels fell by 17%.  Without the negative effect of exchange rate movements of $3.6 million in 2009 compared to the previous year, revenue at the Italian hotels collectively would have been $12.0 million lower in 2009 than in 2008, reflecting a decline in average rates of 14% across the six properties on a same store local currency basis which was partially offset by a 2% rise in occupancy, when expressed in local currency.

 

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Table of Contents

 

Revenue at La Residencia, Mallorca decreased by $5.7 million, or 34%, from $16.8 million in 2008 to $11.1 million in 2009. Of the decrease in revenue, $0.5 million was due to exchange rate movements and $5.2 million due to trading. Average rate decreased by 12% and occupancy by 25% compared to 2008.

 

Revenue at Le Manoir aux Quat’Saisons, Oxfordshire decreased by $3.0 million, or 13%, from $23.7 million in 2008 to $20.7 in 2009. Exchange rate movements caused revenue to fall by $3.7 million in 2009 compared to the prior year.  Revenue increased by $0.7 million due to improved year on year trading.  Average rate increased by 2% while occupancy dropped by 4% compared to the prior year.

 

Revenue at Reid’s Palace, Madeira decreased by $7.8 million, or 31%, to $17.1 million in 2009 from $24.9 million in 2008. Of the decrease in revenue, $0.8 million was due to exchange rate movements and $7.0 million due to trading. Occupancy declined 20% and average rate declined 13% compared to 2008.

 

Revenue at Hôtel de la Cité, Carcassonne decreased by $1.8 million, or 24%, to $5.6 million in 2009 from $7.4 million in 2008. Both occupancy and average rate declined at Hôtel de la Cité in 2009, by 14% and 7% respectively, compared to 2008.

 

On a same store basis across the European hotels, RevPAR decreased by 21% in local currency or 28% when translated in U.S. dollars. Occupancy on a same store basis declined from 54% in 2008 to 46% in 2009, and same store ADR declined 14% from $792 in 2008 to $682 in 2009.

 

North America

 

Year ended December 31,

 

2009

 

2008

 

Average daily rate (in dollars)

 

342

 

374

 

Rooms available (in thousands)

 

271

 

269

 

Rooms sold (in thousands)

 

150

 

175

 

Occupancy (percentage)

 

55

 

65

 

RevPAR (in dollars)

 

189

 

243

 

Same store RevPAR (in dollars)

 

272

 

359

 

 

Revenue increased by $36.3 million in 2009 compared to 2008. Excluding Charleston Place Hotel which was consolidated for the first time in 2009, North America revenue decreased by $10.2 million to $54.0 million in 2009 compared with $64.2 million in 2008.

 

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Table of Contents

 

Revenue at the Charleston Place Hotel, South Carolina was $46.5 million for 2009 compared with $57.7 million in 2008, a decrease of $11.2 million, or 19%. Occupancy fell 10% from 65% in 2008 to 55% in 2009, and RevPAR decreased by 20% from $167 in 2008 to $133 in 2009. Earnings from the Charleston Place Hotel were reflected in earnings from unconsolidated companies in 2008.

 

Revenue at Inn at Perry Cabin, Maryland decreased by $1.9 million, or 17%, from $11.3 million in 2008 to $9.4 million in 2009. Occupancy decreased by 13% and average rate by 1% compared to 2008.

 

In Mexico, revenue at Maroma Resort and Spa decreased by $5.5 million, or 31%, from $17.5 million in 2008 to $12.0 million in 2009. The outbreak of swine flu and media reports on domestic crime impacted revenue as travel plans to Mexico were cancelled by prospective tourists. Average rate dropped 7% while occupancy dropped a significant 26% compared to 2008.  Revenue at Casa de Sierra Nevada decreased by $0.8 million to $2.3 million in 2009 from $3.1 million in 2008, of which $0.4 million was due to currency movement and $0.4 million was due to an occupancy decline of 26%, partly offset by an increase in average rate of 1% compared to 2008.

 

Revenue at La Samanna, St Martin decreased by $1.2 million, or 6%, to $19.6 million in 2009 from $20.8 million in the prior year, with both average rate and occupancy declining by 15% and 9%, respectively, compared to 2008. Five of the eight villas built on land owned by OEH adjacent to La Samanna were available for rental from mid-December 2008 for the first time, generating revenue of $2.1 million in 2009.

 

Revenue at Keswick Hall, Virginia decreased by $0.4 million from $11.1 million in 2008 to $10.7 million in 2009. Average rates fell by 6% and occupancy fell by 3% in 2009.

 

Across all of the North American properties, on a same store basis RevPAR decreased by 24%. Average occupancy was 55% in 2009 compared to 65% in 2008.

 

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Rest of the World

 

Year ended December 31,

 

2009

 

2008

 

Average daily rate (in dollars)

 

293

 

280

 

Rooms available (in thousands)

 

448

 

430

 

Rooms sold (in thousands)

 

221

 

262

 

Occupancy (percentage)

 

49

 

61

 

RevPAR (in dollars)

 

145

 

170

 

Same store RevPAR (in dollars)

 

158

 

181

 

 

Excluding Hotel das Cataratas in Brazil which was undergoing refurbishment for the major part of 2009, revenue in the Rest of the World region decreased by $11.4 million, or 9%, from $121.0 million in 2008 to $109.6 million in 2009.

 

Revenue at the Copacabana Palace, Brazil increased by $1.3 million, or 3%, to $41.8 million in 2009 from $40.5 million in 2008. Exchange rate movements caused revenue to fall by $3.4 million in 2009 compared to the prior year at constant exchange rates.  Revenue increased by $4.7 million due to improved year on year trading.  Occupancy on a same store basis decreased 3% in 2009 and average daily rate increased by 2%.

 

Revenue at The Observatory Hotel, Sydney, Australia, decreased by $1.4 million, or 11%, from $12.9 million in 2008 to $11.5 million in 2009. Exchange rate movement contributed $0.7 million of the revenue shortfall and $0.7 million was due to trading. Average daily rate fell in 2009 by 10% compared to the prior year. Occupancy, however, increased 11% compared to 2008.

 

South African revenue decreased by $6.4 million, or 21%, to $23.7 million in 2009 from $30.1 million in 2008.  Revenue at the Mount Nelson Hotel, Cape Town decreased by $4.8 million and revenue at the Westcliff, Johannesburg decreased by $1.6 million to $15.4 million and $8.3 million, respectively.  The movement of the South African rand and U.S. dollar exchange rate had a negative impact on the revenue of these two hotels of $0.3 million, and $6.1 million of the shortfall was due to trading. Local currency average daily rates at the Mount Nelson decreased by 3% and occupancy decreased by 21% compared to the prior year. Local currency rates increased by 1% at the Westcliff, which offset a drop in occupancy of 12% at this hotel on a same store basis.

 

Revenue at OEH’s three safari camps in Botswana decreased by $3.2 million, or 32%, from $10.0 million in 2008 to $6.8 million in 2009. Exchange rate movements between the U.S dollar and Botwanan pula had a negative impact on revenues of $0.3 million.  Accordingly, trading declined by $2.9 million in 2009 compared to the prior year.

 

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Revenue for OEH’s six Asian hotels collectively decreased by $0.7 million, or 4%, from $19.0 million in 2008 to $18.3 million in 2009.  Exchange rate movements accounted for $0.6 million of the revenue shortfall.

 

The Rest of the World region RevPAR, on a same store basis, decreased by 12% in local currency compared to 2008. This translated into a same store RevPAR decrease of 13% when expressed in U.S. dollars.

 

Hotel Management and Part-Ownership Interests:  Revenue from hotel management interests decreased by $6.0 million from $10.6 million in 2008 to $4.6 million in 2009, primarily due to the consolidation of Charleston Place Hotel for the first time in 2009. This property previously was accounted for under hotel management and part-ownership interests in 2008 and 2007. See Note 3 to the Financial Statements. Weakened trading due to the global economic climate negatively impacted OEH’s interests at Hotel Ritz, Madrid and the Peru hotels by $0.4 million and $0.7 million, respectively.

 

Restaurants:  Revenue decreased by $4.1 million from $18.5 million in 2008 to $14.4 million in 2009. The number of covers at the ‘21’ Club in New York City dropped by 8%, and the average spend decreased 12%, from $125 in 2008 to $109 in 2009.

 

Tourist Trains and Cruises:  Revenue decreased by $19.1 million, or 25%, from $77.2 million in 2008 to $58.1 million in 2009.

 

The Venice Simplon-Orient-Express revenue decreased by $10.4 million, or 37%, from $28.1 million in 2008 to $17.7 million in 2009.  Exchange rate movement reduced the train’s revenue when reported in U.S. dollars by $3.2 million. Venice Simplon-Orient-Express revenue also decreased partly due to the train operating fewer trips than the previous year, resulting in fewer passenger numbers.  The decision to operate fewer trips was due to a shortfall in demand, primarily as a result of the weakened global economic climate.

 

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Table of Contents

 

The Royal Scotsman generated revenue of $4.7 million in 2009 compared to $6.1 million in the prior year. Of this decrease, $0.8 million was due to exchange rate fluctuations. Revenue for The Royal Scotsman also decreased partly due to the train operating fewer trips than the previous year, resulting in fewer passenger numbers, because of lower demand primarily as a result of the weakened global economic climate.

 

Revenue generated by the day train services operating in the United Kingdom — the British Pullman and the Northern Belle — decreased by $2.1 million from $20.7 million in 2008 to $18.6 million in 2009, of which $3.4 million was due to the change in the British pound to U.S. dollar exchange rate offset by improved trading of $1.3 million.

 

Real Estate:  Following the change in the fourth quarter of 2008 to account for sales proceeds as deposits for the Porto Cupecoy development project, revenue of $15.3 million recognized in 2007 was reversed in 2008. Two villas at Napasai, Koh Samui, Thailand were sold during 2009 for $1.7 million. There were no real estate sales at Napasai in 2008. There was no real estate revenue at Keswick Hall in 2009. Real estate revenue derived from Keswick Hall was $1.1 million in 2008 when two lots were sold.

 

Depreciation and Amortization

 

Depreciation and amortization expense increased by $6.0 million from $34.8 million in 2008 to $40.8 million in 2009. Excluding Charleston Place Hotel which was consolidated for the first time, the increase was $0.7 million, $0.6 million being exchange rate movement year on year.

 

Operating Expenses

 

Operating expenses decreased by $6.2 million, or 3%, from $229.9 million in 2008 to $223.7 million in 2009. The 2008 expense included a credit of $9.9 million following the change in the application of the accounting policy for the Porto Cupecoy development in the fourth quarter of 2008, excluding which the saving was $16.1 million. Furthermore, Charleston Place Hotel was consolidated for the first time in 2009 when operating expenses for this property were $20.3 million. If this expense is also excluded, the decrease in operating expense was $36.4 million. Operating expenses decreased as a result of lower trading levels due to the global economic crisis.

 

Operating expenses at the European hotels, excluding Le Manoir aux Quat’Saisons and the Grand Hotel Europe, decreased by $12.0 million, out of which $3.0 million was partly due to the European euro to U.S. dollar exchange rate.

 

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Operating expenses incurred in the United Kingdom in 2009 decreased by $12.0 million to $48.4 million in 2009 from $60.4 million in 2008. Movement in the British pound to the U.S. dollar caused expenses to decrease $10.8 million. The Venice Simplon-Orient-Express train incurs significant operating costs in euros, primarily haulage, railway track access and staff costs, which were higher in 2009 than in 2008 due to movements of the British pound exchange rate to the euro.

 

As a percentage of revenue, operating expenses were 49% of revenue in 2009 and 46% in 2008. Excluding the Porto Cupecoy costs mentioned above and Charleston Place Hotel, operating expenses were 49% of revenue in 2009 and 48% in 2008.

 

Selling, General and Administrative Expenses

 

Selling, general and administrative expenses decreased by $12.8 million, or 7%, from $180.5 million in 2008 to $167.7 million in 2009. Excluding Charleston Place Hotel which was consolidated for the first time in 2009, the decrease was $27.0 million. Selling, general and administrative expenses decreased as a result of lower trading levels due to the weakened global economic climate.

 

Selling, general and administrative expenses at the European hotels, excluding Le Manoir aux Quat’Saisons and the Grand Hotel Europe, decreased by $5.0 million from $36.4 million in 2008 to $31.4 million in 2009. Euro to U.S. dollar exchange rate movements caused costs to decrease by $1.7 million.

 

Selling, general and administrative expenses in 2009 included an amount of $1.1 million in respect of staff termination and restructuring costs.

 

As a percentage of revenue, selling, general and administrative expenses were 37% of revenue in 2009 compared to 36% of revenue in 2008. Excluding Charleston Place Hotel, selling, general and administrative expenses were 38% in 2009.

 

Impairment of Goodwill

 

As noted above, OEH recorded an estimated goodwill impairment charge of $6.5 million in the first quarter of 2009. The goodwill arose on the acquisition in previous years of Miraflores Park Hotel, Casa de Sierra Nevada and The Observatory Hotel. In 2008, an impairment charge of $6.1 million was recorded.  The goodwill arose on acquisitions in previous years of Le Manoir aux Quat’Saisons, Hôtel de la Cité and Keswick Hall.

 

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Table of Contents

 

Impairment of Equity Investment

 

As noted above, OEH recorded an impairment charge of $23.0 million in 2008 in respect its 50% investment in Hotel Ritz in  Madrid. There was no equivalent impairment expense in 2009 or 2007.

 

Gain on disposal of fixed assets

 

There was a gain on the settlement of insurance proceeds for hurricane damaged assets of the Road to Mandalay cruiseship of $1.4 million in 2009.

 

Segment EBITDA

 

Year ended December 31,

 

2009

 

2008

 

 

 

(dollars in thousands)

 

Segment EBITDA:

 

 

 

 

 

 

 

 

 

 

 

Hotels and restaurants

 

 

 

 

 

Owned hotels

 

 

 

 

 

Europe

 

$

38,328

 

$

61,215

 

North America

 

14,579

 

9,455

 

Rest of the world

 

25,453

 

32,000

 

Hotel management/part ownership interests

 

2,995

 

23,302

 

Restaurants

 

1,757

 

3,518

 

 

 

83,112

 

129,490

 

Tourist trains and cruises

 

20,571

 

24,279

 

Real estate

 

(3,476

)

(6,433

)

Impairment of goodwill and other intangible assets

 

(6,500

)

(6,107

)

Impairment of equity investments

 

 

(22,992

)

Gain on disposal of assets

 

1,385

 

 

Central overheads

 

(25,870

)

(31,117

)

 

 

 

 

 

 

 

 

$

69,222

 

$

87,120

 

 

Segment EBITDA margins (calculated as segment EBITDA before impairment of fixed assets, goodwill and equity investments and gain on disposal of fixed assets, as a percentage of revenue) for the year ended December 31, 2009 decreased by 7%, from 23% in 2008 to 16% in 2009.

 

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In 2009, the European hotels collectively reported a segment EBITDA of $38.3 million compared to $61.2 million in the same period in 2008.  As a percentage of European hotel revenue, the European segment EBITDA margin declined from 28% in 2008 to 24% in 2009.

 

Segment EBITDA in the North American region was $9.5 million in 2008 and $14.6 million in 2009, an increase of $5.1 million. Excluding Charleston Place Hotel which was consolidated for the first time in 2009, segment EBITDA for the North American region was $2.6 million in 2009. As a percentage of North American hotel revenue, the North American segment EBITDA margin remained at 15% for both 2008 and 2009. Excluding Charleston Place Hotel, the EBITDA margin was 5% in 2009.

 

Segment EBITDA in the Rest of the World region decreased by $6.5 million to $25.5 million in 2009 from $32.0 million in 2008.  The 2009 and 2008 segment EBITDA included the full year results of Hotel das Cataratas, Brazil, which OEH began operating in October 2007 and which was undergoing refurbishment in 2009 and 2008. This hotel reported an EBITDA loss of $4.9 million in 2009 compared to a loss of $3.6 million in 2008.  If Hotel das Cataratas results for the two years were excluded, segment EBITDA for the Rest of the World region decreased by $5.3 million to $30.3 million in 2009 compared to $35.6 million in 2008. The segment EBITDA margin in 2009, excluding Hotel das Cataratas, was 28% compared to a margin of 29% in 2008.

 

Earnings from Operations

 

Earnings from operations decreased by $31.9 million from a profit of $51.6 million in 2008 to a profit of $19.7 million in 2009 due to the factors referred to in the preceding paragraphs.

 

Net Finance Costs

 

In 2009, net finance costs of $32.1 million include foreign currency translation losses of $1.1 million and a charge of $1.1 million in accordance with ASC 815 “Derivatives and Hedging” (formerly SFAS 133 “Accounting for Derivative Instruments and Hedging Activities”), relating to the movement in fair value of non-effective interest rate hedges.  In 2008, net finance costs of $42.1 million included a foreign currency gain of $4.8 million and a charge of $4.5 million for non-effective interest rate hedges.  Excluding this movement in fair value of interest rate hedges and foreign currency gains and losses, net finance costs decreased by $12.5 million reflecting a decrease in average borrowing levels and lower average interest rates.

 

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Provision for Income Taxes

 

The provision for income taxes increased by $8.8 million, from $2.2 million in 2008 to $11.0 million in 2009.

 

The Company is incorporated in Bermuda, which does not impose an income tax.  Accordingly, the income tax provision was attributable to income tax charges incurred by subsidiaries operating in jurisdictions that impose an income tax and also attributable to the relative amount of earnings or loss in jurisdictions, the effect of valuation allowances, and uncertain tax positions. It is also affected by discrete items that may occur in any given year, but are not consistent from year to year.  Significant discrete items which had the most significant impact on the tax provision included a deferred tax charge of $5.2 million arising in respect of Brazilian fixed asset timing differences, following movements in the exchange rate between the U.S. dollar and Brazilian real.

 

The provision for income taxes of $2.2 million for 2008 included a tax credit of $11.8 million to reduce uncertain tax provisions including related interest and penalties.

 

The provision for income taxes of $11.0 million for 2009 included a tax credit of $4.2 million to reduce OEH’s uncertain tax positions including related interest and penalties.

 

Earnings from Unconsolidated Companies

 

Earnings from unconsolidated companies, before taxes, which included OEH’s share of the net earnings of its equity investments as well as interest income related to loans and advances to the equity investees, decreased by $15.1 million, or 63%, from $23.8 million in 2008 to $8.7 million in 2009.

 

Earnings from the Charleston Place Hotel for 2009 are reflected within owned hotels, as the hotel was consolidated for the first time in 2009.  In 2008, earnings from the Charleston Place Hotel were $15.0 million.

 

Earnings from the Peruvian railway joint venture decreased by $0.5 million, or 5%, from $11.0 million in 2008 to $10.5 million in 2009. The Peruvian hotel joint venture earnings fell by $0.1 million from $2.4 million in 2008 to $2.3 million in 2009.

 

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OEH’s share of earnings from Hotel Ritz in Madrid fell by $4.0 million from income of $0.1 million in 2008 to a loss of $3.9 million in 2009.

 

The income tax expense incurred by OEH in respect of these unconsolidated earnings was $4.5 million in 2009, compared to $7.0 million in 2008.

 

Losses from Discontinued Operations

 

The loss from discontinued operations in 2009 was $49.5 million, an increase of $21.9 million from the loss recognized in 2008 of $27.6 million.

 

Included in the loss for 2009 was an impairment charge of $43.7 million recognized against goodwill and fixed assets of Bora Bora Lagoon Resort, Windsor Court Hotel, La Cabana restaurant and Lilianfels Blue Mountains.

 

Included in the loss for 2008 was an impairment charge of $15.6 million recognized against the goodwill and fixed asset of Lapa Palace, Windsor Court Hotel and Bora Bora Lagoon Resort.

 

During 2009, net gains of $3.7 million were realized on discontinued operations sold by OEH. In 2008, there were no discontinued operations sold and therefore no gains or losses on sale were realized.

 

During 2009, OEH continued in its program to sell non-core assets. In June 2009, OEH sold Lapa Palace as management had concluded that the Lisbon market was not a prime leisure destination and lacked sufficient appeal for OEH’s leisure audiences. In addition, management did not see further opportunities to develop and grow business in Lisbon.

 

In October 2009, sold the Windsor Court Hotel. Management did not believe that New Orleans was a prime leisure destination for OEH’s customers.  The hotel’s performance had been impacted by new local competition and significant capital investment in the hotel was needed.

 

In December 2009, OEH signed an agreement to sell Lilianfels Blue Mountains in Katoomba, New South Wales, Australia for A$21 million ($19.3 million). Again, this hotel was situated in a non-core market for OEH.  The sale was completed in January 2010.

 

Also in December 2009, OEH contracted to sell La Cabana in Buenos Aires for $2.7 million for completion in March 2010, principally due to the restaurant’s underperformance and the small size of this activity.

 

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Year ended December 31, 2008 compared to

Year ended December 31, 2007

 

Operating information for OEH’s owned hotels for the years ended December 31, 2008 and 2007 is as follows:

 

 

 

Year ended
December 31,

 

 

 

 

 

 

 

2008

 

2007

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Average Daily Rate (in dollars)

 

 

 

 

 

 

 

 

 

Europe

 

796

 

723

 

 

 

 

 

North America

 

546

 

526

 

 

 

 

 

Rest of the world

 

280

 

274

 

 

 

 

 

Worldwide

 

482

 

468

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Rooms Available (in thousands)

 

 

 

 

 

 

 

 

 

Europe

 

282

 

285

 

 

 

 

 

North America

 

107

 

105

 

 

 

 

 

Rest of the world

 

423

 

374

 

 

 

 

 

Worldwide

 

812

 

764

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Rooms Sold (in thousands)

 

 

 

 

 

 

 

 

 

Europe

 

153

 

167

 

 

 

 

 

North America

 

70

 

68

 

 

 

 

 

Rest of the world

 

262

 

240

 

 

 

 

 

Worldwide

 

485

 

475