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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2008
-----------------
Commission file number 33-11096
CRI HOTEL INCOME PARTNERS, L.P.
Organized pursuant to the Laws of the State of Delaware
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Internal Revenue Service - Employer Identification No. 52-1500621
11200 Rockville Pike, Rockville, Maryland 20852
(301) 468-9200
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Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 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 is a large accelerated filer, an
accelerated filer, or a non-accelerated filer.
Large accelerated filer [ ] Accelerated filer [ ] Non-accelerated filer [X]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).
Yes [ ] No [X]
- --------------------------------------------------------------------------------
CRI HOTEL INCOME PARTNERS, L.P.
INDEX TO FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 2008
Page
----
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
Balance Sheets
- March 31, 2008 and December 31, 2007........................ 1
Statements of Operations
- for the three months ended March 31, 2008 and 2007.......... 2
Statement of Changes in Partners' (Deficit) Capital
- for the three months ended March 31, 2008................... 3
Statements of Cash Flows
- for the three months ended March 31, 2008 and 2007.......... 4
Notes to Financial Statements
- March 31, 2008 and 2007..................................... 5
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations..................................... 10
Item 4. Controls and Procedures......................................... 15
Part II. OTHER INFORMATION
Item 5. Other Information................................................. 15
Item 6. Exhibits.......................................................... 17
Signature.................................................................. 18
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
CRI HOTEL INCOME PARTNERS, L.P.
BALANCE SHEETS
ASSETS
March 31, December 31,
2008 2007
------------ ------------
(Unaudited)
Property and equipment - at cost:
Land ............................................................................. $ 1,574,490 $ 1,574,490
Buildings and site improvements .................................................. 14,265,485 14,265,485
Furniture, fixtures and equipment ................................................ 4,035,502 3,721,657
Leasehold improvements ........................................................... 1,431,234 1,431,234
------------ ------------
21,306,711 20,992,866
Less: accumulated depreciation and amortization .................................. (13,927,661) (13,703,827)
------------ ------------
7,379,050 7,289,039
Hotel operating cash ............................................................... 454,769 576,809
Working capital reserve ............................................................ 1,305,590 1,582,408
Capital improvements and real estate tax reserves held by servicer ................. 472,289 315,585
Receivables and other assets ....................................................... 717,817 329,260
Acquisition fees, principally paid to related parties,
net of accumulated amortization of $709,579 and $697,296, respectively ........... 310,524 322,807
Property purchase costs,
net of accumulated amortization of $128,867 and $126,274, respectively ........... 53,400 55,993
Deposit ............................................................................ 92,500 18,000
------------ ------------
Total assets ................................................................... $ 10,785,939 $ 10,489,901
============ ============
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable and accrued expenses .............................................. $ 919,675 $ 698,514
Hotel trade payables ............................................................... 137,883 228,397
Mortgage payable ................................................................... 7,213,845 7,273,441
------------ ------------
Total liabilities .............................................................. 8,271,403 8,200,352
------------ ------------
Partners' (deficit) capital:
General Partner .................................................................. (338,494) (342,994)
Beneficial Assignee Certificates (BACs) Series A;
868,662 BACs issued and outstanding ............................................ 2,853,030 2,632,543
------------ ------------
Total partners' capital ........................................................ 2,514,536 2,289,549
------------ ------------
Total liabilities and partners' capital ........................................ $ 10,785,939 $ 10,489,901
============ ============
The accompanying notes are an integral part
of these financial statements.
-1-
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
CRI HOTEL INCOME PARTNERS, L.P.
STATEMENTS OF OPERATIONS
(Unaudited)
For the three months ended
March 31,
---------------------------
2008 2007
----------- -----------
Revenue:
Rooms ............................................. $ 2,890,477 $ 2,921,028
Rental and other .................................. 69,828 73,995
Food and beverage ................................. 12,252 15,940
Telephone ......................................... 11,517 12,979
----------- -----------
2,984,074 3,023,942
----------- -----------
Departmental expenses:
Rooms ............................................. (711,757) (684,608)
Rental and other .................................. (19,704) (19,791)
Telephone ......................................... (17,604) (14,911)
Food and beverage ................................. (6,296) (9,942)
----------- -----------
(755,361) (729,252)
----------- -----------
Gross operating income .............................. 2,228,713 2,294,690
----------- -----------
Unallocated operating income (expenses):
Interest and other income ......................... 34,338 29,151
General and administrative ........................ (444,878) (333,734)
Building lease .................................... (282,398) (293,772)
Depreciation and amortization ..................... (238,709) (262,271)
Marketing ......................................... (233,572) (246,758)
Energy ............................................ (194,160) (186,162)
Property operations and maintenance ............... (181,990) (178,072)
Property taxes .................................... (135,372) (131,178)
Management fees ................................... (104,665) (106,067)
Professional fees ................................. (57,331) (54,331)
Base asset management fee ......................... (23,438) (23,438)
----------- -----------
(1,862,175) (1,786,632)
----------- -----------
Operating income .................................... 366,538 508,058
Interest expense .................................... (141,551) (144,369)
----------- -----------
Net income .......................................... $ 224,987 $ 363,689
=========== ===========
Net income allocated to General Partner (2%) ........ $ 4,500 $ 7,274
=========== ===========
Net income allocated to BAC Holders (98%) ........... $ 220,487 $ 356,415
=========== ===========
Net income per BAC, based on 868,662 BACs outstanding $ 0.25 $ 0.41
=========== ===========
The accompanying notes are an integral part
of these financial statements.
-2-
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
CRI HOTEL INCOME PARTNERS, L.P.
STATEMENT OF CHANGES IN PARTNERS' (DEFICIT) CAPITAL
(Unaudited)
Beneficial
Assignee
General Certificate
Partner Holders Total
--------- ---------- ----------
Partners' (deficit) capital, January 1, 2008 $(342,994) $2,632,543 $2,289,549
Net income 4,500 220,487 224,987
--------- ---------- ----------
Partners' (deficit) capital, March 31, 2008 $(338,494) $2,853,030 $2,514,536
========= ========== ==========
The accompanying notes are an integral part
of these financial statements.
-3-
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
CRI HOTEL INCOME PARTNERS, L.P.
STATEMENTS OF CASH FLOWS
(Unaudited)
For the three months ended
March 31,
---------------------------
2008 2007
--------- ---------
Cash flows from operating activities:
Net income ................................................................ $ 224,987 $ 363,689
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization ........................................... 238,710 262,271
Changes in assets and liabilities:
Increase in receivables and other assets, net ......................... (388,557) (74,919)
Increase in accounts payable and accrued expenses ..................... 221,161 76,925
Decrease in hotel trade payables ...................................... (90,514) (151,302)
--------- ---------
Net cash provided by operating activities ........................... 205,787 476,664
--------- ---------
Cash flows from investing activities:
Additions to property and equipment ....................................... (313,845) (106,494)
Net withdrawals from working capital reserve .............................. 276,818 41,184
Net deposits to capital improvements
and real estate tax reserves held by servicer ........................... (156,704) (109,624)
--------- ---------
Net cash used in investing activities ............................... (193,731) (174,934)
--------- ---------
Cash flows from financing activities:
Payment of principal on mortgage payable .................................. (56,596) (56,777)
Increase in deposits ...................................................... (74,500) --
Distribution payable ...................................................... -- 221,597
--------- ---------
Net cash (used in) provided by financing activities ................. (134,096) 164,820
--------- ---------
Net (decrease) increase in hotel operating cash and cash and cash equivalents (122,040) 466,550
Hotel operating cash and cash and cash equivalents, beginning of period ..... 576,809 257,861
--------- ---------
Hotel operating cash and cash and cash equivalents, end of period ........... $ 454,769 $ 724,411
========= =========
Supplemental disclosure of cash flow information:
Cash paid during the period for interest .................................. $ 141,551 $ 144,369
========= =========
The accompanying notes are an integral part
of these financial statements.
-4-
CRI HOTEL INCOME PARTNERS, L.P.
NOTES TO FINANCIAL STATEMENTS
March 31, 2008 and 2007
(Unaudited)
1. BASIS OF PRESENTATION
In the opinion of CRICO Hotel Associates I, L.P. (the General Partner), the
accompanying unaudited financial statements reflect all adjustments, consisting
of normal recurring accruals, necessary for a fair presentation of the financial
position of CRI Hotel Income Partners, L. P. (the Partnership) as of March 31,
2008, and the results of its operations and its cash flows for the three month
periods ended March 31, 2008 and 2007. The results of operations for the interim
period ended March 31, 2008, are not necessarily indicative of the results to be
expected for the full year.
The accompanying unaudited financial statements have been prepared in
conformity with accounting principles generally accepted in the United States of
America (US GAAP) and with the instructions to Form10-Q. Certain information and
accounting policies and footnote disclosures normally included in financial
statements prepared in conformity with US GAAP have been condensed or omitted
pursuant to such instructions. These condensed financial statements should be
read in conjunction with the financial statements and notes thereto included in
the Partnership's annual report on Form 10-KSB at December 31, 2007.
The Partnership and the chief operating decision maker consider the hotels'
operations as a single homogeneous business activity as it relates to achieving
their objectives of cash flow growth and capital appreciation. The chief
operating decision maker reviews cash flow and operating results in the
aggregate in order to determine the appropriate level of cash available, if any,
for distribution to the investors in the Partnership. Accordingly, the
Partnership considers itself to operate in a single reportable segment in
accordance with Statement of Financial Accounting Standards No. 131.
2. LONG-LIVED ASSETS
The Partnership reviews long-lived assets for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be fully recoverable. Recoverability is measured by a comparison of the carrying
amount of an asset to the estimated future undiscounted net cash flows expected
to be generated by the asset. If an asset were determined to be impaired, its
basis would be adjusted to fair value through the recognition of an impairment
loss.
3. WORKING CAPITAL RESERVE
The working capital reserve of $1,305,590 and $1,582,408 as of March 31,
2008 and December 31, 2007, respectively, represents all cash and cash
equivalents maintained as working capital for the Partnership. In accordance
with the terms of the Partnership Agreement, the working capital reserve may be
increased or reduced by the General Partner as it deems appropriate.
-5-
CRI HOTEL INCOME PARTNERS, L.P.
NOTES TO FINANCIAL STATEMENTS
March 31, 2008 and 2007
(Unaudited)
4. CAPITAL IMPROVEMENTS AND REAL ESTATE TAX RESERVES
HELD BY SERVICER
In addition to the monthly loan installments, as discussed below, through
May 1, 2008 the Partnership also made monthly payments which were escrowed for
capital improvements (CIR) and estimated annual real estate taxes. The monthly
CIR payment totaling $19,365 was held in escrow to be drawn on by the
Partnership for ongoing capital improvement expenditures and for the replacement
of furniture, fixtures and equipment at the hotels. The real estate tax payments
for annual taxes and assessments to be levied on the hotels was estimated as
$32,655 per month. The servicer of the loan paid such taxes and assessments when
due from these escrows. Both the CIR and real estate tax payments were due on
the same day as the monthly principal and interest installments. On May 6, 2008,
the Partnership's mortgage loan was refinanced with the proceeds of four
separate loans. The new lenders will escrow for real estate taxes, but not CIR.
During the three month periods ended March 31, 2008 and 2007, the
Partnership made escrow deposits aggregating $58,094 and $58,094, respectively,
for capital improvements, and $97,966 and $96,605, respectively, for estimated
annual real estate taxes. As of March 31, 2008, and December 31, 2007, the
servicer held reserves of $256,474 and $197,736 respectively, for capital
improvements and $215,815 and $117,849, respectively, for real estate taxes.
5. MORTGAGES PAYABLE
On December 19, 1997, the Partnership refinanced with Citicorp Real Estate,
Inc. (Citicorp) the Zero Coupon Notes which were originally issued in connection
with the Partnership's acquisition of the hotels. The loan matured January 1,
2008. On that date, a balloon payment in the amount of $7,273,441 became due.
The General Partner was unable to refinance the Partnership's mortgage debt
prior to its maturity. Although the loan was in default, the special servicer
has agreed to a forbearance agreement for a period of 180 days in consideration
for payment of a fee in the amount of $72,734.41, and continued monthly payments
of principal, interest (at the pre-default rate) and tax and capital
improvements escrows.
On May 6, 2008, the Partnership closed three loans from General Electric
Credit Corporation ("GE") in the aggregate amount of $5,000,000 to refinance the
Plymouth and Roseville hotels in Minnesota and the Clearwater hotel in Florida.
The three loans are cross-collateralized by the three hotels. The Partnership
used the loan proceeds together with the proceeds of a loan from Remediation
Capital Funding, LLC in the amount of $2,900,000 secured by the University hotel
in Minnesota, to pay off the existing debt in full.
The Phase I environmental study of the University hotel required by GE
revealed excess levels of three chemicals deemed hazardous in the groundwater on
the property. The contamination is not due to acts or omissions of the hotel.
Simultaneously with its refinancing efforts, the Partnership engaged a
consultant to enroll the University property in the Minnesota Pollution Control
Agency's Voluntary Investigation and Cleanup ("VIC") Program and deal with the
contamination at the site. The Partnership's goal is to obtain a No Action
Letter with a Covenant Not to Sue, at which point it should be able to obtain
conventional financing on the property again. The Partnership has been advised
that the VIC Program process will likely take from six months to eighteen
months.
-6-
CRI HOTEL INCOME PARTNERS, L.P.
NOTES TO FINANCIAL STATEMENTS
March 31, 2008 and 2007
(Unaudited)
5. MORTGAGE PAYABLE - Continued
The three new GE loans bear interest at the rate of 6.79% per annum and
mature on January 1, 2016 with balloon payments due as set forth below:
Plymouth $887,269
Roseville $2,083,122
Clearwater $887,269
The new loan with Remediation Capital bears interest at the rate of 14% per
annum and matures on May 6, 2009, although the Partnership has two options to
extend the loan for six months each time. It is contemplated that this loan will
be refinanced after the environmental issues at the University hotel has been
resolved.
The Partnership has determined that the carrying value of the current loans
approximate fair value based on its market rate of interest.
The Partnership made installments of principal and interest aggregating
$201,147 for both of the three month periods ended March 31, 2008 and 2007. The
Partnership's balance on the former loan was $7,213,845 and $7,273,441 as of
March 31, 2008 and December 31, 2007, respectively.
6. DISTRIBUTIONS TO BAC HOLDERS
A distribution in the amount of $221,597 ($0.25 per BAC) was declared and
paid to BAC holders of record and to the General Partner for the first quarter
of 2007 in the amounts of $217,165 and $4,432, respectively. A distribution in
the amount of $221,598 ($0.25 per BAC) was declared and paid to BAC holders of
record, to the General Partner and to the state of Minnesota for withholding for
the second quarter of 2007 in the amounts of $212,021, $4,432 and $5,145,
respectively. A distribution in the amount of $221,597 ($0.25 per BAC) was
declared and paid to BAC holders of record and to the General Partner and to the
state of Minnesota for withholding for the third quarter of 2007 in the amounts
of $212,020, $4,432 and $5,145, respectively. The Partnership did not declare a
distribution for the fourth quarter of 2007 or the first quarter of 2008.
7. COMMITMENTS
a. Hotel Management Agreements
---------------------------
The Partnership entered into management agreements with Bryanston
Group d/b/a Buckhead Hotel Management Company, Inc. (Buckhead) in
connection with operation of the hotels. The management agreements, which
were extended during 2001 to expire between November 2007 and July 2008,
provide for a base management fee of 3.5% of gross revenues from
operations. The management agreements also call for a marketing fee of 1.5%
of net room revenues, a reservation fee of 2.3% of gross revenues from
rental of hotel guest rooms, and an incentive management fee generally
equal to 25% of net cash flow available after payment of a preferred cash
flow return to the Partnership equal to 11% of the aggregate purchase price
for hotels owned by the Partnership. No incentive management fees were
earned for either of the three month periods ended March 31, 2008 and 2007.
-7-
CRI HOTEL INCOME PARTNERS, L.P.
NOTES TO FINANCIAL STATEMENTS
March 31, 2008 and 2007
(Unaudited)
7. COMMITMENTS - Continued
As the respective contracts expire, the Partnership has entered into new
management contracts with Oak Hotels, Inc. under substantially similar
business terms.
b. Lease Agreements
----------------
The Partnership assumed an existing lease agreement from Days
Inns of America, Inc. in connection with the acquisition of the
leasehold interest in the Scottsdale Days Inn. The assumption
transfers the rights to operate the property on the lease's existing
terms over the remaining life of the lease. In October 2002, the lease
was extended to expire on December 31, 2008. There are no further
extensions provided in the lease agreement, but the Partnership is in
negotiations for certain short term extensions through December 31,
2009 until the ground lessor decides to re-develop the property.
Annual lease payments are equal to the greater of $140,450 or 22% of
total room revenue and 2.5% of food and beverage revenue. Minimum
lease payments of $11,704 are payable monthly with a quarterly
analysis of the actual amount due. For the three month periods ended
March 31, 2008 and 2007, lease payments were $282,398 and $293,772,
respectively.
c. License Agreements
------------------
The five License Agreements pursuant to which the hotels are
operated as Days Inns have recently been assigned from the current
licensee (and former management agent), Buckhead Hotel Management
Company, Inc. d/b/a Bryanston Group, Inc., to the Partnership as
Licensee. The business terms remained identical.
8. GROUND LEASE AGREEMENTS
The Partnership had leased a portion of the Minneapolis Days Inn property
to Vicorp Restaurants, Inc. (Vicorp), which operated a Baker's Square restaurant
on the property. Gross rental income pursuant to the lease agreement with
Vicorp, which is included in interest and other income in the accompanying
statements of operations, was $12,712 and $18,424 for the three month periods
ended March 31, 2008 and 2007, respectively. As of March 2008, Viacorp failed to
pay the monthly rent due. On April 3, 2008, Viacorp declared bankruptcy. It
rejected the lease as an executory contract as of that date. The Partnership is
in the process of engaging a broker to locate a new tenant for the space.
The Partnership leases an adjacent building on the Roseville Days Inn
property to India Palace, Inc., which operates a restaurant on the property. The
lease expires on September 30, 2010. The lease provides one option to extend the
lease for an additional period of five years. Gross base rental income pursuant
to the lease agreement with India Palace and the former lease with Happy Chef,
which is included in interest and other income in the accompanying statements of
operations, was $7,500 for each of the three month periods ended March 31, 2008
and 2007, respectively.
-8-
CRI HOTEL INCOME PARTNERS, L.P.
NOTES TO FINANCIAL STATEMENTS
March 31, 2008 and 2007
(Unaudited)
9. RELATED PARTY TRANSACTIONS
In accordance with the terms of the Partnership Agreement, the Partnership
is obligated to reimburse the General Partner or its affiliates for their direct
expenses in connection with managing the Partnership. For the three month
periods ended March 31, 2008 and 2007, the Partnership paid $42,742 and $18,620,
respectively. Such reimbursed expenses are included in general and
administrative expenses in the accompanying statements of operations.
In accordance with the terms of the Partnership Agreement, the Partnership
is obligated to pay the General Partner or its affiliates an annual base asset
management fee (Management Fee), equal to 0.50% of the weighted average balance
of the adjusted partnership investment during the period, as defined in the
Partnership Agreement. The Partnership paid a Management Fee of $23,438 for each
of the three month periods ended March 31, 2008 and 2007.
C.R.I., Inc., the general partner of the General Partner, has contracted
with Capitol Hotel Group, Inc. (CHG), to perform certain asset management
services related to the oversight of the operations and management of the
hotels. The Chairman and President of C.R.I., Inc., are the Chairman and
President, respectively, of, and holders of 100% of the equity interest in, CHG.
10. DEPRECIATION AND AMORTIZATION
Depreciation is based on the estimated useful lives of depreciable assets
using the straight-line method. Salvage value has been incorporated relating to
the Scottsdale hotel. The estimated lives used in determining depreciation
follow.
Type of asset Estimated life
------------- --------------
Building and site improvements 10-30 years
Furniture, fixtures and equipment 7 years
Leasehold improvements Shorter of estimated life
(usually 7 years) or
remaining lease term
Property purchase cost and acquisition fees are being amortized over a
thirty-year period using the straight-line method, except for the Scottsdale
hotel which is being amortized over the remaining lease term.
11. CASH CONCENTRATION RISK
Financial instruments that potentially subject the Partnership to
concentrations of risk consist primarily of cash. The Partnership maintains two
cash accounts with the same bank. The balance is insured by the Federal Deposit
Insurance Corporation up to $100,000. As of March 31, 2008, the uninsured
portion of the cash balance was $1,208,590.
# # #
-9-
Part I. FINANCIAL INFORMATION
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations
CRI Hotel Income Partners, L.P.'s (the Partnership) Management's Discussion
and Analysis of Financial Condition and Results of Operations section is based
on the financial statements, and contains information that may be considered
forward looking, including statements regarding the effect of governmental
regulations. Actual results may differ materially from those described in the
forward looking statements and will be affected by a variety of factors
including seasonality with respect to the hotel industry, national and local
economic conditions, the general level of interest rates, governmental
regulations affecting the Partnership and interpretations of those regulations,
the competitive environment in which the Partnership operates, and the
availability of working capital.
Travel and the Economy
----------------------
The hotel industry in the first quarter 2008 is starting to feel the
effects of a sagging economy with decreased demand and lower occupancies, which
had a negative impact at three of the five hotels owned by the Partnership. The
Partnership's ability to pay operating expenses and current liabilities, to fund
the working capital reserves, to fund capital projects, and to pay distributions
to BAC holders is primarily dependent upon the performance of the underlying
hotels. The General Partner is currently unable to estimate the impact the
future state of the economy could have on the Partnership's operations,
liquidity, or capital resources.
Distributions
-------------
A distribution in the amount of $221,597 ($0.25 per BAC) was declared and
paid to BAC holders of record and to the General Partner for the first quarter
of 2007 in the amounts of $217,165 and $4,432, respectively. A distribution in
the amount of $221,598 ($0.25 per BAC) was declared and paid to BAC holders of
record, to the General Partner and to the state of Minnesota for withholding for
the second quarter of 2007 in the amounts of $212,021, $4,432 and $5,145,
respectively. A distribution in the amount of $221,597 ($0.25 per BAC) was
declared and paid to BAC holders of record and to the General Partner and to the
state of Minnesota for withholding for the third quarter of 2007 in the amounts
of $212,020, $4,432 and $5,145, respectively. The Partnership did not declare a
distribution for the fourth quarter of 2007 or the first quarter of 2008.
Financial Condition/Liquidity
The Partnership expects that the hotels in the aggregate will generate
sufficient cash flow to achieve a positive cash flow after operating expenses.
In addition to the periodic replacement of fixed assets, the General Partner
determined several years ago that certain capital improvements were needed to
enhance the marketability of the hotels. Since 1997, the Partnership funded a
total of approximately $2.5 million from the working capital reserve to the
hotels for such capital improvements.
The Partnership's liquidity and future results of operations are primarily
dependent upon the performance of the underlying hotels. Hotel operations may be
materially affected by changing market conditions and by seasonality caused by
variables such as vacations, holidays and climate. The General Partner continues
to work closely with the hotels' manager to pursue an aggressive marketing
campaign and stricter cost-cutting and cost-control measures in an effort to
maintain liquidity at the hotels.
-10-
Part I. FINANCIAL INFORMATION
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations - Continued
For the three month period ended March 31, 2008, net cash provided by the
hotel's operating activities and existing cash resources were adequate to
support investing and financing requirements. The Partnership anticipates that
future cash flows from the hotels' operations and existing cash resources, in
the aggregate, will be sufficient to pay operating expenses, accounts payable
and accrued expenses, and hotel trade payables, and to fund the working capital
and capital improvements reserves. Accounts payable and accrued expenses and
hotel trade payables at March 31, 2008 totaled $1,057,558, which represents a
$130,647 increase from December 31, 2007. Accounts payable and accrued expenses
increased primarily due to increases in real estate taxes payable, sale and
occupancy taxes payable, franchise fees payable, management fees payable and
accrued payroll costs. Hotel trade payables decreased primarily due to timing of
payment compared to fourth quarter 2007.
Financing
- ---------
On December 19, 1997, the Partnership refinanced with Citicorp Real Estate,
Inc. (Citicorp) the Zero Coupon Notes which were originally issued in connection
with the Partnership's acquisition of the hotels. The loan matured January 1,
2008. On that date, a balloon payment in the amount of $7,273,441 became due.
The General Partner was unable to refinance the Partnership's mortgage debt
prior to its maturity. Although the loan was in default, the special servicer
has agreed to a forbearance agreement for a period of 180 days in consideration
for payment of a fee in the amount of $72,734.41, and continued monthly payments
of principal, interest (at the pre-default rate) and tax and capital
improvements escrows.
On May 6, 2008, the Partnership closed three loans from General Electric
Credit Corporation ("GE") in the aggregate amount of $5,000,000 to refinance the
Plymouth and Roseville hotels in Minnesota and the Clearwater hotel in Florida.
The three loans are cross-collateralized by the three hotels. The Partnership
used the loan proceeds together with the proceeds of a loan from Remediation
Capital Funding, LLC in the amount of $2,900,000 secured by the University hotel
in Minnesota, to pay off the existing debt in full.
The Phase I environmental study of the University hotel required by GE
revealed excess levels of three chemicals deemed hazardous in the groundwater on
the property. The contamination is not due to acts or omissions of the hotel.
Simultaneously with its refinancing efforts, the Partnership engaged a
consultant to enroll the University property in the Minnesota Pollution Control
Agency's Voluntary Investigation and Cleanup ("VIC") Program and deal with the
contamination at the site. The Partnership's goal is to obtain a No Action
Letter with a Covenant Not to Sue, at which point it should be able to obtain
financing on the property again. The Partnership has been advised that the VIC
Program process will likely take from six months to eighteen months.
The three new GE loans bear interest at the rate of 6.79% per annum and
mature on January 1, 2016 with balloon payments due
as set forth below:
Plymouth $887,269
Roseville $2,083,122
Clearwater $887,269
The new loan with Remediation Capital bears interest at the rate of 14% per
annum and matures on May 6, 2009, although the Partnership has two options to
extend the loan for six months each time. It is contemplated that this loan will
be refinanced after the environmental issues at the University hotel has been
resolved.
-11-
Part I. FINANCIAL INFORMATION
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations - Continued
The Partnership has determined that the carrying value of the current loans
approximate fair value based on its market rate of interest.
The Partnership made installments of principal and interest aggregating
$201,147 for both of the three month periods ended March 31, 2008 and 2007. The
Partnership's balance on the former loan was $7,213,845 and $7,273,441 as of
March 31, 2008 and December 31, 2007, respectively.
Capital Improvements and Real Estate Tax Reserves Held by Servicer
- ------------------------------------------------------------------
In addition to the monthly loan installments under its former mortgage
loan, as discussed above, the Partnership also made monthly payments which were
escrowed for capital improvements and estimated annual real estate taxes. During
the three month periods ended March 31, 2008 and 2007, the Partnership made
escrow deposits aggregating $58,094 and $58,094, respectively, for capital
improvements, and $97,966 and $96,605, respectively, for estimated annual real
estate taxes. As of March 31, 2008 and December 31, 2007, the servicer held
reserves of $256,474 and $197,736, respectively, for capital improvements, and
$215,815 and $117,849, respectively, for real estate taxes. This loan was
refinanced on May 6, 2008. The new lenders will escrow for taxes, but not
capital improvements.
Working Capital Reserve
- -----------------------
The working capital reserve of $1,305,590 and $1,582,408 as of March 31,
2008 and December 31, 2007, respectively, represents all cash and cash
equivalents maintained as working capital for the Partnership. In accordance
with the terms of the Partnership Agreement, the working capital reserve may be
increased or reduced by the General Partner as it deems appropriate.
Distributions to BAC Holders
- ----------------------------
A distribution in the amount of $221,597 ($0.25 per BAC) was declared and
paid to BAC holders of record and to the General Partner for the first quarter
of 2007 in the amounts of $217,165 and $4,432, respectively. A distribution in
the amount of $221,598 ($0.25 per BAC) was declared and paid to BAC holders of
record, to the General Partner and to the state of Minnesota for withholding for
the second quarter of 2007 in the amounts of $212,021, $4,432 and $5,145,
respectively. A distribution in the amount of $221,597 ($0.25 per BAC) was
declared and paid to BAC holders of record and to the General Partner and to the
state of Minnesota for withholding for the third quarter of 2007 in the amounts
of $212,020, $4,432 and $5,145, respectively. The Partnership did not declare a
distribution for the fourth quarter of 2007 or the first quarter of 2008.
Results of Operations - Partnership
-----------------------------------
The Partnership's net income for the three month period ended March 31,
2008, decreased compared to March 31, 2007 primarily due to a decrease in gross
operating income and an increase in unallocated operating expenses, partially
offset by an increase in interest and other income and a decrease in interest
expense. Gross operating income decreased primarily due to lower rooms revenue
and higher rooms expense as a result of higher group commissions. The increase
in unallocated operating expenses was primarily due to increases in general and
administrative expenses and energy expense, partially offset by decreases in
depreciation and amortization expense, marketing expense and building lease
expense. General and administrative expenses increased primarily due to higher
reimbursed payroll costs and the forbearance fee.
-12-
Part I. FINANCIAL INFORMATION
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations - Continued
The General Partner is not able to predict the future trend of hotel gross
operating income, especially rooms revenue as it is affected by occupancy and
average daily rate. The General Partner continues to work closely with the
hotels' manager to contain any increase in unallocated operating expenses.
An analysis of each hotel's operating results for the three month periods
ended March 31, 2008 and 2007, follows.
Results of Operations -- Hotels
-------------------------------
Operating statistics
- --------------------
The hotels' results of operations are affected by changing market
conditions and by seasonality caused by variables such as vacations, holidays
and climate. Based on the hotels' operating budgets and historical trends, the
following months should provide the highest net cash flow to the Partnership
from each of the hotels.
Hotel Location Peak Months
-------------- -----------
Clearwater, FL January through April
Minneapolis, MN March through November
Plymouth, MN April through October
Roseville, MN April through October
Scottsdale, AZ January through April; and
October and November
Although there has recently been some improvement in the hotels' room
demand, the hotels' results of operations set forth below may not be consistent
with longer-term historical trends.
The Partnership's statements of operations include operating results for
each of the hotels as summarized below. Gross Operating Income represents total
revenue from rooms, rental and other, telephone, and food and beverage, less the
related departmental expenses. Operating Income represents Gross Operating
Income less unallocated operating income and expenses. The results of operations
and average occupancy for the hotels for the three month periods ended March 31,
2008 and 2007, follow.
Gross Operating Income
for the three months ended
March 31,
-----------------------------
Hotel Location 2008 2007
-------------- ---------- ----------
Clearwater, FL $ 339,680 $ 379,283
Minneapolis, MN 448,320 455,308
Plymouth, MN 162,583 140,266
Roseville, MN 189,413 183,475
Scottsdale, AZ 1,088,717 1,136,358
---------- ----------
Total $2,228,713 $2,294,690
========== ==========
-13-
Part I. FINANCIAL INFORMATION
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations - Continued
Operating Income (Loss)
for the three months ended
March 31,
-----------------------------
Hotel Location 2008 2007
-------------- ---------- ----------
Clearwater, FL $ 121,399 $ 155,351
Minneapolis, MN 205,615 218,621
Plymouth, MN 21,139 1,739
Roseville, MN 47,944 38,122
Scottsdale, AZ 431,841 432,729
Depreciation and net partnership
operating expenses (461,400) (338,504)
---------- ----------
Total $ 366,538 $ 508,058
========== ==========
Average Occupancy
for the three months ended
March 31,
----------------------------
Hotel Location 2008 2007
-------------- ------- --------
Clearwater, FL 71% 72%
Minneapolis, MN 74% 79%
Plymouth, MN 61% 55%
Roseville, MN 59% 59%
Scottsdale, AZ 79% 93%
Clearwater, Florida: Gross operating income and operating income for the three
month period ended March 31, 2008, decreased from 2007 primarily due to
decreases in rooms revenue, telephone revenue, rental and other revenue and
increases in rooms expense, telephone expense, marketing expense, repair and
maintenance expenses and property tax expense, partially offset by decreases in
rental and other expense, general and administrative expenses, energy expense,
management fees and insurance expense. Occupancy decreased due to loss of a
non-repeating aerotech group from the first quarter 2007.
Minneapolis, Minnesota: Gross operating income and operating income for the
three month period ended March 31, 2008, decreased from 2007 primarily due to a
decrease in rental and other revenue and increases in rooms expense, telephone
expense, energy expense, repair and maintenance expenses, insurance expenses and
property tax expense, partially offset by increases in rooms revenue and
telephone revenue and decreases in rental and other expense, general and
administrative expenses and marketing expense. Occupancy decreased due to a
reduction in university sports and visitors, mostly due to the NCAA swimming
events not being held at the University of Minnesota in 2008.
Plymouth, Minnesota: Gross operating income and operating income for the three
month period ended March 31, 2008, increased from 2007 primarily due to
increased rooms revenue and decreases in rental and other expenses, general and
administrative expenses and marketing expense, partially offset by decreases in
telephone revenue and rental and other revenue and increases in rooms expense,
telephone expense, energy expense, repair and maintenance expenses, management
fees, insurance expense and property tax expense. Occupancy increased as a
result of more production from corporate groups.
Roseville, Minnesota: Gross operating income and operating income for the three
month period ended March 31, 2008, increased from 2007 primarily due to
increased rooms revenue and decreases in telephone expense, general and
administrative expenses and marketing expense, partially offset by decreases in
telephone revenue and rental and other income and increases in rooms expense,
rental and other expense, energy expense, management fees, insurance expense and
property tax expense. Occupancy was basically flat from 2007.
-14-
Part I. FINANCIAL INFORMATION
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations - Continued
Scottsdale, Arizona: Gross operating income and operating income for the three
month period ended March 31, 2008, decreased from 2007 primarily due to
decreases in rooms revenue, food and beverage revenue, telephone revenue and
increases in telephone expense, rental and other expense and insurance expense,
partially offset by increased rental and other revenue and decreases in rooms
expense, food and beverage expense, general and administrative expenses,
marketing expense, energy expense, repair and maintenance expenses, management
fees, property tax expense and land lease expense. Occupancy decreased in all
market segments due to lack of demand driven by the economy.
Part I. FINANCIAL INFORMATION
Item 4. Controls and Procedures
In April 2008, representatives of the Managing General Partner of the
Partnership carried out an evaluation of the effectiveness of the design and
operation of the Partnership's disclosure controls and procedures, pursuant to
Exchange Act Rules 13a-15 and 15d-15. The Managing General Partner does not
expect that the Partnership's disclosure controls and procedures will prevent
all error and all fraud. A control system, no matter how well conceived and
operated, can provide only reasonable assurance that the objectives of the
control system are met. Further, the design of a control system must reflect the
fact that there are resource constraints, and the benefits of controls must be
considered relative to their costs. Because of the inherent limitations in all
control systems, no evaluation of controls can provide absolute assurance that
all control issues have been detected. These inherent limitations include the
realities that judgments in decision-making can be faulty, and that breakdowns
can occur because of simple error or mistake. The design of any system of
controls also is based in part upon certain assumptions about the likelihood of
future events, and there can be no assurance that any design will succeed in
achieving its stated goals under all potential future conditions. Over time,
controls may become inadequate because of changes in conditions, or the degree
of compliance with the policies or procedures may deteriorate. Because of the
inherent limitations in a cost-effective control system, misstatements due to
error or fraud may occur and not be detected. Based on such evaluation, our
principal executive officer and principal financial officer have concluded that
as of March 31, 2008, our disclosure controls and procedures were effective to
ensure that (i) the information required to be disclosed by us in the reports
filed or submitted by us under the Securities Exchange Act of 1934, as amended,
was recorded, processed, summarized or reported within the time periods
specified in the SEC's rules and forms and (ii) such information was accumulated
and communicated to management, including our principal executive officer and
principal financial officer, to allow timely decisions regarding required
disclosure. In addition, there have been no significant changes in the
Partnership's internal controls over financial reporting that occurred during
the Partnership's most recent fiscal quarter that has materially affected, or is
reasonably likely to materially affect, the Partnership's internal controls over
financial reporting.
Part II. OTHER INFORMATION
Item 5. Other Information
a. There has not been any information required to be disclosed in a report on
Form 8-K during the quarter ended March 31, 2008, but not reported, whether
or not otherwise required by this Form 10-Q at March 31, 2008.
b. There is no established market for the purchase and sale of BACs, although
various informal secondary market services exist. Due to the limited
markets, however, investors may be unable to sell or otherwise dispose of
their BACs.
-15-
Part II. OTHER INFORMATION
Item 5. Other Information - Continued
Registered Tender Offer
-----------------------
On April 2, 2007, MacKenzie Patterson Fuller L.P. and numerous affiliated
entities (MacKenzie) initiated a registered tender offer to purchase all of the
outstanding BACs at a price of $12.50 per BAC. The offer expired on May 4, 2007.
MacKenzie is not affiliated with the Partnership or the General Partner. The
price offered was determined solely at the discretion of MacKenzie and does not
necessarily represent the fair market value of each BAC. In response to the
MacKenzie registered tender offer, on April 11, 2007, the General Partner filed
a Schedule 14D-9. In that filing, the General Partner recommended that BAC
holders reject the MacKenzie offer because the offer price was far lower than
MacKenzie's own estimated liquidation value of the Partnership and it believed
that current BAC holders could realize that difference in value themselves by
choosing to hold their investments for several more years until the
Partnership's assets are liquidated.
A number of investors have sold their BACs to other investors. If more than
two percent of the total outstanding BACs are transferred due to sale in any one
calendar year (not counting certain exempt transfers), the Partnership could be
taxed as a "publicly traded partnership," with potentially severe tax
implications for the Partnership and its investors. Section 7704 of the Internal
Revenue Code defines the term "publicly traded partnership" as any partnership
for federal income tax purposes, the interests of which are readily traded on an
established securities market, or readily tradable on a secondary market or the
substantial equivalent thereof. If the Partnership is classified as a "publicly
traded partnership" or otherwise fails to qualify as a partnership for federal
income tax purposes in any taxable year, it would then be subject to federal
income tax on any taxable income in that taxable year at regular corporate
rates. A BAC holder could not then take into account the BAC Holder's
distributive share of the Partnership's income and would be subject to tax on
the BAC holder's share of the Partnership's income to the extent distributed
either as dividends out of current or accumulated earnings and profits or as
taxable gain in excess of the tax basis of the investor's BACs. A BAC holder
could also have to file amended income tax returns. If the Partnership were
taxed as a corporation, the BAC holder's cash flow, return on investment and the
value of the investor's BACs would be significantly reduced. Also, the income
and losses from the Partnership would no longer be considered a passive
activity.
From January 1, 2007 through April 29, 2007, the Partnership received sale
transfer requests for approximately 2.0% of the outstanding BAC's. Accordingly,
to remain within the two percent safe harbor, effective April 30, 2007, the
General Partner halted recognition of any transfers that would exceed the safe
harbor limit through December 31, 2007. As a result, transfers of BACs due to
sale transactions were not recognized by the Partnership between April 30, 2007
and December 31, 2007. The Partnership's unaffiliated transfer agent, Registrar
& Transfer Company, informed the General Partner in late January, 2008 that it
had processed sale transfers in excess of four percent of the outstanding BACs
in early January, 2008. Accordingly, the General Partner instructed the transfer
agent to halt all further sale transfers for the rest of 2008. The Partnership
sought an opinion from its tax counsel that it is "more likely than not" that
there would be no adverse tax consequences to the Partnership in connection with
exceeding the safe harbor limitation in 2008. In supplying information requested
in connection with the opinion, the General Partner became aware that the
percentage of trades significantly exceeded the safe harbor in 2006, when
Treasury Regulations applicable to the Partnership reduced the safe harbor
amount from five percent to two percent, and in 2007, when a re-calculation of
the non-exempt transfers reflected a total transfer of 2.21%. However, if
transfers in connection with known tender offers are not counted, the percentage
of sale transfers is reduced to well under two percent. The Partnership's tax
attorneys issued an opinion to the effect that the transfers pursuant to the
tender offers were not the type of regular and ongoing trading activities
contemplated as constituting public trading and that therefore it was more
likely than not that such trading would not result in the Partnership being
treated as a publicly traded partnership under Section 7704. However, there can
be no assurance that the Internal Revenue Service will agree with the
Partnership's position and take no action to treat it as a publicly traded
partnership.
-16-
Part II. OTHER INFORMATION
Item 6. Exhibits
Exhibit No. Description
- ----------- -----------
10.1 Form of Management Agreement dated March 1, 2008 and April 1,
2008 between Registrant and Oak Hotels, Inc. for the University,
Plymouth and Roseville hotels.
31.1 Certification of Principal Executive Officer, pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
31.2 Certification of Principal Financial Officer, pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
32 Certification of Principal Executive Officer and Principal
Financial Officer, pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
All other items are not applicable.
-17-
SIGNATURE
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
CRI HOTEL INCOME PARTNERS, L.P.
-------------------------------------------------
(Registrant)
by: CRICO Hotel Associates I, L.P.
--------------------------------------------
General Partner
by: C.R.I., Inc.
---------------------------------------
its General Partner
May 15, 2008 by: /s/ H. William Willoughby
- ------------ ----------------------------------
DATE H. William Willoughby,
Director, President, Secretary,
Principal Financial Officer and
Principal Accounting Officer
-18-