Securities and Exchange Commission
Washington, D.C. 20549
Form 10-K
o Annual Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the fiscal year ended December 31, 1996
OR
|_| Transition Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
Commission File Number: 0-14381
MARRIOTT HOTEL PROPERTIES LIMITED PARTNERSHIP
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(Exact name of registrant as specified in its charter)
Delaware 52-1436985
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(State or other jurisdiction of (I.R.S. Employer incorporation
or organization) Identification No.)
10400 Fernwood Road
Bethesda, Maryland 20817
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 301-380-2070
Securities registered pursuant to Section 12(b) of the Act:
Not Applicable
Securities registered pursuant to Section 12(g) of the Act:
Units of Limited Partnership Interest
(Title of Class)
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 and (2) has been subject to such filing requirements for
the past 90 days:
Yes x/ No (Not Applicable).
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)
Documents Incorporated by Reference
None
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MARRIOTT HOTEL PROPERTIES, L.P
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TABLE OF CONTENTS
PAGE NO.
PART I
Page
Item 1. Business........................................................ 1
Item 2. Properties...................................................... 6
Item 3. Legal Proceedings............................................... 8
Item 4. Submission of Matters to a Vote of Security Holders............. 8
PART II
Item 5. Market For Registrant's Common Equity and
Related Security Holder Matters................................. 10
Item 6. Selected Financial Data......................................... 11
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations....................................... 12
Item 8. Financial Statements and Supplementary Data..................... 20
Item 9. Changes In and Disagreements With Accountants on Accounting
and Financial Disclosure........................................ 37
PART III
Item 10. Directors and Executive Officers of the Registrant.............. 37
Item 11. Executive Compensation.......................................... 38
Item 12. Security Ownership of Certain Beneficial Owners and Management.. 38
Item 13. Certain Relationships and Related Transactions.................. 39
PART IV
Item 14. Exhibits, Supplemental Financial Statement Schedules
and Reports on Form 8-K......................................... 42
PART I
ITEM 1. BUSINESS
Description of the Partnership
Marriott Hotel Properties Limited Partnership (the "Partnership"), a Delaware
limited partnership which was formed on August 22, 1984, owns (i) Marriott's
Orlando World Center Hotel (the "Orlando Hotel") in Orlando, Florida and the 190
acres of land on which it is located, and (ii) a 50.5% interest in Lauderdale
Beach Association (the "Harbor Beach Partnership"), a general partnership which
owns Marriott's Harbor Beach Resort (the "Harbor Beach Hotel") in Fort
Lauderdale, Florida.
The sole general partner of the Partnership, with a 1% interest, is Hotel
Properties Management, Inc. (the "General Partner"), a Delaware corporation and
a wholly-owned subsidiary of Host Marriott Corporation ("Host Marriott"). The
Partnership is engaged solely in the business of owning, operating and leasing
hotels and therefore is engaged in one industry segment. The principal offices
of the Partnership are located at 10400 Fernwood Road, Bethesda, Maryland 20817.
The Orlando Hotel and the Harbor Beach Hotel (collectively referred to herein as
the "Hotels") are operated as part of the Marriott Hotels, Resorts and Suites
full-service hotel system. The Orlando Hotel is managed by Marriott
International, Inc. ("MII" or the "Manager") under a long-term management
agreement (the "Management Agreement"), and the Harbor Beach Hotel is leased to
Marriott Hotel Services, Inc. ("MHSI" or the "Operating Tenant"), a wholly-owned
subsidiary of MII, under a long-term lease agreement (the "Operating Lease").
The Hotels have the right to use the Marriott name pursuant to the management
and lease agreements and, if these agreements are terminated, the Partnership
and the Harbor Beach Partnership (collectively referred to herein as the
"Partnerships") will lose that right for all purposes (except as part of the
Partnership's name). See Item 13, "Certain Relationships and Related
Transactions."
The Hotels are among the premier resorts in the Marriott system and cater
primarily to meetings/conventions and leisure travelers. Since the Hotels are
located in Florida, operating results are higher during the period from November
through April each year. The Partnership and the Harbor Beach Partnership have
no plans to acquire any new properties or sell any of the existing properties.
See Item 2, "Properties."
The Orlando Hotel was designed as part of the MII network of convention hotels
and thus has extensive meeting and convention facilities. The Orlando Hotel's
business is oriented primarily to professional meeting planners who book
conventions in Orlando. During the past five years, group business has accounted
for most of the business at the Orlando Hotel. For the year ended December 31,
1996, 75% of its business was derived from group demand. The Orlando Hotel
offers group guests award winning service, approximately 200,000 square feet of
meeting space, all on one level, 18 holes of golf on-site, numerous restaurants
and the flexibility to achieve the guests' desired goals. The group business
segment is comprised of corporate groups, association groups and other market
segments including social groups (weddings), military, religious, fraternal and
international groups. During 1996, the Orlando Hotel experienced a decrease of
approximately 5,000 group room nights but the decrease in group occupancy was
offset by increased transient demand.
The Orlando Hotel added an additional 50,960 square foot ballroom and exhibition
hall in 1990 to enhance the Orlando Hotel's ability to attract guests and large
group business. Host Marriott provided interim financing of up to $14 million to
fund the construction of this ballroom and on June 16, 1992, the ballroom loan
of $13.2 million was converted to a revolving line of credit. As of December 31,
1996, the outstanding principal balance under this line of credit was
$2,294,000. In 1996, the Orlando completed the first phase of a rooms
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renovation. The second half of the renovation is expected to be completed in
1997. The 1997 project will require a loan of approximately $3.0 million from
the Manager. These projects were necessary to remain competitive in a
challenging market.
The Harbor Beach Hotel has positioned itself to attract both the leisure
traveler and the group meeting planner who is seeking a luxurious resort
experience. The Harbor Beach Hotel offers easy air accessibility, the largest
private beach in the Fort Lauderdale area and the quality and consistency
associated with the Marriott name. The Harbor Beach Hotel's business is split
between business from transient and group guests. For the year ended December
31, 1996, group business comprised 51% of total room nights compared to 55% in
1995. The decrease in group business was offset by increased transient demand,
especially in the leisure segment.
During 1994, the Harbor Beach Hotel completed a rooms renovation which helped
the property realize a competitive advantage in the Fort Lauderdale market.
Marketing efforts at the Harbor Beach Hotel have emphasized the newly renovated
guest quarters. Financing for the rooms renovation was obtained from a
wholly-owned subsidiary of MII. The loan provided financing of up to $2.8
million. As of December 31, 1996, the outstanding principal balance of the loan
was $1,893,000.
Organization of the Partnership
The Partnership was formed on August 22, 1984, to acquire, construct, own and
operate the Orlando Hotel. Host Marriott was the initial General Partner of the
Partnership and Airline Foods, Inc., a wholly-owned subsidiary of Host Marriott,
was the initial limited partner. Between November 1, 1985 and November 27, 1985
(the "Closing Date"), 1,000 limited partnership interests (the "Units") for
$10,000 a Unit, representing a 99% interest in the Partnership, were sold in a
private placement. The limited partners paid $10,000,000 in cash on the Closing
Date with the remainder due in five annual installments through May 15, 1990.
The limited partners' obligations to make the installment payments were
evidenced by promissory notes (the "Investor Notes") payable to the Partnership
and secured by the Units. Prior to the Closing Date, Marriott Hotel Properties,
Inc. was admitted as General Partner in lieu of Host Marriott, and on the
Closing Date, Airline Foods, Inc. withdrew as a limited partner. In
consideration for agreeing to admit the additional limited partners to the
Partnership, Airline Foods, Inc. was paid $650,000 in cash at closing and
received $45,350,000 of investor notes. On April 22, 1992, the General Partner's
name was changed from Marriott Hotel Properties, Inc. to Hotel Properties
Management, Inc.
On the Closing Date, the Partnership purchased from affiliates of Host Marriott
(i) a 99% limited partnership interest in the Warner Center Marriott Hotel
Limited Partnership, a Delaware limited partnership (the "Warner Center
Partnership"), which owned the 473-room Warner Center Marriott Hotel (the
"Warner Center Hotel") in Los Angeles, California, for $250,000 in cash and a
$12,750,000 deferred purchase note, and (ii) a 49% general partnership interest
in, and a loan receivable of $3,680,000 from, the Harbor Beach Partnership for
$2,500,000 in cash and a $7,500,000 deferred purchase note. The Partnership also
acquired a 1% interest in the remaining 51% general partner of the Harbor Beach
Partnership on the Closing Date for $150,000. This interest was converted into a
0.5% interest in the Harbor Beach Partnership on July 1, 1986. On April 23,
1987, the Partnership exercised an option acquired on January 1, 1986, to
purchase an additional 2% interest in the remaining general partner of the
Harbor Beach Partnership for $300,000, which was simultaneously converted to a
1% interest in the Harbor Beach Partnership, thereby giving the Partnership a
50.5% ownership interest in the Harbor Beach Partnership.
On November 17, 1993, ownership of the Warner Center Hotel was transferred
through foreclosure to the lender. Simultaneously with the foreclosure, the
Warner Center Partnership was dissolved.
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Debt Financing
Upon loan maturity on June 16, 1995, the lender granted the Partnership a
forbearance on the Orlando Hotel mortgage debt (the "Orlando Mortgage Debt"),
extending it through October 31, 1995. On October 31, 1995, the Partnership
successfully completed a modification and extension of this loan. The Orlando
Mortgage Debt is non-recourse to the Partnership and its partners. The Orlando
Mortgage Debt bears a fixed rate of interest of 8.44%, requires semi-annual
amortization of principal totaling $30 million over the term of the loan, and
matures on June 16, 2000 with unamortized principal of $127 million due at that
time. As of December 31, 1996, the outstanding principal balance was
$145,479,000. The Orlando Mortgage Debt is collateralized by the Orlando Hotel,
all personal property associated with the Orlando Hotel, the land on which the
Orlando Hotel and golf course are located and an assignment of certain operating
agreements. It is expected that the Orlando Mortgage Debt will be refinanced at
or prior to the maturity thereof, depending upon prevailing market conditions
and interest rates. However there are no current plans or proposals to refinance
the Orlando Mortgage Debt.
On March 29, 1994, the Harbor Beach Partnership completed a restructuring of its
$92 million loan (the "Harbor Beach Mortgage Debt"). The Harbor Beach Mortgage
Debt carries a fixed rate of interest of 9.125%. Interest only was due and
payable for the first twelve payments through and including April 1, 1995. On
May 1, 1995, monthly payments of principal and interest in the amount of
$772,600 began and will continue until maturity on May 1, 2000. The loan
amortizes based on a 22-year effective amortization period. As of December 31,
1996, the outstanding principal balance was $85,480,000. The Harbor Beach
Mortgage Debt is non-recourse to the Harbor Beach Partnership and its partners.
The Harbor Beach Mortgage Debt is collateralized by all property and assets of
the Harbor Beach Hotel. No debt service guaranty was provided during the March
1994 restructuring. On July 1, 1993, Host Marriott was released from its
guarantee of interest payments up to $9 million, of which no amounts had been
advanced at maturity. It is expected that the Harbor Beach Mortgage Debt will be
refinanced at or prior to the maturity thereof, depending upon prevailing market
conditions and interest rates. However there are no current plans or proposals
to refinance the Harbor Beach Mortgage Debt.
Orlando Ballroom Loan
During 1990, Host Marriott provided financing of $13.2 million to fund the
construction of a new ballroom and exhibition hall at the Orlando Hotel (the
"Orlando Ballroom Loan"). The weighted average effective interest rate for the
year ended December 31, 1996, was 8.25%. As of December 31, 1996, the
outstanding principal balance was $2,294,000.
Harbor Beach Rooms Renovation Loan
On July 21, 1994, the Harbor Beach Partnership entered into a loan agreement
(the "Harbor Beach Rooms Renovation Loan") with Marriott International Capital
Corporation, a wholly-owned subsidiary of MII, in conjunction with a rooms and
suites refurbishment at the Harbor Beach Hotel. The loan provided financing of
up to $2.8 million, plus accrued interest through December 31, 1994, to fund
costs in excess of funds available in the Harbor Beach Partnership's property
improvement fund. This unsecured loan carries a fixed rate of interest of 8% and
matures on December 31, 1999. Payments of principal and interest based upon a
five-year amortization period commenced in January 1995. Under the terms of the
loan, the debt service payments are included as a deduction in determining the
fees paid to MHSI pursuant to the Operating Lease. As of December 31, 1996, the
outstanding principal balance was $1,893,000.
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Material Contracts
The Partnership has entered into a long-term management agreement with MII for
the Orlando Hotel, and the Harbor Beach Partnership has entered into a long-term
operating lease with MHSI for the Harbor Beach Hotel.
The Orlando Hotel Management Agreement has a 25-year term expiring on March 24,
2011, with renewal terms, at the option of MII, for up to five additional
10-year terms. The Management Agreement provides the Manager with a base
management fee equal to 3% of gross hotel sales. In addition, the Manager is
entitled to an incentive management fee equal to 20% of hotel operating profit
and additional incentive management fees equal to 30% of a defined amount. For
additional information see Item 13, "Certain Relationships and Related
Transactions."
The Harbor Beach Hotel Operating Lease has a 36-year term expiring on October
29, 2020, with renewal terms, at the option of the Operating Tenant, for up to
six additional 10-year terms. The Operating Lease provides that the Operating
Tenant pay annual rental to the Harbor Beach Partnership. The Operating Tenant
retains 50% of operating profit of the Harbor Beach Hotel, as defined, in excess
of performance rental. For additional information see Item 13, "Certain
Relationships and Related Transactions."
Pursuant to the Management Agreement and the Operating Lease, the Hotels are
operated as part of the Marriott full-service hotel system. The Marriott
full-service hotel system consists of hotels, resorts, and suites operated under
the Marriott name. At December 31, 1996, the Marriott full-service hotel system
included 316 Marriott Hotels, Resorts and Suites located in 40 states, the
District of Columbia and 26 foreign countries with a total of 120,787 guest
rooms.
Full-service hotels operated by MII generally contain between 300 and 500 rooms.
However, the 19 convention hotels (18,500 rooms) operated by MII, including the
Orlando Hotel, are larger and contain up to 1,900 rooms. Room rates generally
range between $95 and $265 per night depending upon location and type of
facility. Marriott full-service hotel facilities typically include swimming
pools, gift shops, convention and banquet facilities, a variety of restaurants
and lounges and parking facilities. The 30 Marriott resort hotels (14,000
rooms), including the Harbor Beach Hotel, have additional recreational
facilities, such as tennis courts and golf courses.
Ground Lease
The Harbor Beach Partnership leases the land on which the Harbor Beach Hotel is
located from an unrelated third party. For a description of the terms of the
ground lease, see Item 2, "Properties."
Competition
The cyclical nature of the U.S. lodging industry has been demonstrated over the
past two decades. Low hotel profitability during the 1974-1975 recession led to
a prolonged slump in new construction and, over time, high occupancy rates and
real estate price increases in the late 1970's and early 1980's. Changes in tax
and banking laws during the early 1980's precipitated a construction boom which
peaked in 1986, but created an oversupply of hotel rooms. This oversupply has
decreased as room sales, which are determined by occupancy levels and room
rates, have continued to increase in 1996 as the lodging industry as a whole,
and the full-service hotel segment in particular, have benefited from a recent
increase in demand resulting from an improved economic environment and a
corresponding increase in business travel. However, the increased demand for
rooms has not yet fully absorbed the oversupply of hotel rooms constructed in
the 1980's. Hotel supply growth has been limited due to many factors, including
the limited availability of
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attractive building sites for full-service hotels, the lack of available
financing for new full-service hotel construction and the availability of
existing full-service properties for sale at a discount to their replacement
value. The General Partner believes that room supply growth for full-service
hotels will continue to be limited in the near future.
Current trends in the hotel industry indicate that, through at least 1998, the
outlook for the lodging industry remains positive. Demand increases are expected
to continue to outpace supply additions. Rooms supply growth, especially for the
luxury and upscale segment, is forecasted to be limited as compared to growth in
budget and mid-priced hotels. Acquisition prices for first class and luxury
price properties are still at a significant discount to construction or
replacement cost. The favorable gap between demand increases and supply
additions should continue to drive room rate increases, with occupancy rates
leveling as targeted room rates are achieved.
The Manager believes that by emphasizing management and personnel development
and maintaining a competitive price structure, the Partnerships' share of the
market will be maintained or increased. The inclusion of the Orlando Hotel and
the Harbor Beach Hotel within the nationwide MII full-service hotel system
provides advantages of name recognition, centralized reservations and
advertising, system-wide marketing and promotion, centralized purchasing and
training and support services. Additional competitive information is set forth
in Item 2, "Properties," with respect to the Hotels.
Conflicts of Interest
Because Host Marriott and its affiliates own and/or operate hotels other than
those owned by the Partnerships, potential conflicts of interest exist. With
respect to these potential conflicts of interest, Host Marriott and its
affiliates retain a free right to compete with the Partnerships' Hotels,
including the right to develop competing hotels now and in the future, in
addition to those existing hotels which may compete directly or indirectly.
Under Delaware law, the General Partner has a fiduciary duty to the Partnership
and is required to exercise good faith and loyalty in all its dealings with
respect to Partnership affairs.
Policies with Respect to Conflicts of Interest
It is the policy of the General Partner that the Partnership's relationship with
the General Partner, any of its affiliates or persons employed by the General
Partner are conducted on terms which are fair to the Partnership and which are
commercially reasonable.
The Partnership Agreement provides that agreements, contracts or arrangements
between the Partnership and the General Partner, other than arrangements for
rendering legal, tax, accounting, financial, engineering, and procurement
services to the Partnership by the General Partner or its affiliates, which
agreements will be on commercially reasonable terms, will be subject to the
following conditions:
(a) the General Partner or any affiliate must be actively engaged in the
business of rendering such services or selling or leasing such goods,
independently of its dealings with the Partnership and as an ordinary
ongoing business or must enter into and engage in such business with
Marriott system hotels or hotel owners generally and not exclusively
with the Partnerships;
(b) any such agreement, contract or arrangement must be fair to the
Partnership, and reflect commercially reasonable terms and shall be
embodied in a written contract which precisely describes the subject
matter thereof and all compensation to be paid therefor;
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(c) no rebates or give-ups may be received by the General Partner or any
affiliate, nor may the General Partner or any affiliate participate in
any reciprocal business arrangements which would have the effect of
circumventing any of the provisions of the Partnership Agreement or
the Harbor Beach Partnership Agreement;
(d) no such agreement, contract or arrangement as to which the limited
partners had previously given approval may be amended in such manner
as to increase the fees or other compensation payable to the General
Partner or any affiliate or to decrease the responsibilities or duties
of the General Partner or any affiliate in the absence of the consent
of the limited partners holding a majority of the Units (excluding
those Units held by the General Partner or certain of its affiliates);
and
(e) Any such agreement, contract or arrangement which relates to or
secures any funds advanced or loaned to any of the Partnership by the
General Partner or any affiliate must reflect commercially reasonable
terms.
The Harbor Beach Partnership Agreement contains similar provisions with respect
to the Harbor Beach Partnership.
Employees
The Partnership have no employees; however, employees of the General Partner are
available to perform administrative services for the Partnership. The
Partnership reimburses the General Partner for the cost of providing such
services. See Item 11, "Executive Compensation", for information regarding
payments to the General Partner for the cost of providing administrative
services to the Partnership.
The Hotels are staffed by employees of MII and the Operating Tenant.
ITEM 2. PROPERTIES
As of December 31, 1996, the Partnerships' properties consisted of two hotels,
both of which are currently in full operation and described below.
Orlando World Center Hotel
Location
The Orlando Hotel is a full-service Marriott hotel located on approximately 190
acres of fee-owned land two miles from Walt Disney World Resort and is known as
Marriott's Orlando World Center. It is located approximately 15 miles from the
Orlando International Airport.
Description
The Orlando Hotel opened on March 24, 1986. The Orlando Hotel contains 1,503
guest rooms, including 85 suites, in a 27-story building. Designed as part of
the MII network of convention hotels, it has extensive meeting and convention
facilities totaling 200,000 square feet, all on one level of the hotel,
including (i) a 38,675 square foot grand ballroom, (ii) additional ballroom
space of 40,740 square feet which can be subdivided into meeting rooms and
exhibit space, (iii) a 50,960 square foot ballroom and exhibition hall which was
completed in 1990 and (iv) 14 meeting rooms. Hotel facilities also include nine
restaurants and lounges, an 18-hole championship golf course, eight lighted
tennis courts, four pools, a
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health club, golf and tennis pro shops, specialty and gift shops, a game room
and parking for 2,100 cars. The Partnership purchased the Orlando Hotel in 1984
for approximately $211 million.
Competition
The primary competition for the Orlando Hotel comes from the following four
first-class convention and resort lodging-oriented hotels: (i) the Sheraton
Dolphin Hotel with 1,510 guest rooms and 202,000 square feet of meeting space,
(ii) the Westin Swan with 758 guest rooms and 52,000 square feet of meeting
space, (iii) the Peabody Hotel with 891 guest rooms and 54,000 square feet of
meeting space and (iv) the Omni Rosen Hotel, which opened in January 1996, with
1,334 guest rooms and 106,000 square feet of meeting space. In addition, other
hotels, including hotels owned by Disney, also compete with the Orlando Hotel.
None of these hotels are operated as part of the MII full-service hotel system.
As a major convention hotel, the Orlando Hotel also competes with similar
facilities throughout the country.
Several new hotel projects are expected to enter the market in the near future,
including hotels by Disney and Sheraton. Disney's plans for 1997 include a
Coronado Springs Resort with 1,967 guest rooms and 99,000 square feet of meeting
space and an expansion of Disney's All-Star Resort by 5,400 guest rooms. In
addition, Loew's Corporation has plans to construct a 750 all-suite resort to
open in late 1999 and to construct a major convention hotel with 1,300 guest
rooms with over 250,000 square feet of meeting space. This convention hotel is
scheduled to open in early 1999 to coincide with the expansion of Universal
Studios. As a result of the continued expansion of Walt Disney World, hotel
construction in the Orlando market is expected to continue with additional
hotels possible in the near term.
Harbor Beach Hotel
Location
The Harbor Beach Hotel is a full-service Marriott hotel located on a 16.5 acre
tract of leased beach-front property located in Fort Lauderdale, Florida and is
known as Marriott's Harbor Beach Resort. The Hotel is located approximately five
miles from the Fort Lauderdale/Hollywood International Airport.
Description
The Harbor Beach Hotel opened in October 1984 with 624 guest rooms, including 35
suites, in a 15-story building. The Harbor Beach Hotel has approximately 30,000
square feet of meeting and banquet space, including (i) a 14,900 square foot
grand ballroom, (ii) an 8,000 square foot junior ballroom (iii) seven meeting
rooms and (iv) two boardrooms. Hotel facilities also include five restaurants,
three lounges, a 1,100 foot private ocean beach with 50 private cabanas, an
outdoor pool, five tennis courts, a health club, gift shop, tennis pro shop and
parking for 900 cars. The Harbor Beach Partnership purchased the Harbor Beach
Hotel in 1982 for approximately $87 million.
Competition
The primary competition for the Harbor Beach Hotel comes from the following
three first-class hotels: (i) the Hyatt Pier 66 with 388 guest rooms and 22,000
square feet of meeting space, (ii) the Boca Raton Hotel and Club with 963 guest
rooms and 70,000 square feet of meeting space and (iii) the Marriott Marco
Island Resort and Golf Club with 735 guest rooms and 48,000 square feet of
meeting space. The Marriott Marco Island Resort and Golf Club is managed by MII,
and other than limited joint marketing efforts, the Harbor Beach Hotel and the
Marriott Marco Island Resort are direct competitors. Host Marriott acquired
another competing area hotel, the Fort Lauderdale Marina Hotel, in January 1994.
In addition, other
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hotels in the Fort Lauderdale area also compete with the Harbor Beach Hotel;
however, these differ from the Harbor Beach Hotel in terms of size, room rates,
facilities, amenities and services offered, market orientation and/or location.
None of these other hotels are operated as part of the MII full-service hotel
system. As a major resort facility, the Harbor Beach Hotel also competes with
similar facilities throughout the country. No new competition is expected to
open in the Fort Lauderdale area in the near future.
Ground Lease
The Harbor Beach Hotel is located on a site that is leased from an unrelated
third party for an initial term expiring November 30, 2080. The Harbor Beach
Partnership has the option to extend the term for an additional 25 years. The
lease provides for annual rental of $1,430,000 for lease years 1993 and 1994 and
$1,560,000 for lease years 1995 through 1999. Thereafter, annual rentals for
each succeeding five-year period increase by an amount equal to 10% of the
previous annual rental. Under the lease, the Harbor Beach Partnership pays all
costs, expenses, taxes and assessments relating to the Harbor Beach Hotel and
the underlying land, including real estate taxes. In the event the ground lessor
decides to sell the leased premises, the Harbor Beach Partnership has a right of
first refusal to purchase the leased premises. Upon expiration or termination of
the lease, title to the Harbor Beach Hotel and all improvements revert to the
ground lessor.
ITEM 3. LEGAL PROCEEDINGS
Neither the Partnerships nor the Hotels are presently subject to any material
litigation nor, to the General Partner's knowledge, is any material litigation
threatened against the Partnerships or the Hotels, other than routine litigation
and administrative proceedings arising in the ordinary course of business, some
of which are expected to be covered by liability insurance and which
collectively are not expected to have a material adverse effect on the business,
financial condition or results of operations of the Partnerships.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the limited partners in 1996 or in prior
years. On January 14, 1997, in conjunction with a tender offer (the "Tender
Offer") for limited partnership units by MHP Acquisition Corporation (the
"Purchaser"), the General Partner solicited the consent of the limited partners
of the Partnership to the following amendments to the Partnership Agreement:
o An amendment that (a) revises the provisions limiting the voting ights of
the General Partner and its affiliates to permit the General Partner
and its affiliates (including the Purchaser) to have full voting rights
with respect to all Units currently held by the General Partner or
acquired by its affiliates except on matters where the General Partner
and its affiliates have an actual economic interest other than as an
Unit holder or general partner (an "Interested Transaction"), and (b)
establish special voting standards with respect to Interested
Transactions to permit action to be taken only if (i) a majority of Units
by limited partners other than the General Partner and its affiliates
are present in person or by proxy or consent for the vote on an
Interested Transaction and (ii) the Interested Transaction is
approved by limited partners holding a majority of the outstanding
Units, with all Units actually voted by limited partners other than
the General Partner and its affiliates.
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o An amendment that amends the definition of "Affiliate" to make clear that
a publicly-traded entity (such as Marriott International, Inc.) will not
be deemed an affiliate of the General Partner or any of its affiliates
unless a person or group of persons directly or indirectly owns twenty
percent (20%) or more of the outstanding common stock of both the General
Partner (or its affiliates) and such other entity.
o An amendment that revises the provisions relating to the authority of the
General Partner to permit the General Partner, without obtaining the
consent of the limited partners, to (i) sell or otherwise transfer to an
independent third party the assets of the Partnership, including the
Orlando Hotel and the Partnership's 50.5% general partnership interest in
the Harbor Beach Partnership, and (ii) vote its interest in the Harbor
Beach Partnership in favor of the sale or other disposition of the Harbor
Beach Hotel to an independent third party.
o An amendment that (i) revises the provision that permits Unit transfers
only on the first day of a fiscal quarter, so that (a) the Units tendered
pursuant to the Tender Offer and accepted for payment (the "Accepted
Units") are transferred to the Purchaser on the date on which payment for
the Accepted Units pursuant to the Tender Offer occurs (the "Closing
Date") and (b) any subsequent transfer of Units by the Purchaser could
occur on the designated Closing Date, rather than on the first day of a
fiscal quarter; and (ii) revise the provision that prohibits Unit
transfers that result in the assignor or assignee owning a fraction
of a Unit other than a half-Unit to permit fractions of Units to be
purchased by the Purchaser pursuant to the Tender Offer, and the
subsequent assignment of such fractional interests, provided that such
fractional interests are assigned in their entirety.
o An amendment that revises the provisions relating to the allocation of
profits and losses and cash distributions, so that tendering Unit holders
receive allocations of profit and loss with respect to the Accepted Units
for periods up to and including, but not beyond, the accounting period
ending prior to the Closing Date and do not receive cash distributions
with respect to the Accepted Units made after the Closing Date.
o Amendments to certain terms and sections of the Partnership Agreement in
order to reflect various U.S. Treasury Department Regulations that have
been issued subsequent to the formation of the Partnership.
o Amendments to certain terms and sections of the Partnership Agreement in
order to (i) reflect the fact that Host Marriott no longer owns the
management business conducted by Marriott International, Inc., (ii) delete
certain obsolete references to entities and agreements that are no longer
in existence and (iii) update the Partnership Agreement to reflect the
passage of time since the formation of the Partnership.
o An amendment that permits the General Partner, without the consent of the
limited partners, to make any amendment to the Partnership Agreement as is
necessary to clarify the provisions thereof so long as such amendment does
not affect the rights of the limited partners under the Partnership
Agreement in any material respect.
A majority of the limited partners approved all of the amendments to the
Partnership Agreement.
9
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
SECURITY HOLDER MATTERS
There is currently no public market for the Units and it is not anticipated that
a public market for the Units will develop. Transfers of Units are limited to
the first day of each fiscal quarter, and are subject to approval by the General
Partner in its sole and absolute discretion and certain other restrictions. As a
result of the Tender Offer, the Purchaser acquired approximately 464 Units on
January 14, 1997. As of February 20, 1997, there were 639 holders of record of
the 1,000 limited partnership Units.
In accordance with Sections 4.06 and 4.09 of the Partnership Agreement, cash
available for distribution for any fiscal year will be distributed at least
annually, as soon as practicable after the close of each fiscal year, to the
partners of record at the end of each fiscal quarter during such fiscal year as
follows:
(i) first, through and including the end of the fiscal quarter
during which the General Partner and the limited partners
shall have received cumulative distributions of refinancing
and/or sales proceeds ("Capital Receipts") equal to 50% of
their capital contributions (this threshold has not been met
as of December 31, 1996), 1% to the General Partner and 99%
to the limited partners;
(ii) next, through and including the end of the fiscal quarter
during which the General Partner and the limited partners
shall have received cumulative distributions of Capital
Receipts equal to their capital contributions, 15% to the
General Partner and 85% to the limited partners; and
(iii) thereafter, 30% to the General Partner and 70% to the limited
partners.
Cash available for distribution means, with respect to any fiscal period, the
revenues of the Partnership from all sources during such fiscal period less (i)
all cash expenditures of the Partnership during such fiscal period, including,
without limitation, debt service and any fees for management services and
administrative expenses; and (ii) such reserves as may be determined by the
General Partner, in its sole discretion, to be necessary to provide for the
foreseeable needs of the Partnership, but shall not include Capital Receipts.
On April 17, 1995, the Partnership made a cash distribution from 1993 and 1994
operations in the amount of $1,600,000 as follows: $16,000 to the General
Partner and $1,584,000 to the limited partners ($1,584 per Unit).
On November 15, 1995, the Partnership made an interim cash distribution from
1995 operations in the amount of $505,050 as follows: $5,050 to the General
Partner and $500,000 to the limited partners ($500 per Unit). On April 17, 1996,
the Partnership made a cash distribution in the amount of $2,915,150, $29,150 to
the General Partner and $2,886,000 to the limited partners ($2,886 per Unit),
representing a final cash distribution from 1995 operations of $2,078,787
($20,787 to the General Partner and $2,058,000 to the limited partners ($2,058
per Unit)) and an interim cash distribution from 1996 operations of $836,363
($8,363 to the General Partner and $828,000 to the limited partners ($828 per
Unit)).
On November 1, 1996, the Partnership made an interim cash distribution from 1996
operations in the amount of $2,105,050 as follows: $21,050 to the General
Partner and $2,084,000 to the limited partners ($2,084 per Unit).
10
In accordance with section 4.07, 4.08 and 4.09 of the Partnership Agreement,
Capital Receipts not retained by the Partnership will be distributed to the
owners of record on the last day of the fiscal quarter in which the transaction
is completed, as follows:
(i) first, 1% to the General Partner and 99% to the limited
partners until the partners have received cumulative
distributions of Capital Receipts equal to their capital
contributions; and
(ii) thereafter, 30% to the General Partners and 70% to the
limited partners.
As of December 31, 1996, cumulative distributions of Capital Receipts equaled
$7,379,000 ($74,000 to the General Partner and $7,305,000 to the limited
partners ($7,305 per Unit)).
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data presents historical operating information
for the Partnership for each of the five years ended December 31, 1996. In
November 1993, the lender foreclosed on the Warner Center Hotel. Thus, operating
results are not comparable for all years presented:
1996 1995 1994 1993 1992
(in thousands, except per unit amounts)
Partnership Net income (loss):
Revenues..................................................$ 72,753 $ 67,677 $ 59,759 $ 62,204 $ 63,912
========= ========= ========= ========= ========
Net income (loss) before extraordinary
item and minority interest..............................$ 21,097 $ 14,868 $ 7,834 $ (24,572) $ (1,707)
Extraordinary item........................................ -- -- -- 40,356 --
--------- --------- --------- --------- --------
Net income (loss) before minority interest................$ 21,097 $ 14,868 $ 7,834 $ 15,784 $ (1,707)
Minority interest......................................... (2,648) (1,718) (523) (1,036) (185)
--------- --------- --------- --------- --------
Net income (loss).........................................$ 18,449 $ 13,150 $ 7,311 $ 14,748 $ (1,892)
========= ========= ========= ========= ========
Net income (loss) per limited partner Unit (1,000 Units):
Net income (loss) before extraordinary
item and minority interest..............................$ 20,887 $ 14,719 $ 7,756 $ (24,326) $ (1,690)
Extraordinary item........................................ -- -- -- 39,952 --
Minority interest......................................... (2,622) (1,701) (518) (1,026) (183)
--------- --------- --------- --------- --------
Net income (loss) per Unit................................$ 18,265 $ 13,018 $ 7,238 $ 14,600 $ (1,873)
========= ========= ========= ========= ========
Total Assets..............................................$ 249,441 $ 251,217 $ 254,058 $ 257,620 $332,961
========= ========= ========= ========= ========
Total Obligations.........................................$ 238,272 $ 253,483 $ 267,369 $ 278,242 $368,331
========= ========= ========= ========= ========
Cash Distributions per limited partner
Unit (1,000 Units)......................................$ 4,970 $ 2,084 $ -- $ -- $ --
========= ========= ========= ========= ========
11
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
General
The following discussion and analysis addresses the results of operations of the
Partnership for the fiscal years ended December 31, 1996, 1995 and 1994. During
the period from 1994 through 1996 consolidated Partnership hotel sales increased
from $103.5 million to $120.3 million primarily due to strong group demand in
the Orlando market. Consolidated Partnership hotel revenues grew from $41.2
million in 1994 to $50.5 million in 1996. Rental income grew from $17.3 million
to $21.3 million during the period from 1994 to 1996 as a result of strong
operating results at the Harbor Beach Hotel.
Growth in the Partnership's Hotels total room sales, and thus hotel revenues and
rental income, is primarily a function of average room rates, as well as control
of hotel operating costs. In addition, due to the amount of meeting/convention
business at the Orlando Hotel, food and beverage operations, especially in the
banquet and catering areas, have a direct effect on the Partnership's hotel
revenues. Combined average occupancy for the Partnership's Hotels grew from 74%
in 1994 to 79% in 1995 and 1996. Occupancy remained constant in 1996 primarily
due to the completion of the first phase of the Orlando Hotel rooms renovation
which decreased the total available rooms for sale in 1996. The combined average
room rate for the Hotels during this period increased from $134 in 1994 to $145
in 1996 due to continuing strong demand in the Orlando and Ft. Lauderdale
markets. REVPAR, or revenue per available room, represents the combination of
the average daily room rate charged and the average daily occupancy achieved and
is a commonly used indicator of hotel performance (although it is not a GAAP
measure of revenue). REVPAR does not include food and beverage or other
ancillary revenues generated by the Partnership's Hotels. The consolidated
REVPAR for the Partnership's Hotels for each of the periods ended December 31,
1996, 1995, and 1994 was $114, $110 and $100, respectively. Combined food and
beverage sales increased from $57.3 million in 1994 to $68.6 million in 1996
primarily due to an increase in banquet sales.
The Partnership derives substantial operating leverage from increases in hotel
revenues and rental income, since the majority of operating costs and expenses
of the Partnership are fixed. This operating leverage is offset by variable
expenses related to the Orlando Hotel, including base and incentive management
fees under the Orlando Hotel Management Agreement. Net operating cash flow from
the Orlando Hotel is applied to payment of debt service on the Orlando Mortgage
Debt, current and deferred incentive management fees payable to MII, debt
service on the Orlando Ballroom Loan and cash distributions to the partners of
the Partnership. Net rental income derived from the Harbor Beach Hotel is
applied to payment of debt service on the Harbor Beach Mortgage Debt, debt
service on the Harbor Beach Rooms Renovation Loan, ground rent pursuant to the
terms of the Harbor Beach ground lease and cash distributions to the partners of
the Harbor Beach Partnership. The Partnership's allocable share of cash
distributions from the Harbor Beach Partnership are distributed to the partners
of the Partnership.
Results of Operations
1996 Compared to 1995
Hotel Revenues. Hotel revenues increased approximately $3.3 million, or 7%, over
1995 as a result of continued growth in corporate group and transient business.
REVPAR at the Orlando Hotel increased 2% over 1995 to $106. This increase was a
result of the Hotel's ability to restrict discounted rates and achieve a higher
average room rate. The average room rate increased 4% from 1995 to $137. This
increase was slightly offset by a 1.1 percentage point decrease in average
occupancy to 78%. The first half of a rooms
12
renovation project was completed during 1996 thus decreasing the availability of
rooms for sale. As a result of the increase in REVPAR, room sales at the Orlando
Hotel increased $2.4 million, or 4.2%, over 1995. Food and beverage sales in
1996 increased $2.1 million or 4.7% over 1995 primarily due to a 5.9% increase
in banquet sales. Food and beverage profit increased $1.0 million or 5.7% over
1995 due to the increase in revenues combined with continued emphasis on cost
containment. In 1997, the Orlando Hotel expects demand will remain strong and as
a result, 1997 hotel revenues are expected to increase.
Direct hotel operating costs and expenses increased $2.7 million, or 4%, over
1995 due to an increase in certain variable costs related to the increase in
room sales. The ratio of operating costs to room sales declined in 1996 to 58.0%
as compared to 1995 at 58.7%.
Rental Income. Rental income from the Harbor Beach Hotel increased by
approximately $1.6 million, or 7.9%, when compared to 1995 due to increased
transient demand especially in the leisure segment, the highest average room
rate category. The Harbor Beach Hotel experienced record call volume during
prime season and a significant increase in international travelers. REVPAR
increased 7% over 1995 due to a 5% increase in the average room rate to $164
combined with an increase in average occupancy of 1.9 percentage points to 82%.
Despite a 3% decline in group roomnights, transient roomnights increased 13%
over 1995. As a result of the increase in REVPAR, room sales and profit
increased 9.0% and 10.1%, or $2.6 million and $2.3 million, respectively, over
1995. For 1997, advance group bookings currently exceed 1996, primarily in the
first half of the year. Projections indicate that transient demand will also
remain strong in 1997. This strong demand will allow the Hotel to severely
restrict discounted rates and maximize its highest rated leisure transient rate.
Consequently, rental income is projected to increase in 1997.
Indirect hotel operating costs and expenses. Indirect hotel operating costs and
expenses decreased by $1.3 million, or by 4.2%, from $30.9 million in 1995 to
$29.6 million in 1996. The principal components of this category are discussed
below:
Depreciation and amortization. Depreciation and amortization decreased by $2.0
million, or 17.4%, when compared to 1995 due to a portion of the Hotels'
furniture and fixtures becoming fully depreciated in 1995.
Incentive management fees. In accordance with the Orlando Hotel Management
Agreement, incentive management fees increased by $0.5 million, or 6.7%, over
1995 as a result of improved operating results at the Orlando Hotel. Cash flow
from operations of the Orlando Hotel was sufficient to pay all incentive
management fees earned by the Manager in 1996 and 1995.
Base management fees. In accordance with the Orlando Hotel Management Agreement,
base management fees increased 5.2%, from $3.4 million in 1995 to $3.6 million
in 1996, due to improved total sales at the Orlando Hotel.
Interest expense. Interest expense increased 0.6% from $21.9 million in 1995 to
$22.0 million in 1996 primarily due to the Orlando Mortgage Debt loan
modification and extension in October 1995. The Orlando Mortgage Debt interest
rate was increased from 6.7% to 8.4% in October 1995. The effect of the interest
rate increase was offset slightly by principal payments on the Orlando Mortgage
Debt of $7.5 million in 1996.
Minority interest in income. Based on its 50.5% ownership interest, the
Partnership controls the Harbor Beach Partnership and as a result, the accounts
of the Harbor Beach Partnership are included in the consolidated financial
statements of the Partnership. Minority interest in income represents the net
income from the Harbor Beach Partnership allocable to the co-General Partner.
Minority interest in income
13
increased from $1.7 million in 1995 to $2.6 million in 1996 primarily due to the
increase in rental income from the Harbor Beach Hotel, as discussed above.
Net income. Net income for 1996 increased $5.3 million, or 40.3%, over 1995
primarily due to higher hotel revenues and rental income, offset by increased
incentive and base management fees and an increase in minority interest in
income.
1995 Compared to 1994
Hotel Revenues. Hotel revenues increased approximately $6.1 million, or 14.7%,
over 1994 as a result of a substantial increase in corporate group and transient
business. The increased demand in both of these segments allowed the Orlando
Hotel to restrict discounted rates and achieve a higher average rate. REVPAR at
the Orlando Hotel increased 8% over 1994 to $104 due to a 4% improvement in the
average room rate to $132 combined with a 2.7 percentage point increase in
average occupancy to 79%; as a result, room sales at the Orlando Hotel increased
$4.2 million, or 7.8%, over 1994. Food and beverage sales increased $5.4
million, or 13.4%, over 1994 as a direct result of increased catering volume
associated with a 23% increase in corporate group business.
Direct hotel operating costs and expenses increased $4.8 million, or 7.8%, over
1994 primarily due to an increase in certain variable costs related to the
increase in room sales. However, as a percentage of total sales, these direct
hotel operating costs and expenses decreased to 58.7% in 1995 as compared to
60.2% in 1994.
Rental Income. Rental income from the Harbor Beach Hotel increased by
approximately $2.5 million, or 14.3%, when compared to 1994 primarily due to
strong group demand and a rebound in international business from Europe and
South America. In 1994, business was negatively impacted by highly publicized
crime incidents in the South Florida region, as well as a reduction in the
number of rooms available for sale during the rooms refurbishment. REVPAR
increased 14% over 1994 to $125 due to a 2% increase in average room rate to
$157 combined with an 8.3 percentage point increase in average occupancy to 80%,
which translated into a rooms profit improvement of 15%. Average occupancy
improved as a result of an increase in both group and transient business of 15%
and 8%, respectively. Increased catering volume associated with the growth in
group business resulted in a $2.3 million, or 13.7%, increase in food and
beverage sales and a $1.2 million, or 19.2%, increase in food and beverage
profit when compared to 1994.
Interest and other revenues. Interest and other revenues decreased by $0.6
million in 1995, or 47.2%, when compared to 1994. In 1994, the Partnership
recognized a $0.9 million gain on the sale of approximately two acres of land
adjacent to the Orlando Hotel. Interest income increased by approximately $0.3
million over 1994 to $0.6 million, primarily due to interest earned on cash that
was held in reserve during 1995 in anticipation of the refinancing of the
Orlando Mortgage Debt.
Indirect hotel operating costs and expenses. Indirect hotel operating costs and
expenses increased by $1.1 million, or 3.9%, from $29.8 million in 1994 to $30.9
million in 1995. The principal components of this category are discussed below:
Depreciation and amortization. Depreciation and amortization decreased by $0.6
million, or 4.8%, when compared to 1994 due to a portion of the Hotels'
furniture and equipment becoming fully depreciated in 1994.
14
Incentive management fees. In accordance with the Orlando Hotel Management
Agreement, incentive management fees increased by $1.0 million, or 16.0%, over
1994 as a result of improved operating results at the Orlando Hotel. Cash flow
from the operations of the Orlando Hotel was sufficient to pay all incentive
management fees earned by the Manager in 1995 and 1994.
Base management fees. In accordance with the Orlando Hotel Management Agreement,
base management fees increased 10.5%, from $3.1 million in 1994 to $3.4 million
in 1995, due to improved total sales at the Orlando Hotel.
Ground rent, insurance and other. Ground rent, insurance and other increased
$0.6 million, or 11.1%, when compared to 1994. Pursuant to the Harbor Beach
Hotel ground lease, ground rent expense increased $0.1 million, or 8.3%, over
1994. Repairs and maintenance expense related to the Harbor Beach Hotel
increased $0.2 million, or 10.8%, over 1994. Partnership administrative expenses
increased $0.1 million, or 39.9%, over 1994 primarily due to the payment of a
$0.1 million agency fee related to the modification and extension of the Orlando
Mortgage Debt.
Interest expense. Interest expense decreased 1.2% from $22.1 million in 1994 to
$21.9 million in 1995 primarily due to principal payments on the Orlando Hotel
Mortgage Debt and the Harbor Beach Mortgage Debt. This was offset slightly by an
increase in the interest rate on the Orlando Mortgage Debt from 6.7% to 8.4% in
connection with the 1995 loan modification and extension.
Minority interest in income. Based on its 50.5% ownership interest, the
Partnership controls the Harbor Beach Partnership and as a result, the accounts
of the Harbor Beach Partnership are consolidated in the consolidated financial
statements of the Partnership. Minority interest in income represents the net
income from the Harbor Beach Partnership allocable to the co-General Partner.
Minority interest in income increased from $0.5 million in 1994 to $1.7 million
in 1995 primarily due to the increase in rental income from the Harbor Beach
Hotel, as discussed above.
Net income. Net income for 1995 increased $5.8 million, or 79.9%, over 1994
primarily due to higher hotel revenues and rental income, offset slightly by
increased incentive and base management fees and an increase in minority
interest in income.
Capital Resources and Liquidity
Principal Sources and Uses of Cash
The Partnership's principal source of cash is from operations. Its principal
uses of cash are to fund the property improvement funds of the Hotels, to pay
required principal amortization of the mortgage debt and other debt incurred to
fund costs of capital improvements at the Hotels, financing costs and cash
distributions to the partners. Total consolidated cash provided by operations
was $20.9 million, $25.8 million and $27.6 million for the years ended December
31, 1994, 1995 and 1996, respectively. Cash contributed to the property
improvement fund of the Hotels, were $6.0 million, $7.7 million and $8.7 million
for the years ended December 31, 1994, 1995 and 1996, respectively. Principal
repayments made on the mortgage debt of the Hotels totaled $9.8 million, $9.0
million and $8.9 million for the years ended December 31, 1994, 1995 and 1996,
respectively. Financing costs related to the mortgage debt of the Partnership
Hotels totaled $0.3 million, $2.3 million and $40,000 for the years ended
December 31, 1994, 1995 and 1996, respectively. Cash distributed to the partners
was $2.1 million and $5.0 million for the years ended December 31, 1995 and
1996, respectively. There were no distributions paid to the partners in 1994.
Cash distributions paid to the minority partner in Harbor Beach were $0.5
million, $1.5 million and $2.1 million for the years ended December 31, 1994,
1995 and 1996, respectively. Cash contributions
15
from minority interest to the Harbor Beach Partnership were $39,000 in 1994. No
cash contributions were required in 1995 and 1996.
Principal repayments to Host Marriott related to the Orlando ballroom loan and
the Orlando Hotel rooms renovation loan totaled $4.5 million, $2.7 million and
$4.1 million for the years ended December 31, 1994, 1995 and 1996, respectively.
Principal repayments to Marriott International Capital Corporation ("MICC"), a
wholly-owned subsidiary of MII, related to a rooms renovation loan at the Harbor
Beach Hotel totaled $0.5 million for each of the years ended December 31, 1995
and 1996. MICC advanced $2.8 million to the Harbor Beach Partnership during
1994.
The General Partner believes that cash from operations will provide adequate
funds for the operational needs of the Partnership and the Harbor Beach
Partnership for the foreseeable future. The interest rates on the Orlando
Mortgage Debt and the Harbor Beach Mortgage Debt are fixed at 8.44% and 9.13%,
respectively. Both loans mature in the year 2000, at which time the
loan-to-value ratios and debt service coverage of the Hotels are expected to
enhance the Partnership's and the Harbor Beach Partnership's ability to secure
replacement financing.
Property Improvement Funds
The Orlando Hotel Management Agreement and the Harbor Beach Hotel Operating
Lease provide for the establishment of a property improvement fund for each
Hotel. Pursuant to these agreements, contributions to the funds are equal to a
percentage of total sales of each Hotel and are used to provide for the funding
of routine capital expenditures and the replacement of furniture, fixtures, and
equipment. Upon maturity of the Orlando Hotel Mortgage Debt on June 16, 1995,
contributions to the Orlando Hotel fund increased to 5% of total sales. Total
contributions to the Orlando Hotel fund were $4.1 million, $5.1 million and $6.0
million for the years ended December 31, 1994, 1995 and 1996, respectively.
Total capital expenditures at the Orlando Hotel were $2.1 million, $4.8 million
and $8.1 million for the years ended December 31, 1994, 1995 and 1996,
respectively. The balance of the Orlando Hotel fund was $0.8 million as of
December 31, 1996.
Contributions to the Harbor Beach Hotel's property improvement fund were equal
to 4% of total hotel sales for 1994 and were 5% of total hotel sales in 1995 and
1996. Total contributions to the Harbor Beach Hotel fund were $1.9 million, $2.6
million and $2.7 million for the years ended December 31, 1994, 1995 and 1996,
respectively. Total capital expenditures at the Harbor Beach Hotel were $4.7
million, $1.3 million and $1.6 million for the years ended December 31, 1994,
1995 and 1996, respectively. The balance of the Harbor Beach Hotel fund was $2.7
million as of December 31, 1996.
In 1996, the Orlando Hotel completed the first phase of a two-phase rooms
renovation project that will enhance the Orlando Hotel's ability to compete in
the highly competitive and rapidly expanding Orlando market. Phase two of the
project is scheduled to begin in the summer of 1997. The project will require a
loan of approximately $3.0 million because the project is in excess of funds
available in the Orlando Hotel property improvement fund. The General Partner is
currently in discussions with the Manager to provide an unsecured loan. The loan
will be repaid from the future contributions to the Orlando Hotel property
improvement fund. The anticipated shortfall is due to several reasons: 1)
pursuant to the terms of the 1993 refinancing of the Orlando Mortgage Debt, the
contribution to the Orlando Hotel property improvement fund was reduced from 5%
of total sales to 4% of total sales; 2) the Partnership utilized approximately
$3.0 million from the property improvement fund for capital expenditures that
were to have been funded by Partnership funds exclusive of the property
improvement fund; 3) payments of principal and interest on the Orlando rooms
renovation loan from Host Marriott, which was incurred in 1990, were funded by a
portion of the contributions to the property improvement fund; and 4) the nature
of the
16
business of the Orlando Hotel, which generally produces more wear and tear on
the furniture, carpeting and other fixtures of the Orlando Hotel and increases
the amount of cash necessary to ensure that the physical condition and product
quality of the Orlando Hotel is maintained. The General Partner expects that
contributions to the Orlando Hotel property improvement fund will be sufficient
to repay the anticipated advance from MII and will provide a sufficient reserve
for the future capital repair and replacement needs of the Orlando Hotel.
During the fourth quarter of 1994, the Harbor Beach Hotel completed a $4.4
million guest rooms and suites renovation. Financing for the project was
provided from the Harbor Beach Hotel's property improvement fund and a $2.8
million unsecured loan from MICC. The loan carries a fixed rate of interest of
8% and is scheduled to mature on December 31, 1999. Payment of principal and
interest based upon a five-year amortization period commenced in January 1995.
Under the terms of the loan, the debt service payments are included as a
deduction in determining the fees paid to the Operating Tenant. As of December
31, 1996, the outstanding principal balance was $1.9 million. The General
Partner expects that contributions to the Harbor Beach Hotel property
improvement fund will be sufficient for the future capital repair and
replacement needs of the Harbor Beach Hotel.
Orlando Mortgage Debt
On January 12, 1993, the Partnership completed a refinancing of the Orlando
Hotel mortgage debt (the "Orlando Mortgage Debt"). The refinanced loan carried a
fixed interest rate of 6.705% through maturity on June 16, 1995, and semi-annual
principal amortization was required for the years 1993 through 1995, with $9.5
million, $8.5 million and $4.0 million due in each respective year. Host
Marriott provided a $10.0 million guarantee (the "Host Marriott Guarantee") of
principal and interest payments; advances under the guarantee accrued interest
at the Morgan Guaranty Trust Company prime rate. In addition, contributions to
the Orlando Hotel's property improvement fund were reduced from 5% to 4% of
total sales through June 16, 1995.
As a result of strong operating results at the Orlando Hotel, cash flow from
operations was sufficient to enable the Partnership to meet the debt service
requirements of the Orlando Mortgage Debt through maturity in June 1995.
Interest expense on the Orlando Mortgage Debt was $12.0 million for the year
ended December 31, 1994. At maturity, no advances were outstanding under the
Host Marriott Guarantee. In addition, on June 8, 1994, the Partnership sold
approximately two acres of land adjacent to the Orlando Hotel to Marriott
Ownership Resorts, Inc., an affiliate of Marriott International, Inc. ("MII"),
for use in the expansion of its existing time share complex. Proceeds from the
transaction, net of selling costs, totaled $1.1 million and were used to repay
principal on the Orlando Mortgage Debt. The transaction resulted in recognition
of a $0.9 million gain on sale for the year ended December 31, 1994.
The Orlando Mortgage Debt matured on June 16, 1995. Upon maturity of the debt,
the lender granted the Partnership a forbearance on the loan under which, for
the period June 16, 1995 through October 31, 1995, the Partnership paid interest
monthly in arrears at a floating rate equal to the applicable Federal Funds rate
plus 225 basis points. During the forbearance period, the weighted average
interest rate was 7.94%. On October 31, 1995, the Partnership successfully
completed a modification and extension of the Orlando Mortgage Debt. The
mortgage debt carries a fixed interest rate of 8.44%. Under the modified debt,
continued semi-annual amortization of principal is required. The loan matures on
June 16, 2000 with unamortized principal of $127.0 million due at that time. In
addition, no debt service guarantee was required to be provided. The costs
associated with the modification and extension totaled approximately $2.3
million and there were no excess proceeds from the transaction available for
distribution. Interest expense was $12.9 million for the year ended December 31,
1996. The outstanding Orlando Mortgage
17
Debt principal balance as of December 31, 1996 and 1995, was $145.5 million and
$153.0 million, respectively.
Harbor Beach Mortgage Debt
On March 29, 1994, the Harbor Beach Partnership completed a restructuring of its
$92 million loan (the "Harbor Beach Mortgage Debt"). The restructured loan
accrues interest at fixed rate of 9.125% and is payable monthly in arrears.
Interest only was payable for the first twelve payments through and including
April 1, 1995. The difference between the interest only payment and $772,600
(the "Payment Amount") was contributed to an escrow account (the "Capital
Reserve Escrow") with the lender to fund capital improvements at the Harbor
Beach Hotel. The Payment Amount represents the amount necessary to amortize the
original principal balance over a 22-year effective amortization period. The
Harbor Beach Mortgage Debt matures on May 1, 2000 and is collateralized by all
property and assets of the Harbor Beach Hotel. No debt service guarantee was
provided. Interest expense was $7.9 million, $8.0 million and $8.1 million for
the years ended December 31, 1996, 1995 and 1994, respectively. The outstanding
Harbor Beach Mortgage Debt principal balance as of December 31, 1996 and 1995
was $85.5 million and $86.9 million, respectively.
Orlando Ballroom Loan
During 1990, Host Marriott agreed to provide financing of $13.2 million to fund
the construction of a new ballroom and exhibition hall at the Orlando Hotel.
Payment of principal and interest on the Orlando Ballroom Loan is subordinate to
the payment of amounts due under the Orlando Mortgage Debt, repayment of any
outstanding debt service guarantee advances and payment of the first 50% of
incentive management fees to MII. As of December 31, 1996 and 1995, the
outstanding principal balance was $2.3 million and $6.4 million, respectively.
The weighted average interest rate was 8.3% for 1996, 8.8% for 1995 and 7.1% for
1994.
Inflation
For the three fiscal years ended December 31, 1996, the rate of inflation has
been relatively low and, accordingly, has not had a significant impact on the
Partnership's consolidated revenues and net income. The Manager and the
Operating Tenant are generally able to pass through increased costs to customers
through higher room rates. In 1996, the increase in average room rates at the
Hotels exceeded those of direct competitors as well as the general level of
inflation. As stated above, the Orlando Mortgage Debt and the Harbor Beach
Mortgage Debt bear fixed interest rates, thereby eliminating exposure to the
impact of future increases in interest rates.
Seasonality
Demand, and thus occupancy and room rates, is affected by normally recurring
seasonal patterns. Demand tends to be higher during the months of November
through April than during the remainder of the year. This seasonality tends to
affect the results of operations, increasing the revenue and rental income
during these months. In addition, this seasonality may also increase the
liquidity of the Partnership during these months.
18
Forward-Looking Statements
Certain matters discussed herein are forward-looking statements within the
meaning of the Private Litigation Reform Act of 1995 and as such may involve
known and unknown risks, uncertainties, and other factors which may cause the
actual results, performance or achievements of the Partnership to be different
from any future results, performance or achievements expressed or implied by
such forward-looking statements. Although the Partnership believes the
expectations reflected in such forward-looking statements are based upon
reasonable assumptions, it can give no assurance that its expectations will be
attained. These risks are detailed from time to time in the Partnership's
filings with the Securities and Exchange Commission. The Partnership undertakes
no obligation to publicly release the result of any revisions to these
forward-looking statements that may be made to reflect any future events or
circumstances.
19
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index Page
Report of Independent Public Accountants........................... 21
Consolidated Statement of Operations............................... 22
Consolidated Balance Sheet......................................... 23
Consolidated Statement of Cash Flows............................... 24
Statement of Changes in Partners' Capital (Deficit)................ 26
Notes to Consolidated Financial Statements......................... 27
20
- --------------------------------------------------------------------------------
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
TO THE PARTNERS OF MARRIOTT HOTEL PROPERTIES LIMITED PARTNERSHIP:
We have audited the accompanying consolidated balance sheet of Marriott Hotel
Properties Limited Partnership (a Delaware limited partnership) and subsidiaries
as of December 31, 1996 and 1995, and the related consolidated statements of
operations, changes in partners' capital (deficit) and cash flows for each of
the three years in the period ended December 31, 1996. These financial
statements and schedule referred to below are the responsibility of the General
Partner's management. Our responsibility is to express an opinion on these
financial statements and schedule based on our audits. We did not audit the 1995
and 1994 financial statements of Lauderdale Beach Association, which statements
reflect total assets and total revenues of 25 percent and 29 percent in 1995,
respectively, and 29% of total revenues in 1994, of the consolidated totals.
Those statements were audited by other auditors whose report has been furnished
to us and our opinion, insofar as it relates to the amounts included for that
entity, is based solely on the report of the other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform an audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits and the report of other auditors provide a reasonable
basis for our opinion.
In our opinion, based on our audits and the report of other auditors, the
financial statements referred to above present fairly, in all material respects,
the financial position of Marriott Hotel Properties Limited Partnership and
subsidiaries as of December 31, 1996 and 1995, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1996, in conformity with generally accepted accounting principles.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed in the index of Item
14(a)(2) is presented for purpose of complying with the Securities and Exchange
Commission's rules and is not a required part of the basic financial statements.
This schedule has been subjected to the auditing procedures applied in our audit
of the basic financial statements and, in our opinion, fairly states in all
material respects the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Washington, D.C.
March 14, 1997
21
CONSOLIDATED STATEMENT OF OPERATIONS
Marriott Hotel Properties Limited Partnership and Subsidiaries
For the Years Ended December 31, 1996, 1995 and 1994
(in thousands, except per Unit amounts)
1996 1995 1994
--------- --------- -------
REVENUES
Hotel (Note 3).......................................................................$ 50,523 $ 47,251 $ 41,201
Rental income........................................................................ 21,311 19,747 17,273
Interest and other................................................................... 919 679 1,285
--------- --------- ---------
72,753 67,677 59,759
--------- --------- ---------
OPERATING COSTS AND EXPENSES
Interest (including interest paid to related parties of $0.7 million, $1.0 million
and $1.0 million in 1996, 1995 and 1994, respectively)............................. 22,007 21,864 22,128
Depreciation and amortization........................................................ 9,693 11,739 12,327
Incentive management fees (paid to related parties).................................. 7,518 7,047 6,073
Base management fees (paid to related parties)....................................... 3,609 3,431 3,104
Property taxes....................................................................... 3,059 3,104 3,230
Ground rent, insurance and other..................................................... 5,770 5,624 5,063
--------- --------- ---------
51,656 52,809 51,925
-------- --------- ---------
INCOME BEFORE MINORITY INTEREST......................................................... 21,097 14,868 7,834
MINORITY INTEREST IN INCOME............................................................. (2,648) (1,718) (523)
--------- --------- ---------
NET INCOME .............................................................................$ 18,449 $ 13,150 $ 7,311
========= ========= =========
ALLOCATION OF NET INCOME
General Partner......................................................................$ 184 $ 132 $ 73
Limited Partners..................................................................... 18,265 13,018 7,238
--------- --------- ---------
$ 18,449 $ 13,150 $ 7,311
========= ========= =========
NET INCOME PER LIMITED PARTNER UNIT (1,000 Units).......................................$ 18,265 $ 13,018 $ 7,238
========= ========= =========
The accompanying notes are an integral part of these financial statements.
22
CONSOLIDATED BALANCE SHEET
Marriott Hotel Properties Limited Partnership and Subsidiaries
December 31, 1996 and 1995
(in thousands)
1996 1995
----------- -------
ASSETS
Property and equipment, net ...................................................................$ 222,491 $ 222,458
Minority interest.............................................................................. 10,641 11,185
Due from Marriott International, Inc. and its affiliates....................................... 9,114 7,136
Property improvement funds..................................................................... 3,542 4,363
Deferred financing costs, net.................................................................. 1,787 2,266
Prepaid ground rent ........................................................................... 259 259
Cash and cash equivalents...................................................................... 1,607 3,550
----------- -----------
$ 249,441 $ 251,217
=========== ===========
LIABILITIES AND PARTNERS' CAPITAL (DEFICIT)
Mortgage debt..................................................................................$ 230,959 $ 239,860
Note payable and amounts due to Marriott International, Inc.................................... 4,106 6,052
Note payable and amounts due to Host Marriott Corporation...................................... 2,405 6,484
Accounts payable and accrued interest.......................................................... 802 1,087
----------- -----------
Total Liabilities........................................................................... 238,272 253,483
----------- -----------
PARTNERS' CAPITAL (DEFICIT)
General Partner
Capital contribution..................................................................... 1,010 1,010
Capital distributions.................................................................... (512) (462)
Cumulative net losses.................................................................... (277) (461)
----------- -----------
221 87
--------- -----------
Limited Partners
Capital contributions, net of offering costs of $10,978.................................. 89,022 89,022
Investor notes receivable................................................................ (47) (47)
Capital distributions.................................................................... (50,618) (45,654)
Cumulative net losses.................................................................... (27,409) (45,674)
----------- -----------
10,948 (2,353)
----------- -----------
Total Partners' Capital (Deficit)........................................................ 11,169 (2,266)
----------- -----------
$ 249,441 $ 251,217
=========== ===========
The accompanying notes are an integral part of these financial statements.
23
CONSOLIDATED STATEMENT OF CASH FLOWS
Marriott Hotel Properties Limited Partnership and Subsidiaries
For the Years Ended December 31, 1996, 1995 and 1994
(in thousands)
1996 1995 1994
--------- --------- -------
OPERATING ACTIVITIES
Net income ..........................................................................$ 18,449 $ 13,150 $ 7,311
Noncash items:
Depreciation and amortization...................................................... 9,693 11,739 12,327
Minority interest in income........................................................ 2,648 1,718 523
Amortization of deferred financing costs as interest............................... 519 1,041 1,659
Loss (gain) on disposal of property and equipment.................................. 6 48 (948)
Deferred portion of incentive management fees...................................... -- -- 1,608
Interest roll-up on note payable to Marriott International, Inc.................... -- -- 64
Changes in operating accounts:
Due to/from Marriott International, Inc............................................ (1,964) (360) (931)
Payment of deferred incentive management fees...................................... (1,474) (1,972) --
Accounts payable and accrued interest.............................................. (292) 325 (703)
Due to Host Marriott Corporation................................................... 47 62 (3)
Prepaid ground rent and other receivables.......................................... -- 4 (23)
--------- --------- ---------
Cash provided by operations..................................................... 27,632 25,755 20,884
--------- --------- ---------
INVESTING ACTIVITIES
Additions to property and equipment.................................................. (9,732) (6,123) (6,822)
Changes in property improvement funds................................................ 821 (1,748) (1,579)
Withdrawal from (deposits to) capital reserve escrow................................. -- 949 (949)
Proceeds from sale of land........................................................... -- -- 1,109
--------- --------- ---------
Cash used in investing activities............................................... (8,911) (6,922) (8,241)
--------- --------- ---------
FINANCING ACTIVITIES
Repayments of mortgage debt and capital lease obligations............................ (8,901) (8,970) (9,842)
Capital distributions to partners.................................................... (5,007) (2,105) --
Repayments to Host Marriott Corporation.............................................. (4,126) (2,727) (4,489)
Capital distributions to minority interest........................................... (2,104) (1,485) (495)
(Repayments of) proceeds from note payable to Marriott International, Inc............ (486) (485) 2,800
Financing costs...................................................................... (40) (2,254) (309)
Proceeds from loan escrow account.................................................... -- -- 340
Capital contributions from minority interest......................................... -- -- 39
--------- --------- ---------
Cash used in financing activities............................................... (20,664) (18,026) (11,956)
--------- --------- ---------
24
CONSOLIDATED STATEMENT OF CASH FLOWS
(CONTINUED)
Marriott Hotel Properties Limited Partnership and Subsidiaries
For the Years Ended December 31, 1996, 1995 and 1994
(in thousands)
1996 1995 1994
--------- --------- ---------
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS........................................$ (1,943) $ 807 $ 687
CASH AND CASH EQUIVALENTS at beginning of year.......................................... 3,550 2,743 2,056
--------- --------- ---------
CASH AND CASH EQUIVALENTS at end of year................................................$ 1,607 $ 3,550 $ 2,743
========= ========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for mortgage and other interest..........................................$ 21,390 $ 20,893 $ 21,122
========= ========= =========
The accompanying notes are an integral part of these financial statements.
25
STATEMENT OF CHANGES IN PARTNERS'
CAPITAL (DEFICIT)
Marriott Hotel Properties Limited Partnership and Subsidiaries
For the Years Ended December 31, 1996, 1995 and 1994
(in thousands)
General Limited
Partner Partners Total
Balance, December 31, 1993........................................................$ (97) $ (20,525) $ (20,622)
Net income..................................................................... 73 7,238 7,311
----------- ----------- -----------
Balance, December 31, 1994........................................................ (24) (13,287) $ (13,311)
Net income..................................................................... 132 13,018 13,150
Capital distributions.......................................................... (21) (2,084) (2,105)
----------- ----------- -----------
Balance, December 31, 1995........................................................ 87 (2,353) (2,266)
Net income..................................................................... 184 18,265 18,449
Capital distributions.......................................................... (50) (4,964) (5,014)
----------- ----------- -----------
Balance, December 31, 1996........................................................$ 221 $ 10,948 $ 11,169
=========== =========== ===========
The accompanying notes are an integral part of these financial statements.
26
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Marriott Hotel Properties Limited Partnership and Subsidiaries
December 31, 1996 and 1995
NOTE 1. THE PARTNERSHIP
Description of the Partnership
Marriott Hotel Properties Limited Partnership (the "Partnership"), a Delaware
limited partnership, was formed on August 22, 1984, to acquire, construct, own
and operate the 1,503-room Marriott Orlando World Center Hotel (the "Orlando
Hotel"). The Orlando Hotel is managed as part of the Marriott Hotels, Resorts
and Suites full-service hotel system by Marriott International, Inc. (the
"Manager" and "MII").
Between November 1, 1985 and November 27, 1985 (the "Closing Date"), 1,000
limited partnership interests (the "Units"), representing a 99% interest in the
Partnership, were sold in a private placement. The limited partners paid
$10,000,000 in cash on the Closing Date with the remainder due in five annual
installments through May 15, 1990. The limited partners' obligations to make the
installment payments were evidenced by promissory notes totaling $45,350,000
payable to the Partnership and secured by the Units. The general partner is
Hotel Properties Management, Inc. (the "General Partner"), a wholly-owned
subsidiary of Host Marriott Corporation, with a 1% general partnership interest.
On December 29, 1995, Host Marriott Corporation's operations were divided into
two separate companies: Host Marriott Corporation ("Host Marriott") and Host
Marriott Services Corporation.
On the Closing Date, the Partnership purchased from affiliates of Host Marriott
(i) a 99% limited partnership interest in the Warner Center Marriott Hotel
Limited Partnership (the "Warner Center Partnership"), which owned the 473-room
Warner Center Marriott Hotel (the "Warner Center Hotel") in Los Angeles,
California and (ii) a 49% general partnership interest in, and a loan receivable
of $3,680,000 from, Lauderdale Beach Association (the "Harbor Beach
Partnership"), a general partnership that owns Marriott's 624-room Harbor Beach
Resort (the "Harbor Beach Hotel") in Ft. Lauderdale, Florida. As a result of
certain transactions, the Partnership now owns a 50.5% interest in the Harbor
Beach Partnership. The Harbor Beach Hotel is leased to Marriott Hotel Services,
Inc. (the "Operating Tenant"), a wholly-owned subsidiary of MII. On November 17,
1993, the lender foreclosed on the Warner Center Hotel. The foreclosure was
followed by the dissolution of the Warner Center Partnership.
On January 14, 1997, a wholly-owned subsidiary of Host Marriott completed a
tender offer for 464 limited partnership units in the Partnership (see Note 10).
Partnership Allocations and Distributions
The Partnership generally allocates net profits and losses, cash available for
distribution and tax credits as follows: (i) first, 1% to the General Partner
and 99% to the limited partners until cumulative distributions of sale and
refinancing proceeds ("Capital Receipts") equal to 50% of capital contributions
have been distributed; (ii) next, 15% to the General Partner and 85% to the
limited partners until cumulative distributions of Capital Receipts equal to all
capital contributions have been distributed; and (iii) thereafter, 30% to the
General Partner and 70% to the limited partners.
Capital Receipts not retained by the Partnership will generally be distributed
(i) first, 1% to the General Partner and 99% to the limited partners until the
General Partner and the limited partners (collectively the "Partners") have
received cumulative distributions of Capital Receipts equal to their capital
contributions; and (ii) thereafter, 30% to the General Partner and 70% to the
limited partners.
27
Gains are generally allocated (i) first, to Partners with negative capital
accounts, (ii) next, in amounts necessary to bring each Partner's capital
account balance equal to their invested capital, defined as the excess of
paid-in capital contributions over cumulative distributions of Capital Receipts,
and (iii) thereafter, 30% to the General Partner and 70% to the limited
partners.
Upon the sale of substantially all of the assets, gains and sales proceeds will
be distributed based on a specific allocation, as stated in the partnership
agreement, in order to provide the limited partners (if proceeds are sufficient)
a 15% cumulative return, as defined, to the extent not previously received from
cash distributions.
For financial reporting purposes, net losses of the Partnership are allocated 1%
to the General Partner and 99% to the limited partners.
The Harbor Beach Partnership generally allocates profits and losses, cash
distributions, gains and losses, and Capital Receipts in the ratio of ownership
interests.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Accounting
The Partnership's records are maintained on the accrual basis of accounting and
its fiscal year coincides with the calendar year.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Working Capital and Supplies
Pursuant to the terms of the management agreement discussed in Note 8, the
Partnership is required to provide the Manager with working capital and supplies
to meet the operating needs of the Orlando Hotel. The Manager converts cash
advanced by the Partnership into other forms of working capital consisting
primarily of operating cash, inventories, and trade receivables and payables
which are maintained and controlled by the Manager. Upon the termination of the
management agreement, the Manager is required to convert working capital and
supplies into cash and return it to the Partnership. As a result of these
conditions, the individual components of working capital and supplies controlled
by the Manager are not reflected in the accompanying consolidated balance sheet.
As of December 31, 1996 and 1995, $4,707,000 has been advanced to the Manager
for working capital and supplies which is included in Due from Marriott
International, Inc. on the accompanying Consolidated Balance Sheet. The supplies
advanced to the Manager are recorded at their estimated net realizable value. As
of December 31, 1996 and 1995, accumulated amortization related to the
revaluation of these supplies totaled $762,000.
Revenues and Expenses
Hotel Revenues represents house profit from the Orlando Hotel since the
Partnership has delegated substantially all of the operating decisions related
to the generation of house profit of the Orlando Hotel to the Manager. House
profit reflects hotel operating results which flow to the Partnership as
property owner and represents gross hotel sales less property-level expenses
28
excluding depreciation and amortization, base and incentive management fees,
real and personal property taxes, ground and equipment rent, insurance and
certain other costs, which are disclosed separately in the consolidated
statement of operations (seelNotee3).s represents house profit from the Orlando
Hotel since the Partnership has delegated substantially all of the operating
decisions related to the generation of house profit of the Orlando Hotel to the
Manager. House profit reflects hotel PrinciplesrofuConsolidationw to the
Partnership as property owner and represents gross hotel sales less
property-level expenses,
Principles of Consolidation
The consolidated financial statements for the years ended December 31, 1996,
1995 and 1994 include the accounts of the Partnership and the Harbor Beach
Partnership (collectively the "Partnerships"). The 49.5% general partnership
interest in the Harbor Beach Partnership owned by an unrelated party is reported
as minority interest. All significant intercompany balances and transactions
have been eliminated.
Property and Equipment
Property and equipment is recorded at cost. Depreciation and amortization are
computed using the straight-line method over the following estimated useful
lives of the assets, less a 10% estimated residual value on the original
building cost and land improvements related to the Orlando Hotel:
Land improvements 40 to 50 years
Building and improvements 40 to 50 years
Leasehold improvements 40 years
Furniture and equipment 3 to 10 years
All property and equipment is pledged as security for the mortgage debt
described in Note 6.
The Partnership and the Harbor Beach Partnership assess the impairment of their
real estate properties based on whether estimated future undiscounted cash flow
from such properties on an individual hotel basis will be less than their net
book value. If a property is impaired, its basis is adjusted to fair market
value.
On June 8, 1994, the Partnership sold approximately two acres of land adjacent
to the Orlando Hotel to Marriott Ownership Resorts, Inc. ("MORI"), an affiliate
of MII. Proceeds from the transaction, net of selling costs, totaled $1.1
million and were used to pay down principal on the Orlando Mortgage Debt (see
Note 6). This transaction resulted in recognition of $951,000 of gain which is
included in Interest and Other Revenues on the Consolidated Statement of
Operations for the year ended December 31, 1994.
Deferred Financing Costs
Deferred financing costs represent the costs incurred in connection with
obtaining the mortgage debt (see Note 6) and are amortized over the term
thereof. The Orlando Mortgage Debt, which is described in Note 6, was refinanced
on October 31, 1995. Deferred financing costs associated with the refinancing of
the Orlando Mortgage Debt totaled $2,316,000. Deferred financing costs
associated with the restructuring of the Harbor Beach Mortgage Debt (see Note 6)
amounted to $350,000. Accumulated amortization of deferred financing costs were
$879,000 and $360,000 at December 31, 1996 and 1995, respectively.
29
Cash and Cash Equivalents
The Partnership considers all highly liquid investments with a maturity of three
months or less at date of purchase to be cash equivalents.
Income Taxes
Provision for Federal and state income taxes has not been made in the
accompanying financial statements since the Partnership does not pay income
taxes, but rather allocates its profits and losses to the individual partners.
Significant differences exist between the net income for financial reporting
purposes and the net income reported in the Partnership's tax return. These
differences are due primarily to the use, for income tax purposes, of
accelerated depreciation methods, shorter depreciable lives of the assets,
differences in the timing of the recognition of base and incentive management
fee expense and the expensing of certain costs incurred during construction
which have been capitalized in the accompanying financial statements. As a
result of these differences, the excess of the tax basis in net Partnership
liabilities over the net liabilities reported in the accompanying financial
statements amounted to $101,811,000 and $93,026,000 as of December 31, 1996 and
1995, respectively.
New Statement of Financial Accounting Standards
In the first quarter of 1996, the Partnership adopted Statement of Financial
Accounting Standards ("SFAS") No. 121 "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." Adoption of SFAS
No. 121 did not have any effect on the consolidated financial statements.
NOTE 3. HOTEL REVENUES
Hotel Revenues consist of hotel operating results for the Orlando Hotel for the
three years ended December 31, 1996 (in thousands):
1996 1995 1994
----------- ----------- -----------
HOTEL SALES
Rooms.......................................................................$ 59,289 $ 56,881 $ 52,731
Food and beverage........................................................... 47,852 45,708 40,290
Other....................................................................... 13,157 11,762 10,447
----------- ----------- -----------
......................................................................... 120,298 114,351 103,468
----------- ----------- -----------
HOTEL EXPENSES
Departmental Direct Costs
Rooms.................................................................... 12,201 11,665 11,337
Food and beverage........................................................ 29,968 28,784 25,828
Other hotel operating expenses.............................................. 27,606 26,651 25,102
----------- ----------- -----------
......................................................................... 69,775 67,100 62,267
----------- ----------- -----------
HOTEL REVENUES..................................................................$ 50,523 $ 47,251 $ 41,201
=========== =========== ===========
30
NOTE 4. PROPERTY AND EQUIPMENT
Property and equipment consists of the following as of December 31 (in
thousands):
1996 1995
---------- -------
Land and improvements.........................................................................$ 31,074 $ 30,893
Building and improvements..................................................................... 152,361 150,861
Leasehold improvements........................................................................ 80,841 80,646
Furniture and equipment....................................................................... 69,846 62,811
---------- -----------
......................................................................................... 334,122 325,211
Less accumulated depreciation................................................................. (111,631) (102,753)
---------- -----------
.........................................................................................$ 222,491 $ 222,458
=========================
NOTE 5. ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair values of financial instruments are shown below. The fair
values of financial instruments not included in this table are estimated to be
equal to their carrying amounts.
As of December 31, 1996 As of December 31, 1995
---------------------------- --------------------------
Estimated Estimated
Carrying Fair Carrying Fair
Amount Value Amount Value
(in thousands)
Mortgage debt..............................................$ 230,959 $ 233,468 $ 239,860 $ 248,287
Note payable due to Host Marriott Corporation..............$ 2,294 $ 2,294 $ 6,420 $ 6,420
Incentive management fees payable to
Marriott International, Inc.............................$ 2,046 $ 2,046 $ 3,520 $ 2,775
Note payable due to Marriott International, Inc............$ 1,893 $ 1,847 $ 2,379 $ 2,379
The estimated fair value of mortgage debt is based on the expected future debt
service payments discounted at estimated market rates. Notes payable due to Host
Marriott Corporation and Marriott International, Inc. and Incentive management
fees payable to Marriott International, Inc. are valued based on the expected
future payments from operating cash flow discounted at risk adjusted rates.
31
NOTE 6. DEBT
The Partnerships have entered into various long-term loan agreements to provide
non-recourse mortgage financing for the Hotels. Combined mortgage debt
maturities, at December 31, 1996 are (in thousands):
1997....................................$ 8,523
1998.................................... 7,168
1999.................................... 5,826
2000.................................... 209,442
--------------
........................................$ 230,959
==============
Orlando Mortgage
On January 12, 1993 (the "Closing Date"), the General Partner refinanced the
Orlando Hotel mortgage debt (the "Orlando Mortgage Debt"). On the Closing Date,
the Partnership paid $29.3 million to the lender which was applied $12.0 million
to the outstanding principal balance, $13.5 million to interest due through the
Closing Date and $3.8 million to financing costs. The Orlando Mortgage Debt
carried a fixed rate of interest of 6.705% and required semi-annual principal
amortization totaling $22 million through its maturity on June 16, 1995 (the
"Maturity Date"). In 1994, net proceeds of $1.1 million from the sale of land
adjacent to the Orlando Hotel (see Note 2) were used to pay down the principal
balance.
Pursuant to the terms of the refinancing, Host Marriott provided a guarantee of
debt service payments up to $10 million. Payments under the guarantee
constituted advances to the Partnership and were to accrue interest at the
Morgan Guaranty Trust Company prime rate. As of the Maturity Date, no amounts
were outstanding under the guarantee.
On the Maturity Date, the lender granted the Partnership a forbearance on the
loan extending it from June 16, 1995 through October 31, 1995. The Partnership
paid interest monthly in arrears at a floating rate equal to the applicable
Federal Funds rate plus 225 basis points. During the forbearance period, the
weighted average interest rate was 7.94%. On October 31, 1995, the Partnership
successfully completed a modification and extension of the Orlando Mortgage
Debt. The mortgage debt carries a fixed rate of interest of 8.44% and requires
semi-annual amortization of principal. The loan matures on June 16, 2000 with
unamortized principal of $127.0 million due at that time. No debt service
guarantee was provided. As of December 31, 1996 and 1995, the outstanding
principal balance was $145,479,000 and $152,979,000, respectively.
The Orlando Mortgage Debt is secured by the Orlando Hotel, the land on which the
Orlando Hotel and golf course are located and an assignment of certain operating
agreements.
Harbor Beach Mortgage
The original Harbor Beach loan agreement provided $86.6 million for construction
of the Harbor Beach Hotel. On June 30, 1986, this debt was refinanced with a
major insurance company. The $92 million replacement loan (the "Harbor Beach
Mortgage Debt") bore interest at a fixed rate of 9.375% and required payments of
interest only through July 1988 and monthly payments of principal and interest
in the amount of $765,000 thereafter until maturity on July 1, 1993. Upon
maturity, the lender granted the Harbor Beach Partnership a forbearance of the
loan for a fee of $165,000. Under the forbearance agreement, the Harbor Beach
Partnership continued to pay the lender through March 29, 1994, payments of
principal and interest in accordance with the terms of the Harbor Beach Mortgage
Debt.
32
On March 29, 1994 (the "Closing Date"), the Harbor Beach Partnership completed
the restructuring of the Harbor Beach Mortgage Debt. The restructured mortgage
debt carries a fixed rate of interest of 9.125% (the "Contract Interest Rate")
and is payable monthly in arrears. Interest only at the Contract Interest Rate
was due and payable for the first twelve payments through and including April 1,
1995. For the period from the Closing Date through April 1, 1995, the difference
between the interest only payment and $772,600 (the "Payment Amount") was
contributed to an escrow account with the lender to fund capital improvements at
the Harbor Beach Hotel. The Payment Amount represents the amount necessary to
amortize the outstanding principal balance, as of the Closing Date, over a
22-year effective amortization period. The loan matures on May 1, 2000. The
restructured mortgage debt is collateralized by all property and assets of the
Harbor Beach Hotel. No debt service guarantee was provided. As of December 31,
1996 and 1995, the outstanding principal balance was $85,480,000 and
$86,881,000, respectively.
Orlando Ballroom Loan
During 1990, Host Marriott agreed to provide interim financing of up to $14
million to fund the construction of a new ballroom and exhibition hall at the
Orlando Hotel. Construction was completed in February 1990. On December 31,
1990, the interim financing was converted to a permanent loan from Host Marriott
with $13.2 million advanced. Interest only, at the Bankers Trust Company prime
rate, was payable from the Partnership's cash flow after debt service. On June
16, 1992, in conjunction with the refinancing of the Orlando Mortgage Debt, the
Orlando ballroom loan was converted from a term loan to a revolving line of
credit with a floating interest rate equal to the Bankers Trust Company prime
rate. The weighted average effective interest rate for the years ended December
31, 1996, 1995 and 1994 was 8.3%, 8.8% and 7.1%, respectively (rate as of
December 31, 1996 and 1995 was 8.3% and 8.5%, respectively). As of December 31,
1996 and 1995, the outstanding principal balance was $2,294,000 and $6,420,000,
respectively.
Harbor Beach Rooms Renovation Loan
On July 21, 1994, the Harbor Beach Partnership entered into a loan agreement
with Marriott International Capital Corporation ("MICC"), a wholly-owned
subsidiary of MII, in conjunction with a rooms and suites refurbishment at the
Harbor Beach Hotel. The loan provided financing of up to $2.8 million, plus
accrued interest through December 31, 1994, to fund costs in excess of funds
available in the Harbor Beach Partnership's property improvement fund. This
unsecured loan carries a fixed rate of interest of 8%. Accrued interest
totalling $64,000 was rolled into the principal balance at December 31, 1994.
Payments of principal and interest based upon a five-year amortization period
commenced in January 1995. Under the terms of the loan, the debt service
payments are included as a deduction in determining the fees paid to the
Operating Tenant, as described in Note 8. As of December 31, 1996 and 1995, the
outstanding principal balance was $1,893,000 and $2,379,000, respectively.
Interest earned by MICC was $171,000 and $211,000 in 1996 and 1995,
respectively. No interest was earned in 1994.
NOTE 7. LEASES
The Harbor Beach Partnership, through an assignment of a lease on January 15,
1982, acquired all rights to a 99-year lease with a 25-year renewal option for
the land on which the Harbor Beach Hotel is located. On April 28, 1993, the
lessor sold its rights under the lease to an unrelated party. A provision under
the sale of the lease provided for the early refund to the Harbor Beach
Partnership of the remaining $1,250,000 balance of an initial $2,500,000
security deposit paid to the lessor and a $500,000 payment to facilitate the
modification of the lease.
33
- --------------------------------------------------------------------------------
Lease payments are made quarterly in advance in accordance with a lease year
that operates from December 1 through November 30. The annual rental for the
lease year ended November 1994 was $1,430,000 and increased to $1,560,000 on
December 1994 for lease years 1995 through 1999. After lease year 1999, annual
rentals for each succeeding five-year period increase by an amount equal to 10%
of the previous annual rental.
Minimum annual rentals during the term of the ground lease are (in thousands):
Year
1997.................................................$ 1,560
1998................................................. 1,560
1999................................................. 1,573
2000................................................. 1,716
2001................................................. 1,716
Thereafter........................................... 312,856
--------------
Total Minimum Lease Payments.........................$ 320,981
==============
NOTE 8. MANAGEMENT AND OPERATING LEASE AGREEMENTS
The Partnership has entered into a long-term management agreement with the
Manager, and the Harbor Beach Partnership has entered into a long-term operating
lease with the Operating Tenant. The Hotels are operated as part of the Marriott
Hotels, Resorts and Suites full-service hotel system. Significant provisions
under the agreements are as follows:
Orlando Hotel. The management agreement provides for an initial term of 25
years, commencing with the opening of the Orlando Hotel (March 24, 1986), and
five 10-year renewals at the Manager's option. The Manager is paid a base
management fee of 3% of gross hotel sales and is also entitled to an incentive
management fee equal to 20% of operating profit, as defined, and an additional
incentive management fee equal to 30% of the following amount: (i) 80% of
operating profit in each fiscal year less (ii) the greater of (a) $25,000,000 or
(b) debt service on the Orlando Mortgage Debt plus $7,000,000. Payment of the
incentive management fee is subordinate to debt service and retention of
specified amounts of operating profit by the Partnership. Unpaid incentive
management fees are deferred without interest and are payable from future
operating cash flow, as defined, but are due upon termination of the management
agreement only if the termination is the result of a default by the Partnership.
Unpaid incentive management fees as of December 31, 1996 and 1995 were
$2,046,000 and $3,520,000, respectively.
Under the management agreement, the Manager is required to furnish the Orlando
Hotel with certain services ("Chain Services") which are generally provided on a
central or regional basis to all hotels in the Marriott full-service hotel
system. Chain Services include central training, advertising and promotion, a
national reservation system, computerized payroll and accounting services, and
such additional services as needed which may be more efficiently performed on a
centralized basis. Costs and expenses incurred in providing such services are
allocated among all domestic full-service hotels managed, owned or leased by MII
or its subsidiaries. In addition, the Hotel participates in MII's Honored Guest
Awards Program ("HGA"). The cost of this program is charged to all hotels in the
Marriott full-service hotel system based upon the HGA sales at each hotel. The
total amount of Chain Services and HGA costs allocated to the Orlando Hotel was
$3,588,000, $3,336,000 and $2,825,000 for the years ended December 31, 1996,
1995 and 1994, respectively.
34
Harbor Beach Hotel. The operating lease provides for an initial 36-year term
commencing with the opening of the Harbor Beach Hotel (October 29, 1984), with
options to renew for six successive 10-year periods based on certain defined
conditions.
The annual rental paid to the Harbor Beach Partnership includes the following:
o basic rental: annual rental payable under the land lease and insurance
costs
o percentage rental: determined by multiplying the applicable percentage
set annually by the Harbor Beach Partnership by revenues
o performance rental: first $9,720,000 of operating profit of the Harbor
Beach Hotel, as defined
o additional performance rental: 50% of operating profit of the Harbor
Beach Hotel, as defined, in excess of $9,720,000
o contingent rental: up to 50% of operating profit of the Harbor Beach
Hotel, as defined, in excess of $9,720,000 if the aggregate annual
rental is otherwise insufficient to cover debt service.
Pursuant to the terms of the Harbor Beach rooms renovation loan (see Note 6),
the annual performance rental is adjusted upward by the annual debt service
required under the loan. For the five-year period beginning with 1995 and ending
in 1999, annual performance rental is increased by $696,557 to $10,416,557.
Subsequent to year-end 1999, performance rental will return to $9,720,000.
Percentage rental is intended to cover the cost of utilities, repairs and
maintenance, and the required contribution to the property improvement fund (4%
for 1994 and 5% for 1995 and thereafter) and is therefore adjusted annually in
order to equal the actual applicable costs. Any payments of contingent rental
reduce future payments of additional performance rental (subject to limitations)
in subsequent years. No contingent rental has been accrued as of December 31,
1996 and 1995.
Rental income under the Harbor Beach Partnership operating lease for the three
years ended December 31, 1996 was (in thousands):
1996 1995 1994
--------- --------- -------
Basic Rental..........................................................................$ 1,694 $ 1,616 $ 1,469
Percentage Rental..................................................................... 6,240 5,921 4,978
Performance Rental.................................................................... 10,417 10,417 9,720
Additional Performance Rental......................................................... 2,960 1,793 1,106
--------- --------- ---------
.................................................................................$ 21,311 $ 19,747 $ 17,273
- --------------------------------------------------------------------------------------========= ========= =========
Cost and accumulated depreciation of the rental property were $100,647,000 and
$37,279,000 at December 31, 1996, and $99,077,000 and $33,990,000, respectively,
at December 31, 1995.
Property Improvement Funds
The management agreement and the operating lease provide for the establishment
of a property improvement fund for each of the Hotels. Contributions to the
property improvement funds are equal to a percentage of gross sales of each
hotel. Pursuant to the terms of the Orlando Mortgage Debt refinancing,
contributions to the fund for the Orlando Hotel were 4%
35
through maturity of the refinanced mortgage in June 1995. Contributions
increased to 5% subsequent to maturity and will remain at 5% thereafter.
Contributions to the fund for the Orlando Hotel totaled $6,015,000 and
$5,120,000 for the years ended December 31, 1996 and 1995, respectively.
Contributions to the fund for the Harbor Beach Hotel were 5% in 1995 and 1996.
Contributions to the fund for the Harbor Beach Hotel totaled $2,729,000 and
$2,610,000 for the years ended December 31, 1996 and 1995, respectively.
NOTE 9. COMPARATIVE LEASED HOTEL OPERATING RESULTS
The Harbor Beach Hotel is a leased property whose income to the Partnership is
included in the consolidated statement of operation as rental income. The
following is a comparative summary of hotel operating results for the Harbor
Beach Hotel for the three years ended December 31, 1996 (in thousands):
1996 1995 1994
--------- --------- ---------
HOTEL SALES
Rooms...............................................................................$ 30,939 $ 28,384 $ 24,835
Food and beverage................................................................... 20,764 19,366 17,037
Other............................................................................... 5,016 4,857 4,659
--------- --------- ---------
................................................................................. 56,719 52,607 46,531
--------- --------- ---------
HOTEL EXPENSES
Departmental Direct Costs
Rooms............................................................................ 5,566 5,332 4,768
Food and beverage................................................................ 12,664 12,140 10,974
Other hotel operating expenses...................................................... 22,151 21,219 19,127
--------- --------- ---------
HOTEL REVENUES........................................................................$ 16,338 $ 13,916 $ 11,662
========= ========= =========
NOTE 10. SUBSEQUENT EVENT
On January 14, 1997, MHP Acquisition Corporation (the "Company"), a wholly-owned
subsidiary of Host Marriott, completed its tender offer for limited partnership
units in the Partnership. The Company purchased approximately 464 units for an
aggregate consideration of $37.1 million or $80,000 per unit. Combined with its
prior ownership position, Host Marriott now indirectly owns through affiliates,
48% of the Partnership. Additionally, in a Partnership vote held in conjunction
with the tender offer, the limited partners approved all of the proposed
amendments to the partnership agreement that were conditions to the tender
offer.
36
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The Partnership has no directors or officers. The business policy making
functions of the Partnership are carried out through the directors and executive
officers of Hotel Properties Management, Inc., the General Partner, who are
listed below:
Current Position in Hotel
Name Properties Management, Inc. Age
----------------------- ------------------------------------------- ------
Bruce F. Stemerman President, Treasurer and Director 41
Robert E. Parsons, Jr. Vice President and Director 42
Earla L. Stowe Vice President and Chief Accounting Officer 35
Christopher G. Townsend Vice President and Director 50
Anna Mary Coburn Secretary 41
Business Experience
Bruce F. Stemerman was elected President of the General Partner in November 1995
and Treasurer of the General Partner in 1996. He was Director and Chief
Accounting Officer of the General Partner from October 1993 to October 1996 and
was Vice President--Finance from October 1993 to November 1995. Mr. Stemerman
joined Host Marriott in 1989 as Director--Partnership Services. He was promoted
to Vice President--Lodging Partnerships in 1994 and became Senior Vice
President--Asset Management in 1996. Prior to joining Host Marriott, Mr.
Stemerman spent ten years with Price Waterhouse. He also serves as a director
and an officer of numerous Host Marriott subsidiaries.
Robert E. Parsons, Jr. has been a Vice President of the General Partner since
November 1995 and a Director of the General Partner since September 1988. From
1988 to October 1995, Mr. Parsons was President of the General Partner. Mr.
Parsons joined Host Marriott's Corporate Financial Planning staff in 1981, was
made Director-Project Finance of Host Marriott's Treasury Department in 1984,
and in 1986 he was made Vice President-Project Finance of Host Marriott's
Treasury Department. He was made Assistant Treasurer of Host Marriott in 1988.
Mr. Parsons was named Senior Vice President and Treasurer of Host Marriott in
1993. He was named Executive Vice President and Chief Financial Officer of Host
Marriott in October 1995. He also serves as a director and an officer of
numerous Host Marriott subsidiaries.
Earla L. Stowe was appointed to Vice President and Chief Accounting Officer of
the General Partner on October 8, 1996. Ms. Stowe joined Host Marriott
Corporation in 1982 and held various positions in the tax department until 1988.
She joined Partnership Services as an accountant in 1988 and in 1989 she became
an Assistant Manager-Partnership Services. She was promoted to
Manager-Partnership Services in 1991 and to Director-Asset Management in June,
1996. She also serves as an officer of numerous Host Marriott subsidiaries.
37
Christopher G. Townsend has been Vice President and Director of the General
Partner since September 1988. Mr. Townsend joined Host Marriott's Law Department
in 1982 as a Senior Attorney. In 1984, Mr. Townsend was made Assistant Secretary
of Host Marriott and in 1986 was made Assistant General Counsel. In 1993, he was
made Senior Vice President, Corporate Secretary and Deputy General Counsel of
Host Marriott. In January 1997, he was made General Counsel of Host Marriott. He
also serves as a director and an officer of numerous Host Marriott subsidiaries.
Anna Mary Coburn joined Host Marriott as an Attorney in 1988, became Assistant
General Counsel in 1993, and was elected Corporate Secretary and Associate
General Counsel in 1997. Prior to joining Host Marriott, Ms. Coburn was an
Attorney for the law firm of Shawe & Rosenthal and was a law clerk for the
United States Court of Appeals for the Fourth Circuit.
ITEM 11. EXECUTIVE COMPENSATION
As noted in Item 10 above, the Partnership has no directors or officers nor does
it have any employees. Under the Partnership Agreement, however, the General
Partner has the exclusive right to conduct the business and affairs of the
Partnership subject only to the Management Agreement described in Items 1 and
13. The General Partner is required to devote to the Partnership such time as
may be necessary for the proper performance of its duties, but the officers and
the directors of the General Partner are not required to devote their full time
to the performance of such duties. No officer or director of the General Partner
devotes a significant percentage of time to Partnership matters. To the extent
that any officer or director does devote time to the Partnership, the General
Partner is entitled to reimbursement for the cost of providing such services.
Any such costs may include a charge for overhead, but without a profit to the
General Partner. For the fiscal years ending December 31, 1996, 1995 and 1994,
administrative expenses reimbursed to the General Partner totaled $126,000,
$129,000 and $200,000, respectively. For information regarding all payments made
by the Partnership to Host Marriott and subsidiaries, see Item 13 "Certain
Relationships and Related Transactions."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
Pursuant to the Tender Offer, an affiliate of Host Marriott and the General
Partner, acquired 463.75 Units representing a 46.4% limited partnership interest
in the Partnership. The General Partner owns a total of 10.5 Units representing
a 1.05% limited partnership interest in the Partnership. Therefore, Host
Marriott and affiliates own 472.25 Units representing a 47.45% limited
partnership interest in the Partnership.
There are no Units owned by the executive officers and directors of the General
Partner, as a group.
The officers and directors of MII, as a group, own the following units:
Amount and Nature of
Title of Class Beneficial Ownership Percent of Class
Limited Partnership Units 3.0 Units 0.3%
There are no Units owned by individuals who are directors of both the General
Partner and MII.
38
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Management and Operating Lease Agreements
As described below, the Partnerships are parties to important ongoing agreements
with MII pursuant to which the Orlando Hotel is managed by MII and the Harbor
Beach Hotel is leased to MHSI.
Orlando Hotel Management Agreement
The Partnership entered into the Management Agreement with MII to manage and
operate the Orlando Hotel. The Management Agreement is for a term of 25 years
from the opening date with renewal terms, at the option of MII, of up to five
additional 10-year periods. The Management Agreement provides the Manager with a
base management fee equal to 3% of gross hotel sales. In addition, the Manager
is entitled to receive incentive management fees equal to 20% of hotel operating
profit and additional incentive fees equal to 30% of the following amount: (i)
80% of hotel operating profit less (ii) the greater of (a) $25 million or (b)
debt service on the Orlando Mortgage Debt plus $7 million. Payment of the
incentive management fee is subordinate to debt service and retention of
specified amounts of hotel operating profit by the Partnership.
Unpaid incentive management fees ("Deferred Incentive Management Fees") accrue
without interest and are payable from future hotel operating cash flow available
following payment of any then current incentive management fees and retention of
specified amounts of hotel operating profit by the Partnership. As of December
31, 1996 and 1995, Deferred Incentive Management Fees were $2,046,000 and
$3,520,000, respectively.
The Manager is required to furnish the Orlando Hotel with certain services
("Chain Services") that are generally provided on a central or regional basis to
all hotels in the MII full-service hotel system. The major cost components
included in Chain Services are computer, reservations, advertising, training and
sales costs. Costs and expenses incurred in providing such services are
allocated among all domestic full-service hotels managed, owned or leased by MII
or its subsidiaries with no profit to MII. The methods of allocating the costs
and expenses are based upon one or a combination of the following: (i) percent
of sales, (ii) total number of hotel rooms, (iii) total number of reservations
booked, and (iv) total number of management employees.
The following table sets forth the amounts paid to the Manager for the years
ended December 31, 1996, 1995 and 1994. The table also includes accrued but
unpaid incentive management fees:
Year Ended December 31,
1996 1995 1994
(in thousands)
Base management fees.............................................................$ 3,609 $ 3,431 $ 3,104
Chain services and HGA costs..................................................... 3,588 3,336 3,019
Incentive management fees........................................................ 8,992 9,019 4,465
--------- --------- ---------
Total paid.....................................................................$ 16,189 $ 15,786 $ 10,588
========= ========= =========
Accrued but unpaid incentive management fees.....................................$ -- $ -- $ 1,608
========= ========= =========
39
The Management Agreement also provides for the establishment of a property
improvement fund for the Orlando Hotel to cover the cost of certain non-routine
repairs and maintenance to the hotel which are normally capitalized and the cost
of replacements and renewals to the hotel property and improvements.
Contributions to the property improvement fund are based on a percentage of
gross hotel sales. Contributions to the fund were 4% through maturity of the
refinanced Orlando Mortgage Debt in June 1995. Contributions increased to 5%
subsequent to maturity and will remain at 5% thereafter.
Pursuant to the Management Agreement, the Partnership provided the Manager with
working capital and supplies to meet the operating needs of the Orlando Hotel.
This advance bears no interest and remains the property of the Partnership
throughout the term of the Management Agreement. The Partnership is required to
advance upon request of the Manager any additional funds necessary to maintain
the working capital and supplies at levels determined by the Manager to be
necessary to satisfy the needs of the hotel as its operations may require from
time to time. Upon termination of the Management Agreement, the Manager will
return to the Partnership any unused working capital and supplies. At the
inception of the Partnership, $4.7 million was advanced to the Manager for
working capital and supplies.
The Management Agreement also provides that the Partnership may terminate the
agreement and remove the Manager if, during any three consecutive fiscal years
after fiscal year 1992, the average of hotel operating profit fails to equal or
exceed the lesser of (i) 10% of the original cost of the hotel or (ii) the sum
of the average annual amount of the interest portion of the Orlando Mortgage
Debt plus $5 million. The Manager may, however, prevent termination by paying to
the Partnership such amounts as are necessary to achieve the above performance
standards.
Harbor Beach Hotel Operating Lease
The Harbor Beach Partnership entered into the Operating Lease with MHSI, a
subsidiary of MII, to operate the Harbor Beach Hotel. The Operating Lease is for
a term of 36 years from the opening of the hotel with renewal terms, at the
option of MHSI, of up to six additional 10-year periods. The annual rental paid
to the Harbor Beach Partnership includes the following:
Basic rental: annual rental payable under the land lease and insurance costs.
Performance rental: first $9,720,000 of operating profit of the Harbor Beach
Hotel, as defined.
Additional performance rental: 50% of operating profit of the Harbor Beach
Hotel, as defined, in excess of $9,720,000.
Contingent rental: up to 50% of operating profit of the Harbor Beach Hotel, as
defined, in excess of $9,720,000 if the aggregate annual rental is otherwise
insufficient to cover debt service.
Pursuant to the terms of Harbor Beach rooms renovation loan, the annual
performance rental is adjusted upward by the annual debt service required under
the loan. For the five-year period beginning with 1995 and ending in 1999,
annual performance rental is increased by $696,557 to $10,416,557. Subsequent to
year-end 1999, performance rental will return to $9,720,000.
40
Percentage rental is adjusted annually to equal the costs it was intended to
cover. Any payments of contingent rental reduce future payments of additional
performance rental (subject to limitations) in subsequent years.
The following table sets forth the rental income under the Harbor Beach
operating lease for the years ended December 31, 1996, 1995 and 1994 (in
thousands):
Year Ended December 31,
1996 1995 1994
Basic rental..................................................................$ 1,694 $ 1,616 $ 1,469
Percentage rental............................................................. 6,240 5,921 4,978
Performance rental............................................................ 10,417 10,417 9,720
Additional performance rental................................................. 2,960 1,793 1,106
-------- -------- ----------
Total rental income $ 21,311 $ 19,747 $ 17,273
======== ======== ==========
The Operating Lease provides that the Harbor Beach Partnership may terminate the
Operating Lease and remove the Operating Tenant if the payments of performance
rental in any three consecutive fiscal years beginning with fiscal year 1991 are
less than $7.2 million. The Operating Tenant may, however, prevent termination
by paying to the Harbor Beach Partnership such amounts as are necessary to
achieve the above performance standards.
Payments to Host Marriott, MII and their Affiliates
The following table sets forth amounts paid by the Partnerships to Host
Marriott, MII and their subsidiaries for the years ended December 31, 1996, 1995
and 1994 (in thousands):
Year Ended December 31,
1996 1995 1994
Payments to Host Marriott and affiliates:
Interest and principal paid on Orlando Ballroom Loan..........................$ 4,604 $ 3,531 $ 5,000
Interest and principal paid on Orlando Rooms Renovation Loan.................. -- -- 433
Administrative expenses....................................................... 126 129 200
Cash distributions............................................................ 102 43 --
-------- -------- ---------
...........................................................................$ 4,832 $ 3,703 $ 5,633
======== ======== =========
Payments to MII and affiliates:
Interest and principal paid on Harbor Beach Rooms Renovation Loan.............$ 643 $ 697 $ --
======== ======== =========
41
PART IV
ITEM 14. EXHIBITS, SUPPLEMENTAL FINANCIAL STATEMENT SCHEDULES, AND
REPORTS ON FORM 8-K
(a) List of Documents Filed as Part of This Report
(1) Financial Statements
All financial statements of the registrant as set
forth under Item 8 of this Report on Form 10-K.
(2) Financial Statement Schedules
The following financial information is filed herewith
on the pages indicated.
III. Real Estate and Accumulated Depreciation
All other schedules are omitted because they are not
applicable or the required information is included in the consolidated
financial statements or notes thereto.
(3) EXHIBITS
Exhibit # Description
2.a. Purchase Agreement between Airline Foods, Inc. and Marriott Hotel
Properties Limited Partnership dated November 27, 1985, to acquire the 99%
limited partner interest in the Partnership. Incorporated by reference from
Exhibit 2a. of the amended registration statement on Form 10 dated September 29,
1986.
2.b. Purchase Agreement between Airline Foods, Inc. and
Marriott Hotel Properties imited Partnership dated
November 27, 1985, to acquire the 99% limited partner
interest in the Warner Center Partnership.
Incorporated by reference from Exhibit 2b. of the
amended registration statement on Form 10 dated
September 29, 1986.
2.c. Purchase Agreement between Host International, Inc.
and Marriott Hotel Properties Limited Partnership
dated November 27, 1985, to acquire a 49% interest
in the Harbor Beach Partnership. Incorporated by
reference from Exhibit 2c. of the amended
registration statement on Form 10 dated
September 29, 1986.
2.d. [reference to Warner Center Foreclosure Documents]
3.a Amended and Restated Agreement of Limited
Partnership of Marriott Hotel Properties Limited
Partnership dated November 27, 1985. Incorporated
by reference from Exhibit 3a. of the amended
registration statement on Form 10 dated
September 29, 1986.
3.b. Amended and Restated Partnership Agreement of
Lauderdale Beach Association dated July 1, 1986.
Incorporated by reference from Exhibit 3c. of the
1986 Form 10-K.
3.c. Certificate of Incorporation and By-Laws of Marriott
Orlando Capital Corporation dated April 30, 1987.
Incorporated by reference from Exhibit 3d. of the
1987 Form 10-K.
42
10.a. Management Agreement between Marriott Hotel
Properties Limited Partnership and Marriott Hotels,
Inc. dated October 25, 1985. Incorporated by
reference from Exhibit 10a. of the amended
registration statement on Form 10 dated September 29,
1986.
10.b. Lease between Lauderdale Beach Association and
Marriott Hotels, Inc. dated October 26, 1984,
subsequently assigned to Marriott Hotel Services,
Inc. on January 1, 1985. Incorporated by reference
from Exhibit 10c. of the amended registration
statement on Form 10 dated September 29, 1986.
10.c. Letter dated June 16, 1987, between Marriott Hotels,
Inc., Marriott Hotel Properties Limited Partnership
and The Sanwa Bank Limited, amending Exhibit 10a.
Incorporated by reference from Exhibit 10d. of the
1987 Form 10-K.
10.d. Assignment and Assumption of Lease Agreement dated
April 28, 1993 between Holiday Hotel Corporation,
Poinsettia Corporation, Lubbock Corporation and The
Northwestern Mutual Life Insurance Company. Ground
Lease Agreement between Holiday Hotel Corporation,
Poinsettia Corporation, Lubbock Corporation and
Cavendish Properties, Inc., dated November 30, 1981,
and amendments dated January 30, 1982, December 21,
1982 and June 30, 1986, respectively. Assignment
of Lease dated January 30, 1982, between Cavendish
Properties, Inc. and Lauderdale Beach Association.
10.e. Real Estate Purchase Agreement dated January 25,
1993, between Holiday Hotel Corporation, Poinsettia
Corporation, Lubbock Corporation and The Northwestern
Mutual Life Insurance Company.
10.f. Amended and Restated Loan Agreement between Marriott
Hotel Properties Inc. and Marriott Hotel Properties
Limited Partnership dated April 9, 1991.
10.g. Loan Agreement between Marriott Properties, Inc. and
Marriott Hotel Properties Limited Partnership dated
April 17, 1991, and amendments thereto dated December
31, 1991 and June 1, 1992, respectively.
10.h. Amended and Restated Term Loan Agreement between
Lauderdale Beach Association and Aetna Life Insurance
Company dated July 1, 1993.
10.i. Loan Agreement between Marriott International
Capital Corporation and Lauderdale Beach Association
dated July 21, 1994.
10.j. Amended and Restated Term Loan Agreement between
Marriott Hotel Properties Limited Partnership and
The Sanwa Bank Limited dated June 16, 1995.
27. Financial Data Schedule
(b) REPORTS ON FORM 8-K
No reports on Form 8-K were filed during 1996.
43
SIGNATURE
Pursuant to the requirements of Section 13 or 15 (d) of the Securities
Exchange Act of 1934, the registrant has duly caused this Form 10-K to be signed
on its behalf by the undersigned, thereunto duly authorized, on , 1997.
MARRIOTT HOTEL PROPERTIES LIMITED PARTNERSHIP
By: HOTEL PROPERTIES MANAGEMENT, INC.
General Partner
By:
Bruce F. Stemerman
President, Treasurer and Director
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on , 1997.
Signature Title
(HOTEL PROPERTIES MANAGEMENT, INC.)
- --------------------------------------------
President, Treasurer and Director
Bruce F. Stemerman (Principal Executive Officer)
- --------------------------------------------
Vice President and Director
Robert E. Parsons, Jr. (Principal Financial Officer)
- --------------------------------------------
Vice President and Chief Accounting Officer
Earla L. Stowe (Principal Accounting Officer)
- --------------------------------------------
Vice President and Director
Christopher G. Townsend
- --------------------------------------------
Secretary
Anna Mary Coburn
44
SIGNATURE
Pursuant to the requirements of Section 13 or 15 (d) of the Securities
Exchange Act of 1934, the registrant has duly caused this Form 10-K to be signed
on its behalf by the undersigned, thereunto duly authorized, on , 1997.
MARRIOTT HOTEL PROPERTIES LIMITED PARTNERSHIP
By: HOTEL PROPERTIES MANAGEMENT, INC.
General Partner
By: /s/ Bruce F. Stemerman
Bruce F. Stemerman
President, Treasurer and Director
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on , 1997.
Signature Title
(HOTEL PROPERTIES MANAGEMENT, INC.)
- --------------------------------------------
/s/ Bruce F. Stemerman President, Treasurer and Director
Bruce F. Stemerman (Principal Executive Officer)
- --------------------------------------------
/s/ Robert E. Parsons, Jr. Vice President and Director
Robert E. Parsons, Jr. (Principal Financial Officer)
- --------------------------------------------
/s/ Earla L. Stowe Vice President and Chief Accounting Officer
Earla L. Stowe (Principal Accounting Officer)
- --------------------------------------------
/s/ Christopher G. Townsend Vice President and Director
Christopher G. Townsend
- --------------------------------------------
/s/ Anna Mary Coburn Secretary
Anna Mary Coburn
45
SCHEDULE III
MARRIOTT HOTEL PROPERTIES LIMITED PARTNERSHIP
REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 1996
(in thousands)
Initial Costs Gross Amount at December 31, 1996
--------------------- ---------------------------------------
Subsequent
Buildings & Costs Buildings & Accumulated
Debt Land Improvements Capitalized Land Improvements Total Depreciation
----------- ---------- ------------- -------------- ---------- ------------ ----------- ------------
Orlando World Center
Orlando, Florida $ 145,479 $ 27,447 $ 135,351 $ 18,280 $ 28,717 $ 152,361 $ 181,078 $ 34,573
Harbor Beach Resort
Ft. Lauderdale,
Florida 85,480 1,837 63,806 17,555 2,357 80,841 83,198 24,268
---------- ---------- ------------ ------------ ---------- ------------ ----------- ----------
Total $ 230,959 $ 29,284 $ 199,157 $ 35,835 $ 31,074 $ 233,202 $ 264,276 $ 58,841
=========== ========== ============ ============ ========== ============ =========== ==========
Date of
Completion of Date Depreciation
Construction Acquired Life
----------- ----------- -----------
Orlando World Center
Orlando, Florida 1986 1985 40 to 50 years
Harbor Beach Resort
Ft. Lauderdale,
Florida 1984 1985 40 years
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SCHEDULE III
Page 2 of 2
MARRIOTT HOTEL PROPERTIES LIMITED PARTNERSHIP
REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 1996
(in thousands)
1994 1995 1996
----------- ------------ -------
Notes:
(a) The changes in the total cost of land, buildings and improvements for
the three years ended December 31, 1996 were as follows:
Balance at beginning of year.........................................$ 256,584 $ 260,320 $ 262,400
Capital expenditures.............................................. 3,899 2,080 1,953
Dispositions...................................................... (163) -- (77)
----------- ------------ -----------
Balance at end of year...............................................$ 260,320 $ 262,400 $ 264,276
=========== ============ ===========
(b) The changes in accumulated depreciation and amortization for the three
years ended December 31, 1996 were as follows:
Balance at beginning of year.........................................$ 40,221 $ 46,626 $ 53,410
Depreciation and amortization..................................... 6,548 6,784 5,508
Dispositions and other ........................................... (143) -- (77)
----------- ------------ -----------
Balance at end of year...............................................$ 46,626 $ 53,410 $ 58,841
=========== ============ ===========
(c) The aggregate cost of land, buildings and improvements for Federal income
tax purposes was approximately $172,727 at December 31, 1996.
47