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Marriott Residence Inn
Limited Partnership
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1999 Third Quarter Report
Limited Partner Quarterly Update
Presented for your review is the 1999 Third Quarter Report for the Marriott
Residence Inn Limited Partnership (the "Partnership"). A discussion of the
Partnership's performance and Inn operations is included in the attached Form
10-Q, Item 2, Management's Discussion and Analysis of Financial Condition and
Results of Operations. You are encouraged to review this report in its entirety.
If you have any further questions regarding your investment, please contact Host
Marriott Partnership Investor Relations at (301) 380-2070.
Strategy for Liquidity
During 1999, the General Partner has worked with a major investment banking
firm to explore alternatives to provide liquidity for the partners in the
Partnership while securing the highest possible value for the limited partners.
More than 70 prospective purchasers were contacted and Partnership financial
information was made available to a number of them for their review and analysis
on a confidential basis. It is the General Partner's opinion that the offers
received do not reflect the full value of the Inns. The inability to obtain an
acceptable offer at this time is a result of slow revenue growth this year and
an expectation of moderate or low profit growth in the near future, as well as a
general over-supply in the Partnership's lodging markets and a shift of equity
and debt capital out of the lodging sector. Some industry analysts indicate that
new construction starts in the limited service segment have peaked. If this is
the case, the market should see a trend toward supply and demand growth
equilibrium. The rate of general economic growth as well as changes in specific
market conditions will be additional variables affecting this trend. The General
Partner continues to evaluate alternatives for liquidity. However, the General
Partner can make no assurances as to the outcome of these efforts.
Transfer and Sale of Limited Partnership Units
As you know, the Partnership Units are a non-traded security. In most
cases, the Partnership Agreement does allow limited partners to transfer
Partnership Units to related parties. In addition, you may, under certain
circumstances, sell your Partnership Units to a third party; however, the
General Partner must consent to such a sale. Please note there are certain tax
and legal limitations to transferring Partnership Units including significant
tax effects resulting from the sale of these Units that may impact your decision
to sell. In addition to consulting with your advisors, we recommend that limited
partners contact the General Partner about such limitations before entering into
any agreement to sell your Partnership Units.
If you do wish to request a transfer of your Partnership Units, please
contact our Transfer Agent at 800-797-6812. You will be supplied with the
necessary documents. Please note that the General Partner does not charge any
fee for effecting a transfer.
Inn Operations
The combined operations of the Partnership's 15 Inns increased slightly in
third quarter 1999 as compared to third quarter 1998. For a detailed discussion
of Inn operations, please refer to Item 2 of the Form 10-Q.
Residence Inn by Marriott continues to be highly competitive and report
stable system-wide operating results when compared to the prior year due to
successful marketing efforts and a continued guest commitment. 1999 has been a
challenge as extended-stay hotel competitors continue to increase their presence
in the market. In response, during 1999 the Manager continues to heighten its
efforts to become the pre-eminent leader in this hospitality category, focusing
on customers that prefer a quality residential experience. The Manager is
continuing to monitor the introduction and growth of new extended-stay brands
including Homewood Suites, Hawthorne Suites, Summerfield Suites, Staybridge by
Holiday Inn and Hilton Residential Suites. In addition, a renewed focus will be
placed on strengthening each Inn's sales efforts in order to solidify the
existing relationships shared with current clients and to establish new ones.
Impact of Capital Expenditures on Cash Distributions
As an owner of fifteen extended-stay properties, the Partnership must
concentrate on the impact of increased competition on its goals to provide
liquidity and maximize the value of your investment. To ensure our Inns remain
competitive, there will be a continuing focus on the renovation and
refurbishment of the properties during 1999 and beyond.
These renovations are part of the routine capital expenditure cycle for
maintaining Inns that are 12 to 15 years old. In light of the increased
competition in the extended-stay market described above, the Manager has also
proposed additional improvements that are intended to enhance the overall value
and competitiveness of the Inns. These proposed improvements include design,
structural and technological improvements to modernize and enhance the
functionality and appeal of the Inns. Based upon information provided by the
Manager, approximately $48 million may be required over the next five years for
the routine renovations and all of the proposed additional improvements. The
General Partner is reviewing the Manager's proposed renovations and improvements
to identify those projects that have the greatest value to the Partnership.
However, if all projects were implemented, the overall cost of these future
capital expenditures would be expected to exceed the Partnership's available
funds.
As we have previously communicated to you, there will be no cash available
for distribution from 1999 operations. In addition, based on the anticipated
capital expenditure needs of the Inns over the next few years, it appears
unlikely that cash distributions will be possible for 2000 and 2001.
Amounts Paid to the General Partner and Marriott International, Inc.
The chart below summarizes amounts paid (in thousands) to the General
Partner and Marriott International, Inc. for the thirty-six weeks ended
September 10, 1999 (unaudited):
Marriott International, Inc.:
Residence Inn system fee................................................$ 1,811
Incentive management fee................................................ 1,330
Marketing fund contribution............................................. 1,129
Base management fee..................................................... 949
Chain services and Marriott Rewards Program............................. 874
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$ 6,093
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General Partner:
Administrative expenses reimbursed......................................$ 70
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Estimated 1999 Tax Information
Based on current projections, estimated taxable income of $140 will be
allocated to each limited partner unit for the year ending December 31, 1999.
The 1999 tax information, used for preparing your Federal and state income
tax returns, will be mailed no later than March 15, 2000. To ensure
confidentiality, we regret that we are unable to furnish your tax information
over the telephone. Unless otherwise instructed, we will mail your tax
information to your address as it appears on this report. Therefore, to avoid
delays in delivery of this important information, please notify the Partnership
in writing of any address changes by January 31, 2000.
We appreciate your continued support and invite you to visit Residence Inns
as you travel throughout the United States.