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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED JUNE 16, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File No. 033-20022
MARRIOTT RESIDENCE INN LIMITED PARTNERSHIP
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(Exact name of registrant as specified in its charter)
Delaware 52-1558094
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(State of Organization) (I.R.S. Employer Identification Number)
10400 Fernwood Road, Bethesda, MD 20817-1109
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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 ____.
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MARRIOTT RESIDENCE INN LIMITED PARTNERSHIP
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TABLE OF CONTENTS
PAGE NO.
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Balance Sheets
June 16, 2000 (Unaudited) and December 31, 1999...............................................1
Condensed Statements of Operations
Twelve and Twenty-Four Weeks Ended June 16, 2000 and
June 18, 1999 (Unaudited).....................................................................2
Condensed Statements of Cash Flows
Twenty-Four Weeks ended June 16, 2000 and June 18, 1999 (Unaudited)...........................3
Note to Condensed Financial Statements (Unaudited)...............................................4
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations...........................................................5
Item 3. Quantitative and Qualitative Disclosures about Market Risk.......................................7
PART II - OTHER INFORMATION
Item 1. Legal Proceedings................................................................................8
Item 6. Exhibits and Reports on Form 8-K.................................................................9
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MARRIOTT RESIDENCE INN LIMITED PARTNERSHIP
CONDENSED BALANCE SHEETS
(IN THOUSANDS)
June 16, December 31,
2000 1999
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(unaudited)
ASSETS
Property and equipment, net........................................................$ 138,301 $ 138,792
Due from Residence Inn by Marriott, Inc............................................ 2,632 1,984
Deferred financing costs, net of accumulated amortization.......................... 1,089 1,307
Property improvement fund.......................................................... 1,774 867
Cash and cash equivalents.......................................................... 7,865 6,025
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$ 151,661 $ 148,975
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LIABILITIES AND PARTNERS' CAPITAL
LIABILITIES
Mortgage debt......................................................................$ 101,233 $ 103,282
Incentive management fees due to Residence Inn by Marriott, Inc.................... 31,562 29,781
Accounts payable and accrued expenses.............................................. 706 312
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Total Liabilities............................................................ 133,501 133,375
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PARTNERS' CAPITAL
General Partner.................................................................... 259 233
Limited Partners................................................................... 17,901 15,367
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Total Partners' Capital...................................................... 18,160 15,600
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$ 151,661 $ 148,975
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See Note to Condensed Financial Statements.
MARRIOTT RESIDENCE INN LIMITED PARTNERSHIP
CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT UNIT AND PER UNIT AMOUNTS)
Twelve Weeks Ended Twenty-Four Weeks Ended
June 16, June 18, June 16, June 18,
2000 1999 2000 1999
------------- ------------- -------------- -------------
REVENUES
Inn revenues
Suites...............................................$ 15,500 $ 14,846 $ 29,764 $ 29,187
Other................................................ 742 710 1,461 1,404
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Total Inn revenues................................. 16,242 15,556 31,225 30,591
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OPERATING COSTS AND EXPENSES
Inn property-level costs and expenses
Suites............................................... 3,347 3,184 6,605 6,361
Other department costs and expenses.................. 423 369 856 756
Selling, administrative and other.................... 3,793 3,641 7,616 7,474
------------- ------------- -------------- -------------
Total Inn property-level costs and expenses........ 7,563 7,194 15,077 14,591
Depreciation........................................... 1,469 1,396 2,951 2,667
Incentive management fee............................... 1,416 1,154 2,186 2,222
Property taxes......................................... 611 543 1,194 1,072
Residence Inn system fee............................... 620 593 1,191 1,167
Equipment rent and other............................... 471 210 665 352
Base management fee.................................... 325 311 625 612
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Total operating costs and expenses................. 12,475 11,401 23,889 22,683
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OPERATING PROFIT.......................................... 3,767 4,155 7,336 7,908
Interest expense....................................... (2,479) (2,604) (4,998) (5,354)
Interest income........................................ 137 50 222 84
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NET INCOME................................................$ 1,425 $ 1,601 $ 2,560 $ 2,638
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ALLOCATION OF NET INCOME
General Partner........................................$ 14 $ 16 $ 26 $ 26
Limited Partners....................................... 1,411 1,585 2,534 2,612
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$ 1,425 $ 1,601 $ 2,560 $ 2,638
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NET INCOME PER LIMITED
PARTNER UNIT (65,600 Units)............................$ 22 $ 24 $ 39 $ 40
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See Note to Condensed Financial Statements.
MARRIOTT RESIDENCE INN LIMITED PARTNERSHIP
CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
Twenty-Four Weeks Ended
June 16, June 18,
2000 1999
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OPERATING ACTIVITIES
Net income...........................................................................$ 2,560 $ 2,638
Noncash items........................................................................ 4,966 4,653
Changes in operating accounts........................................................ (254) (1,023)
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Cash provided by operating activities.......................................... 7,272 6,268
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INVESTING ACTIVITIES
Additions to property and equipment.................................................. (2,476) (2,377)
Change in property improvement fund.................................................. (907) (1,802)
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Cash used in investing activities.............................................. (3,383) (4,179)
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FINANCING ACTIVITIES
Repayment of mortgage debt........................................................... (2,049) (2,131)
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INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........................................ 1,840 (42)
CASH AND CASH EQUIVALENTS at beginning of period........................................ 6,025 4,027
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CASH AND CASH EQUIVALENTS at end of period..............................................$ 7,865 $ 3,985
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SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for mortgage interest......................................................$ 4,324 $ 5,518
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See Note to Condensed Financial Statements.
MARRIOTT RESIDENCE INN LIMITED PARTNERSHIP
NOTE TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
1. Summary of Significant Accounting Policies
The accompanying unaudited, condensed financial statements have been
prepared by Marriott Residence Inn Limited Partnership (the "Partnership").
Certain information and footnote disclosures normally included in financial
statements presented in accordance with accounting principles generally
accepted in the United States have been condensed or omitted from the
accompanying statements. The Partnership believes the disclosures made are
adequate to make the information presented not misleading. However, the
unaudited, condensed financial statements should be read in conjunction
with the Partnership's financial statements and notes thereto included in
the Partnership's Form 10-K for the year ended December 31, 1999.
In the opinion of the Partnership, the accompanying unaudited, condensed
financial statements reflect all adjustments necessary to present fairly
the financial position of the Partnership as of June 16, 2000 and December
31, 1999, the results of operations for the twelve and twenty-four weeks
ended June 16, 2000 and June 18, 1999 and the cash flows for the
twenty-four weeks ended June 16, 2000 and June 18, 1999. Results are not
necessarily indicative of full year performance because of seasonal and
short-term variations.
For financial reporting purposes, net income of the Partnership is
allocated 99% to the limited partners and 1% to RIBM One LLC (the "General
Partner"). Significant differences exist between the net income for
financial reporting purposes and the net income for Federal income tax
purposes. These differences are due primarily to the use, for Federal
income tax purposes, of accelerated depreciation methods and shorter
depreciable lives of the assets and differences in the timing of the
recognition of incentive management fee expense.
Certain reclassifications were made to the prior year unaudited, condensed
financial statements to conform to the 2000 presentation.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS FORWARD-LOOKING STATEMENTS
Certain matters discussed in this Form 10-Q are forward-looking statements
within the meaning of federal securities regulations. All forward-looking
statements involve known and unknown risks, uncertainties and other factors
which may cause the actual transactions, results, performance or achievements to
be materially different from any future transactions, results, performance or
achievements expressed or implied by such forward-looking statements. Future
transactions, results, performance and achievements will be affected by general
economic, business and financing conditions, competition and governmental
actions. The cautionary statements set forth in reports filed with the
Securities and Exchange Commission contain important factors with respect to
such forward-looking statements, including: (i) national and local economic and
business conditions that will, among other things, affect demand for hotels and
other properties and the availability and terms of financing; (ii) the ability
to maintain the properties in a first-class manner (including meeting capital
expenditure requirements); (iii) the ability to compete effectively in areas
such as access, location, quality of accommodations and room rate structure;
(iv) changes in travel patterns, taxes and government regulations; (v)
governmental approvals, actions and initiatives; and (vi) the effects of tax
legislative action. 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 or that any deviations
will not be material. 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.
RESULTS OF OPERATIONS
Revenues. Partnership revenues increased $686,000 to $16.2 million and $634,000
to $31.2 million for the twelve and twenty-four weeks ended June 16, 2000,
respectively, when compared to the same periods in 1999. These increases were
achieved primarily through increases in Inn revenue per available room
("REVPAR"). REVPAR measures daily room revenues generated on a per room basis
and represents the combination of the average daily suite rate charged and the
average daily occupancy achieved. Year-to-date REVPAR for the 15 Inns combined
increased 2.4% over the same period in 1999 primarily due to an increase in the
combined average suite rate from $97 in 1999 to $100 in 2000. Second quarter
REVPAR increased 4.4% primarily because of a $4 increase in the combined average
suite rate from $100 to $104 and an increase in the combined average occupancy
of one percentage point to 85.0%.
Operating Costs and Expenses. Year-to-date operating costs and expenses
increased to $23.9 million from $22.6 million for the comparable period in 1999.
This was primarily due to an increase in property-level costs and expenses of
$486,000, a $284,000 increase in depreciation expense and an increase of
$313,000 in equipment rent and other expenses.
Property-level costs and expenses increased due primarily to a $244,000 increase
in direct suites expenses caused by higher salary and benefits costs as the Inns
endeavor to maintain competitive wage scales. Additionally, a $142,000 increase
in property-level selling, administrative and other expenses was primarily due
to a $163,000 increase in marketing and sales costs as a result of more
aggressive sales efforts at the Inns. Finally, other department costs and
expenses increased $100,000 primarily because of a $106,000 increase in
expenditures for items that fall below the minimum dollar threshold for
capitalization. The increase in depreciation expense was due to the $3.8 million
growth in the average depreciable fixed assets balance between the end of the
second quarter of 1999 and 2000, respectively. Equipment rent and other expenses
increased primarily due to the fact that during second quarter 1999, the
Partnership recognized a $130,000 gain on the retirement of fixed assets that
did not recur in 2000. Additionally, Partnership general and administrative
expenses increased $96,000 for the year-to-date in 2000 relative to the same
period in the prior year due primarily to higher printing and mailing fees
incurred in connection with mailing the court approved notices discussed in Part
II, Item 1, Legal Proceedings. As a percentage of Inn revenues, operating costs
and expenses were 77% and 74% of revenues for the second quarter year-to-date in
2000 and 1999, respectively.
Second quarter operating costs and expenses increased $1.1 million, or 9.4%, to
$12.4 million in 2000 compared to the same period in 1999. The increase was due
primarily to a $369,000 increase in property-level costs and expenses, a
$262,000 increase in incentive management fee and a $261,000 increase in
equipment rent and other expenses. The increase in property-level costs and
expenses was primarily due to a $163,000 increase in direct suites expenses as
the result of increases in salary, wages and benefits costs and a $152,000
increase in selling, administrative and other expenses due to higher sales and
marketing costs. The incentive management fee ("IMF") earned by Residence Inn by
Marriott, Inc. (the "Manager") is calculated as 15% of Operating Profit, as
defined in the Management Agreement, in any year in which Operating Profit is
less than $23.5 million and as 20% of Operating Profit whenever Operating Profit
equals or exceeds $23.5 million. During interim reporting periods, the
percentage used to calculate IMF, 15% or 20%, is determined based on whether or
not full year Operating Profit is expected to fall short of, or exceed, $23.5
million. The IMF was calculated as 20% of Operating Profit for the twenty-four
weeks ended June 16, 2000, based upon the expectation that full year Operating
Profit will meet or exceed $23.5 million. However, in the first quarter 2000,
the IMF was calculated as 15% of Operating Profit. Because the estimated full
year IMF calculation increased to 20% of Operating Profit, the result was a
second quarter adjustment of $257,000 to IMF to adjust the year-to-date accrual
to the 20% rate. IMF was calculated as 20% of Operating Profit for the second
quarter and year-to-date of 1999. The increase in equipment rent and other
expenses was primarily due to the second quarter 1999 $130,000 gain on the
retirement of fixed assets that did not recur in 2000 and a $93,000 increase in
Partnership general and administrative expenses for the quarter. As a percentage
of revenues, operating costs and expenses were 77% and 73% of revenues for
second quarter 2000 and second quarter 1999, respectively.
Operating Profit. As a result of the changes in revenues and operating costs and
expenses discussed above, operating profit decreased $572,000 to $7.3 million,
or 23% of revenues, for the twenty-four weeks ended June 16, 2000 from $7.9
million, or 26% of revenues, for the same period in 1999. Operating profit for
the twelve weeks ended June 16, 2000 decreased $388,000 to $3.8 million, or 23%
of revenues, from $4.2 million, or 27% of revenues for the same period in 1999.
Interest Expense. Interest expense decreased $125,000 and $356,000 for the
twelve and twenty-four weeks ended June 16, 2000, respectively, when compared to
the same periods in 1999 due to principal amortization of the Senior and Second
Mortgages.
Net Income. As a result of the items discussed above, net income for the twelve
and twenty-four weeks ended June 16, 2000 decreased $176,000 to $1.4 million,
and $78,000 to $2.5 million, when compared to the same periods in 1999. Net
income for the twelve and twenty-four weeks ended June 16, 2000 was 9% and 8% of
revenues, respectively, compared to 10% and 9% of revenues, respectively for the
comparable periods in 1999.
LIQUIDITY AND CAPITAL RESOURCES
The Partnership's financing needs have been historically funded through loan
agreements with independent financial institutions. Beginning in 1998, the
Partnership's property improvement fund was insufficient to meet current needs.
The shortfall is primarily due to the need to complete renovations and total
suite refurbishments at a majority of the Partnership's Inns. To reduce the
shortfall, the Partnership provided a $1.2 million and a $1.45 million loan to
the fund in first quarter 2000 and first quarter 1999, respectively.
A portion of the renovations mentioned above is part of the routine capital
expenditure cycle for maintaining Inns that are 12 to 15 years old. However, in
light of the increased competition in the extended-stay market, the Manager has
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 $45 million to $55 million may be required over the next
five years for the routine renovations and all of the proposed additional
improvements. Based on the continuing capital expenditure needs of the Inns over
the next few years, it appears unlikely that cash distributions will be possible
for 2000 and 2001.
The General Partner believes that cash from Inn operations and Partnership
reserves will be sufficient to make the required debt service payments and to
fund a portion of the capital expenditures at the Inns. The General Partner is
reviewing the Manager's proposed Inn renovations and improvements to identify
those projects that have the greatest value to the Partnership.
Principal Sources and Uses of Cash
The Partnership's principal source of cash is cash from operations. Its
principal uses of cash are to make debt service payments and fund the property
improvement fund. Cash provided by operating activities was $7.3 million for the
first two quarters 2000 compared to $6.3 million for the first two quarters
1999. This $1 million increase was primarily due to a decrease in interest
payments on the Partnership's mortgage debt of $837,000.
The Partnership's cash used in investing activities primarily consists of
contributions to the property improvement fund and capital expenditures for
improvements to the Inns. Cash used in investing activities was $3.4 million and
$4.2 million year-to-date in 2000 and 1999, respectively. Contributions to the
property improvement fund, including the $1.2 million and $1.45 million loans
made in the first quarter of 2000 and 1999, respectively, were $2.9 million and
$3.1 million for the year-to-date period in 2000 and 1999 respectively. Capital
expenditures during these same time periods were $2.6 million and $1.5 million,
respectively.
The Partnership's cash used in financing activities consists of the repayment of
mortgage debt of $2.0 million and $2.1 million for the first two quarters of
2000 and 1999, respectively.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Partnership does not have significant market risk with respect to interest
rates, foreign currency exchanges or other market rate or price risks, and the
Partnership does not hold any financial instruments for trading purposes. As of
June 16, 2000, all of the Partnership's debt has a fixed interest rate. As of
June 16, 2000 and December 31, 1999, the Partnership's mortgage debt totaled
$101.2 million and $103.3 million, respectively.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Partnership and the Inns are involved in 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 Partnership.
On March 16, 1998, limited partners in several partnerships sponsored by Host
Marriott, filed a lawsuit, styled Robert M. Haas, Sr. and Irwin Randolph Joint
Tenants, et al. v. Marriott International, Inc., et al., Case No. 98-CI-04092,
in the 57th Judicial District Court of Bexar County, Texas against Marriott
International, Inc., Host Marriott Corporation, various of their subsidiaries,
J.W. Marriott, Jr., Stephen Rushmore, and Hospitality Valuation Services, Inc.
(collectively, the "Defendants"). The lawsuit now relates to the following
limited partnerships: Courtyard by Marriott Limited Partnership, Marriott
Residence Inn Limited Partnership, Marriott Residence Inn II Limited
Partnership, Fairfield Inn by Marriott Limited Partnership, Host DSM Limited
Partnership (formerly known as Desert Springs Marriott Limited Partnership) and
Atlanta II Limited Partnership (formerly known as Atlanta Marriott Marquis
Limited Partnership), collectively, the "Six Partnerships". The plaintiffs
allege that the Defendants conspired to sell hotels to the Six Partnerships for
inflated prices and that they charged the Six Partnerships excessive management
fees to operate the Six Partnerships' hotels. The plaintiffs further allege,
among other things, that the Defendants committed fraud, breached fiduciary
duties and violated the provisions of various contracts. A related case
concerning Courtyard by Marriott II Limited Partnership ("Courtyard II") filed
by the plaintiffs' lawyers in the same court involves similar allegations
against the Defendants, and has been certified as a class action. As a result of
this development, Courtyard II is no longer involved in the above-referenced
Haas lawsuit, Case No. 98-CI-04092.
On March 9, 2000, the Defendants entered into a settlement agreement with
counsel for the plaintiffs to resolve the Haas and Courtyard II litigation. The
settlement is subject to numerous conditions, including participation
thresholds, court approval and various consents. Under the terms of the
settlement, the limited partners of the Partnership who elect to participate
would receive $228.38 per Unit or a pro rata portion thereof, ($14,981,728 in
the aggregate, if the holders of all Units participate) in cash in exchange for
dismissal of the litigation and a complete release of all claims. If the Texas
court approves legal fees and expenses of approximately $78 per Unit to counsel
to the class action plaintiffs, the net amount that each holder that is a class
member will receive is approximately $150 per Unit, or a pro rata portion
thereof for fractional Units. In addition to the Defendants' cash payments, the
Manager would waive $29,781,000 of deferred management fees. Limited partners
who opt out of the settlement would receive no payment but would retain their
individual claims against the Defendants. The settlement will not be consummated
unless the Texas court approves the fairness of the settlement. The Defendants
may terminate the settlement if the holders of more than 10% of the
Partnership's 65,600 limited partner Units choose not to participate, if the
holders of more than 10% of the limited partner units in any one of the other
partnerships involved in the litigation choose not to participate or if certain
other conditions are not satisfied. The Manager will continue to manage the
Partnership's Inns under long-term agreements. The details of the settlement are
contained in a court-approved notice which was mailed to the Partnership's
limited partners during the week of June 19th, and the discussion of the
settlement herein is qualified in its entirety by the terms of the actual
court-approved notice sent to the Partnership's limited partners.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits: None.
b. Reports on Form 8-K:
A Form 8-K was filed with the Securities and Exchange
Commission on April 28, 2000. This filing, Item 5--Other
Events, discloses that on April 28, 2000, the General
Partner sent to the limited partners of the Partnership a
letter that accompanied the Partnership's Annual Report on
Form 10-K for the year ended December 31, 1999. The letter
disclosed the annual activities of the Partnership. A copy
of the letter was included as an Item 7-Exhibit in this
Form 8-K filing.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this Form 10-Q to be signed on its behalf by the
undersigned, thereunto duly authorized.
MARRIOTT RESIDENCE INN
LIMITED PARTNERSHIP
By: RIBM ONE LLC
General Partner
July 27, 2000 By: /s/ Matt Whelan
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Matt Whelan
Vice President