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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. 033-24935
MARRIOTT RESIDENCE INN II LIMITED PARTNERSHIP
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(Exact name of registrant as specified in its charter)
Delaware 52-1605434
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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 II LIMITED PARTNERSHIP
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TABLE OF CONTENTS
PAGE NO.
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets
June 16, 2000 (Unaudited) and December 31, 1999...............................................1
Condensed Consolidated Statements of Operations
Twelve and Twenty-four Weeks Ended June 16, 2000 and June 18, 1999 (Unaudited)................2
Condensed Consolidated Statements of Cash Flows
Twenty-four Weeks Ended June 16, 2000 and June 18, 1999 (Unaudited)...........................3
Note to Condensed Consolidated 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 II LIMITED PARTNERSHIP
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
June 16, December 31,
2000 1999
-------------- ---------------
(Unaudited)
ASSETS
Property and equipment, net............................................................$ 139,740 $ 140,524
Due from Residence Inn by Marriott, Inc................................................ 3,909 3,424
Deferred financing costs, net of accumulated amortization.............................. 2,372 2,562
Property improvement fund.............................................................. 2,762 466
Restricted cash reserves............................................................... 7,230 6,654
Cash and cash equivalents.............................................................. 19,038 19,039
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$ 175,051 $ 172,669
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LIABILITIES AND PARTNERS' CAPITAL
LIABILITIES
Mortgage debt..........................................................................$ 135,070 $ 135,933
Incentive management fee due to Residence Inn by Marriott, Inc......................... 24,133 22,693
Accounts payable and accrued expenses.................................................. 1,961 2,247
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Total Liabilities................................................................ 161,164 160,873
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PARTNERS' CAPITAL
General Partner........................................................................ 217 196
Limited Partners....................................................................... 13,670 11,600
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Total Partners' Capital.......................................................... 13,887 11,796
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$ 175,051 $ 172,669
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See Note to Condensed Consolidated Financial Statements.
MARRIOTT RESIDENCE INN II LIMITED PARTNERSHIP
CONDENSED CONSOLIDATED 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............................................$ 16,810 $ 16,517 $ 32,513 $ 32,473
Other............................................. 797 868 1,636 1,713
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Total Inn revenues.............................. 17,607 17,385 34,149 34,186
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OPERATING COSTS AND EXPENSES
Inn property-level costs and expenses
Suites............................................ 4,195 3,971 8,142 7,811
Other department costs and expenses............... 525 479 985 941
Selling, administrative and other................. 4,820 4,619 9,258 9,103
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Total Inn property-level costs and expenses..... 9,540 9,069 18,385 17,855
Depreciation........................................ 1,664 1,663 3,308 3,316
Incentive management fee............................ 669 798 1,440 1,575
Residence Inn system fee............................ 672 661 1,300 1,299
Property taxes...................................... 540 541 1,075 1,111
Equipment rent and other............................ 568 399 783 590
Base management fee................................. 352 348 683 684
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Total operating costs and expenses.............. 14,005 13,479 26,974 26,430
-------------- ------------- ------------- -------------
OPERATING PROFIT....................................... 3,602 3,906 7,175 7,756
Interest expense.................................... (2,889) (2,923) (5,787) (5,889)
Interest income..................................... 415 217 703 408
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NET INCOME.............................................$ 1,128 $ 1,200 $ 2,091 $ 2,275
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ALLOCATION OF NET INCOME
General Partner.....................................$ 11 $ 12 $ 21 $ 23
Limited Partners.................................... 1,117 1,188 2,070 2,252
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$ 1,128 $ 1,200 $ 2,091 $ 2,275
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NET INCOME PER LIMITED
PARTNER UNIT (70,000 Units).........................$ 16 $ 17 $ 30 $ 32
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See Note to Condensed Consolidated Financial Statements.
MARRIOTT RESIDENCE INN II LIMITED PARTNERSHIP
CONDENSED CONSOLIDATED 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.........................................................................$ 2,091 $ 2,275
Noncash items...................................................................... 4,973 4,807
Changes in operating accounts...................................................... (1,097) (1,010)
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Cash provided by operating activities.......................................... 5,967 6,072
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INVESTING ACTIVITIES
Additions to property and equipment, net........................................... (2,559) (2,996)
Change in property improvement fund................................................ (2,296) (1,726)
Change in restricted cash reserves................................................. (250) (250)
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Cash used in investing activities.............................................. (5,105) (4,972)
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FINANCING ACTIVITIES
Repayment of mortgage debt......................................................... (863) (823)
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INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........................................ (1) 277
CASH AND CASH EQUIVALENTS at beginning of period........................................ 19,039 14,553
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CASH AND CASH EQUIVALENTS at end of period..............................................$ 19,038 $ 14,830
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SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for mortgage interest....................................................$ 6,099 $ 6,140
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See Note to Condensed Consolidated Financial Statements.
MARRIOTT RESIDENCE INN II LIMITED PARTNERSHIP
NOTE TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Summary of Significant Accounting Policies
The accompanying unaudited, condensed, consolidated financial statements
have been prepared by Marriott Residence Inn II 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, consolidated financial
statements should be read in conjunction with the Partnership's
consolidated 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,
consolidated 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 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 Two 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,
consolidated 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. Inn revenues increased $222,000, or 1%, to $17.6 million and remained
stable at $34.1 million for the second quarter of 2000 and through the second
quarter of 2000, respectively, when compared to the same periods in 1999 due to
changes in REVPAR. REVPAR, or revenue per available room, represents the
combination of the average daily suite rate charged and the average daily
occupancy achieved. For the second quarter of 2000, REVPAR increased 3% to $81
due to a $3, or 4%, increase in the combined average suite rate to $95 partially
offset by a one percentage point decrease in the combined average occupancy to
85%. Through the second quarter of 2000, REVPAR increased 1% to $78 due to an
increase in the combined average suite rate of $3, or 3%, to $95 partially
offset by a decrease in the combined average occupancy by two percentage points
to 82%.
Operating Costs and Expenses. Operating costs and expenses increased by $526,000
and $544,000 to $14.0 million and $27.0 million for the second quarter of 2000
and through the second quarter of 2000, respectively, when compared to the same
periods in 1999. As a percentage of Inn revenues, Inn operating costs and
expenses were 80% and 78% for the second quarters of 2000 and 1999,
respectively, and 79% and 77% of revenues through the second quarter of 2000 and
1999, respectively. The increase in operating costs and expenses was primarily
due to an increase in property-level costs and expenses at the Inns and
equipment rent and other expenses as discussed below.
Inn property-level costs and expenses increased $471,000 and $530,000 for the
second quarter of 2000 and through the second quarter of 2000, respectively,
when compared to the same periods in 1999 due to an increase in hourly wage and
benefit expense. The increase in hourly wage and benefit expense was due to the
Inns' endeavor to maintain competitive wage scales. As a percentage of Inn
revenues, Inn property-level costs and expenses represented 54% of revenues for
both the second quarter of 2000 and through the second quarter of 2000 as
compared to 52% of revenues for both the second quarter of 1999 and through the
second quarter of 1999.
Equipment rent and other expenses increased $169,000 and $193,000 to $568,000
and $783,000 for the second quarter of 2000 and through the second quarter of
2000, respectively, when compared to the same periods in 1999 due to marginal
increases in each of its components: equipment rent, permits and licenses, fire
insurance, general administrative expense and gain or loss on sale of equipment.
Operating Profit. As a result of the changes in revenues and operating costs and
expenses discussed above, operating profit decreased $304,000, or 8%, to $3.6
million, or 20% of revenues, for the second quarter of 2000 from $3.9 million,
or 22% of revenues, for the second quarter of 1999. Through the second quarter
of 2000, operating profit decreased $581,000, or 7%, to $7.2 million, or 21% of
revenues, from $7.8 million, or 23% of revenues, through the second quarter of
1999.
Interest Expense. Interest expense decreased $34,000, or 1%, and $102,000, or
2%, to $2.9 million and $5.8 million for the second quarter of 2000 and through
the second quarter of 2000, respectively, when compared to the same periods in
1999 as a result of principal amortization of the Partnership's mortgage debt.
Net Income. As a result of the items discussed above, net income decreased
$72,000, or 6%, to $1.1 million, or 6% of revenues for the second quarter of
2000 compared to net income of $1.2 million, or 7% of revenues, for the second
quarter of 1999. Through the second quarter of 2000, net income decreased
$184,000, or 8%, to $2.1 million, or 6% of revenues, compared to net income of
$2.3 million, or 7% of revenues, for the same period 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 $2.5 million loan to the property
improvement fund in first quarter 1999 and increased the contribution rate in
1999 to 7% of gross Inn revenues.
Pursuant to the modification to the Restated Management Agreements, Residence
Inn by Marriott, Inc. (the "Manager") decreased the contribution rate to 5% of
gross Inn revenues commencing January 1, 2000. However, the Partnership funded
an additional $1.6 million loan to the property improvement fund in first
quarter 2000 to aid in the current shortfall estimate for 1999. In second
quarter 2000, the contribution rate was increased by the Manager to 7% and was
applied retroactively to first quarter operating results.
A portion of the renovations mentioned above is part of the routine capital
expenditure cycle for maintaining Inns that are 10 to 16 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 $50 million to $60 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 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 $6.0 million through the second
quarter of 2000 compared to $6.1 million for the same period in 1999. The
$100,000 decrease was due to a decrease in operating profit as discussed above.
Cash used in investing activities through the second quarter of 2000 and 1999
was $5.1 million and $5.0 million, respectively. The Partnership's cash
investing activities consist primarily of contributions to the property
improvement fund, capital expenditures for improvements to the Inns and
contributions to restricted cash reserves required under the terms of the
mortgage debt. Contributions to the property improvement fund were $4.0 million
and $4.9 million through the second quarter of 2000 and 1999, respectively,
while expenditures were $1.7 million and $3.1 million through the second quarter
of 2000 and 1999, respectively. The $900,000 decrease in contributions is
primarily the difference between the $1.6 million loan to the property
improvement fund made in 2000 and the $2.5 million loan made in 1999 since
revenues remained relatively stable through the second quarter of 2000 and 1999.
Cash used in financing activities through the second quarter of 2000 and 1999
were $863,000 and $823,000, respectively. The Partnership's cash financing
activities are repayments of mortgage debt. Repayment of mortgage debt was
$863,000 and $823,000 through the second quarter of 2000 and 1999, respectively.
No distributions of cash were made through the second quarter of 2000 or 1999.
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, the Partnership's mortgage debt has a fixed interest rate. As of
June 16, 2000 and December 31, 1999, the Partnership's mortgage debt totaled
$135.1 million and $135.9 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
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Joint Tenants, et al. v. Marriott International, Inc., et. al., Case No.
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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, ($15,986,600 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 $22,693,000 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 70,000 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 settlement 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 II
LIMITED PARTNERSHIP
By: RIBM TWO LLC
General Partner
July 27, 2000 By: /s/ Matt Whelan
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Matt Whelan
Vice President