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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 MARCH 24, 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 Statement of Operations
Twelve Weeks Ended March 24, 2000 and March 26, 1999 (Unaudited)..............................1
Condensed Consolidated Balance Sheet
March 24, 2000 (Unaudited) and December 31, 1999..............................................2
Condensed Consolidated Statement of Cash Flows
Twelve Weeks Ended March 24, 2000 and March 26, 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 STATEMENT OF OPERATIONS
(Unaudited)
(in thousands, except Unit and per Unit amounts)
Twelve Weeks Ended
March 24, March 26,
2000 1999
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REVENUES
Inn revenues
Suites.........................................................................$ 15,703 $ 15,956
Other.......................................................................... 839 845
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Total Inn revenues........................................................... 16,542 16,801
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OPERATING COSTS AND EXPENSES
Inn property-level costs and expenses
Suites......................................................................... 3,947 3,840
Other department costs and expenses............................................ 460 462
Selling, administrative and other.............................................. 4,438 4,484
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Total Inn property-level costs and expenses.................................. 8,845 8,786
Depreciation..................................................................... 1,644 1,653
Incentive management fee......................................................... 771 777
Residence Inn system fee......................................................... 628 638
Property taxes................................................................... 535 570
Base management fee.............................................................. 331 336
Equipment rent and other......................................................... 215 191
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12,969 12,951
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OPERATING PROFIT.................................................................... 3,573 3,850
Interest expense................................................................. (2,898) (2,966)
Interest income.................................................................. 288 191
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NET INCOME..........................................................................$ 963 $ 1,075
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ALLOCATION OF NET INCOME
General Partner..................................................................$ 10 $ 11
Limited Partners................................................................. 953 1,064
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$ 963 $ 1,075
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NET INCOME PER LIMITED PARTNER UNIT
(70,000 Units)...................................................................$ 14 $ 15
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See Note to Condensed Consolidated Financial Statements.
MARRIOTT RESIDENCE INN II LIMITED PARTNERSHIP
CONDENSED CONSOLIDATED BALANCE SHEET
(in thousands)
March 24, December 31,
2000 1999
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(Unaudited)
ASSETS
Property and equipment, net....................................................$ 140,354 $ 140,524
Due from Residence Inn by Marriott, Inc........................................ 4,855 3,424
Deferred financing costs, net of accumulated amortization...................... 2,467 2,562
Property improvement fund...................................................... 1,367 466
Restricted cash reserves....................................................... 6,626 6,654
Cash and cash equivalents...................................................... 17,641 19,039
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$ 173,310 $ 172,669
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LIABILITIES AND PARTNERS' CAPITAL
LIABILITIES
Mortgage debt..................................................................$ 135,490 $ 135,933
Incentive management fee due to Residence Inn by Marriott, Inc................. 23,392 22,693
Accounts payable and accrued expenses.......................................... 1,669 2,247
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Total Liabilities........................................................ 160,551 160,873
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PARTNERS' CAPITAL
General Partner................................................................ 206 196
Limited Partners............................................................... 12,553 11,600
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Total Partners' Capital.................................................. 12,759 11,796
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$ 173,310 $ 172,669
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See Note to Condensed Consolidated Financial Statements.
MARRIOTT RESIDENCE INN II LIMITED PARTNERSHIP
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
(in thousands)
Twelve Weeks Ended
March 24, March 26,
2000 1999
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OPERATING ACTIVITIES
Net income.......................................................................$ 963 $ 1,075
Noncash items.................................................................... 2,440 2,447
Change in operating accounts..................................................... (1,731) (1,822)
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Cash provided by operating activities...................................... 1,672 1,700
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INVESTING ACTIVITIES
Additions to property and equipment, net......................................... (1,476) (2,532)
Change in property improvement fund.............................................. (901) (1,063)
Change in restricted cash reserves............................................... (250) (295)
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Cash used in investing activities.......................................... (2,627) (3,890)
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FINANCING ACTIVITIES
Repayment of mortgage debt....................................................... (443) (440)
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DECREASE IN CASH AND CASH EQUIVALENTS............................................... (1,398) (2,630)
CASH AND CASH EQUIVALENTS at beginning of period.................................... 19,039 14,553
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CASH AND CASH EQUIVALENTS at end of period..........................................$ 17,641 $ 11,923
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SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for mortgage interest..................................................$ 3,038 $ 3,042
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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 March 24,
2000, and the results of operations and cash flows for the twelve weeks
ended March 24, 2000 and March 26, 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.
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 include forward-looking statements
and as such may 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. The
cautionary statements set forth in reports filed under the Securities Act of
1934 contained important factors with respect to such forward-looking
statements, including: (i) national and local economic and business conditions
that will affect, among other things, demand for products and services at the
Inns and other properties, the level of suite and room rates and occupancy that
can be achieved by such properties and the availability and terms of financing;
(ii) the ability to compete effectively in areas such as access, location,
quality of accommodations and suite and room rate structures; (iii) changes in
travel patterns, taxes and government regulations which influence or determine
wages, prices, construction procedures and costs; (iv) governmental approvals,
actions and initiatives, including the need for compliance with environmental
and safety requirements, and changes in laws and regulations or the
interpretation thereof; and (v) 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 decreased slightly by $259,000, or 2%, to $16.5 million
for first quarter 2000 when compared to the same period in 1999 as a result of
an additional day of operations in first quarter 1999. First quarter 2000
revenues represent 84 days of operations and first quarter 1999 represents 85
days of operations. REVPAR, or Inn revenue per available room, represents the
combination of the combined average daily suite rate charged and the combined
average daily occupancy achieved. REVPAR remained stable for the first quarter
2000 at $75 when compared to the first quarter 1999. The combined average daily
rate decreased $4, or 4%, to $94 which was offset by an increase of three
percentage points in the combined average daily occupancy to 80%.
Operating Costs and Expenses. Operating costs and expenses increased slightly by
$18,000 to $13.0 million for the first quarter 2000 when compared to the first
quarter 1999. As a percentage of Inn revenues, Inn operating costs and expenses
were 78% of revenues for the first quarter 2000 and the first quarter 1999. For
the first quarter 2000, Inn property-level costs and expenses increased slightly
to $8.8 million when compared to the same period in 1999.
Operating Profit. As a result of the changes in revenues and operating costs and
expenses discussed above, operating profit decreased by $277,000 to $3.6
million, or 22% of revenues, for the first quarter 2000 when compared to the
first quarter 1999.
Interest Expense. Interest expense decreased $68,000, or 2%, to $2.9 million for
the first quarter 2000 when compared to the first quarter 1999 due to principal
amortization on the mortgage debt.
Net Income. Net income for the first quarter 2000 decreased slightly by $112,000
to $963,000, or 6% of revenues, for the first quarter 2000 when compared to the
first quarter 1999 as a result of the items discussed above.
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.
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 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 $1.7 million for both the first
quarter 2000 and the first quarter 1999. This reflects the relatively stable
operating results of first quarter 2000 when compared to the first quarter of
1999.
Cash used in investing activities for the first quarter 2000 was $2.6 million
compared to $3.9 million for the first quarter 1999. 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 $2.4 million
and $3.7 for the first quarter 2000 and the first quarter 1999, respectively,
while expenditures were $1.5 million and $2.5 million for the first quarter 2000
and the first quarter 1999, respectively. The $1.3 million decrease in
contributions is due to a decrease in the contribution rate from 7% of gross Inn
revenues in 1999 to 5% in 2000. The contributions above also include $1.6
million and $2.5 million in loans to the property improvement fund for 2000 and
1999, respectively.
Cash used in financing activities for the first quarters 2000 and 1999 was
$443,000 and $440,000, respectively. The Partnership's cash financing activities
are repayments of mortgage debt. Repayment of mortgage debt was $443,000 and
$440,000 during first quarter 2000 and first quarter 1999, respectively. No
distributions of cash were made in the first quarter 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
March 24, 2000, all of the Partnership's debt has a fixed rate.
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 will be contained in a court-approved notice to be
sent to the Partnership's limited partners, 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:
None.
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
May 8, 2000 By: /s/ Earla L. Stowe
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Earla L. Stowe
Vice President