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Securities and Exchange Commission
Washington, D.C. 20549
Form 10-K
8 Annual Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the fiscal year ended December 31, 1997
OR
0 Transition Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
Commission File Number: 033-24935
MARRIOTT RESIDENCE INN II LIMITED PARTNERSHIP
(Exact name of registrant as specified in its charter)
Delaware 52-1605434
- ---------------------------------- ----------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
10400 Fernwood Road
Bethesda, Maryland 20817
- ---------------------------------- ----------------------------------
(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 No . (Not Applicable. On August 25, 1992, the Registrant
filed an application for relief from the reporting requirements of the
Securities Exchange Act of 1934 pursuant to Sections 12(h) thereof. Because of
the pendency of such application, the Registrant was not required to, and did
not make, any filings pursuant to the Securities Exchange Act of 1934 from
October 23, 1989 until the application was voluntarily withdrawn on January 16,
1998.)
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 RESIDENCE INN II LIMITED PARTNERSHIP
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TABLE OF CONTENTS
PAGE NO.
PART I
Item 1. Business.......................................................1
Item 2. Properties.....................................................5
Item 3. Legal Proceedings..............................................7
Item 4. Submission of Matters to a Vote of Security Holders............7
PART II
Item 5. Market For The Partnership's Limited Partnership Units
and Related Security Holder Matters............................7
Item 6. Selected Financial Data........................................8
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations......................................9
Item 8. Financial Statements and Supplementary Data...................14
Item 9. Changes In and Disagreements With Accountants on Accounting
and Financial Disclosure......................................27
PART III
Item 10. Directors and Executive Officers..............................28
Item 11. Management Remuneration and Transactions......................29
Item 12. Security Ownership of Certain Beneficial Owners and
Management....................................................29
Item 13. Certain Relationships and Related Transactions................29
PART IV
Item 14. Exhibits, Supplemental Financial Statement Schedules
and Reports on Form 8-K.......................................32
.
PART I
ITEM 1. BUSINESS
Description of the Partnership
Marriott Residence Inn II Limited Partnership, a Delaware limited partnership
(the "Partnership"), was formed on November 23, 1988 to acquire and own 23
Marriott Residence Inn properties (the "Inns") and the land on which the Inns
are located. The Inns are located in 16 states and contain a total of 2,487
suites as of December 31, 1997. The Partnership commenced operations on December
28, 1988.
On October 8, 1993, Marriott Corporation's operations were divided into two
separate companies: Host Marriott Corporation ("Host Marriott") and Marriott
International, Inc. ("MII"). The sole general partner of the Partnership is
Marriott RIBM Two Corporation, a Delaware corporation (the "General Partner"), a
wholly-owned subsidiary of Host Marriott. The Partnership is engaged solely in
the business of owning and operating the Inns and therefore is engaged in one
industry segment. The principal offices of the Partnership are located at 10400
Fernwood Road, Bethesda, Maryland 20817.
The Inns are operated as part of the Residence Inn by Marriott system, which
includes 258 Inns in 43 states and Canada in the extended stay segment of the US
lodging industry. The Inns are managed by Residence Inn by Marriott, Inc. (the
"Manager"), a wholly-owned subsidiary of MII; effective March 22, 1996, the
original management agreement was restated into two separate management
agreements. The Partnership entered into a management agreement with the Manager
for 22 of the Inns and Bossier RIBM Two LLC entered into a management agreement
for the Bossier City Residence Inn, collectively, (the "Restated Management
Agreements"). Additionally, the Partnership, Bossier RIBM Two, LLC, and the
Manager entered into a Coordination Agreement to ensure that certain
calculations for items such as fees, payments of operating profit and escrow
contributions are made on a consolidated basis for all 23 Inns. The primary
provisions are discussed in Item 13, "Certain Relationships and Related
Transactions." The Restated Management Agreements expire in 2012 with renewals
at the option of the Manager for one or more of the Inns for up to 45 years
thereafter. See Item 13 "Certain Relationships and Related Transactions."
The Inns are extended stay hotels which cater primarily to business and family
travelers who stay more than five consecutive nights. The Inns typically have 88
to 144 studio, one bedroom, two bedroom and two-story penthouse suites. The Inns
generally are located in suburban settings throughout the United States and
feature a series of residential style buildings with landscaped walkways,
courtyards and recreational areas. Residence Inns do not have restaurants, but
offer a complimentary continental breakfast. In addition, most Residence Inns
provide a complimentary hospitality hour. Each suite contains a fully-equipped
kitchen and many suites have woodburning fireplaces.
The Partnership's financing needs have been funded through loan agreements with
independent financial institutions. See the "Debt Financing" section below.
Organization of the Partnership
On December 28, 1988 (the "Closing Date"), 70,000 units of limited
partnership interests (the "Units") in the Partnership, representing a 99%
interest in the Partnership, were sold in a public offering. The offering price
per Unit was $1,000. The General Partner contributed $707,100 for its 1% general
partner interest. The Partnership acquired 17 of the Inns on the Closing Date.
The remaining six Inns were acquired during 1989.
To facilitate the refinancing of the Partnership's mortgage debt, on March 22,
1996, as permitted by the Partnership Agreement, the Partnership transferred
ownership of the Bossier City Residence Inn to a newly formed subsidiary,
Bossier RIBM Two LLC (the "LLC"), a Delaware limited liability company. The
general partner of the LLC with a 1% interest is Bossier RIBM Two, Inc., a
wholly owned subsidiary of the Partnership. The remaining 99% interest in the
LLC is owned by the Partnership.
Debt Financing
As of December 31, 1995, the Partnership's mortgage debt consisted of a
$131,500,000 nonrecourse mortgage loan (the "Term Loan") and $5,589,000 borrowed
under a $10 million revolving credit facility (the "Revolving Loan"). Both the
Term Loan and the Revolving Loan matured on December 30, 1995. However, the
third party lender granted the Partnership an initial and subsequent forbearance
which effectively extended the maturity of the loans through March 22, 1996.
During the forbearance period, the Partnership was required to make interest
only payments on the total outstanding debt balance of $137,089,000 at a fixed
rate of 10.174%. During 1995, the Term Loan carried interest at a fixed rate of
10.17% per annum and required no amortization of principal. The Revolving Loan
was available to provide interest payments on up to $20 million of the principal
amount of the Term Loan. Borrowings under the Revolving Loan carried interest
per annum at a floating rate equal to .625% plus the one, two, three or six
month London Interbank Offered Rate ("LIBOR"), as elected by the Partnership and
required no amortization of principal. Interest on the borrowings could also
have been funded under the Revolving Loan. There were no borrowings under the
Revolving Loan in 1995. The weighted average interest rate on the Revolving Loan
was 6.9% in 1995.
Refinancing
On March 22, 1996 (the "Refinancing Closing Date") the General Partner was
successful in refinancing the Term Loan and the Revolving Loan with a new third
party lender. In conjunction with the refinancing, the principal amount of the
Partnership's mortgage debt was increased from $137.1 million to $140 million to
provide funds for the establishment of required reserves and to pay transaction
costs. The refinanced mortgage debt (the "Mortgage Debt") continues to be
nonrecourse to the Partnership, bears interest at a fixed rate of 8.85% for a
10-year term expiring March 10, 2006 and required payments of interest only
during the first loan year (April 1996 through March 1997) and principal
amortization based upon a 25-year amortization schedule beginning with the
second loan year.
The Mortgage Debt is secured by first mortgages on 22 of the Partnership's 23
Inns, the land on which they are located, a security interest in all personal
property associated with those Inns including furniture and equipment,
inventory, contracts, and other intangibles and the Partnership's rights under
the management agreement. Although the Partnership continues to own 23 Residence
Inns, during the course of performing environmental studies at the properties,
the lender determined that the Bossier City Residence Inn did not pass certain
required thresholds to enable the property to collateralize the Mortgage Debt.
Additionally, as part of the refinancing, the Partnership was required to
deposit $500,000 into a reserve account and fund $250,000 annually through 2006
into the account to provide for any claim, investigation, or litigation that may
arise from any environmental condition at the Bossier City Residence Inn. The
initial $500,000 deposit was funded by the lender. The Partnership is required
to repay the initial reserve as promptly as possible if the Partnership draws on
the deposit or by the end of the 10-year term in March 2006. Any draws upon the
account will accrue interest at the 30-day LIBOR plus 4.5 percentage points. If
the Partnership does not need to draw on the reserve account, the lender will
hold the reserve until such time as the Mortgage Debt is either repaid, or a
governmental authority determines that the statute of limitations on filing any
claims has expired or that no further remedial activities are required at the
property. Based upon the results of the environmental studies performed, the
Partnership does not expect that it will be necessary to draw on the reserve.
Pursuant to the terms of the Mortgage Debt, the Partnership is required to
establish with the lender a separate escrow account for payments of insurance
premiums and real estate taxes (the "Tax and Insurance Escrow Reserves") for
each mortgaged property if the credit rating of Marriott International, Inc.
("MII") is downgraded by Standard and Poors Rating Services. The Manager of the
Partnership's Inns, Residence Inn by Marriott , Inc. (the "Manager"), is a
wholly-owned subsidiary of MII. In March 1997, MII acquired the Renaissance
Hotel Group N.V., adding greater geographic diversity and growth potential to
its lodging portfolio. The assumption of additional debt associated with this
transaction resulted in a single downgrade of MII's long-term senior unsecured
debt effective April 1, 1997. As a result, the Partnership was required to
transfer $834,000 into the Tax and Insurance Escrow Reserves from the Manager's
existing tax and insurance reserve account. In addition, the Mortgage Debt
required the Partnership to fund an additional month's debt service of $1.2
million into the debt service reserve account over a six-month period as a
result of this downgrade. This funding was completed in November 1997. The tax
and insurance escrow reserves and the debt service reserve are shown as
restricted reserves and the related tax and insurance liability is included with
accounts payable and accrued expenses in the accompanying balance sheet.
Additionally, the terms of the Mortgage Debt require the Partnership to
establish certain reserves including:
o $3,482,000 Debt Service Reserve - This reserve was fully funded by
November 1997 and is to equal three months of debt service.
o $2,357,000 Capital Expenditure Reserve - This reserve was fully funded on
the Refinancing Closing Date. The funds will be expended for various
renewals and replacements, site improvements, Americans with Disabilities
Act of 1990 modifications and environmental remediation projects identified
during the course of the appraisals and environmental studies undertaken in
conjunction with the refinancing. As of December 31, 1997 the balance of
this reserve is $1,249,000.
Furthermore, in the event of a MII credit rating downgrade, as described above,
the Manager required additional working capital as follows:
o $900,000 Working Capital Reserve - This reserve was provided for from
1996 cash from operations.
Material Contracts
Management Agreement
To facilitate the refinancing, effective March 22, 1996, the original management
agreement was restated into two separate management agreements. The Partnership
entered into a management agreement with the Manager for 22 of the Inns and the
LLC entered into a management agreement for the Bossier City Residence Inn,
collectively, (the "Restated Management Agreements"). The primary provisions are
discussed in Item 13, "Certain Relationships and Related Transactions."
Additionally, the Partnership, Bossier RIBM Two, LLC, and the Manager entered
into a Coordination Agreement to ensure certain calculations for items such as
fees, payments of operating profit and escrow contributions are made on a
consolidated basis for all 23 Inns.
Competition
The United States lodging industry generally is comprised of two broad segments:
full service hotels and limited service hotels. Full service hotels generally
offer restaurant and lounge facilities and meeting spaces, as well as a wide
range of services, typically including bell service and room service. Limited
service hotels generally offer accommodations with limited or no services and
amenities. As extended stay hotels, the Inns compete effectively with both full
service and limited service hotels in their respective markets by providing
streamlined services and amenities exceeding those provided by typical limited
service hotels at prices that are significantly lower than those available at
full service hotels.
Conflicts of Interest
Because Host Marriott, the parent of the General Partner, MII, and their
affiliates own and/or operate hotels other than the Partnership's Inns and MII
and its affiliates license others to operate hotels under the various brand
names owned by MII and its affiliates, potential conflicts of interest exist.
With respect to these potential conflicts of interest, Host Marriott, MII and
their affiliates retain a free right to compete with the Partnership's Inns,
including the right to develop, own, and operate competing hotels now and in the
future in markets in which the Inns are located, in addition to those existing
hotels which may currently compete directly or indirectly with the Inns.
Under Delaware law, the General Partner has unlimited liability for the
obligations of the Partnership, unless those obligations are, by contract,
without recourse to the partners of the Partnership. Since the General Partner
is entitled to manage and control the business and operations of the
Partnership, and because certain actions taken by the General Partner or the
Partnership could expose the General Partner or its parent, Host Marriott, to
liability that is not shared by the limited partners (for example, tort
liability and environmental liability), this control could lead to conflicts of
interest.
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 affiliate of the General Partner, or persons employed
by the General Partner or its affiliates be conducted on terms that are fair to
the Partnership and that are commercially reasonable. Agreements and
relationships involving the General Partner or its affiliates and the
Partnership are on terms consistent with the terms on which the General Partner
or its affiliates have dealt with unrelated parties.
The Amended and Restated Agreement of Limited Partnership (the "Partnership
Agreement") provides that any agreements, contracts or arrangements between the
Partnership and the General Partner or any of its affiliates, except for
rendering legal, tax, accounting, financial, engineering, and procurement
services to the Partnership by employees of the General Partner or its
affiliates, will be on commercially reasonable terms and will be subject to the
following additional conditions:
(i) the General Partner or any such affiliate must have the ability to
render such services or to sell or lease such goods;
(ii) such agreements, contracts or arrangements must be fair to the
Partnership and reflect commercially reasonable terms and must be
embodied in a written contract which precisely describes the subject
matter thereof and all compensation to be paid therefor;
(iii) no rebates or give-ups may be received by the General Partner or any such
affiliate, nor may the General Partner or any such affiliate participate
in any reciprocal business arrangements which would have the effect of
circumventing any of the provisions of the Partnership Agreement; and
(iv) no such agreement, contract or arrangement as to which the limited
partners had previously given approval may be amended in such a manner as
to increase the fees or other compensation payable by the Partnership to
the General Partner or any of its affiliates or to decrease the
responsibilities or duties of the General Partner or any such affiliate
in the absence of the consent of the holders of a majority in interest of
the limited partners.
Employees
Neither the General Partner nor the Partnership has any employees. Host Marriott
provides the services of certain employees (including the General Partner's
executive officers) of Host Marriott to the Partnership and the General Partner.
The Partnership and the General Partner anticipate that each of the executive
officers of the General Partner will generally devote a sufficient portion of
his or her time to the business of the Partnership. However, each of such
executive officers also will devote a significant portion of his or her time to
the business of Host Marriott and its other affiliates. No officer or director
of the General Partner or employee of Host Marriott devotes a significant
percentage of time to Partnership matters. To the extent that any officer,
director or employee does devote time to the Partnership, the General Partner or
Host Marriott, as applicable, is entitled to reimbursement for the cost of
providing such services. See Item 11 "Management Remuneration and Transactions"
for information regarding payments made to Host Marriott or its subsidiaries for
the cost of providing administrative services to the Partnership.
Potential Transaction
The General Partner has undertaken, on behalf of the Partnership, to pursue,
subject to further approval of the partners, a potential transaction (the
"Consolidation") in which (i) subsidiaries of CRF Lodging Company, L.P. (the
"Company"), a newly formed Delaware limited partnership, would merge with and
into the Partnership and up to five other limited partnerships, with the
Partnership and the other limited partnerships being the surviving entities
(each, a "Merger and collectively, the "Merger"), subject to the satisfaction or
waiver of certain conditions, (ii) CRF Lodging Trust ("CRFLT"), a Maryland real
estate investment trust, the sole general partner of the Company, would offer
its common shares of beneficial interest, par value $0.01 per share (the "Common
Shares") to investors in an underwritten public offering and would invest the
proceeds of such offering in the Company in exchange for units of limited
partnership interests in the Company ("CRFLT Units") and (iii) the Partnership
would enter into a Lease for the operation of its Hotels pursuant to which a
Lessee would pay rent to the Partnership based upon the greater of a fixed
dollar amount of base rent or specified percentages of gross sales, as specified
in the Lease. If the partners approve the transaction and other conditions are
satisfied, the partners of the Partnership would receive CRFLT Units in the
Merger in exchange for their interests in the Partnership.
A preliminary Prospectus/consent Solicitation was filed as part of a
Registration Statement on Form S-4 with the Securities and Exchange Commission
and which describes the potential transaction in greater detail. Any offer of
CRFLT Units in connection with the Consolidation will be made solely by a final
Prospectus/Consent Solicitation.
ITEM 2. PROPERTIES
Introduction
The properties consist of 23 Residence Inn by Marriott Inns as of December 31,
1997. The Inns range in age between 8 and 14 years. The Inns are
geographically diversified among 16 states, and no state has more than four
Inns.
The extended stay segment of the lodging industry continued to experience
increased competition throughout 1997 as new extended stay purpose-built
competitors entered the market. This trend is expected to continue in 1998. In
response to this increased competition, Residence Inn by Marriott's strategy is
to differentiate the brand on the basis of superior service offerings and
delivery. On a combined basis, competitive forces affecting the Inns are not, in
the opinion of the General Partner, more adverse than the overall competitive
forces affecting the lodging industry generally. See Item 1
"Business--Competition."
Name and Location of Partnership Inns
Inn Number of Suites Date Opened
- ---------------- ------------------------- ------------------
Alabama
Birmingham 128 1986
California
Arcadia 120 1989
Irvine 112 1989
Placentia 112 1988
Florida
Boca Raton 120 1988
Jacksonville 112 1986
Pensacola 64 1985
St. Petersburg 88 1986
Illinois
Chicago-Deerfield 128 1989
Louisiana
Shreveport-Bossier City 72 1983
Massachusetts
Boston-Danvers 96 1989
Michigan
Kalamazoo 83 1989
Missouri
Jackson 120 1986
Nevada
Las Vegas 192 1989
New Mexico
Santa Fe 120 1986
North Carolina
Charlotte North 91 1988
Greensboro 128 1987
Ohio
Akron 112 1987
Pennsylvania
Valley Forge 88 1988
South Carolina
Columbia 128 1988
Spartanburg 88 1985
Tennessee
Memphis 105 1986
Texas
Lubbock 80 1986
TOTAL
=========================
2,487
=========================
The following table shows selected combined operating and financial statistics
for the Inns. Revenue per available room ("REVPAR") is a commonly used indicator
of market performance for hotels which represents the combination of daily suite
rate charged and the average daily occupancy achieved:
Year Ended December 31,
---------------------------------
1997 1996 1995
---------------------------------
Combined average occupancy............... 83.6% 84.5% 86.5%
Combined average daily room rate.......$ 89.08 $ 84.65 $ 80.92
REVPAR.................................$ 74.47 $ 71.50 $ 70.01
ITEM 3. 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 February 11, 1998, four individual limited partners in partnerships sponsored
by Host Marriott Corporation ("Host Marriott"), filed a class action lawsuit
against Host Marriott and the general partners of Courtyard by Marriott Limited
Partnership, Courtyard by Marriott II Limited Partnership, Marriott Residence
Inn Limited Partnership, Marriott Residence Inn II Limited Partnership, and
Fairfield Inn by Marriott Limited Partnership (collectively, the
"Partnerships"). The plaintiffs allege that the merger of the Partnerships (the
"Merger") into an umbrella partnership real estate investment trust proposed by
CRF Lodging Company, L.P. in a preliminary registration statement filed with the
Securities and Exchange Commission, dated December 22, 1997, constitutes a
breach of the fiduciary duties owed to the limited partners of the Partnerships
by Host Marriott and the general partners of the Partnerships. In addition, the
plaintiffs allege that the Merger breaches various agreements relating to the
Partnerships. The plaintiffs are seeking, among other things, the following:
certification of a class; injunctive relief to prohibit consummation of the
Merger or, in the alternative, recision of the Merger; and damages. Host
Marriott and the general partners of the Partnerships believe that these
allegations are totally devoid of merit and they intend to vigorously defend
against such claims. The defendants also maintain that this lawsuit is premature
because the Merger has not been, and may not be, consummated as prosed in the
filings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR THE PARTNERSHIP'S LIMITED PARTNERSHIP UNITS AND
RELATED SECURITY HOLDER MATTERS
There is currently no established public trading 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 date of each accounting quarter. All transfers
are subject to approval by the General Partner. As of December 31, 1997, there
were 3,763 holders of record of the 70,000 Units.
The Partnership generally distributes cash available for distribution as
follows: (i) first, 99% to the limited partners and 1% to the General Partner,
until the partners have received, with respect to such year, an amount equal to
10% of their Net Capital Investment, defined as the excess of original capital
contributions over cumulative distributions of net refinancing and sales
proceeds ("Capital Receipts"); (ii) second, remaining cash available for
distribution will be distributed as follows, depending on the amount of Capital
Receipts previously distributed:
(a) 99% to the limited partners and 1% to the General Partner, if the
partners have received aggregate cumulative distributions of Capital
Receipts of less than 50% of their original capital contributions; or
(b) 90% to the limited partners and 10% to the General Partner, if the
partners have received aggregate cumulative distributions of Capital
Receipts equal to or greater than 50% but less than 100% of their original
capital contributions; or
(c) 75% to the limited partners and 25% to the General Partner, if the
partners have received aggregate cumulative distributions of Capital
Receipts equal to 100% or more of their original capital contributions.
Cash available for distribution means, with respect to any fiscal period, the
cash revenues of the Partnership from all sources during the fiscal period,
other than Capital Receipts, less (i) all cash expenditures of the Partnership
during such fiscal period, including, without limitation, debt service,
repayment of advances made by the General Partner, any fees for management
services and administrative expenses, but excluding expenditures incurred by the
Partnership in connection with a transaction resulting in Capital Receipts, and
(ii) such reserves as may be determined by the General Partner, in its
reasonable discretion to be necessary to provide for the foreseeable cash needs
of the Partnership or for the maintenance, repair, or restoration of the Inns.
As of December 31, 1997, the Partnership has distributed a total of $42,565,000
($602 per limited partner unit) since inception. In 1997, $3,535,000 ($50 per
limited partner unit) was distributed from 1996 cash from operations. In 1996,
no cash was distributed. No distributions of Capital Receipts have been made
since inception.
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data presents historical operating information
for the Partnership for each of the five years in the period ended December 31,
1997 presented in accordance with generally accepted accounting principles:
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
(in thousands, except per unit amounts)
Revenues......... $ 35,482 $ 34,035 $ 33,300 $ 30,441 $ 28,290
========= ========= ========= ========= =========
Net income (loss)..$ 4,894 $ 2,663 $ 1,603 $ (528) $ (2,452)
========= ========= ========= ========= ==========
Net income (loss)
per limited
partner unit
(70,000 Units)...$ 69 $ 38 $ 23 $ (7) $ (35)
========= ========= ========= ========== ==========
Total assets...... $ 167,883 $ 165,510 $ 165,362 $ 159,801 $ 162,216
========== ========= ========= ========== ==========
Total liabilities..$ 157,319 $ 156,305 $ 158,820 $ 149,913 $ 146,709
========= ========== ========= ========== ==========
Cash distributions
per limited
partner unit
(70,000 Units)...$ 50 $ -- $ 70 $ 72 $ 66
========= ========== ========== ========== ===========
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
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.
GENERAL
During the period from 1995 through 1997, Partnership revenues grew from $33.3
million to $35.5 million, while the Partnership's total Inn sales grew from
$66.9 million to $71.0 million. Growth in suite sales, and thus Inn sales, is
primarily a function of combined average occupancy and combined average suite
rates. During the period from 1995 through 1997, the Inns' combined average room
rate increased approximately $8 from $81 to $89, while the combined average
occupancy decreased from 86.5% to 83.6%.
The Partnership's operating costs and expenses are, to a great extent, fixed.
Therefore, the Partnership derives substantial operating leverage from increases
in revenue. This operating leverage is offset in part by variable expenses,
including (i) base and Residence Inn system management fees under the management
agreement, which are 2% of gross Inn sales, and 4% of suite sales, respectively
and (ii) incentive management fees under the Restated Management Agreements
equal to 15% of operating profit, as defined, payable out of 50% of available
cash flow, as defined.
RESULTS OF OPERATIONS
1997 Compared to 1996:
Revenues. Revenues (Inn sales less Inn operating costs and expenses) increased
$1.5 million, or 4%, to $35.5 million in 1997 from $34.0 million in 1996.
Revenue and operating profit were impacted primarily by growth in REVPAR. REVPAR
is a commonly used indicator of market performance for hotels which represents
the combination of daily suite rate charged and the average daily occupancy
achieved. REVPAR does not include food and beverage or other ancillary revenues
generated by the property. Inn sales increased $1.4 million, or 2%, to $71.0
million in 1997 reflecting the improvements in REVPAR for the year. REVPAR
increased 4% during the year due primarily to an increase in average suite rates
of approximately 5%, with a decrease in average occupancy of one percentage
point. A $726,000 decrease in other Inn operating expenses due to an adjustment
to the Partnership's sales and use tax liability also contributed to the
increase in Inn revenues.
Operating Costs and Expenses. Operating costs and expenses decreased
$300,000 to $18.3 million in 1997 from $18.6 million in 1996. As a percentage of
Inn revenues, Inn operating costs and expenses represented 52% of revenues for
1997 and 55% in 1996.
Operating Profit. As a result of the changes in revenues and operating
costs and expenses discussed above, operating profit increased $1.7 million to
$17.1 million, or 48% of revenues, in 1997 from $15.4 million, or 45% of
revenues in 1996.
Interest Expense. Interest expense decreased $300,000 to $12.9 million primarily
due to the decline in the weighted average interest rate on the Partnership's
mortgage debt from 10.17% to 8.85%. The refinanced debt carries a lower average
interest rate versus the old loan, which was in place for the beginning of 1996.
Net Income. Net income increased $2.2 million to $4.9 million, or 14% of
revenues, in 1997 from $2.7 million, or 8% of total revenues, in 1996 due
primarily to improved operating results and lower interest expense.
1996 Compared to 1995:
Revenues. Revenues increased $700,000, or 2%, to $34.0 million in 1996 from
$33.3 million in 1995. Inn sales increased $2.8 million, or 4%, to $69.6 million
in 1996 reflecting the improvements in REVPAR for the year. REVPAR increased 2%
during the year due primarily to an increase in average suite rates of
approximately 5%, with a decrease in average occupancy of two percentage points.
Operating Costs and Expenses. Operating costs and expenses increased
$400,000 to $18.6 million in 1996 from $18.2 million in 1995. Inn operating
costs and expenses represented 55% of Inn revenues for 1996 and 55% in 1995.
Operating Profit. As a result of the changes in revenues and operating
costs and expenses discussed above, operating profit increased $.3 million to
$15.4 million, or 45% of revenues, in 1996 from $15.1 million, or 45% of
revenues in 1995.
Interest Expense. Interest expense decreased $700,000 to $13.3 million due
to the decline in the weighted average interest rate on the Partnership's
mortgage debt from 10.17% to 8.85%.
Net Income. Net income increased $1.1 million to $2.7 million, or 8% of
revenues, in 1996 from $1.6 million, or 5% of total revenues, in 1995 due
primarily to improved operating results and lower interest expense.
CAPITAL RESOURCES AND LIQUIDITY
General
The General Partner believes that cash from Inn operations and Partnership
reserves will be adequate in the short term and long term for the operational
and capital needs of 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, fund the property
improvement fund, and to make distributions to the limited partners.
Cash provided by operations was $12.5 million in 1997, $3.9 million in 1996 and
$19.8 million in 1995. The $9.4 million increase in cash from operations in 1997
from 1996 was primarily the result of increased net income due to stronger
operating results and payment of previous deferred base management fees during
1996. The $15.9 million decrease in cash from operations in 1996 from 1995 was
primarily the result of the payment of accrued interest expense and deferred
base management fees discussed above.
Cash used in investing activities was $4.3 million, $7.2 million and $3.4
million in 1997, 1996 and 1995, respectively. The Partnership's cash investing
activities consists primarily of contributions to the property improvement fund,
capital expenditures for improvements to existing Inns and contributions to
restricted cash reserves required under the new terms of the mortgage debt.
Contributions to the property improvement fund were $3.5 million, $3.5 million
and $3.3 million for the years ended December 31, 1997, 1996, and 1995,
respectively, while capital expenditures were $5.8 million, $4.4 million and
$3.0 million, respectively, during these same time periods. The increase in
capital expenditures is primarily due to spending for suite refurbishments at
the Inns.
Cash used in financing activities was $6.0 million, $2.6 million and $5.5
million in 1997, 1996 and 1995, respectively. The Partnership's cash financing
activities consist primarily of capital distributions to partners, repayment of
debt, payment of financing costs and debt refinancing. In March 1996, the
Partnership refinanced mortgage debt of $137 million with proceeds from a $140
million nonrecourse mortgage loan. The excess proceeds from the loan were
primarily used to establish a reserve for certain capital expenditures and
transaction costs. The refinanced debt is nonrecourse to the Partnership, bears
interest at a fixed rate of 8.85%, and matures in 2006. Principal amortization
is required on the loan over the ten year term based on a 25-year amortization.
In connection with refinancing, the Partnership contributed the Bossier City
Residence Inn to a newly formed wholly-owned subsidiary.
Refinancing
On March 22, 1996 the General Partner was successful in refinancing the Term
Loan and the Revolving Loan with a new third party lender.
To facilitate the refinancing of the Partnership's mortgage debt, on March 22,
1996, as permitted by the Partnership Agreement, the Partnership transferred
ownership of the Bossier City Residence Inn to a newly formed subsidiary,
Bossier RIBM Two LLC (the "LLC"), a Delaware limited liability company. The
general partner of the LLC with a 1% interest is Bossier RIBM Two, Inc., a
wholly owned subsidiary of the Partnership. The remaining 99% interest in the
LLC is owned by the Partnership. The Inns are managed by the Manager, a
wholly-owned subsidiary of MII, as part of the Residence Inn by Marriott hotel
system.
In conjunction with the refinancing, the principal amount of the Partnership's
mortgage debt was increased from $137.1 million to $140 million. The refinanced
mortgage debt (the "Mortgage Debt") continues to be nonrecourse to the
Partnership, bears interest at a fixed rate of 8.85% based upon actual number of
days over a 360 day year for a 10-year term expiring March 10, 2006 and requires
payments of interest only during the first loan year (April 1996 through March
1997) and principal amortization based upon a 25-year amortization schedule
beginning with the second loan year.
The Mortgage Debt is secured by first mortgages on 22 of the Partnership's 23
Inns, the land on which they are located, a security interest in all personal
property associated with those Inns including furniture and equipment,
inventory, contracts, and other intangibles and the Partnership's rights under
the management agreement. Although the Partnership continues to own 23 Residence
Inns, during the course of performing environmental studies at the properties,
the lender determined that the Bossier City Residence Inn did not pass certain
required thresholds to enable the property to collateralize the Mortgage Debt.
Additionally, as part of the refinancing, the Partnership was required to
deposit $500,000 into a reserve account and fund $250,000 annually through 2006
into the account to provide for any claim, investigation, or litigation that may
arise from any environmental condition at the Bossier City Residence Inn. The
initial $500,000 deposit was funded by the lender. The Partnership is required
to repay the initial reserve as promptly as possible if the Partnership draws on
the deposit or by the end of the 10-year term in March 2006. Any draws upon the
account will accrue interest at the 30-day LIBOR plus 4.5 percentage points. If
the Partnership does not need to draw on the reserve account, the lender will
hold the reserve until such time as the Mortgage Debt is either repaid, or a
governmental authority determines that the statute of limitations on filing any
claims has expired or that no further remedial activities are required at the
property. Based upon the results of the environmental studies performed, the
Partnership does not expect that it will be necessary to draw on the reserve.
Property Improvement Fund
The Restated Management Agreements and the prior Management Agreement
provide for the establishment of a property improvement fund for the Inns.
Contributions to the property improvement fund are 5% of gross Inn revenues.
Based on current capital budgets, the Partnership's FF&E reserves are forecasted
to be insufficient beginning in 1998 through 2002. The shortfall is primarily
due to the need to complete total suite refurbishments at the majority of the
Partnership's Inns in the next several years. As a result, the General Partner
established a reserve in 1996 for the future capital needs of the Partnership's
Inns. Both 1996 and 1997 distributions were net of this reserve. The current
shortfall estimate for 1998 of $3.3 million is projected to be funded from
undistributed operating cash reserved for in prior years. It is anticipated that
1998 distributions will be net of an additional capital reserve. Total
contributions to the property improvement fund for the years ended December 31,
1997, 1996 and 1995 were $3,547,000, $3,482,000 and $3,343,000 respectively.
Deferred Management Fees
To facilitate the refinancing, effective March 22, 1996, the original management
agreement was restated into two separate management agreements. The Partnership
entered into a management agreement with the Manager for 22 of the Inns which
the Partnership directly owns and the LLC entered into a management agreement
for the Bossier City Residence Inn, which the LLC owns, collectively (the
"Restated Management Agreements"). Additionally, the Partnership, Bossier RIBM
Two, LLC, and the Manager entered into a Coordination Agreement to ensure
certain calculations for items such as fees, payments of operating profit and
escrow contributions are made on a consolidated basis for all 23 Inns.
The Manager earns a base management fee equal to 2% of the Inns' gross revenues.
Through 1991, payment of the base management fee was subordinate to qualifying
debt service payments, a provision for Partnership administrative expenses and
retention by the Partnership of annual cash flow from operations of $7,070,707.
Deferred base management fees are payable in the future from operating cash
flow, as defined. Beginning in 1992 and thereafter, base management fees are
paid currently. Pursuant to the terms of the Restated Management Agreements, the
Partnership paid the remaining $743,000 of deferred base management fees in
1996.
In addition, the Manager is entitled to an incentive management fee equal to 15%
of operating profit, as defined (23.5% in any year in which operating profit is
equal to or greater than $25.3 million; however, cumulative incentive management
fees cannot exceed 20% of cumulative operating profit). The incentive management
fee is payable out of 50% of cash flow from operations remaining after payment
of debt service, provision for Partnership administrative expenses, payment of
the base management fee, payment of deferred base management fees and retention
by the Partnership of annual cash flow from operations of $7,071,000. After the
Partnership has retained an additional 5% return, the incentive management fee
is payable out of 75% of the remaining cash flow from operations. Through 1991,
the Manager was not entitled to accrue any unpaid incentive management fees.
Incentive management fees earned after 1991 are payable in the future from
operating cash flow, as defined. Incentive management fees of $3,641,000,
$3,542,000 and $3,502,000 were earned during 1997, 1996 and 1995, respectively.
Incentive management fees of $1,706,000 and $1,190,000 were paid during 1997 and
1996, respectively. There were no incentive management fees paid to the Manager
prior to 1996. Deferred incentive management fees were $16,545,000, $14,610,000,
and $13,794,000 as of December 31, 1997, 1996, and 1995 respectively.
Competition
The extended stay lodging segment continues to be highly competitive. An
increase in supply growth began in 1997 with the introduction of a number of new
national brands. Residence Inns continue to command a premium share of the
market in which they are located in spite of the growth of new chains. It is
expected that Residence Inn will continue outperforming both national and local
competitors. The brand is continuing to carefully monitor the introduction of
new extended stay brands and growth of existing brands including Homewood
Suites, Hawthorne Suites, Summerfield Suites and AmeriSuites.
Inflation
The rate of inflation has been relatively low in the past four years. The
Manager is generally able to pass through increased costs to customers through
higher room rates and prices. In 1997, average suite rates of Residence Inns
exceeded inflationary costs. On March 22, 1996, the Partnership refinanced its
mortgage debt and fixed its interest costs thereby eliminating the Partnership's
exposure to the impact of changing interest rates.
Seasonality
Demand, and thus room occupancy, is affected by normally recurring seasonal
patterns. For most of the Inns, demand is higher in the spring and summer months
(March through October) than during the remainder of the year.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index Page
- ----- ----
Residence Inn by Marriott II Limited Partnership Consolidated Financial
Statements:
Report of Independent Public Accountants............................ 15
Consolidated Statement of Operations................................ 16
Consolidated Balance Sheet.......................................... 17
Consolidated Statement of Changes in Partners' Capital.............. 18
Consolidated Statement of Cash Flows................................ 19
Notes to Consolidated Financial Statements.......................... 20
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
TO THE PARTNERS OF MARRIOTT RESIDENCE INN II LIMITED PARTNERSHIP:
We have audited the accompanying consolidated balance sheet of Marriott
Residence Inn II Limited Partnership (a Delaware limited partnership) and
Bossier RIBM Two LLC, its majority-owned subsidiary limited liability company,
as of December 31, 1997 and 1996, and the related consolidated statements of
operations, changes in partners' capital and cash flows for each of the three
years in the period ended December 31, 1997. These financial statements and the
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 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 consolidated 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 provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Marriott Residence
Inn II Limited Partnership and subsidiary as of December 31, 1997 and 1996, and
the results of their operations and their cash flows for each of the three years
in the period ended December 31, 1997, 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 at Item
14(a)(2) is presented for purposes of complying with The Securities and Exchange
Commission's rules and is not part of the basic financial statements. This
schedule has been subjected to the auditing procedures applied in the 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 26, 1998
CONSOLIDATED STATEMENT OF OPERATIONS
Marriott Residence Inn II Limited Partnership and Subsidiary
For the Years Ended December 31, 1997, 1996 and 1995
(in thousands, except per Unit amounts)
1997 1996 1995
---------- ----------- -----------
REVENUES (Note 3)........................$ 35,482 $ 34,035 $ 33,300
---------- ----------- -----------
OPERATING COSTS AND EXPENSES
Depreciation ......................... 7,493 7,700 7,796
Incentive management fee.............. 3,641 3,542 3,502
Residence Inn system fee.............. 2,696 2,639 2,535
Property taxes........................ 2,111 2,141 2,092
Base management fee................... 1,419 1,393 1,337
Equipment rent and other.............. 975 1,201 897
---------- ----------- -----------
18,335 18,616 18,159
---------- ----------- -----------
OPERATING PROFIT......................... 17,147 15,419 15,141
Interest expense...................... (12,945) (13,268) (14,038)
Interest income....................... 692 512 500
---------- ----------- -----------
NET INCOME .............................$ 4,894 $ 2,663 $ 1,603
========== =========== ===========
ALLOCATION OF NET INCOME
General Partner.......................$ 49 $ 27 $ 16
Limited Partners...................... 4,845 2,636 1,587
---------- ----------- -----------
$ 4,894 $ 2,663 $ 1,603
========== =========== ===========
NET INCOME PER LIMITED PARTNER UNIT
(70,000 Units)........................$ 69 $ 38 $ 23
========== =========== ===========
The accompanying notes are an integral part of these consolidated
financial statements.
CONSOLIDATED BALANCE SHEET
Marriott Residence Inn II Limited Partnership and Subsidiary
December 31, 1997 and 1996
(in thousands)
1997 1996
-------------- --------------
ASSETS
Property and equipment, net................$ 143,125 $ 144,792
Deferred financing costs, net of
accumulated amortization.................. 3,385 3,797
Due from Residence Inn by Marriott, Inc..... 4,057 2,472
Property improvement fund................... 1,543 2,150
Restricted cash reserves.................... 5,647 4,291
Cash and cash equivalents................... 10,126 8,008
-------------- --------------
$ 167,883 $ 165,510
============== ==============
LIABILITIES AND PARTNERS' CAPITAL
LIABILITIES
Mortgage debt...........................$ 139,090 $ 140,000
Incentive management fee due to
Residence Inn by Marriott, Inc......... 16,545 14,610
Accounts payable and accrued expenses..... 1,684 1,695
-------------- --------------
Total Liabilities..................... 157,319 156,305
-------------- --------------
PARTNERS' CAPITAL
General Partner
Capital contribution................... 707 707
Capital distributions.................. (425) (390)
Cumulative net losses.................. (97) (146)
-------------- --------------
185 171
-------------- --------------
Limited Partners
Capital contributions, net of
offering costs of $7,845............ 62,155 62,155
Capital distributions................. (42,140) (38,640)
Cumulative net losses................. (9,636) (14,481)
-------------- --------------
10,379 9,034
-------------- --------------
Total Partners' Capital............... 10,564 9,205
-------------- --------------
$ 167,883 $ 165,510
============== ==============
The accompanying notes are an integral part of these consolidated
financial statements.
CONSOLIDATED STATEMENT OF CHANGES IN PARTNERS' CAPITAL
Marriott Residence Inn II Limited Partnership and Subsidiary
For the Years Ended December 31, 1997, 1996 and 1995
(in thousands)
General Limited
Partner Partners Total
------------- -------------- --------------
Balance, December 31, 1994...$ 177 $ 9,711 $ 9,888
Capital distributions... (49) (4,900) (4,949)
Net income.............. 16 1,587 1,603
------------- -------------- --------------
Balance, December 31, 1995... 144 6,398 6,542
Net income.............. 27 2,636 2,663
------------- -------------- --------------
Balance, December 31, 1996... 171 9,034 9,205
Capital distribution.... (35) (3,500) (3,535)
Net income.............. 49 4,845 4,894
------------- -------------- --------------
Balance, December 31, 1997...$ 185 $ 10,379 $ 10,564
============= ============== ==============
The accompanying notes are an integral part of these consolidated
financial statements.
CONSOLIDATED STATEMENT OF CASH FLOWS
Marriott Residence Inn II Limited Partnership and Subsidiary
For the Years Ended December 31, 1997, 1996 and 1995
(in thousands)
1997 1996 1995
---------- ---------- ---------
OPERATING ACTIVITIES
Net income ...........................$ 4,894 $ 2,663 $ 1,603
Noncash items:
Depreciation and amortization...... 7,493 7,700 7,796
Deferred incentive management fee.. 1,935 2,352 3,502
Amortization of deferred financing
costs as interest................ 412 322 299
Gain on dispositions of property
and equipment.................... -- (5) --
Changes in operating accounts:
Accounts payable and accrued
expenses......................... (635) (7,035) 7,701
Due from Residence Inn by
Marriott, Inc.................... (1,585) (1,322) 1,203
Base management fee due to
Residence Inn by Marriott, Inc... -- (743) (2,296)
---------- ---------- ---------
Cash provided by operations..... 12,514 3,932 19,808
---------- ---------- ---------
INVESTING ACTIVITIES
Additions to property and
equipment, net....................... (5,826) (4,376) (3,009)
Change in restricted capital
expenditure reserve.................. 816 (2,357) --
Change in property improvement fund.... 607 (507) (416)
---------- ---------- ---------
Cash used in investing activities (4,403) (7,240) (3,425)
---------- ---------- ---------
FINANCING ACTIVITIES
Capital distributions to partners...... (3,535) -- (4,949)
Additions to debt service reserve...... (1,548) (1,934) --
Proceeds from mortgage debt............ -- 140,000 --
Repayment of mortgage debt............. (910) (137,089) --
Payment of financing costs............. -- (3,553) (566)
---------- ---------- ---------
Cash used in investing activities (5,993) (2,576) (5,515)
---------- ---------- ---------
INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS.......................... 2,118 (5,884) 10,868
CASH AND CASH EQUIVALENTS at beginning
of year.............................. 8,008 13,892 3,024
---------- ---------- ---------
CASH AND CASH EQUIVALENTS at end of year..$ 10,126 $ 8,008 $ 13,892
========== ========== =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest.................$ 12,538 $ 18,985 $ 7,053
========== ========== =========
The accompanying notes are an integral part of these consolidated
financial statements
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Marriott Residence Inn II Limited Partnership and Subsidiary
December 31, 1997 and 1996
NOTE 1. THE PARTNERSHIP
Description of the Partnership
Marriott Residence Inn II Limited Partnership (the "Partnership"), a Delaware
limited partnership, was formed on November 23, 1988, to acquire, own and
operate 23 Residence Inn by Marriott hotels (the "Inns") and the land on which
the Inns are located. The Inns are located in 16 states in the United States:
four in Florida, three in California, two in North Carolina and South Carolina,
respectively, and one in Alabama, Illinois, Louisiana, Massachusetts, Michigan,
Mississippi, Nevada, New Mexico, Ohio, Pennsylvania, Tennessee and Texas. As of
December 31, 1997, the Inns have a total of 2,487 suites.
To facilitate the refinancing of the Partnership's mortgage debt, on March 22,
1996, as permitted by the Partnership Agreement, the Partnership transferred
ownership of the Bossier City Residence Inn to a newly formed subsidiary,
Bossier RIBM Two LLC (the "LLC"), a Delaware limited liability company. The
general partner of the LLC with a 1% interest is Bossier RIBM Two, Inc., a
wholly owned subsidiary of the Partnership. The remaining 99% interest in the
LLC is owned by the Partnership. The Inns are managed by Residence Inn by
Marriott, Inc. (the "Manager"), a wholly-owned subsidiary of Marriott
International, Inc. ("MII"), as part of the Residence Inn by Marriott hotel
system.
Between November 23, 1988 and December 29, 1988, 70,000 limited partnership
interests (the "Units") were sold in a public offering. The offering price per
unit was $1,000. The General Partner contributed $707,100 for its 1% general
partnership interest. The Partnership acquired 17 of the Inns on the closing
date. The remaining six Inns were acquired during 1989.
The General Partner has undertaken, on behalf of the Partnership, to pursue,
subject to further approval of the partners, a potential transaction (the
"Consolidation") in which (i) subsidiaries of CRF Lodging Company, L.P. (the
"Company"), a newly formed Delaware limited partnership, would merge with and
into the Partnership and up to five other limited partnerships, with the
Partnership and the other limited partnerships being the surviving entities
(each, a "Merger and collectively, the "Merger"), subject to the satisfaction or
waiver of certain conditions, (ii) CRF Lodging Trust ("CRFLT"), a Maryland real
estate investment trust, the sole general partner of the Company, would offer
its common shares of beneficial interest, par value $0.01 per share (the "Common
Shares") to investors in an underwritten public offering and would invest the
proceeds of such offering in the Company in exchange for units of limited
partnership interests in the Company ("CRFLT Units") and (iii) the Partnership
would enter into a Lease for the operation of its Hotels pursuant to which a
Lessee would pay rent to the Partnership based upon the greater of a fixed
dollar amount of base rent or specified percentages of gross sales, as specified
in the Lease. If the partners approve the transaction and other conditions are
satisfied, the partners of the Partnership would receive CRFLT Units in the
Merger in exchange for their interests in the Partnership.
A preliminary Prospectus/consent Solicitation was filed as part of a
Registration Statement on Form S-4 with the Securities and Exchange Commission
and which describes the potential transaction in greater detail. Any offer of
CRFLT Units in connection with the Consolidation will be made solely by a final
Prospectus/Consent Solicitation.
Partnership Allocations and Distributions
Net profits for Federal income tax purposes are generally allocated to the
partners in proportion to the distributions of cash available for distribution.
The Partnership generally distributes cash available for distribution as
follows: (i) first, 99% to the limited partners and 1% to the General Partner,
until the partners have received, with respect to such year, an amount equal to
10% of their Net Capital Investment, defined as the excess of original capital
contributions over cumulative distributions of net refinancing and sales
proceeds ("Capital Receipts"); (ii) second, remaining cash available for
distribution will be distributed as follows, depending on the amount of Capital
Receipts previously distributed:
(a) 99% to the limited partners and 1% to the General Partner, if the
partners have received aggregate cumulative distributions of Capital
Receipts of less than 50% of their original capital contributions; or
(b) 90% to the limited partners and 10% to the General Partner, if the partners
have received aggregate cumulative distributions of Capital Receipts equal
to or greater than 50% but less than 100% of their original capital
contributions; or
(c) 75% to the limited partners and 25% to the General Partner, if the
partners have received aggregate cumulative distributions of Capital
Receipts equal to 100% or more of their original capital contributions.
For Federal income tax purposes, losses and net losses are allocated 99% to the
limited partners and 1% to the General Partner.
Capital Receipts not retained by the Partnership will generally be distributed
(i) first, 99% to the limited partners and 1% to the General Partner until the
partners have received cumulative distributions from all sources equal to a
cumulative simple return of 12% per annum on their Net Capital Investment and an
amount equal to their contributed capital, payable only from Capital Receipts;
(ii) next, if the Capital Receipts are from a sale, 100% to the General Partner
until it has received 2% of the gross proceeds from the sale; and (iii)
thereafter, 75% to the limited partners and 25% to the General Partner.
Gains will generally be allocated (i) first, to those partners whose capital
accounts have negative balances until such negative balances are brought to
zero; (ii) second, to all partners in amounts necessary to bring their
respective capital account balances equal to their invested capital, as defined,
plus a 12% return on such invested capital; (iii) next, to the General Partner
in an amount necessary to bring the General Partner's capital account balance to
an amount which is equal to 2% of the gross proceeds from the sale, and (iv)
thereafter, 75% to the limited partners and 25% to the General Partner.
Proceeds from the sale of substantially all of the assets of the Partnership
will be distributed to the partners in accordance with their capital account
balances as adjusted to take into account gain or loss resulting from such sale.
For financial reporting purposes, profits and losses are allocated among the
partners based upon their stated interests in cash available for distribution.
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.
Revenues and Expenses
Revenues represent house profit from the Partnership's Inns because the
Partnership has delegated substantially all of the operating decisions related
to the generation of house profit from the Inns to the Manager. House profit
reflects the net revenues flowing to the Partnership as property owner and
represents Inn operating results less property-level expenses, excluding
depreciation and amortization, base, Residence Inn system and incentive
management fees, property taxes, equipment rent and other costs, which are
disclosed separately in the consolidated statement of operations.
Property and Equipment
Property and equipment is recorded at cost. Depreciation is computed using the
straight-line method over the estimated useful lives of the assets, as follows:
Land improvements 40 years
Building and improvements 40 years
Furniture and equipment 3 to 10 years
All property and equipment at 22 of the Partnership's 23 Inns (Bossier City
excluded) is pledged as security for the mortgage debt described in Note 6.
The Partnership assesses impairment of its real estate properties based on
whether estimated undiscounted future cash flows 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.
Income Taxes
Provision for Federal and state income taxes has not been made in the financial
statements since the Partnership does not pay income taxes but rather allocates
profits and losses to the individual partners. Significant differences exist
between the net income (loss) for financial reporting purposes and the net
income (loss) as reported in the Partnership's tax return. These differences are
due primarily to the use, for income tax purposes, of accelerated depreciation
methods and shorter depreciable lives of the assets and the timing of the
recognition of base and incentive management fee expense. As a result of these
differences, the excess between the Partnership's net assets reported in the
accompanying consolidated financial statements and the tax basis of such net
assets was $849,000 as of December 31, 1997 and $411,000 as of December 31,
1996.
Deferred Financing Costs
Deferred financing costs represent the costs incurred in connection with
obtaining the debt financing and are amortized over the term thereof. The
Partnership incurred $4,119,000 of financing costs in connection with the
refinanced mortgage debt described in Note 6 which are being amortized using the
straight line method, which approximates the effective interest method, over the
ten year term of the mortgage debt. As of December 31, 1997 and 1996,
accumulated amortization of deferred financing costs totaled $734,000 and
$322,000, respectively.
Restricted Cash Reserves
On March 22, 1996, the Partnership was required to establish certain reserves in
conjunction with the refinancing of the Mortgage Debt as described in Note 6.
The balances in those reserves at December 31, 1997 are as follows (in
thousands):
Capital Expenditure Reserve................$ 1,541
Debt Service Reserve....................... 3,482
Real Estate Tax and Insurance Reserve...... 624
----------
$ 5,647
==========
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.
New Statements of Financial Accounting Standards
In 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 121 did not have an
effect on the Partnership's financial statements.
On November 20, 1997, the Emerging Issues Task Force ("EITF") of the Financial
Accounting Standards Board reached a consensus on EITF 97-2, "Application of
FASB Statement No. 94 and APB Opinion No. 16 to Physician Practice Management
Entities and Certain Others Entities with Contractual Management Arrangements."
EITF 97-2 addresses the circumstances in which a management entity may include
the revenues and expenses of a managed entity in its financial statements.
The Partnership is assessing the impact of EITF 97-2 on its policy of excluding
the property-level revenues and operating expenses of its Inns from its
statements of operations (see Note 3.) If the Partnership concludes that EITF
97-2 should be applied to its Inns, it would include operating results of those
managed operations in its financial statements. Application of EITF 97-2 to
financial statements as of and for the year ended December 31, 1997, would have
increased both revenues and operating expenses by approximately $35.6 million
and would have had no impact on operating profit or net income.
Reclassifications
Certain reclassifications were made to the prior year financial statements to
conform to the 1997 presentation.
NOTE 3. REVENUES
Partnership revenues consist of the following (in thousands):
1997 1996 1995
------------ ------------ -----------
INN SALES
Suites.........................$ 67,397 $ 65,969 $ 63,374
Other operating departments.... 3,642 3,675 3,491
------------ ------------ ------------
71,039 69,644 66,865
------------ ------------ ------------
INN EXPENSES
Departmental direct costs
Suites...................... 15,102 14,313 13,279
Other operating expenses....... 20,455 21,296 20,286
------------ ------------ ------------
35,557 35,609 33,565
------------ ------------ ------------
REVENUES..........................$ 35,482 $ 34,035 $ 33,300
============ ============ ============
NOTE 4. PROPERTY AND EQUIPMENT
Property and equipment consists of the following as of December 31 (in
thousands):
1997 1996
------------ -----------
Land and improvements.......................$ 57,362 $ 57,362
Building and improvements................. 105,118 102,054
Furniture and equipment................... 51,523 48,761
------------ -----------
214,003 208,177
Accumulated depreciation................... (70,878) (63,385)
------------ -----------
$ 143,125 $ 144,792
============ ===========
NOTE 5. ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair value 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 (in thousands):
As of December 31, 1997 As of December 31, 1996
------------------------ --------------------------
Estimated Estimated
Carrying Fair Carrying Fair
Amount Value Amount Value
---------- ---------- ----------- -----------
Mortgage debt $ 139,090 $ 144,200 $ 140,000 $ 140,000
Incentive management fee
due to Residence Inn
by Marriott, Inc. $ 16,545 $ 1,600 $ 14,610 $ 2,800
The estimated fair value of the mortgage debt obligation is based on expected
future debt service payments discounted at estimated risk adjusted rates.
Incentive management fees payable are valued based on the expected future
payments from operating cash flow discounted at risk adjusted rates.
NOTE 6. MORTGAGE DEBT
As of December 31, 1995, the Partnership's mortgage debt consisted of a
$131,500,000 nonrecourse mortgage loan (the "Term Loan") and $5,589,000 borrowed
under a $10 million revolving credit facility (the "Revolving Loan"). Both the
Term Loan and the Revolving Loan matured on December 30, 1995. However, the
third party lender granted the Partnership an initial and subsequent forbearance
which effectively extended the maturity of the loans through March 22, 1996.
During the forbearance period, the Partnership was required to make interest
only payments on the total outstanding debt balance of $137,089,000 at a fixed
rate of 10.174%. During 1995, the Term Loan carried interest at a fixed rate of
10.17% per annum and required no amortization of principal. The Revolving Loan
was available to provide interest payments on up to $20 million of the principal
amount of the Term Loan. Borrowings under the Revolving Loan carried interest
per annum at a floating rate equal to .625% plus the one, two, three or six
month London Interbank Offered Rate ("LIBOR"), as elected by the Partnership and
required no amortization of principal. Interest on the borrowings could also
have been funded under the Revolving Loan. There were no borrowings under the
Revolving Loan in 1995.
On March 22, 1996 (the "Closing Date") the Term Loan and the Revolving Loan were
refinanced with a new third party lender. In conjunction with the refinancing,
the principal amount of the Partnership's mortgage debt was increased from
$137.1 million to $140 million. The refinanced mortgage debt (the "Mortgage
Debt") continues to be nonrecourse to the Partnership, bears interest at a fixed
rate of 8.85% based upon actual number of days over a 360 day year for a 10-year
term expiring March 10, 2006 and required payments of interest only during the
first loan year (April 1996 through March 1997) and principal amortization based
upon a 25-year amortization schedule beginning with the second loan year.
Principal amortization of the Mortgage Debt at December 31, 1997 is as follows
(in thousands):
1998.................................$ 1,508
1999................................. 1,649
2000................................. 1,767
2001................................. 1,968
2002................................. 2,152
Thereafter........................... 130,046
----------------
$ 139,090
================
The Mortgage Debt is secured by first mortgages on 22 of the Partnership's 23
Inns, the land on which they are located, a security interest in all personal
property associated with those Inns including furniture and equipment,
inventory, contracts, and other intangibles and the Partnership's rights under
the management agreement. Although the Partnership continues to own 23 Residence
Inns, during the course of performing environmental studies at the properties,
the lender determined that the Bossier City Residence Inn did not pass certain
required thresholds to enable the property to collateralize the Mortgage Debt.
Additionally, as part of the refinancing, the Partnership was required to
deposit $500,000 into a reserve account and fund $250,000 annually into the
account to provide for any claim, investigation, or litigation that may arise
from any environmental condition at the Bossier City Residence Inn. The initial
$500,000 deposit was funded by the lender. The Partnership was required to repay
the initial reserve as promptly as possible if the Partnership draws on the
deposit or by the end of the 10-year term in March 2006. Any draws upon the
account will accrue interest at the 30-day London Interbank Offered Rate
("LIBOR") plus 4.5 percentage points. If the Partnership does not need to draw
on the reserve account, the lender will hold the reserve until such time as the
Mortgage Debt is either repaid, or a governmental authority determines that the
statute of limitations on filing any claims has expired or that no further
remedial activities are required at the property. Based upon the results of the
environmental studies performed, the Partnership believes that it is remote that
it will be necessary to draw on the reserve. This reserve is included in
restricted cash reserves on the accompanying balance sheet.
Pursuant to the terms of the Mortgage Debt, the Partnership is required to
establish with the lender a separate escrow account for payments of insurance
premiums and real estate taxes (the "Tax and Insurance Escrow Reserves") for
each mortgaged property if the credit rating of Marriott International, Inc.
("MII") is downgraded by Standard and Poors Rating Services. The Manager of the
Partnership's Inns, Residence Inn by Marriott , Inc. (the "Manager"), is a
wholly-owned subsidiary of MII. In March 1997, MII acquired the Renaissance
Hotel Group N.V., adding greater geographic diversity and growth potential to
its lodging portfolio. The assumption of additional debt associated with this
transaction resulted in a single downgrade of MII's long-term senior unsecured
debt effective April 1, 1997. As a result, the Partnership subsequently
transferred $834,000 into the Tax and Insurance Escrow Reserves from the
Manager's existing tax and insurance reserve account. In addition, the Mortgage
Debt required the Partnership to fund an additional month's debt service into
the debt service reserve account over a six month period as a result of this
downgrade. The tax and insurance escrow reserves and the debt service reserve
are shown as restricted reserves and the related tax and insurance liability is
included with accounts payable and accrued expenses in the accompanying balance
sheet.
Additionally, the terms of the Mortgage Debt require the Partnership to
establish certain reserves including:
o $3,482,000 Debt Service Reserve - This reserve was fully funded by
mid-1997 and is to equal three months of debt service.
o $2,357,000 Capital Expenditure Reserve - This reserve was fully funded on the
Closing Date. The funds will be expended for various renewals and
replacements, site improvements, Americans with Disabilities Act of 1990
modifications and environmental remediation projects identified during the
course of the appraisals and environmental studies undertaken in conjunction
with the refinancing. As of December 31, 1997 the balance of this reserve is
$1,249,000.
Furthermore, in the event of a MII credit rating downgrade, as described above,
the Manager required additional working capital as follows:
o $900,000 Working Capital Reserve - This reserve was funded from 1996 cash
from operations.
NOTE 7. MANAGEMENT AGREEMENT
During 1995, the Manager operated the Inns pursuant to a long-term management
agreement (the "Original Management Agreement") with an initial term expiring on
December 28, 2007. The Manager had the option to extend the Original Management
Agreement on one or more of the Inns for up to five 10-year terms. To facilitate
the refinancing, effective March 22, 1996, the Original Management Agreement was
restated into two separate management agreements. The Partnership entered into a
management agreement with the Manager for the 22 Inns the Mortgage Debt is
secured by and the LLC also entered into a management agreement with the Manager
for the Bossier City Residence Inn (collectively, the "Restated Management
Agreements"). The terms of the Restated Management Agreements do not differ from
the Original Management Agreement with the exception of the term. Pursuant to
the Restated Management Agreements, the initial term expires December 31, 2012,
with the Manager having the option to extend the agreement on one or more of the
Inns for up to four 10-year terms.
The Manager earns a base management fee equal to 2% of the Inns' gross revenues.
Through 1991, payment of the base management fee was subordinate to qualifying
debt service payments, a provision for Partnership administrative expenses and
retention by the Partnership of annual cash flow from operations of $7,071,000.
Deferred base management fees are payable in the future from operating cash
flow, as defined. Beginning in 1992 and thereafter, base management fees are
paid currently. Pursuant to the terms of the Restated Management Agreements, the
Partnership paid the remaining $743,000 of deferred base management fees in
1996.
In addition, the Manager is entitled to an incentive management fee equal to 15%
of Operating Profit, as defined (23.5% in any year in which operating profit is
equal to or greater than $25.3 million; however, cumulative incentive management
fees cannot exceed 20% of cumulative Operating Profit). The incentive management
fee is payable out of 50% of cash flow from operations remaining after payment
of debt service, provision for Partnership administrative expenses, payment of
the base management fee, payment of deferred base management fees and retention
by the Partnership of annual cash flow from operations of $7,071,000. After the
Partnership has retained an additional 5% return, the incentive management fee
is payable out of 75% of the remaining cash flow from operations. Through 1991,
the Manager was not entitled to accrue any unpaid incentive management fees.
Incentive management fees earned after 1991 will be payable in the future from
operating cash flow, as defined. Incentive management fees of $3,641,000,
$3,542,000 and $3,502,000 were earned during 1997, 1996 and 1995 respectively.
Incentive management fees of $1,706,000 and $1,190,000 were paid during 1997 and
1996, respectively. Deferred incentive management fees were $16,545,000,
$14,610,000, and $13,794,000 as of December 31, 1997, 1996, and 1995
respectively.
The Restated Management Agreements provide for a Residence Inn system fee equal
to 4% of suite revenues. In addition, the Manager is reimbursed for each Inn's
pro rata share of the actual costs and expenses incurred in providing certain
services ("Chain Services") on a central or regional basis to all hotels
operated by the Manager. Such reimbursements were limited through 1991 to 2% of
gross revenues from Inn operations. As franchiser of the Residence Inn by
Marriott system, the Manager maintains a marketing fund to pay the costs
associated with certain system-wide advertising, promotional, and public
relations materials and programs and the operation of a toll-free reservation
system. Each Inn contributes 2.5% of suite revenues to the marketing fund. For
the years ended December 31, 1997, 1996 and 1995, the Partnership paid a
Residence Inn system fee of $2,696,000, $2,639,000 and $2,535,000, reimbursed
the Manager for $1,590,000, $1,558,000 and $1,498,000 of Chain Services and
contributed $1,685,000, $1,649,000 and $1,584,000 to the marketing fund,
respectively. Chain Services and contributions to the marketing fund are
included in other operating expenses in Note 3.
The Partnership is required to provide the Manager with working capital to meet
the operating needs of the Inns. 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 termination of the Restated
Management Agreements, the working capital will be returned to the Partnership.
The individual components of working capital controlled by the Manager are not
reflected in the Partnership's balance sheet. As of December 31, 1997 and 1996,
$2,050,000 and $1,150,000, respectively, has been advanced to the Manager for
working capital which is included in Due from Residence Inn by Marriott, Inc. in
the accompanying consolidated balance sheet.
The Restated Management Agreements provide for the establishment of a property
improvement fund for the Inns. Contributions to the property improvement fund
are 5% of gross Inn revenues. Total contributions to the property improvement
fund for the years ended December 31, 1997, 1996 and 1995 were $3,547,000,
$3,482,000 and $3,343,000, respectively.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
The Partnership has no directors or officers. The business and policy making
functions of the Partnership are carried out through the directors and executive
officers of Marriott RIBM Two Corporation, the General Partner, who are listed
below:
Age at
Name Current Position December 31, 1997
- ----------------------- ------------------------------ -----------------
Bruce F. Stemerman President and Director 42
Christopher G. Townsend Vice President, Secretary and
Director 50
Patricia K. Brady Vice President and Chief Accounting
Officer 36
Bruce Wardinski Treasurer 37
Business Experience
Bruce F. Stemerman joined Host Marriott in 1989 as Director--Partnership
Services. He became 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.
Christopher G. Townsend joined Host Marriott's Law Department in 1982 as a
Senior Attorney. In 1984 he was made Assistant Secretary of Host Marriott. In
1986 he was made an Assistant General Counsel. He was made Senior Vice
President, Corporate Secretary and Deputy General Counsel of Host Marriott in
1993. 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.
Patricia K. Brady was appointed to Vice President and Chief Accounting
Officer of the General Partner on October 10, 1996. Ms. Brady joined Host
Marriott in 1989 as Assistant Manager--Partnership Services. She was promoted to
Manager in 1990 and to Director--Asset Management in June 1996. Ms. Brady also
serves as an officer of numerous Host Marriott subsidiaries.
Bruce Wardinski joined Host Marriott in 1987 as a Senior Financial Analyst of
Financial Planning & Analysis and was named Manager in June 1988. He was
appointed Director, Financial Planning & Analysis in 1989, Director of Project
Finance in January 1990, Senior Director of Project Finance in June 1993, Vice
President--Project Finance in June 1994, and Senior Vice President of
International Development in October 1995. In June 1996, Mr. Wardinski was named
Senior Vice President and Treasurer of Host Marriott. Prior to joining Host
Marriott, Mr. Wardinski was with the public accounting firm Price Waterhouse.
ITEM 11. MANAGEMENT REMUNERATION AND TRANSACTIONS
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 agreements 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
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.
For the fiscal years ending December 31, 1997, 1996 and 1995, the Partnership
reimbursed Host Marriott or its subsidiaries in the amount of $143,000, $131,000
and $89,000, respectively, for the cost of providing all administrative and
other services as General Partner. 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
As of December 31, 1997, Prescott Associates, LLC, an unrelated third party,
owned 6.5% of the total number of limited partnership Units. No other person
owned of record, or to the Partnership's knowledge owned beneficially, more than
5% of the total number of limited partnership Units. The General Partner does
not own any limited partnership interest in the Partnership.
The executive officers and directors of the General Partner, Host Marriott, MII
and their respective affiliates do not own any Units as of December 31, 1997.
The Partnership is not aware of any arrangements which may, at a subsequent
date, result in a change in control of the Partnership.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Management Agreement
To facilitate the refinancing, effective March 22, 1996, the original Management
Agreement was restated into two separate management agreements. The Partnership
entered into a management agreement with the Manager for 22 of the Inns which
the Partnership directly owns and the LLC entered into a management agreement
for the Bossier City Residence Inn which the LLC owns, collectively, (the
"Restated Management Agreements").
Term
During 1995, the Manager operated the Inns pursuant to a long-term management
agreement (the "Original Management Agreement") with an initial term expiring on
December 28, 2007. The Manager had the option to extend the Original Management
Agreement on one or more of the Inns for up to five 10-year terms. To facilitate
the refinancing, effective March 22, 1996, the Original Management Agreement was
restated into two separate management agreements. The Partnership entered into a
management agreement with the Manager for the 22 Inns the Mortgage Debt is
secured by and the LLC also entered into a management agreement with the Manager
for the Bossier City Residence Inn (collectively, the "Restated Management
Agreements"). The terms of the Restated Management Agreements do not differ from
the Original Management Agreement with the exception of the term. Pursuant to
the Restated Management Agreements, the initial term expires December 31, 2012,
with the Manager having the option to extend the agreement on one or more of the
Inns for up to four 10-year terms.
Management Fees
The Restated Management Agreements provide for annual payments of (i) the base
management fee equal to 2% of gross sales from the Inns, (ii) the Residence Inn
system fee equal to 4% of gross suite sales from the Inns, and (iii) the
incentive management fee equal to 15% of operating profit, as defined (23.5% of
operating profit, as defined, in any year in which operating profit exceeds
$25.3 million; however, cumulative incentive management fee can not exceed 20%
of cumulative operating profit). During 1997, 1996 and 1995, respectively, the
Partnership paid a system fee of $2,696,000, $2,639,000 and $2,535,000. See
"Deferral Provisions" for a discussion of the payment of base and incentive
management fees.
Deferral Provisions
Through 1991, payment of the base management fee was subordinate to qualifying
debt service payments, a provision for Partnership administrative expenses and
retention by the Partnership of annual cash flow from operations of $7,071,000.
Deferred base management fees are payable in the future from operating cash
flow, as defined. Beginning in 1992 and thereafter, base management fees are
paid currently. Pursuant to the terms of the Restated Management Agreements, the
Partnership paid the remaining $743,000 of deferred base management fees in
1996.
The incentive management fee is payable out of 50% of cash flow from operations
remaining after payment of debt service, provision for Partnership
administrative expenses, payment of the base management fee, payment of deferred
base management fees and retention by the Partnership of annual cash flow from
operations of $7,071,000. After the Partnership has retained an additional 5%
return, the incentive management fee is payable out of 75% of the remaining cash
flow from operations. Through 1991, the Manager was not entitled to accrue any
unpaid incentive management fees. Incentive management fees earned after 1991
will be payable in the future from operating cash flow, as defined. Incentive
management fees of $3,641,000, $3,542,000 and $3,502,000 were earned during
1997, 1996 and 1995 respectively. Incentive management fees of $1,706,000 and
$1,190,000 were paid during 1997 and 1996, respectively. There were no incentive
management fees paid to the Manager prior to 1996. Deferred incentive management
fees were $16,545,000, $14,610,000 and $13,794,000 as of December 31, 1997,
1996, and 1995 respectively.
Chain Services and Marketing Fund
The Manager is reimbursed for each Inn's pro rata share of the actual costs and
expenses incurred in providing certain services ("Chain Services") on a central
or regional basis to all hotels operated by the Manager. Such reimbursements
were limited through 1991 to 2% of gross revenues from Inn operations. As
franchiser of the Residence Inn by Marriott system, the Manager maintains a
marketing fund to pay the costs associated with certain system-wide advertising,
promotional, and public relations materials and programs and the operation of a
toll-free reservation system. Each Inn contributes 2.5% of suite revenues to the
marketing fund. For the years ended December 31, 1997, 1996 and 1995, the
Partnership paid a Residence Inn system fee of $2,696,000, $2,639,000 and
$2,535,000, reimbursed the Manager for $1,590,000, $1,558,000 and $1,498,000 of
Chain Services and contributed $1,685,000, $1,649,000 and $1,584,000 to the
marketing fund, respectively. Chain Services and contributions to the marketing
fund are included in other operating expenses detailed in the Consolidated
Financial Statements (see Item 8).
Working Capital
The Partnership is required to provide the Manager with working capital to meet
the operating needs of the Inns. 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 termination of the Restated
Management Agreements, the working capital will be returned to the Partnership.
The individual components of working capital controlled by the Manager are not
reflected in the Partnership's balance sheet. As of December 31, 1997 and 1996,
$2,050,000 and $1,150,000, respectively, has been advanced to the Manager for
working capital which is included in Due from Residence Inn by Marriott, Inc. in
the accompanying Consolidated Balance Sheet (see Item 8).
Property Improvement Funds
The Restated Management Agreements provide for the establishment of a property
improvement fund for the Inns. Contributions to the property improvement fund
are 5% of gross Inn revenues. Total contributions to the property improvement
fund for the years ended December 31, 1997, 1996 and 1995 were $3,547,000,
$3,482,000 and $3,343,000, respectively.
Payments to MII and Subsidiaries
The following table sets forth the amount paid to MII and affiliates under
the Restated Management Agreements for the years ended December 31, 1997, 1996
and 1995 (in thousands):
1997 1996 1995
------------ ------------ -----------
Residence Inn system fee. .........$ 2,696 $ 2,639 $ 2,535
Incentive management fee........... 1,706 1,190 --
Marketing fund contribution........ 1,685 1,649 1,584
Chain services..................... 1,590 1,558 1,498
Base management fee................ 1,419 1,393 1,337
Deferred base management fees...... -- 743 2,296
------------ ----------- -----------
$ 9,096 $ 9,172 $ 9,250
============ =========== ===========
Payments to Host Marriott and Subsidiaries
The following sets forth amounts paid by the Partnership to Host Marriott and
its subsidiaries for the years ended December 31, 1997, 1996 and 1995 (in
thousands):
1997 1996 1995
------------ ------------ -------------
Administrative expenses reimbursed..$ 143 $ 131 $ 89
Cash distributions.................. 35 -- 49
------------ ------------ -------------
$ 178 $ 131 $ 138
============ ============ =============
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.
Schedule III - Real Estate and Accumulated Depreciation
All other schedules are omitted because they are not applicable or the required
information is included in the financial statements or notes thereto.
(3) EXHIBITS
Exhibit Number Description
------------------- ----------------------------------------
* 3.1 Amended and Restated Agreement of
Limited Partnership of Marriott
Residence Inn II Limited Partnership
dated November 23, 1988.
*3.2 First Amendment to Amended and Restated
Agreement of Limited Partnership dated
April 1, 1989.
*10.1 Amended and Restated Management
Agreement by and between Residence Inn
by Marriott, Inc. and Marriott Residence
Inn II Limited Partnership dated as of
March 22, 1996.
* 10.2 Loan Agreement by and between Marriott
Residence Inn II Limited Partnership and
the Sanwa Bank Limited dated December
27, 1988.
*10.3 Loan Agreement between Marriott
Residence Inn II Limited Partnership
and Nomura Asset Capital Corporation
dated as of March 22, 1996.
---------------------
* Incorporated by reference to the Partnership's previously
filed documents.
SCHEDULE III
MARRIOTT RESIDENCE INN II LIMITED PARTNERSHIP
REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 1997
(in thousands)
Initial Costs
------------------------
Subsequent
Land and Building and Costs
Description Debt Improvements Improvements Capitalized
- -------------------- ------- ------------ ------------ -----------
Las Vegas, NV $ 16,618 $ 4,967 $ 8,284 $ 415
Irvine, CA 7,213 3,503 5,843 67
Arcadia, CA 9,104 3,426 5,714 176
Greensboro, NC 8,460 2,937 4,926 242
Birmingham, AL 7,320 2,886 4,840 580
Placentia, CA 4,723 2,911 4,882 351
Memphis East, TN 3,695 2,629 4,409 1,312
Other properties,
each less than 5% of total 81,957 33,565 55,746 7,869
-------- ---------- ----------- -----------
$139,090 $ 56,824 $ 94,644 $ 11,012
======== ========== =========== ===========
Gross Amount at December 31, 1997
----------------------------------------------------
Land and Buildings and Accumulated
Description Improvements Improvements Total Depreciation
- -------------------- ------------ ------------- -------- ------------
Las Vegas, NV $ 5,037 $ 8,629 $ 13,666 $ 2,434
Irvine, CA 3,507 5,906 9,413 1,536
Arcadia, CA 3,442 5,874 9,316 1,577
Greensboro, NC 2,963 5,142 8,105 1,488
Birmingham, AL 2,931 5,375 8,306 1,577
Placentia, CA 2,955 5,189 8,144 1,371
Memphis East, TN 2,661 5,689 8,350 1,494
Other properties,
each less than 5% of total 33,866 63,314 97,180 18,116
-------- ------------- ------- ------------
$ 57,362 $ 105,118 $162,480 $ 29,593
======== ============ ======== ============
Date of
Completion of Date Depreciation
Description Construction Acquired Life
- -------------------- ------------ --------- -------------
Las Vegas, NV 1989 1989 40 years
Irvine, CA 1989 1989 40 years
Arcadia, CA 1989 1989 40 years
Greensboro, NC 1987 1988 40 years
Birmingham, AL 1986 1988 40 years
Placentia, CA 1988 1988 40 years
Memphis East, TN 1986 1988 40 years
Other properties,
each less than 5% of total 1983-1989 1988-1989 40 years
Notes:
1995 1996 1997
----------- ----------- -----------
(a) Reconciliation of Real Estate:
Balance at beginning of year......$ 156,679 $ 158,439 $ 159,416
Capital Expenditures.............. 1,760 977 3,064
Dispositions...................... -- -- --
----------- ----------- -----------
Balance at end of year............$ 158,439 $ 159,416 $ 162,480
=========== =========== ===========
(b) Reconciliation of Accumulated Depreciation:
Balance at beginning of year......$ 18,115 $ 21,748 25,540
Depreciation.................... 3,633 3,792 4,053
----------- ----------- -----------
Balance at end of year............$ 21,748 $ 25,540 $ 29,593
=========== =========== ===========
(c) The aggregate cost of land, buildings and improvements for Federal income
tax purposes is approximately $156.6 million at December 31, 1997.
(d) The Debt balance is $139,090 million as of December 31, 1997.
SIGNATURES
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 this March 27,
1998.
MARRIOTT RESIDENCE INN II
LIMITED PARTNERSHIP
By: MARRIOTT RIBM TWO CORPORATION
General Partner
/s/ Patricia K. Brady
---------------------
Patricia K. Brady
Vice President and Chief Accounting Officer
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 the capacities and on the date indicated above.
Signature Title
- --------- -----
(MARRIOTT RIBM TWO CORPORATION)
/s/ Bruce F. Stemerman President and Director
- --------------------------- (Principal Executive Officer)
Bruce F. Stemerman
/s/ Christopher G. Townsend Vice President, Secretary and Director
- ---------------------------
Christopher G. Townsend
/s/ Patricia K. Brady Vice President and Chief Accounting Officer
- ---------------------------
Patricia K. Brady
/s/ Bruce Wardinski Treasurer
- ---------------------------
Bruce Wardinski
SIGNATURES
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 this March 27,
1998.
MARRIOTT RESIDENCE INN II
LIMITED PARTNERSHIP
By: MARRIOTT RIBM TWO CORPORATION
General Partner
-----------------
Patricia K. Brady
Vice President and Chief Accounting Officer
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 the capacities and on the date indicated above.
Signature Title
- --------- -----
(MARRIOTT RIBM TWO CORPORATION)
- ----------------------- President and Director
Bruce F. Stemerman (Principal Executive Officer)
- ----------------------- Vice President, Secretary and Director
Christopher G. Townsend
- ----------------------- Vice President and Chief Accounting Officer
Patricia K. Brady
- ----------------------- Treasurer
Bruce Wardinski