May 11, 1998
BY ELECTRONIC FILING
Securities and Exchange Commission
Operations Center
6432 General Green Way
Alexandria, VA 22312-2413
RE: MARRIOTT RESIDENCE INN II LIMITED PARTNERSHIP
SEC File No. 033-24935
Dear Sir/Madam:
Enclosed for filing is the Quarterly Report on Form 10-Q for the quarter ended
March 27, 1998 and the Financial Data Schedule for Marriott Residence Inn II
Limited Partnership.
Sincerely,
MARRIOTT RIBM TWO CORPORATION
General Partner
/s/ Patricia K. Brady
Patricia K. Brady
Vice President and
Chief Accounting Officer
Enclosures
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 27, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File No. 033-24935
MARRIOTT RESIDENCE INN II LIMITED PARTNERSHIP
(Exact name of registrant as specified in its charter)
Delaware 52-1605434
- -------------------------------- --------------------------------------
(State of Organization) (I.R.S. Employer Identification Number)
10400 Fernwood Road, Bethesda, MD 20817-1109
- --------------------------------- --------------------------------------
(Address of principal (Zip Code)
executive offices)
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)
Indicated 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 Section 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withdrawn on January 16, 1998.)
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MARRIOTT RESIDENCE INN II LIMITED PARTNERSHIP
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TABLE OF CONTENTS
PAGE NO.
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Statement of Operations
Twelve Weeks Ended March 27, 1998 and March 28, 1997............1
Condensed Consolidated Balance Sheet
March 27, 1998 and December 31, 1997............................2
Condensed Consolidated Statement of Cash Flows
Twelve Weeks ended March 27, 1998 and March 28, 1997............3
Notes to Condensed Consolidated Financial Statements...............4
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.............................6
PART II - OTHER INFORMATION
Item 1. Legal Proceedings..................................................8
Item 6. Exhibits and Reports on Form 8-K...................................9
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MARRIOTT RESIDENCE INN II LIMITED PARTNERSHIP
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
(in thousands, except per Unit amounts)
Twelve Weeks Ended
March 27, March 28,
1998 1997
------------- -------------
REVENUES..................................$ 8,027 $ 8,348
------------- -------------
OPERATING COSTS AND EXPENSES
Depreciation ........................... 1,662 1,633
Incentive management fee................ 841 887
Residence Inn system fee................ 637 631
Property taxes.......................... 516 516
Base management fee..................... 334 332
Equipment rent and other................ 136 211
------------- -------------
4,126 4,210
OPERATING PROFIT.......................... 3,901 4,138
Interest expense........................ (3,032) (3,055)
Interest income......................... 193 138
------------- -------------
NET INCOME................................$ 1,062 $ 1,221
============= =============
ALLOCATION OF NET INCOME
General Partner.........................$ 11 $ 12
Limited Partners........................ 1,051 1,209
------------- -------------
$ 1,062 $ 1,221
============= =============
NET INCOME PER LIMITED PARTNER UNIT
(70,000 Units).........................$ 15 $ 17
============= =============
See notes to condensed consolidated financial
statements.
MARRIOTT RESIDENCE INN II LIMITED PARTNERSHIP
CONDENSED CONSOLIDATED BALANCE SHEET
(in thousands)
March 27, December 31,
1998 1997
(Unaudited)
ASSETS
Property and equipment, net...............$ 142,533 $ 143,125
Due from Residence Inn by Marriott, Inc... 4,623 4,057
Deferred financing costs, net............. 3,290 3,385
Property improvement fund................. 1,313 1,543
Restricted reserves....................... 6,049 5,647
Cash and cash equivalents................. 7,624 10,126
------------- -------------
$ 165,432 $ 167,883
============= =============
LIABILITIES AND PARTNERS' CAPITAL
LIABILITIES
Mortgage debt.............................$ 138,683 $ 139,090
Incentive management fee due to
Residence Inn by Marriott, Inc.......... 17,087 16,545
Accounts payable and accrued expenses..... 1,571 1,684
------------- -------------
Total Liabilities...................... 157,341 157,319
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PARTNERS' CAPITAL
General Partner........................... 161 185
Limited Partners.......................... 7,930 10,379
------------- -------------
Total Partners' Capital................ 8,091 10,564
------------- -------------
$ 165,432 $ 167,883
============= =============
See notes to condensed consolidated financial
statements.
MARRIOTT RESIDENCE INN II LIMITED PARTNERSHIP
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
(in thousands)
Twelve Weeks Ended
March 27, March 28,
1998 1997
------------- --------
OPERATING ACTIVITIES
Net income .............................$ 1,062 $ 1,221
Noncash items........................... 2,299 1,996
Changes in operating accounts........... (831) (427)
------------- -------------
Cash provided by operating activities 2,530 2,790
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INVESTING ACTIVITIES
Additions to property and equipment, net (1,070) (1,340)
Additions to restricted reserves........ (250) (637)
Change in property improvement funds.... 230 312
------------- -------------
Cash used in investing activities.... (1,090) (1,665)
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FINANCING ACTIVITIES
Capital distributions to partners....... (3,535) (3,536)
Repayment of mortgage debt.............. (407) --
------------- -------------
Cash used in financing activities.... (3,942) (3,536)
------------- -------------
DECREASE IN CASH AND CASH EQUIVALENTS..... (2,502) (2,411)
CASH AND CASH EQUIVALENTS at beginning
of period.............................. 10,126 8,008
------------- -------------
CASH AND CASH EQUIVALENTS at end of
period $ 7,624 $ 5,597
============= =============
SUPPLEMENTAL DISCLOSURE OF
CASH FLOW INFORMATION:
Cash paid for mortgage interest......$ 3,075 $ 3,098
============= =============
See notes to condensed consolidated financial
statements.
MARRIOTT RESIDENCE INN II LIMITED PARTNERSHIP
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. The accompanying condensed consolidated financial statements have been
prepared by Marriott Residence Inn II Limited Partnership (the
"Partnership") without audit. Certain information and footnote
disclosures normally included in financial statements presented in
accordance with generally accepted accounting principles have been
condensed or omitted from the accompanying statements. The Partnership
believes the disclosures made are adequate to make the information
presented not misleading. However, the condensed consolidated financial
statements should be read in conjunction with the Partnership's
consolidated financial statements and notes thereto included in the
Partnership's Form 10-K for the fiscal year ended December 31, 1997.
In the opinion of the Partnership, the accompanying condensed unaudited
financial statements reflect all adjustments (which include only normal
recurring adjustments) necessary to present fairly the financial
position of the Partnership as of March 27, 1998, and the results of
operations and cash flows for the twelve weeks ended March 27, 1998 and
March 28, 1997. Interim results are not necessarily indicative of
fiscal year performance because of seasonal and short-term variations.
The net income of the Partnership is allocated 99% to the limited
partners and 1% to Marriott RIBM Two Corporation (the "General
Partner"). Significant differences exist between the net income for
financial reporting purposes and the net income for Federal income tax
purposes. These differences are due primarily to the use, for income
tax purposes, of accelerated depreciation methods and shorter
depreciable lives of the assets and differences in the timing of the
recognition of incentive management fee expense.
2. Revenues represent house profit of the Partnership Inns since the
Partnership has delegated substantially all of the operating decisions
related to the generation of house profit of the Inns to Residence Inn
by Marriott, Inc. (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, Residence Inn system, base and incentive management fees,
real and personal property taxes, equipment rent and certain other
costs, which are classified as operating costs and expenses. Revenues
consist of the following for the twelve-weeks ended (in thousands):
March 27, March 28,
1998 1997
INN SALES
Suites............................$ 15,924 $ 15,778
Other operating departments....... 793 868
------------- -------------
16,717 16,646
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INN EXPENSES
Departmental direct costs
Suites......................... 3,448 3,356
Other operating departments.... 534 353
Other Inn operating expenses...... 4,708 4,589
------------- -------------
8,690 8,298
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REVENUES.............................$ 8,027 $ 8,348
============= =============
3. In December 1997, Host Marriott Corporation on behalf of the General
Partner, Marriott RIBM Two Corporation, filed a preliminary Prospectus/
Consent Solicitation Statement(the "S-4") with the Securities and
Exchange Commission which proposed the consolidation (the
"Consolidation") of this Partnership and five other limited
partnerships into a publicly traded real estate investment trust
("REIT"). The General Partner has been working to resolve various open
issues concerning the proposed Consolidation.
In addition, there are existing REIT's which are active in the moderate
price and extended stay hotel segment that have expressed an interest
in the six limited partnerships. Therefore, the General Partner has had
preliminary discussions with some of these companies. Although no
agreements have yet been reached, the General Partner continues to
pursue the possibility of a potential transaction involving the
Partnership's assets or a merger of the Partnership with an existing
publicly traded company.
The General Partner has retained Merrill Lynch to advise the
Partnership with respect to the Partnership's strategic alternatives,
including the original Consolidation plan and other available
alternatives. The General Partner intends to continue to explore these
alternatives and determine which path to pursue, obviously subject to
appropriate partner approval.
ITEM 2. 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.
RESULTS OF OPERATIONS
First Quarter 1998 Compared To First Quarter 1997
Revenues. Revenue and operating profit are impacted primarily by growth in
revenue per available room ("REVPAR"). REVPAR is a commonly used indicator of
market performance for hotels (although it is not a GAAP, or generally accepted
accounting principles, measure of revenue) which represents the combination of
daily room 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 $100,000, or 1%, to $16.7 million in the first
quarter 1998 reflecting stable REVPAR for the period. REVPAR remained stable for
the first quarter 1998 due primarily to an increase in combined average room
rates of 3%, while combined average occupancy decreased by two percentage
points. Partnership revenues for the first quarter 1998 decreased $300,000, or
4%, to $8.0 million. This decrease is primarily due to stable Inn sales and
REVPAR results combined with higher Inn labor costs.
Operating Costs and Expenses. Operating costs and expenses decreased $100,000,
or 2%, to $4.1 million for the first quarter 1998. As a percentage of Inn
revenues, Inn operating costs and expenses were 51% and 50% of revenues for the
first quarter 1998 and the first quarter 1997, respectively.
Operating Profit. As a result of the changes in revenues and operating costs and
expenses discussed above, operating profit decreased by $200,000 to $3.9
million, or 49% of revenues, for the first quarter 1998 from $4.1 million, or
50% of revenues, for the first quarter 1997.
Interest Expense. Interest expense decreased 3% to $3.0 million for the first
quarter 1998 from $3.1 million for the first quarter 1997 due to principal
amortization on the mortgage debt.
Net Income. Net income for the first quarter 1998 decreased $100,000 to $1.1
million, or 13% of revenues, compared to net income of $1.2 million, or 15% of
revenues, for the first quarter 1997.
LIQUIDITY AND CAPITAL RESOURCES
The Partnership's financing needs have been historically funded through
loan agreements with independent financial institutions. As a result of the
successful refinancing of the Partnership's mortgage debt, the General Partner
believes that the Partnership will have sufficient capital resources to conduct
its operations in the ordinary course of business although there can be no
assurance of the Partnership's ability to do so.
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 operating activities was $2.5 million for the first quarter
1998 compared to $2.8 million for the first quarter 1997. The decrease was due
to a $300,000 reduction in Partnership revenues.
Cash used in investing activities for the first quarter 1998 and the first
quarter 1997 was $1.1 million and $1.7 million, respectively. The Partnership's
cash investing activities consists primarily of contributions to the property
improvement fund and 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 $800,000 for
both the first quarter 1998 and the first quarter 1997, while expenditures from
the property improvement fund were $1.1 million and $1.2 million for first
quarter 1998 and first quarter 1997, respectively.
Cash used in financing activities for the first quarter 1998 and the first
quarter 1997 was $3.9 million and $3.5 million, respectively. The Partnership's
cash financing activities primarily consist of capital distributions to partners
and repayment of mortgage debt. The Partnership distributed $3.5 million to the
partners in the first quarter of 1998 from 1997 operations. In the first quarter
of 1997, the Partnership distributed $3.5 million to the partners from 1996
operations. Repayment of mortgage debt was $400,000 during first quarter 1998
compared to no repayments during first quarter 1997. The Partnership's mortgage
debt required payments of interest only through March 1997. Thereafter, it
required principal amortization based on a 25-year amortization schedule.
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.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On February 11, 1998, four individual limited partners in partnerships
sponsored by Host Marriott Corporation ("Host Marriott") filed a class action
lawsuit, styled Ruben, et al. v. Host Marriott Corporation, et al., Civil Action
No. 16186, in Delaware State Chancery Court 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 "Five Partnerships"). The plaintiffs
allege that the merger of the Five 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 Five Partnerships by Host Marriott
and the general partners of the Five Partnerships. In addition, the plaintiffs
allege that the Merger breaches various agreements relating to the Five
Partnerships. The plaintiffs are seeking, among other things, the following:
certification of a class; injunctive relief to block consummation of the Merger
or, in the alternative, recision of the Merger; and damages. Host Marriott and
the general partners of the Five Partnerships believe that these allegations are
totally devoid of merit and they intend to vigorously defend against them. The
defendants also maintain that this lawsuit is premature because the Merger has
not been, and may not be, consummated as proposed in the SEC filings.
On March 16, 1998, limited partners in several partnerships sponsored by
Host Marriott Corporation ("Host Marriott"), filed a lawsuit, styled Robert M.
Haas, Sr. and Irwin Randolph Joint Tenants, et al. v. Marriott International,
Inc., et al., Case No. CI-04092, in the 57th Judicial District Court of Bexar
County, Texas against Marriott International, Inc. ("Marriott International"),
Host Marriott, various of their subsidiaries, J.W. Marriott, Jr., Stephen
Rushmore, and Hospitality Valuation Services, Inc. (collectively, the
"Defendants"). The lawsuit relates to the following limited partnerships:
Courtyard by Marriott Limited Partnership, Courtyard by Marriott II Limited
Partnership, Marriott Residence Inn Limited Partnership, Marriott Residence Inn
II Limited Partnership, Fairfield Inn by Marriott Limited Partnership, Desert
Springs Marriott Limited Partnership, and Atlanta Marriott Marquis Limited
Partnership (collectively, the "Seven Partnerships"). The plaintiffs allege that
the Defendants conspired to sell hotels to the Seven Partnerships for inflated
prices and that they charged the Seven Partnerships excessive management fees to
operate the Seven Partnerships' hotels. The plaintiffs further allege that the
Defendants committed fraud, breached fiduciary duties, and violated the
provisions of various contracts. The plaintiffs are seeking unspecified damages.
The Defendants, which do not include the Seven Partnerships, believe that there
is no truth to the plaintiffs' allegations and that the lawsuit is totally
devoid of merit. The Defendants intend to vigorously defend against the claims
asserted in the lawsuit. Although the Seven Partnerships have not been named as
Defendants in the lawsuit, the partnership agreements relating to the Seven
Partnerships include an indemnity provision which requires the Seven
Partnerships, under certain circumstances, to indemnify the general partners
against losses, judgments, expenses, and fees.
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.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits:
None
b. Reports on Form 8-K:
May 6, 1998 -- Letter to limited partners regarding status
of proposed consolidation.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this Form 10-Q to be signed on its behalf by the
undersigned, thereunto duly authorized.
MARRIOTT RESIDENCE INN II
LIMITED PARTNERSHIP
By: MARRIOTT RIBM TWO CORPORATION
General Partner
May 11, 1998 By: /s/ Patricia K. Brady
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Patricia K. Brady
Vice President and Chief Accounting Officer