Exhibit 99.3
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MARRIOTT RESIDENCE INN II
LIMITED PARTNERSHIP
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1998 Third Quarter Report
Limited Partner Quarterly Update
Presented for your review is the 1998 Third Quarter Report for Marriott
Residence Inn II Limited Partnership (the "Partnership"). A discussion of the
Partnership's performance and Inn operations is included in the attached Form
10-Q, Item 2, Management's Discussion and Analysis of Financial Condition and
Results of Operations. You are encouraged to review this report in its entirety.
If you have any further questions regarding your investment, please contact Host
Marriott Partnership Investor Relations at (301) 380-2070.
Potential Transaction
The General Partner previously advised you that it is reviewing strategic
alternatives that could result in increased liquidity for Limited Partners. In
December 1997, we reported that Host Marriott Corporation ("Host") on behalf of
the General Partner, filed a preliminary Prospectus/Consent Solicitation
Statement with the Securities and Exchange Commission. This statement proposed
the consolidation (the "Consolidation") of this Partnership and five other
limited partnerships into a publicly traded real estate investment trust
("REIT"). Subsequently, we reported to you that there were existing REITs active
in the moderate price and extended-stay hotel segment that had expressed an
interest in acquiring some of the hotels owned by the six limited partnerships.
The General Partner retained Merrill Lynch to advise the Partnerships with
respect to these alternatives.
You may also be aware that although the hotel industry is generally continuing
to report improving operating results, stock prices for the companies that own
hotels, including REITs, have declined significantly from the price levels
experienced in early 1998. There are a number of reasons given by the industry's
analysts for this development ranging from increased supply in certain segments
of the market to general economic concerns and global market trends influencing
the US securities markets. In addition, the availability of bank credit and
public debt has reduced dramatically in recent months. The effect of these
developments is that many of the traditional purchasers of hotels such as those
owned by the Partnership are restricted in their ability to raise capital to
purchase hotels. Although over the past months we have reviewed various
alternatives, to date, there have been no acceptable offers from third parties
to purchase the Partnership's hotels.
These same market conditions have adversely affected the proposed Consolidation
that would form a new REIT focused on limited service hotels. The original
Consolidation plan included an initial public offering of the REIT's common
shares. We have been advised that it would be difficult to raise the appropriate
level of outside equity and that the perceived benefits of the Consolidation are
not achievable. Therefore, we are not pursuing the plan to form a new REIT.
We are continuing to work with Merrill Lynch to explore alternatives designed to
maximize the long term value of your investment. We will promptly advise you of
any developments.
Cash Distributions
As previously reported, the Partnership's property improvement fund is
forecasted to be insufficient this year. An additional shortfall in 1999 is
currently being projected. The General Partner has begun discussions with the
Manager in order to resolve this shortfall. However, this shortfall combined
with increased competition in the markets where the Inns operate will impact the
Partnership's ability to make cash distributions to the Limited Partners. At
this time, we do not anticipate being able to make a cash distribution from 1998
operations.
Secondary Market Activity
We are aware of a number of third party solicitations for this Partnership's
limited partner units. Although we are not in a position to advise you as to
whether you should accept such offers, limited partners should be aware that the
Partnership Agreement contains certain restrictions on the assignment of
partnership interests. Among these restrictions is a prohibition on sales of
additional Partnership interests in any calendar year if such additional
transfers would result in the Partnership not being able to qualify for at least
one of the "safe harbors" which govern the circumstances under which a limited
partnership will cease to be treated as a partnership and will instead be
treated as a corporation for tax purposes. If Partnership sales activity for
1998 brings the Partnership to the safe harbor limit for 1998, the Partnership
would be unable to allow additional unit sales in 1998. You should check with
the General Partner before signing any sale document to determine if your
transfer can be accepted.
In addition to reviewing the information provided in this report, we encourage
you to consult with your financial and tax advisors when deciding if you should
sell your Partnership units. Due to the allocation of tax losses and income to
you over the life of the Partnership as well as any cash distributions paid to
you, your tax basis in this investment may be significantly lower than your
original investment amount. Therefore, there may be negative tax effects
resulting from the sale of these units that may impact your decision to sell.
Once you have begun the sale process we will do whatever is in our power to
facilitate the transfer of your units. Please note, the General Partner does not
charge a fee in connection with the transfer of Partnership units. If you wish
to effect a transfer, please contact our transfer agent, Trust Company of
America/Gemisys, at 1-800-797-6812 for the necessary documents.
Amounts Paid to the General Partner and Marriott International, Inc and
Affiliates
The chart below summarizes amounts paid (in thousands) to the General Partner
and Marriott International, Inc. and affiliates for the thirty-six weeks ended
September 11, 1998 (unaudited):
General Partner:
Administrative expenses reimbursed...................$ 209
Capital distribution................................. 35
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$ 244
Marriott International, Inc. and Affiliates:
Residence Inn system fee.............................$ 1,938
Chain services and Marriott Rewards Program.......... 1,417
Marketing fund contribution.......................... 1,211
Base management fee.................................. 1,018
Incentive management fee............................. 846
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$ 6,430
Estimated 1998 Tax Information
Based on current projections, estimated taxable income of $110 will be allocated
to each limited partner unit for the year ending December 31, 1998.
The 1998 tax information, used for preparing your Federal and state income tax
returns, will be mailed no later than March 15, 1999. To ensure confidentiality,
we regret that we are unable to furnish your tax information over the telephone.
Unless otherwise instructed, we will mail your tax information to your address
as it appears on this report. Therefore, to avoid delays in delivery of this
important information, please notify the Partnership in writing of any address
changes by January 31, 1999.