Exhibit 99.5
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Marriott Residence Inn II
Limited Partnership
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1999 Second Quarter Report
Limited Partner Quarterly Update
Presented for your review is the 1999 Second 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.
Strategy for Liquidity
As previously reported, the General Partner is utilizing the investment
banking firm of Merrill Lynch to explore alternatives to provide liquidity for
the Partnership and maximize the value of the limited partners' investment.
During the second quarter 1999, Partnership financial information was made
available to a number of prospective purchasers for their review and analysis.
The General Partner and Merrill Lynch are continuing to work with prospective
purchasers in an effort to negotiate a transaction that will provide liquidity
for the Partnership while securing the highest possible value for the limited
partner units.
We can make no assurances as to the outcome of our efforts. However, if a
suitable transaction develops we will advise you through special correspondence
and the quarterly updates.
Transfer and Sale of Limited Partnership Units
As you know, the Partnership Units are a non-traded security. In most
cases, the Partnership Agreement does allow limited partners to transfer
Partnership Units to related parties. In addition, you may, under certain
circumstances, sell your Partnership Units to a third party; however, the
General Partner must consent to such a sale. Please note there are certain tax
and legal limitations to transferring Partnership Units including significant
tax effects resulting from the sale of these Units that may impact your decision
to sell. In addition to consulting with your advisors, we recommend that limited
partners contact the General Partner about such limitations before entering into
any agreement to sell your Partnership Units.
If you do wish to request a transfer of your Partnership Units, please
contact our Transfer Agent at 800-797-6812. You will be supplied with the
necessary documents. Please note that the General Partner does not charge any
fee for effecting a transfer.
Inn Operations
The combined operations of the Partnership's 23 Inns improved in the second
quarter 1999. For a detailed discussion of Inn operations, please refer to Item
2 of the Form 10-Q.
Residence Inn by Marriott continues to be highly competitive and report
stable system-wide operating results when compared to the prior year due to
successful marketing efforts and a continued guest commitment. 1999 has been a
challenge as extended-stay hotel competitors continue to increase their presence
in the market. In response, during 1999 the Manager continues to heighten its
efforts to become the pre-eminent leader in this hospitality category, focusing
on customers that prefer quality residential suites. The Manager is continuing
to monitor the introduction and growth of new extended-stay brands including
Homewood Suites, Hawthorne Suites, Summerfield Suites, Staybridge by Holiday Inn
and Hilton Residential Suites. In addition, a renewed focus will be placed on
strengthening each Inn's sales efforts in order to solidify the existing
relationships shared with current clients and to establish new ones.
As an owner of twenty-three extended-stay properties, the Partnership must
also concentrate on the impact of increased competition on its goals to provide
liquidity and maximize the value of your investment. To ensure our Inns remain
competitive, there will be a continuing focus on the renovation and
refurbishment of the properties during 1999 and beyond.
As you are aware, the Partnership reserves a percentage of gross Inn
revenues for replacements and renewals to furniture, fixtures and equipment at
the Inns. Contributions to this property improvement fund reserve are currently
7% of gross Inn revenues. In prior years, capital expenditures have been managed
to remain within the amount covered by this fund. However, based upon
information provided by the Manager, there will be a shortfall in this funding
in excess of $15 million over the next five years.
According to the management agreement, certain capital expenditure projects
(e.g. projects related to roofs and facades) must be funded by the Partnership's
available cash and not by the property improvement fund. Therefore, the
Partnership will also be required to fund certain capital expenditure projects
from Partnership operating cash. These projects are expected to be more than $12
million during the same period. This is due primarily to the fact that these
properties are now 10 to 16 years old and more extensive renovations are
required to keep them competitive with new hotel properties.
The General Partner expects to be able to fund the current year property
improvement fund shortfall with a $1.6 million loan from the Partnership to the
property improvement fund. In addition, $1.8 million of owner funded renovations
will be funded from the remaining available cash generated from operations. A
total of $8.3 million will be reinvested in the properties in 1999.
While this will preclude distributions to the partners, in light of the
circumstances described above, we believe this strategy is the most judicious at
this time. However, we will continually review these circumstances and keep you
apprised should that approach change.
Amounts Paid to the General Partner and Marriott International, Inc.
The chart below summarizes amounts paid (in thousands) to the General
Partner and Marriott International, Inc. for the twenty-four weeks ended June
18, 1999 (unaudited):
Marriott International, Inc.:
Residence Inn system fee................................................$ 1,299
Chain services and Marriott Rewards Program............................. 944
Marketing fund contribution............................................. 812
Base management fee..................................................... 684
Incentive management fee................................................ 255
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$ 3,994
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General Partner:
Administrative expenses reimbursed......................................$ 56
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We appreciate your continued support and invite you to visit Residence Inns
as you travel throughout the United States.