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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
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended September 8, 2000 Commission File No. 033-20022
MARRIOTT RESIDENCE INN LIMITED PARTNERSHIP
10400 Fernwood Road
Bethesda, MD 20817-1109
(301) 380-9000
Delaware 52-1558094
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(State of Organization) (I.R.S. Employer Identification Number)
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
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(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, and (2) has been subject to such filing requirements
for the past 90 days. Yes X No ____.
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Marriott Residence Inn Limited Partnership
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TABLE OF CONTENTS
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PAGE NO.
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PART I - FINANCIAL INFORMATION (Unaudited)
Condensed Balance Sheets
September 8, 2000 and December 31, 1999................................................. 1
Condensed Statements of Operations
Twelve and Thirty-Six Weeks Ended September 8, 2000 and
September 10, 1999...................................................................... 2
Condensed Statements of Cash Flows
Thirty-Six Weeks Ended September 8, 2000 and September 10, 1999......................... 3
Notes to Condensed Financial Statements.................................................... 4
Management's Discussion and Analysis of Financial
Condition and Results of Operations..................................................... 7
Quantitative and Qualitative Disclosures about Market Risk................................. 9
PART II - OTHER INFORMATION
Item 1. Legal Proceedings............................................................... 10
Marriott Residence Inn Limited Partnership
Condensed Balance Sheets
(IN THOUSANDS)
September 8, December 31,
2000 1999
-------------- --------------
(unaudited)
ASSETS
Property and equipment, net...................................................... $ 137,912 $ 138,792
Due from Residence Inn by Marriott, Inc.......................................... 2,684 1,984
Deferred financing costs, net of accumulated amortization........................ 980 1,307
Property improvement fund........................................................ 1,351 867
Cash and cash equivalents........................................................ 10,465 6,025
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$ 153,392 $ 148,975
========== =========
LIABILITIES AND PARTNERS' CAPITAL
LIABILITIES
Mortgage debt.................................................................... $ 99,961 $ 103,282
Incentive management fees due to Residence Inn by Marriott, Inc.................. 31,996 29,781
Accounts payable and accrued expenses............................................ 476 312
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Total Liabilities.......................................................... 132,433 133,375
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PARTNERS' CAPITAL
General Partner.................................................................. 287 233
Limited Partners................................................................. 20,672 15,367
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Total Partners' Capital.................................................... 20,959 15,600
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$ 153,392 $ 148,975
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See Notes to Condensed Financial Statements.
1
Marriott Residence Inn Limited Partnership
Condensed Statements of Operations
(Unaudited, in Thousands, except Unit and per Unit Amounts)
Twelve Weeks Ended Thirty-Six Weeks Ended
September 8, September 10, September 8, September 10,
2000 1999 2000 1999
-------------- -------------- --------------- --------------
REVENUES
Inn revenues
Suites......................................... $ 17,022 $ 16,086 $ 46,786 $ 45,273
Other.......................................... 813 765 2,274 2,169
---------- ---------- ---------- ----------
Total Inn revenues............................ 17,835 16,851 49,060 47,442
---------- ---------- ---------- ----------
OPERATING COSTS AND EXPENSES
Inn property-level costs and expenses
Suites......................................... 3,530 3,360 10,135 9,721
Other department costs and expenses............ 249 384 1,105 1,140
Selling, administrative and other.............. 4,246 3,742 11,862 11,216
---------- ---------- ---------- ----------
Total Inn property-level costs and expenses... 8,025 7,486 23,102 22,077
Depreciation..................................... 1,457 1,580 4,408 4,247
Incentive management fee......................... 1,397 456 3,583 2,678
Property taxes................................... 516 438 1,710 1,510
Residence Inn system fee......................... 680 644 1,871 1,811
Equipment rent and other......................... 358 238 1,023 590
Base management fee.............................. 356 337 981 949
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Total operating costs and expenses............ 12,789 11,179 36,678 33,862
---------- ---------- ---------- ----------
OPERATING PROFIT.................................... 5,046 5,672 12,382 13,580
Interest expense................................. (2,430) (2,581) (7,428) (7,935)
Interest income.................................. 183 68 405 152
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NET INCOME.......................................... $ 2,799 $ 3,159 $ 5,359 $ 5,797
========== ========== ========== ==========
ALLOCATION OF NET INCOME
General Partner.................................. $ 28 $ 32 $ 54 $ 58
Limited Partners................................. 2,771 3,127 5,305 5,739
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$ 2,799 $ 3,159 $ 5,359 $ 5,797
========== ========== ========== ==========
NET INCOME PER LIMITED
PARTNER UNIT (65,600 Units)...................... $ 42 $ 47 $ 81 $ 87
========== ========== ========== ==========
See Notes to Condensed Financial Statements.
2
Marriott Residence Inn Limited Partnership
Condensed Statements of Cash Flows
(Unaudited, in Thousands)
Thirty-Six Weeks Ended
September 8, September 10,
2000 1999
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OPERATING ACTIVITIES
Net income....................................................................... $ 5,359 $ 5,797
Depreciation..................................................................... 4,408 4,247
Amortization of deferred financing costs......................................... 327 327
Deferred incentive management fees............................................... 2,215 1,348
Loss on sale of fixed assets..................................................... 7 --
Changes in operating accounts.................................................... (536) (1,326)
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Cash provided by operating activities...................................... 11,780 10,393
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INVESTING ACTIVITIES
Additions to property and equipment.............................................. (3,535) (2,638)
Change in property improvement fund.............................................. (484) (2,471)
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Cash used in investing activities.......................................... (4,019) (5,109)
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FINANCING ACTIVITIES
Repayment of mortgage debt....................................................... (3,321) (3,238)
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INCREASE IN CASH AND CASH EQUIVALENTS............................................... 4,440 2,046
CASH AND CASH EQUIVALENTS at beginning of period.................................... 6,025 4,027
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CASH AND CASH EQUIVALENTS at end of period.......................................... $ 10,465 $ 6,073
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SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for mortgage interest.................................................. $ 6,877 $ 8,235
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See Notes to Condensed Financial Statements.
3
Marriott Residence Inn Limited Partnership
Notes to Condensed Financial Statements
(Unaudited)
1. Organization
Marriott Residence Inn Limited Partnership (the "Partnership"), a Delaware
limited partnership, was formed on March 29, 1988 to acquire, own and operate 15
Residence Inn by Marriott hotels (the "Inns") and the land on which the Inns are
located. The Inns are located in seven states in the United States: four in
Ohio, three in California, three in Georgia, two in Missouri and one in each of
Illinois, Colorado and Michigan, and as of December 31, 1999, have a total of
2,129 suites. The Inns are managed by Residence Inn by Marriott, Inc. (the
"Manager"), a wholly-owned subsidiary of Marriott International, Inc., as part
of the Residence Inn by Marriott hotel system.
2. Summary of Significant Accounting Policies
The accompanying unaudited, condensed financial statements have been prepared by
Marriott Residence Inn Limited Partnership (the "Partnership"). Certain
information and footnote disclosures normally included in financial statements
presented in accordance with accounting principles generally accepted in the
United States have been condensed or omitted from the accompanying statements.
The Partnership believes the disclosures made are adequate to make the
information presented not misleading. However, the unaudited, condensed
financial statements should be read in conjunction with the Partnership's
financial statements and notes thereto included in the Partnership's Form 10-K
for the year ended December 31, 1999.
In the opinion of the Partnership, the accompanying unaudited, condensed
financial statements reflect all adjustments necessary to present fairly the
financial position of the Partnership as of September 8, 2000, the results of
operations for the twelve and thirty-six weeks ended September 8, 2000 and
September 10, 1999 and the cash flows for the thirty-six weeks ended September
8, 2000 and September 10, 1999. Results are not necessarily indicative of full
year performance because of seasonal and short-term variations.
For financial reporting purposes, net income of the Partnership is allocated 99%
to the limited partners and 1% to RIBM One LLC (the "General Partner").
Significant differences exist between the net income for financial reporting
purposes and the net income for Federal income tax purposes. These differences
are due primarily to the use, for Federal income tax purposes, of accelerated
depreciation methods and shorter depreciable lives of the assets and differences
in the timing of the recognition of incentive management fee expense.
Certain reclassifications were made to the prior year unaudited, condensed
financial statements to conform to the 2000 presentation.
3. Amounts Paid to the General Partner and Marriott International, Inc.
The chart below summarizes amounts paid to the General Partner and Marriott
International, Inc. for the thirty-six weeks ended September 8, 2000 and
September 10, 1999 (in thousands):
2000 1999
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Marriott International, Inc.:
Residence Inn system fee......................................................... $ 1,871 $ 1,811
Incentive management fee......................................................... 1,369 1,330
Marketing fund contribution...................................................... 1,170 1,129
Base management fee.............................................................. 981 949
Chain services and Marriott Rewards Program...................................... 1,022 874
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$ 6,413 $ 6,093
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General Partner:
Administrative expenses reimbursed............................................. $ 188 $ 70
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4
Marriott Residence Inn Limited Partnership
Notes to Condensed Financial Statements
(Unaudited)
4. Contingencies
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.
Texas Multi-Partnership Lawsuit. On March 16, 1998, limited partners in several
limited partnerships sponsored by Host REIT or its subsidiaries filed a lawsuit,
Robert M. Haas, Sr. and Irwin Randolph Joint Tenants, et al. v. Marriott
International, Inc., et al., Case No. 98-CI-04092, in the 57th Judicial District
Court of Bexar County Texas, alleging that the defendants conspired to sell
hotels to the partnerships for inflated prices and that they charged the
partnerships excessive management fees to operate the partnerships' hotels. A
Marriott International subsidiary manages each of the hotels involved and, as to
some properties, Marriott International, or one of its subsidiaries, is the
ground lessor and collects rent. Host REIT, Marriott International, several of
their subsidiaries, and J.W. Marriott, Jr. are among the various named
defendants. The Haas lawsuit originally involved the following partnerships:
1.) Courtyard by Marriott Limited Partnership ("CBM I");
2.) Courtyard by Marriott II Limited Partnership ("CBM II");
3.) Marriott Residence Inn Limited Partnership ("Res I");
4.) Marriott Residence Inn II Limited Partnership ("Res II");
5.) Fairfield Inn by Marriott Limited Partnership ("Fairfield");
6.) Desert Springs Marriott Limited Partnership ("Desert Springs"); and
7.) Atlanta Marriott Marquis Limited Partnership ("AMMLP").
Host Marriott has settled the claims of the AMMLP unitholders as part of a
settlement of a separate class action suit, pursuant to which settlement Host
Marriott paid $4.25 million in return for a release of all claims. This
settlement, which has been finalized, is not contingent on any portion of the
Partnership Litigation Settlement, discussed more fully below. InPursuant to the
terms of the Partnership Litigation Settlement, CBM I and CBM II addition, we
consummated settlements with the unitholders of Res I, Res II, Fairfield and
Desert Springs, under the umbrella of the Partnership Litigation Settlement.
Pursuant to the terms of the Partnership Litigation Settlement, CBM I and CBM II
are currently subject to the tender offers which have been approved by the
necessary percentages of the partnerships' limited partners and the court in
their respective fairness hearings and are discussed in public filings by these
partnerships. The settlements also remain subject to receiving third party
consents which have not been obtained as of this filing. The completion of these
tender offers will release Host Marriott and the other defendants from all
claims by CBM I and CBM II unitholders who have not opted out of these
settlements. The holders of fewer than three units have elected such treatment.
Partnership Litigation Settlement. On March 9, 2000, Host Marriott and Marriott
International entered into a settlement agreement that will resolve the Texas
Multi-Partnership, the CBM II and the CBM I litigation. Under this settlement,
Host Marriott and Marriott International have settled with the Res I, Res II,
Fairfield and Desert Springs Plaintiffs for an aggregate payment of
approximately $62 million (of which Host Marriott and our subsidiaries have paid
approximately $31 million) in return for a general release of all claims. The
Res I, Res II, Fairfield and Desert Springs settlements were severed from the
CBM I and CBM II settlements by a court order dated September 25, 2000. This
settlement is subject to a thirty day appeal period beginning September 28,
2000, during which time any class members can appeal the settlement.
5
Marriott Residence Inn Limited Partnership
Notes to Condensed Financial Statements
(Unaudited)
As a result of the proposed settlement of the above discussed litigation, each
limited partner who did not opt out of the settlement will receive per limited
partner unit approximately $229. As of October 20, 2000, no partner has opted
out of the settlement. The amount will be further adjusted for plaintiffs
counsel's legal fees and expenses which will result in each limited partner unit
receiving a net distribution of approximately $151. In addition to the cash
payments, the Manager waived $29,781,000 of deferred management fees. Except for
the waiver of the deferred management fees, the settlement does not disturb the
terms of the long-term management agreements.
The details of the settlement are contained in a court-approved notice which was
mailed to the Partnership's limited partners during the week of June 19th, and
the discussion of the settlement herein is qualified in its entirety by the
terms of the actual court-approved notice sent to the Partnership's limited
partners.
6
MARRIOTT RESIDENCE INN LIMITED PARTNERSHIP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS
Certain matters discussed herein are forward-looking statements. We have based
these forward-looking statements on our current expectations and projections
about future events. Certain, but not necessarily all, of such forward-looking
statements can be identified by the use of forward-looking terminology, such as
"believes," "expects," "may," "will," "should," "estimates," or "anticipates,"
or the negative thereof or other variations thereof or comparable terminology.
All forward-looking statements involve known and unknown risks, uncertainties
and other factors which may cause our actual transactions, results, performance
or achievements to be materially different from any future transactions,
results, performance or achievements expressed or implied by such forward-
looking statements. Although we believe the expectations reflected in such
forward-looking statements are based upon reasonable assumptions, we can give no
assurance that our expectations will be attained or that any deviations will not
be material. We disclaim any obligations or undertaking to publicly release any
updates or revisions to any forward-looking statement contained in this
quarterly report on Form 10-Q to reflect any change in our expectations with
regard thereto or any change in events, conditions or circumstances on which any
such statement is based.
RESULTS OF OPERATIONS
Revenues. Partnership revenues increased $984,000 to $17.8 million and
$1.6 million to $49.0 million for the twelve and thirty-six weeks ended
September 8, 2000, respectively, when compared to the same periods in 1999.
These increases were achieved primarily through increases in Inn revenue per
available room ("REVPAR"). REVPAR measures daily room revenues generated on a
per room basis and represents the combination of the average daily suite rate
charged and the average daily occupancy achieved. Year-to-date REVPAR for the 15
Inns combined increased 4% over the same period in 1999 primarily due to an
increase in the combined average suite rate from $99 in 1999 to $102 in 2000.
Third quarter REVPAR increased 5.8% primarily because of a $4 increase in the
combined average suite rate from $103 to $107 and an increase in the combined
average occupancy of two percentage points to 89%.
Operating Costs and Expenses. Third quarter and year-to-date operating costs and
expenses increased $1.6 million to $12.8 million and $2.8 million to $36.7
million, respectively. This was primarily due to increases in Inn property-level
costs and expenses, incentive management fees, and equipment rent and other
expenses. As a percentage of Inn revenues, operating costs and expenses were 72%
and 75% of revenues for the third quarter and year to date 2000, respectively,
compared to 66% and 71% for the same periods in 1999, respectively.
Inn property-level costs and expenses increased $539,000 and $1.0 million for
the quarter and year-to-date, respectively, primarily due to an increase in
salary and benefits costs in order to maintain competitive wage scales, and an
increase in marketing and sales costs as a result of more aggressive sales
efforts at the Inns.
Equipment rent and other expenses increased over the prior year primarily due to
a $130,000 non-recurring gain on the retirement of fixed assets recognized
during the second quarter of 1999, and an increase in selling, general and
administrative expenses of $504,000 and $646,000 for the quarter and year-to-
date, respectively, due primarily to higher printing and mailing fees incurred
in connection with mailing the court approved notices discussed in Note 4 to the
condensed financial statements.
The incentive management fee ("IMF") earned by Residence Inn by Marriott, Inc.
(the "Manager") is calculated as 15% of Operating Profit, as defined in the
Management Agreement, in any year in which Operating Profit is less than $23.5
million and as 20% of Operating Profit whenever Operating Profit equals or
7
MARRIOTT RESIDENCE INN LIMITED PARTNERSHIP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
exceeds $23.5 million. During interim reporting periods, the percentage used to
calculate IMF is 15% or 20%, and is determined based on whether or not full year
Operating Profit is expected to fall short of, or exceed, $23.5 million. In the
first two quarters of 2000, the IMF was calculated as 15% of Operating Profit
based upon the expectation at June 16, 2000 that full year operating profit
would not exceed $23.5 million. However, as of September 8, 2000, the
expectation is that full year 2000 Operating Profit will exceed the $23.5
million threshold. Thus, during the third quarter of 2000, we adjusted IMF
expense to $3.6 million based on 20% of Operating Profit. IMF was calculated as
15% of Operating Profit for the third quarter and year-to-date 1999.
Operating Profit. As a result of the changes in revenues and operating costs and
expenses discussed above, operating profit decreased $1.2 million to $12.4
million, or 25% of revenues, for the thirty-six weeks ended September 8, 2000
from $13.6 million, or 29% of revenues, for the same period in 1999. Operating
profit for the twelve weeks ended September 8, 2000 decreased $626,000 to $5.0
million, or 28% of revenues, from $5.7 million, or 34% of revenues for the same
period in 1999.
Interest Expense. Interest expense decreased $151,000 and $507,000 for the
twelve and thirty-six weeks ended September 8, 2000, respectively, when compared
to the same periods in 1999 due to principal amortization of the Senior and
Second Mortgages.
Net Income. As a result of the items discussed above, net income for the twelve
and thirty-six weeks ended September 8, 2000 decreased $360,000 to $2.8 million,
and $438,000 to $5.4 million, when compared to the same periods in 1999. Net
income for the twelve and thirty-six weeks ended September 8, 2000 was 16% and
11% of revenues, respectively, compared to 19% and 12% of revenues, respectively
for the comparable periods in 1999.
LIQUIDITY AND CAPITAL RESOURCES
The Partnership's financing needs have been historically funded through loan
agreements with independent financial institutions. Beginning in 1998, the
Partnership's property improvement fund was insufficient to meet current needs.
The shortfall is primarily due to the need to complete renovations and total
suite refurbishments at a majority of the Partnership's Inns. To reduce the
shortfall, the Partnership provided $1.2 million and $1.5 million loans to
the fund in first quarter 2000 and first quarter 1999, respectively.
A portion of the renovations mentioned above is part of the routine capital
expenditure cycle for maintaining Inns that are 12 to 15 years old. However, in
light of the increased competition in the extended-stay market, the Manager has
proposed additional improvements that are intended to enhance the overall value
and competitiveness of the Inns. These proposed improvements include design,
structural and technological improvements to modernize and enhance the
functionality and appeal of the Inns. Based upon information provided by the
Manager, approximately $45 million to $55 million may be required over the next
five years for the routine renovations and all of the proposed additional
improvements.
The General Partner believes that cash from Inn operations and Partnership
reserves will be sufficient to make the required debt service payments and to
fund a portion of the capital expenditures at the Inns. The General Partner is
reviewing the Manager's proposed Inn renovations and improvements to identify
those projects that have the greatest value to the Partnership.
8
MARRIOTT RESIDENCE INN LIMITED PARTNERSHIP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Principal Sources and Uses of Cash
The Partnership's principal source of cash is cash from operations. Its
principal uses of cash are to make debt service payments and fund the property
improvement fund. Cash provided by operating activities was $11.8 million for
the first three quarters 2000 compared to $10.4 million for the first three
quarters 1999. This $1.4 million increase was primarily due to a decrease in
interest payments on the Partnership's mortgage debt and the increase in the
deferred incentive management fee, slightly offset by a decrease in net income.
The Partnership's cash used in investing activities primarily consists of
contributions to the property improvement fund and capital expenditures for
improvements to the Inns. Cash used in investing activities was $4.0 million and
$5.1 million year-to-date in 2000 and 1999, respectively. Contributions to the
property improvement fund, including the $1.2 million and $1.5 million loans
made in the first quarter of 2000 and 1999, respectively, were $4.0 million and
$4.2 million for the year-to-date period in 2000 and 1999, respectively. Capital
expenditures during these same time periods were $3.8 million and $2.7 million,
respectively.
The Partnership's cash used in financing activities consists of the repayment of
mortgage debt of $3.3 million and $3.2 million for the first three quarters of
2000 and 1999, respectively.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Partnership does not have significant market risk with respect to interest
rates, foreign currency exchanges or other market rate or price risks, and the
Partnership does not hold any financial instruments for trading purposes. As of
September 8, 2000, all of the Partnership's debt has a fixed interest rate. As
of September 8, 2000 and December 31, 1999, the Partnership's mortgage debt
totaled $100.0 million and $103.3 million, respectively.
9
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Incorporated by reference to the description of legal proceedings in footnote
four to the condensed financial statements set forth in Part I, "Financial
Information."
10
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
LIMITED PARTNERSHIP
By: RIBM ONE LLC
General Partner
October 23, 2000 By: /s/ Mathew Whelan
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Mathew Whelan
Vice President
11