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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 March 23, 2001 Commission File No. 033-24935
MARRIOTT RESIDENCE INN II LIMITED PARTNERSHIP
10400 Fernwood Road
Bethesda, MD 20817-1109
(301) 380-9000
Delaware 52-1605434
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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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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 II 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 Consolidated Balance Sheets
March 23, 2001 and December 31, 2000................................. 1
Condensed Consolidated Statements of Operations
Twelve Weeks Ended March 23, 2001 and March 24, 2000................. 2
Condensed Consolidated Statements of Cash Flows
Twelve Weeks Ended March 23, 2001 and March 24, 2000................. 3
Notes to Condensed Consolidated Financial Statements................... 4
Management's Discussion and Analysis of Financial
Condition and Results of Operations.................................. 5
Quantitative and Qualitative Disclosures about Market Risk............. 7
PART II - OTHER INFORMATION
Marriott Residence Inn II Limited Partnership
Condensed Consolidated Balance Sheets
(in thousands)
March 23, December 31,
2001 2000
--------------- ---------------
(Unaudited)
ASSETS
Property and equipment, net.......................................................... $ 132,236 $ 133,126
Due from Residence Inn by Marriott, Inc.............................................. 3,909 2,040
Deferred financing costs, net of accumulated amortization............................ 2,055 2,150
Property improvement fund............................................................ 4,551 3,998
Restricted cash reserves............................................................. 8,604 8,467
Cash and cash equivalents............................................................ 21,308 22,291
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$ 172,663 $ 172,072
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LIABILITIES AND PARTNERS' CAPITAL
LIABILITIES
Mortgage debt........................................................................ $ 133,650 $ 134,166
Incentive management fee due to Residence Inn by Marriott, Inc....................... 3,536 2,895
Accounts payable and accrued expenses................................................ 1,707 1,998
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Total Liabilities.............................................................. 138,893 139,059
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PARTNERS' CAPITAL
General Partner...................................................................... 416 408
Limited Partners..................................................................... 33,354 32,605
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Total Partners' Capital........................................................ 33,770 33,013
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$ 172,663 $ 172,072
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See Notes to Condensed Consolidated Financial Statements.
1
Marriott Residence Inn II Limited Partnership
Condensed Consolidated Statements of Operations
(Unaudited, in thousands, except Unit and per Unit amounts)
Twelve Weeks Ended
March 23, March 24,
2001 2000
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REVENUES
Inn revenues
Suites.................................................................................. $ 15,961 $ 15,703
Other................................................................................... 688 839
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Total Inn revenues..................................................................... 16,649 16,542
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OPERATING COSTS AND EXPENSES
Inn property-level costs and expenses
Suites.................................................................................. 4,057 3,947
Other department costs and expenses..................................................... 420 460
Selling, administrative and other....................................................... 4,930 4,438
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Total Inn property-level costs and expenses............................................ 9,407 8,845
Depreciation.............................................................................. 1,672 1,644
Incentive management fee.................................................................. 641 771
Residence Inn system fee.................................................................. 638 628
Property taxes............................................................................ 495 535
Equipment rent and other.................................................................. 225 215
Base management fee....................................................................... 333 331
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Total operating costs and expenses..................................................... 13,411 12,969
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OPERATING PROFIT............................................................................. 3,238 3,573
Interest expense.......................................................................... (2,795) (2,898)
Interest income........................................................................... 314 288
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NET INCOME................................................................................... $ 757 $ 963
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ALLOCATION OF NET INCOME
General Partner........................................................................... $ 8 $ 10
Limited Partners.......................................................................... 749 953
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$ 757 $ 963
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NET INCOME PER LIMITED
PARTNER UNIT (70,000 Units)............................................................... $ 11 $ 14
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See Notes to Condensed Consolidated Financial Statements.
2
Marriott Residence Inn II Limited Partnership
Condensed Consolidated Statements of Cash Flows
(Unaudited, in thousands)
Twelve Weeks Ended
March 23, March 24,
2001 2000
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OPERATING ACTIVITIES
Net income................................................................................ $ 757 $ 963
Depreciation.............................................................................. 1,672 1,644
Amortization of deferred financing costs.................................................. 95 95
Deferred incentive management fees........................................................ 641 699
Loss on dispositions of fixed assets...................................................... 2 2
Changes in operating accounts............................................................. (2,076) (1,726)
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Cash provided by operating activities............................................... 1,091 1,677
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INVESTING ACTIVITIES
Additions to property and equipment, net.................................................. (784) (1,476)
Change in property improvement fund....................................................... (553) (901)
Change in restricted cash reserves........................................................ -- (250)
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Cash used in investing activities................................................... (1,337) (2,627)
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FINANCING ACTIVITIES
Repayment of mortgage debt................................................................ (516) (443)
Change in restricted cash reserves........................................................ (221) (5)
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Cash used in financing activities................................................... (737) (448)
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DECREASE IN CASH AND CASH EQUIVALENTS........................................................ (983) (1,398)
CASH AND CASH EQUIVALENTS at beginning of period............................................. 22,291 19,039
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CASH AND CASH EQUIVALENTS at end of period................................................... $ 21,308 $ 17,641
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SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for mortgage interest........................................................... $ 2,965 $ 3,098
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See Notes to Condensed Consolidated Financial Statements.
3
Marriott Residence Inn II Limited Partnership
Notes to Condensed Consolidated Financial Statements
(Unaudited)
1. Organization
Marriott Residence Inn II Limited Partnership (the "Partnership"), a Delaware
limited 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 March 23, 2001. The Partnership commenced operations on December
28, 1988. The Inns are operated as part of the Residence Inn by Marriott system
and are managed by Residence Inn by Marriott, Inc. (the "Manager"), a wholly-
owned subsidiary of Marriott International, Inc.
2. Summary of Significant Accounting Policies
The accompanying unaudited condensed consolidated financial statements of the
Partnership have been prepared without audit. 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. The Partnership believes the disclosures made are adequate
to make the information presented not misleading. However, the unaudited
condensed consolidated financial statements should be read in conjunction with
the Partnership's consolidated financial statements and notes thereto included
in the Partnership's annual report on Form 10-K for the year ended December 31,
2000.
In the opinion of the Partnership, the accompanying unaudited condensed
consolidated financial statements reflect all adjustments necessary to present
fairly the financial position of the Partnership as of March 23, 2001, and the
results of its operations and cash flows for the twelve weeks ended March 23,
2001 and March 24, 2000. Interim results are not necessarily indicative of full
year performance because of the impact 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 Two 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
consolidated financial statements to conform to the current presentation.
3. Amounts Paid to the General Partner and Marriott International, Inc.
The chart below summarizes cash amounts paid to the General Partner and Marriott
International, Inc. for the twelve weeks ended March 23, 2001 and March 24, 2000
(in thousands):
Marriott International, Inc.:
2001 2000
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Residence Inn system fee............................... $ 638 $ 628
Chain services and Marriott Rewards Program............ 486 473
Marketing fund contribution............................ 399 392
Base management fee.................................... 333 331
Incentive management fee............................... -- 72
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$ 1,856 $ 1,896
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General Partner:
Administrative expenses reimbursed..................... $ -- $ 55
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4
RESIDENCE INN II 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.
GENERAL
Consistent with the terms of the Partnership agreement and the original
investment objectives contemplated at the formation of the Partnership, the
General Partner is currently attempting to sell the Inns or, in the alternative,
find a buyer for the partnership interests. In this regard, the General Partner
has recently engaged a financial advisor to solicit bids from interested
parties. There can be no assurance, however, that such a transaction will occur
or, if it were to occur, of the timing or value of any such transaction. If the
General Partner determines that any such bids would be in the best interest of
the Limited Partners, then the General Partner will attempt to effectuate such a
transaction. No such transaction is pending as of the date of this report.
RESULTS OF OPERATIONS
Revenues. Inn revenues increased $107,000, or .6%, to $16.6 million for the
first quarter of 2001, when compared to the same period in 2000. The slight
increase was achieved primarily through increases in room revenue per available
room, or 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. For the first quarter of 2001, REVPAR
increased 1.6% to $76.40 due to a $3.11, or 3.3%, increase in the combined
average suite rate to $97.50 offset by a one percentage point decrease in the
combined average occupancy to 78.4%.
Operating Costs and Expenses. Operating costs and expenses increased $442,000,
or 3.4%, to $13.4 million for the first quarter of 2001, when compared to the
same period in 2000, primarily due to increases in Inn property-level costs and
expenses, partially offset by a $130,000 reduction in incentive management fees.
As a percentage of total Inn revenues, total operating costs and expenses were
81% and 78% for the first quarters of 2001 and 2000, respectively.
Inn property-level costs and expenses increased $562,000, or 6.4%, to $9.4
million for the first quarter of 2001, when compared to the same period in 2000
primarily due to an increase in selling, administrative and other expenses,
including salaries and benefits, energy costs, repairs and maintenance costs,
and marketing and sales expense. As a percentage of Inn revenues, Inn
property-level costs and expenses represented 57% and 53% for the first quarter
of 2001 and 2000, respectively.
Operating Profit. As a result of the changes in revenues and operating costs and
expenses discussed above, operating profit decreased $335,000 to $3.2 million,
or 19% of revenues, for the first quarter of 2001, versus $3.6 million, or 22%
of revenues, for the same period in 2000.
Interest Expense. Interest expense decreased $103,000, or 4% for the first
quarter of 2001, when compared to the same period in 2000 as a result of
principal amortization of the Partnership's mortgage debt.
Net Income. As a result of the items discussed above, net income decreased
$206,000, or 21%, to $.8 million, or 5% of revenues for the first quarter of
2001 compared to net income of $1 million, or 6% of revenues, for the first
quarter of 2000.
5
RESIDENCE INN II LIMITED PARTNERSHIP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
Our 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 for total suite refurbishments at a majority of the
Inns as part of ongoing routine capital maintenance. To reduce the shortfall,
the Partnership increased the contribution rate to the fund beginning in 1999
from 6% in 1998 to 7% of gross Inn revenues. The Partnership also provided
additional cash of $1.6 million to the property improvement fund in the first
quarter 2000 to help address the shortfall. The contribution rate will
remain 7% for 2001.
In light of the increased competition in the extended-stay market described
above, the Manager has also 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 $59 million may be required
over the next five years for the routine renovations and all of the proposed
additional improvements. The General Partner is currently in discussions with
the Manager regarding alternate funding sources for the capital expenditure
needs. The Partnership may be required to fund a portion of these capital needs.
Once negotiations are completed, the General Partner will be in a better
position to project possible cash distributions to limited partners in the
future.
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.
Principal Sources and Uses of Cash
The Partnership's principal source of cash is 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 $1.1 million through the first quarter
of 2001 compared to $1.7 million for the same period in 2000. The $.6 million
decrease was primarily due to a $1.9 million increase in amounts due from the
Manager due to timing of receipts from the Manager, partially offset by an
increase in deferred incentive management fees.
Cash used in investing activities through the first quarters of 2001 and 2000
was $1.3 million and $2.6 million, respectively. The Partnership's cash
investing activities consist primarily of contributions to the property
improvement fund, capital expenditures for improvements to the Inns and
contributions to restricted cash reserves
6
RESIDENCE INN II LIMITED PARTNERSHIP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
required under the terms of the mortgage debt. Contributions to the property
improvement fund were $1.2 million and $2.4 million through the first quarter of
2001 and 2000, respectively, and we provided additional cash of $1.6 million to
the fund in the first quarter of 2000. Capital expenditures were $.8 million and
$1.5 million through the first quarter of 2001 and 2000, respectively.
Cash used in financing activities through the first quarters of 2001 and 2000
were $737,000 and $448,000, respectively, consisting primarily of repayments of
mortgage debt of $516,000 and $443,000, respectively, as well as increases in
the debt service reserves. There were no distributions to the partners during
the first quarters of 2001 or 2000.
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
March 23, 2001, the Partnership's mortgage debt has a fixed interest rate. As of
March 23, 2001 and March 24, 2000, the Partnership's mortgage debt totaled
$133.7 million and $134.2 million, respectively.
PART II. OTHER INFORMATION
ITEM 1. 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.
7
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: RIBM TWO LLC
General Partner
May 7, 2001 By: /s/ Mathew Whelan
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Mathew Whelan
Vice President