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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 7, 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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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
September 7, 2001 and December 31, 2000......................................................... 1
Condensed Consolidated Statements of Operations
Twelve and Thirty-Six Weeks Ended September 7, 2001 and September 8, 2000....................... 2
Condensed Consolidated Statements of Cash Flows
Thirty-Six Weeks Ended September 7, 2001 and September 8, 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....................................... 8
PART II - OTHER INFORMATION AND SIGNATURE.................................................................. 9
Marriott Residence Inn II Limited Partnership
Condensed Consolidated Balance Sheets
(in thousands)
September 7, December 31,
2001 2000
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(Unaudited)
ASSETS
Property and equipment, net................................................. $ 130,236 $ 133,126
Due from Residence Inn by Marriott, Inc..................................... 2,899 2,040
Deferred financing costs, net of accumulated amortization................... 1,865 2,150
Property improvement fund................................................... 6,016 3,998
Restricted cash reserves.................................................... 8,604 8,467
Cash and cash equivalents................................................... 25,337 22,291
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$ 174,957 $ 172,072
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LIABILITIES AND PARTNERS' CAPITAL
LIABILITIES
Mortgage debt............................................................... $ 132,863 $ 134,166
Incentive management fee due to Residence Inn by Marriott, Inc.............. 4,771 2,895
Accounts payable and accrued expenses....................................... 2,517 1,998
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Total Liabilities..................................................... 140,151 139,059
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PARTNERS' CAPITAL
General Partner............................................................. 426 408
Limited Partners............................................................ 34,380 32,605
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Total Partners' Capital............................................... 34,806 33,013
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$ 174,957 $ 172,072
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See Notes to Condensed Consolidated Financial Statements.
Marriott Residence Inn II Limited Partnership
Condensed Consolidated Statements of Operations
(Unaudited, in thousands, except Unit and per Unit amounts)
Twelve Weeks Ended Thirty-Six Weeks Ended
September 7, September 8, September 7, September 8,
2001 2000 2001 2000
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REVENUES
Inn revenues
Suites...................................... $ 15,071 $ 16,698 $ 46,500 $ 49,211
Other....................................... 692 764 2,097 2,400
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Total Inn revenues...................... 15,763 17,462 48,597 51,611
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OPERATING COSTS AND EXPENSES
Inn property-level costs and expenses
Suites...................................... 3,802 4,288 11,820 12,430
Other department costs and expenses......... 438 578 1,365 1,563
Selling, administrative and other........... 4,694 4,945 14,119 14,203
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Total Inn property-level costs
and expenses.......................... 8,934 9,811 27,304 28,196
Depreciation.................................. 1,594 1,598 4,978 4,906
Incentive management fee...................... 590 703 1,876 2,143
Residence Inn system fee...................... 603 669 1,860 1,969
Property taxes................................ 569 506 1,606 1,581
Equipment rent and other...................... 167 195 809 978
Base management fee........................... 315 349 972 1,032
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Total operating costs and expenses...... 12,772 13,831 39,405 40,805
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OPERATING PROFIT................................. 2,991 3,631 9,192 10,806
Interest expense.............................. (2,842) (2,881) (8,488) (8,668)
Interest income............................... 356 473 1,089 1,176
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NET INCOME....................................... $ 505 $ 1,223 $ 1,793 $ 3,314
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ALLOCATION OF NET INCOME
General Partner............................... $ 5 $ 12 $ 18 $ 33
Limited Partners.............................. 500 1,211 1,775 3,281
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$ 505 $ 1,223 $ 1,793 $ 3,314
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NET INCOME PER LIMITED
PARTNER UNIT (70,000 Units)................... $ 7 $ 17 $ 25 $ 46
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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)
Thirty-Six Weeks Ended
September 7, September 8,
2001 2000
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OPERATING ACTIVITIES
Net income................................................................... $ 1,793 $ 3,314
Depreciation................................................................. 4,978 4,906
Amortization of deferred financing costs..................................... 285 286
Deferred incentive management fees........................................... 1,876 2,143
Loss on dispositions of fixed assets......................................... 2 64
Changes in operating accounts................................................ (333) (276)
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Cash provided by operating activities.................................. 8,601 10,437
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INVESTING ACTIVITIES
Additions to property and equipment, net..................................... (2,090) (3,220)
Change in property improvement fund.......................................... (2,018) (2,746)
Change in restricted cash reserves........................................... 73 (250)
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Cash used in investing activities...................................... (4,035) (6,216)
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FINANCING ACTIVITIES
Repayment of mortgage debt................................................... (1,303) (1,160)
Change in restricted cash reserves........................................... (217) --
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Cash used in financing activities...................................... (1,520) (1,160)
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INCREASE IN CASH AND CASH EQUIVALENTS........................................... 3,046 3,061
CASH AND CASH EQUIVALENTS at beginning of period................................ 22,291 19,039
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CASH AND CASH EQUIVALENTS at end of period...................................... $ 25,337 $ 22,100
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SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for mortgage interest.............................................. $ 7,981 $ 8,124
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See Notes to Condensed Consolidated Financial Statements.
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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, owns 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. The Inns 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 September 7, 2001, the
results of its operations for the twelve and thirty-six weeks ended September 7,
2001 and September 8, 2000 and its cash flows for the thirty-six weeks ended
September 7, 2001 and September 8, 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 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 thirty-six weeks ended September 7, 2001 and
September 8, 2000 (unaudited, in thousands):
Marriott International, Inc.:
2001 2000
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Residence Inn system fee.......................................... $ 1,860 $ 1,969
Chain services and Marriott Rewards Program....................... 1,392 1,457
Marketing fund contribution....................................... 1,162 1,230
Base management fee............................................... 972 1,032
Incentive management fee.......................................... -- --
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$ 5,386 $ 5,688
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General Partner:
Administrative expenses reimbursed................................ $ 123 $ 160
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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. As stated in the Partnership's
letter to limited partners dated October 9, 2001, the General Partner engaged
Merrill Lynch & Co. ("Merrill Lynch") as its financial advisor in April 2001 to
solicit bids from interested parties. As part of that process, Merrill Lynch
prepared a list of over 20 parties who they believed might have an interest in
acquiring either the Partnership's Inns or the limited partner units and
contacted those parties. Several of the parties contacted requested additional
information, conducted preliminary due diligence of the Partnership and
submitted acquisition proposals to the Partnership.
As previously disclosed to the limited partners, as a result of this process the
Partnership had begun exclusive discussions with one potential acquirer.
Currently, these discussions have been suspended until both parties are better
able to determine the effect of the terrorist attacks of September 11, 2001 and
the current economic conditions on the Partnership's Inns. Although we continue
to be in contact with the potential acquirer, there can be no assurance that a
transaction will occur or, if it were to occur, of the timing or ultimate value
of any such transaction. In addition, if a transaction were to occur, it would
require approval of the limited partners as well as the consent of the
Partnership's lenders.
RECENT EVENTS
As a result of the September 11, 2001 terrorist attacks, which occurred
subsequent to the third quarter, occupancy levels have declined significantly
during the first four-weeks of the fourth quarter. However, we do not believe
that this four-week period will be representative of the remainder of the
quarter. We expect operations to recover somewhat, but remain significantly
below third quarter 2001 and fourth quarter 2000 levels. As a result, we have
been actively working with the Manager on a number of initiatives to reverse
this trend. The Manager has become more focused on marketing and advertising and
has targeted specific industry groups that are likely to benefit from the
changed economic environment such as the defense industry
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and government agencies. We have implemented a number of cost saving initiatives
to reflect the reduced volume at the properties, including consolidating or
reducing hours of operations and reducing labor costs. Many of these initiatives
had been in place at varying degrees prior to September 11/th/ due to the slower
economy and have subsequently been accelerated. We believe that while the near
term outlook for the Inns' operations will continue to be difficult, we
anticipate a gradual return to normal business levels.
RESULTS OF OPERATIONS
Revenues. Inn revenues decreased $1.7 million, or 10%, to $15.8 million and
decreased $3.0 million, or 6%, to $48.6 million for the third quarter of 2001
and through the third quarter of 2001, respectively, and are the result of the
continued overall weakness in the economy compared to the prior year. For the
third quarter of 2001, revenue per available room (REVPAR) decreased 10% to
$72.23 due to a 7 percentage point decrease in the combined average occupancy to
78.2%, and a $1.36, or 1%, decrease in the combined average suite rate to
$92.28. Through the third quarter of 2001, REVPAR decreased 5% to $74.23 due to
a 5.3 percentage point decrease in the combined average occupancy to 78%,
partially offset by a $0.92, or 1%, increase in the combined average suite rate
to $95.16.
Operating Costs and Expenses. Operating costs and expenses decreased $1.1
million, or 8%, to $12.8 million and $1.4 million, or 3%, to $39.4 million for
the third quarter of 2001 and through the third quarter of 2001, respectively,
when compared to the same periods in 2000, primarily due to decreases in Inn
property-level costs and expenses and decreases in fees due to the manager as
Inn revenues decrease. As a percentage of total Inn revenues, total operating
costs and expenses were 81% and 79% for the third quarters of 2001 and 2000,
respectively, and 81% and 79% of revenues through the third quarters of 2001 and
2000, respectively.
Inn property-level costs and expenses decreased $877,000, or 9%, to $9 million
and decreased $892,000, or 3%, to $27.3 million for the third quarter of 2001
and through the third quarter of 2001, respectively, when compared to the same
periods in 2000. The decrease is due to a decrease in rooms controllable
expenses corresponding to the decreasing occupancy and in general and
administrative expenses as a result of the Manager's cost-cutting efforts at the
Inns. As a percentage of Inn revenues, Inn property-level costs and expenses
represented 57% and 56% for the third quarters of 2001 and 2000, respectively,
and 56% and 55% of revenues through the third quarters 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 $640,000 to $3.0 million,
or 19% of revenues, versus $3.6 million, or 21% of revenues, for the same period
in 2000. Through the third quarter of 2001, operating profit decreased $1.6
million to $9.2 million, or 19% of revenues, for the third quarter of 2001,
versus $10.8 million, or 21% of revenues, for the same period in 2000.
Interest Expense. Interest expense decreased $39,000, or 1%, and $180,000, or
2%, for the third quarter of 2001 and through the third quarter of 2001,
respectively, when compared to the same periods 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
$718,000, or 59%, to $505,000, or 3% of revenues compared to net income of $1.2
million, or 7% of revenues, during the third quarter of 2000. Through the third
quarter of 2001, net income decreased $1.5 million, or 46%, to $1.8 million, or
4% of revenues through the third quarter of 2001 compared to net income of $3.3
million, or 6% of revenues, through the third quarter of 2000.
6
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 replacement. 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 contribution rate will remain
at 7% for 2001. Currently we are negotiating with the Manager a long-term plan,
discussed below, and until such time as this is completed we do not anticipate
any material routine capital maintenance expenses.
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, if any, 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 $8.6 million through the third quarter
of 2001 compared to $10.4 million for the same period in 2000. The $1.8 million
decrease was primarily due to decreased cash from operations at the Inns.
Cash used in investing activities through the second quarter of 2001 and 2000
was $4.0 million and $6.2 million, respectively. The Partnership's cash
investing activities consist primarily of contributions to the property
improvement fund and capital expenditures for improvements to the Inns.
Contributions to the property improvement fund were $3.3 million and $5.2
million through the third quarters 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 $2.1 million and $3.2 million through the third
quarters of 2001 and 2000, respectively.
Cash used in financing activities through the third quarters of 2001 and 2000
were $1.5 million and $1.2 million, respectively, which represented repayments
of mortgage debt. There were no distributions to the partners during the first
three quarters of 2001 or 2000.
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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 7, 2001, the Partnership's mortgage debt has a fixed interest rate.
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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.
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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
October 22, 2001 By: /s/ Mathew Whelan
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Mathew Whelan
Vice President
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