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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. 033-20022
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 7, 2001 and December 31, 2000............................................... 1
Condensed Statements of Operations
Twelve and Thirty-Six Weeks Ended September 7, 2001 and September 8, 2000............. 2
Condensed Statements of Cash Flows
Thirty-Six Weeks Ended September 7, 2001 and September 8, 2000........................ 3
Notes to Condensed 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................................................... 8
Marriott Residence Inn Limited Partnership
Condensed Balance Sheets
(in thousands)
September 7, December 31,
2001 2000
------------ -----------
(unaudited)
ASSETS
Property and equipment, net...................................... $134,676 $137,497
Due from Residence Inn by Marriott, Inc.......................... 2,593 2,160
Deferred financing costs, net of accumulated amortization........ 508 835
Property improvement fund........................................ 3,836 2,889
Cash and cash equivalents........................................ 16,429 10,755
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$158,042 $154,136
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LIABILITIES AND PARTNERS' CAPITAL
LIABILITIES
Mortgage debt.................................................... $ 94,534 $ 98,213
Incentive management fees due to Residence Inn by Marriott, Inc.. 6,121 3,626
Accounts payable and accrued expenses............................ 498 277
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Total Liabilities............................................ 101,153 102,116
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PARTNERS' CAPITAL
General Partner.................................................. 644 597
Limited Partners................................................. 56,245 51,423
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Total Partners' Capital...................................... 56,889 52,020
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$158,042 $154,136
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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 7, September 8, September 7, September 8,
2001 2000 2001 2000
------------ ------------ ------------ ------------
REVENUES
Inn revenues
Suites........................................ $15,661 $17,022 $45,440 $46,786
Other......................................... 759 813 2,005 2,274
------- ------- ------- -------
Total Inn revenues........................... 16,420 17,835 47,445 49,060
------- ------- ------- -------
OPERATING COSTS AND EXPENSES
Inn property-level costs and expenses
Suites........................................ 3,267 3,530 9,728 10,135
Other department costs and expenses........... 349 249 1,111 1,105
Selling, administrative and other............. 3,681 4,246 11,290 11,862
------- ------- ------- -------
Total Inn property-level costs and expenses.. 7,297 8,025 22,129 23,102
Depreciation................................... 1,478 1,457 4,512 4,408
Incentive management fee....................... 1,256 1,397 3,396 3,583
Property taxes................................. 571 516 1,695 1,710
Residence Inn system fee....................... 626 680 1,817 1,871
Equipment rent and other....................... 481 358 1,556 1,023
Base management fee............................ 328 356 949 981
------- ------- ------- -------
Total operating costs and expenses........... 12,037 12,789 36,054 36,678
------- ------- ------- -------
OPERATING PROFIT................................ 4,383 5,046 11,391 12,382
Interest expense............................... (2,305) (2,430) (7,031) (7,428)
Interest income................................ 172 183 509 405
------- ------- ------- -------
NET INCOME...................................... $ 2,250 $ 2,799 $ 4,869 $ 5,359
======= ======= ======= =======
ALLOCATION OF NET INCOME
General Partner................................ $ 23 $ 28 49 54
Limited Partners............................... 2,227 2,771 4,820 5,305
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$ 2,250 $ 2,799 $ 4,869 $ 5,359
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NET INCOME PER LIMITED PARTNER UNIT
(65,600 Units)................................. $ 34 $ 42 $ 73 $ 81
======= ======= ======= =======
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 7, September 8,
2001 2000
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OPERATING ACTIVITIES
Net income....................................... $ 4,869 $ 5,359
Depreciation..................................... 4,512 4,408
Amortization of deferred financing costs......... 327 327
Deferred incentive management fees............... 2,495 2,215
Loss on dispositions of fixed assets............. 1 7
Changes in operating accounts.................... (212) (536)
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Cash provided by operating activities........ 11,992 11,780
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INVESTING ACTIVITIES
Additions to property and equipment.............. (1,692) (3,535)
Change in property improvement fund.............. (947) (484)
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Cash used in investing activities............ (2,639) (4,019)
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FINANCING ACTIVITIES
Repayment of mortgage debt....................... (3,679) (3,321)
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INCREASE IN CASH AND CASH EQUIVALENTS............. 5,674 4,440
CASH AND CASH EQUIVALENTS at beginning of period.. 10,755 6,025
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CASH AND CASH EQUIVALENTS at end of period........ $16,429 $10,465
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SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for mortgage interest.................. $ 6,518 $ 6,877
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See Notes to Condensed Financial Statements.
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Marriott Residence Inn Limited Partnership
Notes to Condensed Financial Statements
(Unaudited)
1. Organization
Marriott Residence Inn Limited Partnership (the "Partnership"), a Delaware
limited partnership, owns 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 and 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.
2. Summary of Significant Accounting Policies
The accompanying unaudited, condensed financial statements have been prepared by
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, 2000.
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 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 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 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):
2001 2000
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Marriott International, Inc.:
Residence Inn system fee..................... $1,817 $1,871
Incentive management fee..................... 900 1,369
Marketing fund contribution.................. 1,136 1,170
Base management fee.......................... 949 981
Chain services and Marriott Rewards Program.. 972 1,022
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$5,774 $6,413
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General Partner:
Administrative expenses reimbursed........... $ 55 $ 188
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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.
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 September 14, 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, the Partnership has begun
exclusive discussions with one potential acquirer. As part of these
discussions, we are working with the potential acquirer to determine, among
other things, the effect of the terrorist attacks of September 11, 2001 on the
Partnership's Inns and the transaction in general. Since the sale process is
still ongoing, 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 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
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industry 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 $1,415,000, or 8%, to $16.4 million and
decreased $1,615,000, or 3%, to $47.4 million, respectively, for the twelve week
and thirty-six week periods ended September 7, 2001 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 3% to
$84.95 due to a less than 1% increase in the combined average suite rate to
$102.99 offset by a 2.9 percentage point decrease in the combined average
occupancy to 82.5%. Through the third quarter of 2001, RevPAR decreased 3% to
$84.66 due to a $1, or 1%, increase in the combined average suite rate to
$102.77, offset by a 2.9 percentage point decrease in the combined average
occupancy to 82.4%.
Operating Costs and Expenses. Operating costs and expenses decreased $752,000,
or 6%, to $12.0 million and decreased $624,000, or 2%, to $36.1 million for the
twelve weeks and thirty-six weeks ended September 7, 2001, respectively, when
compared to the same periods in 2000, primarily due to decreases in Inn
property-level costs and expenses. As a percentage of total Inn revenues, total
operating costs and expenses were 73% and 72% for the third quarter of 2001 and
2000, respectively, and 76% and 75% of revenues through the third quarters of
2001 and 2000, respectively.
Inn property-level costs and expenses decreased $728,000, or 9%, to $7.3 million
and decreased $973,000, or 4%, to $22.1 million for the twelve and thirty-six
weeks ended September 7, 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 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 44% and 45%
for the third quarters of 2001 and 2000, respectively, and 47% year-to-date 2001
and 2000.
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
exceeds $23.5 million. The IMF was calculated as 20% of Operating Profit for
the thirty-six weeks ended September 7, 2001 and September 8, 2000, based upon
the expectations for full year Operating Profit. However, the estimated full
year IMF calculation was increased from 15% of operating profit for the first
quarter of 2000 to 20% of Operating Profit in the second quarter 2000, the
result was an adjustment of $257,000 to IMF during the second quarter of 2000.
Operating Profit. As a result of the changes in revenues and operating costs and
expenses discussed above, operating profit decreased $663,000 to $4.4 million,
or 27% of revenues, for the third quarter of 2001, versus $5.0 million, or 28%
of revenues, for the same period in 2000, and decreased $991,000 to $11.4
million, or 24% of revenues, for the first three quarters of 2001, versus $12.4
million, or 25% of revenues, for the same period in 2000.
Interest Expense. Interest expense decreased $125,000, or 5%, and $397,000, or
5%, for the third quarter and year-to-date 2001, respectively, primarily due to
principal amortization of the senior and second
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mortgages.
Net Income. As a result of the items discussed above, net income decreased
$549,000, or 20%, to $2.3 million, and decreased $490,000 or 9%, to $4.9 million
for the twelve and thirty-six weeks ended September 7, 2001, respectively. Net
income comprised approximately 14% and 16% of revenues for the third quarter of
2001 and 2000, and 10% and 11% of revenues for the first three quarters of 2001
and 2000, respectively.
LIQUIDITY AND CAPITAL RESOURCES
The Partnership's financing needs have been historically funded through loan
agreements with independent financial institutions. Our mortgage matures in
2002, and it is expected that the debt will be refinanced prior to maturity.
Beginning in 1998, the Partnership's property improvement fund was insufficient
to meet current needs. The shortfall is primarily due to the need for suite
refurbishments at a majority of the Inns as part of ongoing, routine capital
replacement. To reduce the shortfall, the contribution rate to the fund has
been set at 5.5% of gross Inn revenues since 1999. The contribution rate will
remain at 5.5% 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 $47 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 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 $12 million for the
first three quarters of 2001 and 2000.
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 $2.6 million and
$4.0 million for the first three quarters of 2001 and 2000, respectively.
Contributions to the property improvement fund were $2.6 and $1.2 million for
the first three quarters in 2001 and 2000, respectively, and we provided
additional cash of $1.2 million to the fund in the first quarter of 2000.
Capital expenditures during these same time periods were $1.7 million and $3.8
million, respectively.
The Partnership's cash used in financing activities consist of repayments of
mortgage debt of $3.7 million
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and $3.3 million for the first three quarters of 2001 and 2000, 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 7, 2001, all of the Partnership's debt has a fixed interest rate.
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
LIMITED PARTNERSHIP
By: RIBM ONE LLC
General Partner
October 22, 2001 By: /s/ Mathew Whelan
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Mathew Whelan
Vice President
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