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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 22, 2002 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
March 22, 2002 and December 31, 2001 ............................................ 1
Condensed Consolidated Statements of Operations
Twelve Weeks Ended March 22, 2002 and March 23, 2001 ............................ 2
Condensed Consolidated Statements of Cash Flows
Twelve Weeks Ended March 22, 2002 and March 23, 2001 ............................ 3
Notes to Condensed Consolidated Financial Statements .............................. 4
Management's Discussion and Analysis of Financial
Condition and Results of Operations ............................................. 6
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)
March 22, December 31,
2002 2001
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(Unaudited)
ASSETS
Property and equipment, net ................................................ $ 130,952 $ 132,137
Due from Residence Inn by Marriott, Inc. ................................... 4,302 3,005
Deferred financing costs, net of accumulated amortization .................. 1,643 1,738
Property improvement fund .................................................. 4,653 3,923
Restricted cash reserves. .................................................. 7,020 7,762
Cash and cash equivalents .................................................. 24,849 25,149
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$ 173,419 $ 173,714
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LIABILITIES AND PARTNERS' CAPITAL
LIABILITIES
Mortgage debt .............................................................. $ 131,638 $ 132,198
Incentive management fee due to Residence Inn by Marriott, Inc. ............ 6,019 5,440
Accounts payable and accrued expenses ...................................... 1,615 2,037
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Total Liabilities .................................................... 139,272 139,675
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PARTNERS' CAPITAL
General partner ............................................................ 419 418
Limited Partners. .......................................................... 33,728 33,621
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Total Partners' Capital .............................................. 34,147 34,039
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$ 173,419 $ 173,714
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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 22, March 23,
2002 2001
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REVENUES
Suites ...................................................................... $ 14,022 $ 15,961
Other. ...................................................................... 574 688
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Total revenues......................................................... 14,596 16,649
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OPERATING COSTS AND EXPENSES
Suites ...................................................................... 3,429 4,057
Department costs and expenses ............................................... 446 420
Selling, administrative and other ........................................... 4,206 4,930
Depreciation ................................................................ 1,668 1,672
Incentive management fee .................................................... 579 641
Residence Inn system fee .................................................... 561 638
Property taxes .............................................................. 535 495
Equipment rent and other .................................................... 179 225
Base management fee ......................................................... 292 333
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OPERATING PROFIT ............................................................... 2,701 3,238
Interest expense ............................................................ (2,723) (2,795)
Interest income ............................................................. 130 314
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NET INCOME ..................................................................... $ 108 $ 757
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ALLOCATION OF NET INCOME
General partner ............................................................. $ 1 $ 8
Limited Partners ............................................................ 107 749
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$ 108 $ 757
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NET INCOME PER LIMITED PARTNER UNIT (70,000 Units) ............................. $ 2 $ 11
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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 22, March 23,
2002 2001
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OPERATING ACTIVITIES
Net income .................................................................. $ 108 $ 757
Depreciation ................................................................ 1,668 1,672
Amortization of deferred financing costs .................................... 95 95
Deferred incentive management fees .......................................... 579 641
Loss on dispositions of fixed assets ........................................ -- 2
Change in real estate tax and insurance reserves ............................ 213 84
Changes in operating accounts................................................ (1,719) (2,160)
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Cash provided by operating activities.................................. 944 1,091
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INVESTING ACTIVITIES
Additions to property and equipment, net .................................... (483) (784)
Change in property improvement fund.......................................... (730) (553)
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Cash used in investing activities. .................................... (1,213) (1,337)
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FINANCING ACTIVITIES
Repayment of mortgage debt .................................................. (560) (516)
Change in debt service reserves ............................................. 529 (221)
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Cash used in financing activities...................................... (31) (737)
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DECREASE IN CASH AND CASH EQUIVALENTS .......................................... (300) (983)
CASH AND CASH EQUIVALENTS at beginning of period................................ 25,149 22,291
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CASH AND CASH EQUIVALENTS at end of period...................................... $ 24,849 $ 21,308
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SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for mortgage interest.............................................. $ 2,922 $ 2,965
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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, 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. See Note 4 Subsequent
Events for a discussion of a proposed merger with Apple Hospitality Two, 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,
2001.
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 22, 2002, and the
results of its operations and cash flows for the twelve weeks ended March 22,
2002 and March 23, 2001. 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 twelve weeks ended March 22, 2002 and March 23, 2001
(unaudited, in thousands):
Marriott International, Inc.:
2002 2001
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Residence Inn system fee........................................ $ 561 $ 638
Chain services and Marriott Rewards Program .................... 380 486
Marketing fund contribution .................................... 351 399
Base management fee ............................................ 292 333
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$ 1,584 $ 1,856
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General partner:
Administrative expenses reimbursed. ............................ $ 80 $ --
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4. Subsequent Events
As disclosed in a letter to the limited partners on April 30, 2002, on that day
the partnership entered into a definitive merger agreement with Apple
Hospitality Two, Inc. ("Apple") and AHT Res II Acquisition L.P., a wholly owned
indirect subsidiary of Apple, pursuant to which Apple will acquire all of the
outstanding partnership interests in the partnership and will assume
approximately $131 million of the Partnership's indebtedness and the
Partnership's obligation to fund the $9.7 million capital expenditure plan for
the current fiscal year.
The aggregate purchase price for all of the outstanding units and the one
percent general partner interest of the partnership is $29,250,000. If the
merger is completed, the limited partners will receive $415 in cash for each
unit of limited partnership interest owned immediately prior to the closing of
the merger. In addition, the limited partners will receive a beneficial interest
in a liquidating trust to be created by the partnership to hold several
contingent assets of the partnership and to facilitate certain cash flow
adjustments and other transactions to be made by the parties after the closing
of the merger. Prior to the closing of the merger, the Partnership will
contribute $300,000 of Partnership cash ($4.28 per unit) and assign certain
contingent assets to this trust, which will be managed without profit by the
general partner. Approximately two years after the completion of the merger, the
trust will be liquidated and its remaining assets distributed to the Limited
Partners. The general partner will receive $200,000 in cash for its 1% general
partner interest, which will be retained by Apple for a period of time after
completion of the merger to satisfy certain indemnification obligations that the
general partner agreed to fund under the merger agreement.
Consumation of the merger is subject to certain conditions, including approval
of the merger by the limited partners holding a majority of the issued and
outstanding units, consent of the partnership's lender and consent of the
manager of the Inns. In connection with the proposed merger, the partnership
will file a consent solicitation statement with the Securities and Exchange
Commission. The partnership will mail a copy of the consent solicitation to each
limited partner who is listed on the on the records of the partnerships on the
record date. The partnership expects to mail the consent solicitation during the
second quarter. If the merger is approved, it is expected to occur during the
third quarter of 2002.
5. Insurance
Due to the changes in the insurance markets arising prior to September 11, 2001
and the effects of the terrorist attacks on September 11, 2001, it has become
more difficult and more expensive to obtain insurance. The partnership's
property insurance policy reached the end of its term on April 1, 2002 and the
carrier has notified the partnership that it does not intend to renew the
existing policy when it expires at the end of the extension period on May 7,
2002. For the period from April 1, 2002 to May 7, 2002 a carrier that is rated
A+ by A.M. Best provides the partnership's insurance. This carrier is not rated
by Standard & Poors as required by the mortgage debt and the partnership has
notified the lender accordingly. The Manager is in the process of renewing the
partnership's property insurance coverage and intends as part of that process to
attempt to obtain coverage from a carrier or carriers that are appropriately
rated by S&P. If the partnership is unable to obtain insurance that complies
with the debt covenants or if the partnership is unable to amend the loan
documents it could have a material adverse effect on the partnership's business.
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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
Sale of Partnership
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
conduct a broad marketing process in an effort to maximize value for the limited
partners. As disclosed in a letter to the limited partners on April 30, 2002, on
that day the partnership entered into a definitive merger agreement with Apple,
pursuant to which Apple and AHT Res II Acquisition, L.P. a wholly owned indirect
subsidiary of Apple, will acquire all of the outstanding partnership interests
in the partnership and will assume approximately $131 million of the
partnership's indebtedness and the partnership's obligation to fund the $9.7
million capital expenditure plan for the current fiscal year.
The aggregate purchase price for all of the outstanding units and the one
percent general partner interest of the partnership is $29,250,000. If the
merger is completed, the limited partners will receive $415 in cash for each
unit of limited partnership interest owned immediately prior to the closing of
the merger. In addition, the limited partners will receive a beneficial interest
in a liquidating trust to be created by the partnership to hold several
contingent assets of the partnership and to facilitate certain cash flow
adjustments and other transactions to be made by the parties after the closing
of the merger. Prior to the closing of the merger, the partnership will
contribute $300,000 of partnership cash ($4.28 per unit) and assign certain
contingent assets to this trust, which will be managed without profit by the
General Partner. Approximately two years after the completion of the merger, the
trust will be liquidated and its remaining assets distributed to the limited
partners. The general partner will receive $200,000 in cash for its 1% general
partner interest, which will be retained by Apple for a period of time after
completion of the merger to satisfy certain indemnification obligations that the
general partner agreed to fund under the merger agreement although it had no
obligation to do so.
Consumation of the merger is subject to certain conditions, including approval
of the merger by the limited partners holding a majority of the issued and
outstanding units, consent of the partnership's lender and consent of the
manager of the Inns. In connection with the proposed merger, the partnership
will file a
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consent solicitation statement with the Securities and Exchange Commission. The
partnership will mail a copy of the consent solicitation to each limited partner
who is listed on the on the records of the partnerships on the record date. The
partnership expects to mail the consent solicitation during the second quarter.
If the merger is approved, it is expected to occur during the third quarter of
2002.
If the conditions necessary for the merger to occur are not satisfied, the
partnership will continue to pursue selling the Inns or, in the alternative,
finding a buyer for the partnership interests, consistent with the terms of the
partnership agreement and the original investment objectives contemplated at the
formation of the partnership.
CHANGES TO MANAGEMENT AGREEMENT
The general partner and the Manager have been negotiating certain changes to the
management agreement.
In addition, Apple has entered into discussions with the Manager regarding
certain changes to the management agreement. If the merger closes, it is
anticipated that the changes to the management agreement negotiated between the
general partner and the manager would be entered into at the same time as the
changes agreed to by Apple and the manager.
If the merger is not completed, we expect to complete our negotiations of the
changes to the management agreement discussed below. Therefore, if the limited
partners do not approve the merger agreement, they will continue to own a
limited partner interest in the partnership and receive, if the negotiations are
successful, the benefits, if any, of such proposed changes. There can be no
assurance that such changes will be made or that such changes will be made in
substantially the form described below. The partnership and the Manager will
execute mutual general releases in connection with the merger or, if the merger
is not completed, upon implementation of the changes to the management agreement
agreed to by the general partner and the Manager.
As currently contemplated, the general partner and the manager propose to revise
the management agreement as follows:
. FF&E Reserve - The partnership would be given the right to approve the
annual budget for furniture, fixtures and equipment expenditures under
the management agreement with respect to each expenditure of $10,000
or more. Expenditures of less than $10,000 would be budgeted and
approved in the aggregate by Inn.
. Adjustments to First Priority Return - The First Priority Return
payable to the partnership under the management agreement would be
increased by $75,000. In addition. Additional Inn Investments (as that
term is defined in the management agreement) made after the date of
the amendment would be included in the calculation of the
partnership's First Priority Return rather than in the calculation of
the partnership's Second Priority Return (as those terms are defined
in the management agreement).
. Design Specifications - With regard to capital-expenditure programs
proposed by the manager, the partnership would have the right to
select in its reasonable discretion a prototype design package for
such programs out of applicable prototype design packages then
available within the Residence Inn system. The partnership and the
Manager would mutually agree on any custom design packages not
contemplated by then-current brand design standards and prototype
design packages.
. Chain Services and Marketing Fund - Commencing in fiscal year 2002,
required contributions by the partnership to the marketing fund
maintained by the manager would not be increased without the prior
approval of a majority of the members of The Residence Inn
Association, an association of Residence Inn owners and franchisees.
. Renewal - The Manager would be required, if it wishes to renew the
management agreement, to renew the management agreement with respect
to at least 80% of the partnership's Inns which either meet the
then-current brand standards or are in compliance with a specified
ten-year property-improvement program currently required by the
manager.
. Performance Termination - Commencing in 2004, the partnership's
ability to terminate the management agreement due to inadequate
performance would be based on the Inns' performance over the previous
two years rather than the previous three years, coupled with a new
test comparing the Inns' aggregate "revenues per available room"
("RevPar") with the RevPar of hotels in their competitive sets. Any
cure payments made by the manager to avoid a performance termination
would not be recoverable in later years.
. Accounting - The manager would be required to provide the partnership
with annual operating projections on both a consolidated and a per-inn
basis. The manager would also be required to meet with representatives
of the partnership and consider in good faith the suggestions of such
representatives regarding the partnership's annual operating
projections.
RESULTS OF OPERATIONS
Revenues. Revenues decreased $2.1 million, or 12%, to $14.6 million for the
first quarter of 2002 when compared to the same period in 2001. The decrease is
a result of the continued demand weakness in the lodging industry. For the first
quarter of 2002, revenue per available room, or RevPAR, decreased 11.8% to
$67.35 due to a 2.3 percentage point decrease in the combined average occupancy
to 76.1% combined with a 9.2% decrease in the combined average suite rate to
$88.55. RevPAR represents the combination of average suite rate charged and the
average occupancy achieved, and is a commonly used indicator of hotel
performance. RevPAR does not include other ancillary revenues generated by the
Inns.
Operating Costs and Expenses. Operating costs and expenses decreased $1.5
million, or 11%, to $11.9 million for the first quarter of 2002, when compared
to the same period in 2001. The decrease was primarily due to decreases in Inn
property-level costs and expenses discussed below as well as decreases in fees
due to the Manager, which are affected by changes in Inn revenues. As a
percentage of total Inn revenues, operating costs and expenses were 82% and 81%
for the first quarters of 2002 and 2001, respectively.
Inn property-level costs and expenses decreased $1.3 million, or 14%, to $8.1
million for the first quarter of 2002, when compared to the same period in 2001.
The decrease is primarily due to decreases in controllable rooms expenses
corresponding to the decreasing occupancy as well as decreases in general and
administrative expenses as a result of the Manager's continued efforts to
control operating costs at the Inns. As a percentage of Inn revenues, Inn
property-level costs and expenses represented 55% and 57% for the first quarters
of 2002 and 2001, respectively.
Operating Profit. As a result of the changes in revenues and operating costs and
expenses discussed above, operating profit decreased $.5 million to $2.7
million, or 19% of revenues, from $3.2 million, or 19% of revenues, for the same
period in 2001.
Net Income. As a result of the items discussed above, net income decreased $.6
million, or 86%, to $.1 million in the first quarter of 2002 compared to $.8
million during the first quarter of 2001.
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 and to remain competitive in
the market place. Over the past several years, the general partner has retained
cash in the partnership in anticipation of financing required capital
improvements to the Inns and beginning in 1999, the partnership increased the
contribution rate to the property improvement fund to 7% of gross Inn revenues.
The contribution rate will remain at 7% for 2002.
The Manager has also proposed additional improvements that are intended to
enhance the overall value and competitiveness of the Inns. Based upon
information provided by the Manager, approximately $59
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million may be required over the next five years for the routine renovations and
all of the proposed additional improvements. The general partner does not
believe that cash flows from the operations of the Inns will be sufficient to
fund these improvements. As a result, the general partner expects to fund these
improvements with approximately $9.7 million (approximately $138 per unit) of
the partnership's existing cash. Actual funding of these improvements is not
expected to occur until the end of fiscal year 2002. However, if the merger is
consumated, the prospective purchaser will assume the obligation to fund these
improvements. The general partner will continue to monitor the capital
expenditure program with a view towards maximizing limited partner value.
The Manager has also proposed additional improvements to the Inns that are
intended to be implemented in fiscal years subsequent to 2002. The general
partner will review and assess these additional proposed improvements annually
at the end of each fiscal year.
If the merger is not consumated, the general partner does not believe that cash
from Inn operations and the partnership's remaining cash reserves will be
sufficient to fund all of the proposed additional capital expenditures requested
by the Manager of the Inns. As a result, if the merger does not occur it appears
unlikely that cash distributions will be possible for the next several years.
Principal Sources and Uses of Cash
Our principal source of cash is cash from operations. Our principal uses of cash
are to make debt service payments and fund the property improvement fund.
Cash provided by operating activities was $944,000 through the first quarter of
2002 compared to $1,091,000 for the same period in 2001. The $147,000 decrease
was primarily due to declining operations at the Inns.
Cash used in investing activities through the first quarters of 2002 and 2001
was $1,213,000 and $1,337,000, respectively. 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 $1,022,000 and $1,165,000 through the first quarters of
2002 and 2001, respectively.
Cash used in financing activities through the first quarters of 2002 and 2001
were $31,000 and $737,000, respectively. Financing activities consist primarily
of the repayments of mortgage debt. There were no cash distributions to the
partners during the first quarters of 2002 or 2001. As previously discussed, it
appears unlikely that cash distributions will be possible for the next several
years.
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 22, 2002, the partnership's mortgage debt has a fixed interest rate.
8
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.
9
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 6, 2002 By: /s/ Mathew Whelan
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Mathew Whelan
Vice President (Chief Accounting Officer)
10