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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. 0-16728
COURTYARD BY MARRIOTT II LIMITED PARTNERSHIP
10400 Fernwood Road
Bethesda, MD 20817-1109
(301) 380-9000
Delaware 52-1533559
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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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Courtyard by Marriott 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 ................................ 5
Quantitative and Qualitative Disclosures about Market Risk ............ 6
PART II - OTHER INFORMATION
Legal Proceedings ..................................................... 7
Courtyard by Marriott 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 ................................................. $ 413,897 $ 418,885
Deferred financing costs, net of accumulated amortization ................... 9,184 9,547
Due from Courtyard Management Corporation ................................... 8,718 9,117
Other assets ................................................................ 11 --
Property improvement fund ................................................... 33,310 30,513
Restricted cash ............................................................. 24,923 22,535
Cash and cash equivalents ................................................... 3,981 10,489
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$ 494,024 $ 501,086
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LIABILITIES AND PARTNERS' CAPITAL (DEFICIT)
LIABILITIES
Debt ........................................................................ $ 445,483 $ 448,605
Management fees due to Courtyard Management Corporation ..................... 45,487 43,288
Due to Marriott International, Inc. and affiliates .......................... 8,547 8,574
Accounts payable and accrued liabilities .................................... 9,576 12,389
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Total Liabilities ..................................................... 509,093 512,856
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PARTNERS' CAPITAL (DEFICIT)
General Partner ............................................................. 9,142 9,307
Limited Partners ............................................................ (24,211) (21,077)
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Total Partners' Deficit ............................................... (15,069) (11,770)
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$ 494,024 $ 501,086
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See Notes to Condensed Consolidated Financial Statements.
1
Courtyard by Marriott 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
Rooms $ 52,209 $ 63,450
Food and beverage 3,336 3,960
Other 1,330 1,966
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Total revenues 56,875 69,376
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OPERATING COSTS AND EXPENSES
Rooms 11,767 13,999
Food and beverage 2,817 3,578
Department costs and expenses 449 450
Selling, administrative and other 14,351 16,792
Depreciation 6,137 6,515
Ground rent, taxes and other 6,358 6,586
Base and Courtyard management fees 3,413 4,163
Incentive management fee 2,199 2,954
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OPERATING PROFIT 9,384 14,339
Interest expense (9,138) (9,526)
Interest income 106 331
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NET INCOME $ 352 $ 5,144
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ALLOCATION OF NET INCOME
General Partner $ 18 $ 257
Limited Partners 334 4,887
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$ 352 $ 5,144
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NET INCOME PER LIMITED PARTNER UNIT (1,470 Units) $ 227 $ 3,324
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See Notes to Condensed Consolidated Financial Statements.
2
Courtyard by Marriott 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 ............................................ $ 352 $ 5,144
Depreciation expense .................................. 6,137 6,515
Loss on disposition of fixed assets ................... -- 1
Amortization of deferred financing fees ............... 363 363
Changes in operating accounts ......................... (2,651) (10,225)
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Cash provided by operating activities ........... 4,201 1,798
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INVESTING ACTIVITIES
Additions to property and equipment, net .............. (1,149) (879)
Change in property improvement funds .................. (2,797) (4,355)
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Cash used in investing activities ............... (3,946) (5,234)
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FINANCING ACTIVITIES
Repayments of debt .................................... (3,122) (2,897)
Deferred financing costs .............................. -- (66)
Change in debt service reserve ........................ 10 138
Capital distributions ................................. (3,651) (6,204)
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Cash used in financing activities ............... (6,763) (9,029)
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DECREASE IN CASH AND CASH EQUIVALENTS .................... (6,508) (12,465)
CASH AND CASH EQUIVALENTS at beginning of period ......... 10,489 13,511
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CASH AND CASH EQUIVALENTS at end of period ............... $ 3,981 $ 1,046
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SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for mortgage and other interest ............. $ 11,059 $ 11,263
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See Notes to Condensed Consolidated Financial Statements.
3
Courtyard by Marriott II Limited Partnership
Notes to Condensed Consolidated Financial Statements
(Unaudited)
1. Organization
Courtyard by Marriott II Limited Partnership, a Delaware limited partnership,
owns 70 Courtyard by Marriott hotels located in 29 states within the contiguous
United States. The hotels are operated under a management agreement by a
subsidiary of Marriott International (the "Manager").
2. Summary of Significant Accounting Policies
The accompanying unaudited, condensed consolidated 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 consolidated financial statements
should be read in conjunction with the partnership's consolidated financial
statements and notes thereto included in the partnership's 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 seasonal and short-term variations.
Certain reclassifications were made to the prior year financial statements to
conform to the 2002 presentation.
For financial reporting purposes, the net income of the partnership is allocated
95% to the limited partners and 5% to CBM Two LLC (the "General Partner").
Significant differences exist between the net income for financial reporting
purposes and the net income reported for Federal income tax purposes. These
differences are due primarily to the use for Federal income tax purposes of
accelerated depreciation methods, shorter depreciable lives for certain assets,
differences in the timing of the recognition of certain fees and straight-line
rent adjustments.
3. 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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COURTYARD BY MARRIOTT 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.
RESULTS OF OPERATIONS
Revenues. Total revenues for the first quarter of 2002 decreased $12.5 million,
or 18% to $56.9 million compared to the same period in 2001. This includes a
decline in rooms' revenues of $11.2 million, or 18%, to $52.2 million for the
first quarter of 2002 when compared to the same period in 2001. The decrease is
due to a decrease in revenue per available room ("RevPAR") of 18%, or $12.95,
which reflects a decrease in occupancy of 8.7 percentage points and a decrease
in room rates of 7%, or $6.70. The results reflect the continued demand weakness
in the lodging industry. Additionally, lower room rates at full service hotels
have caused increased competition for the limited service segment.
Property level costs and expenses. Property level costs and expenses, which
includes rooms, food and beverage, department costs and expenses and selling,
administration, and other expenses, declined $5.4 million, or 16%, for the first
quarter of 2002 when compared to the same period in 2001. The decrease is
primarily due to a decline in controllable expenses as a result of cost-cutting
efforts implemented at the hotels in response to the decrease in occupancy.
These efforts include a reduction in wages at the properties of $2.1 million.
For the first quarters of 2002 and 2001, property-level costs represented 52%
and 50% of hotel revenues, respectively.
Base and Courtyard management fees. Base and Courtyard management fees declined
$.8 million, or 18%, for the first quarter of 2002 when compared to the first
quarter of 2001. The decrease in management fees, which are calculated as a
percentage of total hotel revenues, is consistent with the decline in hotel
revenues.
Incentive Management Fees. Incentive management fees have decreased by $.8
million, or 26%, for the first quarter of 2002 when compared to the same period
in 2001 as a result of decreased hotel revenues.
Operating Profit. For the first quarter of 2002, operating profit decreased $5.0
million, or 35%, to $9.4 million compared to the first quarter of 2001.
Operating profit represented 16.5% and 20.7% of revenues for the first quarters
of 2002 and 2001, respectively.
Interest Expense. Interest expense decreased $.4 million, or 4% for the first
quarter of 2002, when compared to the same period in 2001 as a result of
principal amortization on the debt.
Net Income. Net income decreased $4.8 million to $.4 million for the first
quarter of 2002 when compared to the first quarter of 2001 as a result of the
items discussed above.
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COURTYARD BY MARRIOTT II LIMITED PARTNERSHIP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
The partnership's financing needs have historically been funded through loan
agreements with independent financial institutions. The General Partner believes
that cash from hotel operations will be sufficient to make the required debt
service payments, to fund the current capital expenditures needs of the hotels
as well as to make cash distributions to the limited partners.
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, fund the property improvement
fund and to make distributions to limited partners.
Cash provided by operations for the first quarter of 2002 was $4.2 million
compared to $1.8 million for the first quarter of 2001. The increase in cash
provided by operations is due to a decrease in cash deposited into the
restricted cash reserves, which was partially offset by a decrease in operating
cash as a result of declining operations at the hotels.
Cash used in investing activities was $3.9 million and $5.2 million for the
first quarters of 2002 and 2001, respectively. Cash used in investing activities
for the first quarter of 2002 includes capital expenditures of $1.1 million,
primarily related to renovations and replacements of furniture, fixtures and
equipment at the partnership's hotels as compared to $.9 million in the first
quarter of 2001. The property improvement fund increased $2.8 million for the
first quarter of 2002 as compared to an increase of $4.4 million for the
comparable period in 2001. Contributions to the property improvement fund were
$3.7 million and $4.5 million for the first quarters of 2002 and 2001,
respectively.
Cash used in financing activities was $6.8 million and $9.0 million for first
quarter 2002 and 2001, respectively. The partnership repaid $3.1 million and
$2.9 million, respectively, of principal on the commercial mortgage-backed
securities during the first quarters of 2002 and 2001. Cash used in financing
activities included $3.7 million of cash distributions to the limited partners
during the first quarter of 2002 as compared to $6.2 million during the first
quarter of 2001.
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, all of the partnership's debt is fixed rate.
6
PART II. OTHER INFORMATION
LEGAL PROCEEDINGS
The partnership is 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.
COURTYARD BY MARRIOTT II
LIMITED PARTNERSHIP
By: CBM TWO LLC
General Partner
May 6, 2002 By: /s/ Mathew J. Whelan
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Mathew J. Whelan
Vice President (Chief Accounting
Officer)
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