MARRIOTT HOTEL PROPERTIES LTD PARTNERSHIP, 10-K, 1996-11-19

MARRIOTT HOTEL PROPERTIES LTD PARTNERSHIP
10-K, 1996-11-19
HOTELS & MOTELS

Previous: HARISTON CORP, 10-Q, 1996-11-19

Next: MARRIOTT HOTEL PROPERTIES LTD PARTNERSHIP, 10-Q, 1996-11-19

<PAGE>

================================================================================

Securities and Exchange Commission
Washington, D.C. 20549
Form 10-K

[X] Annual Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the fiscal year ended December 31, 1995

[ ] Transition Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934

Commission File Number: 0-14381
----------

MARRIOTT HOTEL PROPERTIES LIMITED PARTNERSHIP
---------------------------------------------
(Exact name of registrant as specified in its charter)

Delaware 52-1436985
- - ---------------------------------------- -----------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)

10400 Fernwood Road
Bethesda, Maryland 20817
- - ---------------------------------------- -----------------------------
(Address of principal executive offices) (Zip Code)

Registrant's telephone number, including area code: 301-380-2070

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
-------------------------------------
(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 ___ No ___ (Not Applicable). On August 25, 1992, the
Registrant filed an application for relief from the reporting requirements of
the Securities Exchange Act of 1934 pursuant to Section 12(h) thereof. Because
of the pendency of such application, the Registrant was not required to, and did
not, make any filings pursuant to the Securities Exchange Act of 1934 from
October 23, 1989 until the application was voluntarily withdrawn on
November 18, 1996.

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ] (Not Applicable)

Documents Incorporated by Reference
None
================================================================================
<PAGE>

- - --------------------------------------------------------------------------------
Marriott Hotel Properties, L.P.
- - --------------------------------------------------------------------------------

TABLE OF CONTENTS
-----------------

PAGE NO.
----------

PART I
<TABLE>
<CAPTION>

<S> <C> <C>
Item 1. Business 1

Item 2. Properties 7

Item 3. Legal Proceedings 9

Item 4. Submission of Matters to a Vote of Security Holders 9

PART II

Item 5. Market For Registrant's Common Equity and
Related Security Holder Matters 9

Item 6. Selected Financial Data 11

Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations 12

Item 8. Financial Statements and Supplementary Data 22

Item 9. Changes In and Disagreements With Accountants on Accounting
and Financial Disclosure 41

PART III

Item 10. Directors and Executive Officers of the Registrant 41

Item 11. Executive Compensation 42

Item 12. Security Ownership of Certain Beneficial Owners and Management 42

Item 13. Certain Relationships and Related Transactions 43

PART IV

Item 14. Exhibits, Supplemental Financial Statement Schedules
and Reports on Form 8-K 46
</TABLE>
<PAGE>

PART I

ITEM 1. BUSINESS

Description of the Partnership
- - ------------------------------

Marriott Hotel Properties Limited Partnership (the "Partnership"), a
Delaware limited partnership which was formed on August 22, 1984, owns (i)
Marriott's Orlando World Center Hotel (the "Orlando Hotel") in Orlando, Florida
and the 190 acres of land on which it is located, and (ii) a 50.5% interest in
Lauderdale Beach Association (the "Harbor Beach Partnership"), a general
partnership which owns Marriott's Harbor Beach Resort (the "Harbor Beach Hotel")
in Fort Lauderdale, Florida.

The sole general partner of the Partnership, with a 1% interest, is Hotel
Properties Management, Inc. (the "General Partner"), a Delaware corporation and
a wholly-owned subsidiary of Host Marriott Corporation ("Host Marriott"). The
Partnership is engaged solely in the business of owning, operating and leasing
hotels and therefore is engaged in one industry segment. The principal offices
of the Partnership are located at 10400 Fernwood Road, Bethesda, Maryland 20817.

The Orlando Hotel and the Harbor Beach Hotel (collectively referred to
herein as the "Hotels") are operated as part of the Marriott Hotels, Resorts and
Suites full-service hotel system. The Orlando Hotel is managed by Marriott
International, Inc. ("MII" or the "Manager") under a long-term management
agreement (the "Management Agreement"), and the Harbor Beach Hotel is leased to
Marriott Hotel Services, Inc. ("MHSI" or the "Operating Tenant"), a wholly-owned
subsidiary of MII, under a long-term lease agreement (the "Operating Lease").
The Hotels have the right to use the Marriott name pursuant to the management
and lease agreements and, if these agreements are terminated, the Partnership
and the Harbor Beach Partnership (collectively referred to herein as the
"Partnerships") will lose that right for all purposes (except as part of the
Partnership's name). See Item 13, "Certain Relationships and Related
Transactions."

The Hotels are among the premier resorts in the Marriott system and cater
primarily to meetings/conventions and leisure travelers. Since the Hotels are
located in Florida, operating results are higher during the period from November
through April each year. The Partnership and the Harbor Beach Partnership have
no plans to acquire any new properties or sell any of the existing properties.
See Item 2, "Properties."

The Orlando Hotel was designed as part of the MII network of convention
hotels and thus has extensive meeting and convention facilities. The Orlando
Hotel's business is oriented primarily to professional meeting planners who book
conventions in Orlando. During the last five years, group business at the
Orlando Hotel has steadily increased. For the year ended December 31, 1995,
almost 80% of its business was derived from group demand, compared to 69% for
the year ended December 31, 1990. The Orlando Hotel offers group guests award
winning service, approximately 200,000 square feet of meeting space, all on one
level, 18 holes of golf on-site, numerous restaurants and the flexibility to
achieve the guests' desired goals. The group business segment is comprised of
corporate groups, association groups and other market segments including social
groups (weddings), military, religious, fraternal and international groups.
During 1994 and 1995, the Orlando Hotel experienced stronger demand in the
higher-rated corporate group business segment which allowed the hotel to
restrict discounted rates in both group and transient business. In 1995, the
Orlando Hotel experienced a 23% increase in corporate group room nights, which
have stronger revenue potential due to traditionally higher average room rates
and food and beverage profit margins.

1
<PAGE>

The Orlando Hotel added an additional 48,500 square foot ballroom and
exhibition hall in 1990 to enhance the Orlando Hotel's ability to attract guests
and large group business. Host Marriott provided interim financing of up to $14
million to fund the construction of this ballroom and on June 16, 1992, the
ballroom loan of $13.2 million was converted to a revolving line of credit. As
of December 31, 1995, the outstanding principal balance under this line of
credit was $6,420,000. In addition, the Orlando Hotel completed a $11.5 million
rooms renovation project in April 1991, with financing provided by Host
Marriott. This loan was fully repaid during 1994. These projects were
necessary to remain competitive in a challenging market.

The Harbor Beach Hotel has positioned itself to attract both the leisure
traveler and the group meeting planner who is seeking a luxurious resort
experience. The Harbor Beach Hotel offers easy air accessibility, the largest
private beach in the Fort Lauderdale area and the quality and consistency
associated with the Marriott name. The Harbor Beach Hotel's business is split
between business from transient and group guests. For the year ended December
31, 1995, group business comprised 55% of total room nights. In 1995,
international business from Europe and South America rebounded from significant
decreases experienced during 1994 due to highly publicized violent crimes in
South Florida. This positive trend in international business is expected to
continue.

During 1994, the Harbor Beach Hotel completed a rooms renovation which
helped the property realize a competitive advantage in the Fort Lauderdale
market. Marketing efforts at the Harbor Beach Hotel have emphasized the newly
renovated guest quarters. Financing for the rooms renovation was obtained from
a wholly-owned subsidiary of MII. The loan provided financing of up to $2.8
million. As of December 31, 1995, the outstanding principal balance of the loan
was $2,379,000.

Organization of the Partnership
- - -------------------------------

The Partnership was formed on August 22, 1984, to acquire, construct, own
and operate the Orlando Hotel. Host Marriott was the initial General Partner of
the Partnership and Airline Foods, Inc., a wholly-owned subsidiary of Host
Marriott, was the initial limited partner. Between November 1, 1985 and
November 27, 1985 (the "Closing Date"), 1,000 limited partnership interests (the
"Units"), representing a 99% interest in the Partnership, were sold in a private
placement. The limited partners paid $10,000,000 in cash on the Closing Date
with the remainder due in five annual installments through May 15, 1990. The
limited partners' obligations to make the installment payments were evidenced by
promissory notes (the "Investor Notes") payable to the Partnership and secured
by the Units. Prior to the Closing Date, Marriott Hotel Properties, Inc. was
admitted as General Partner in lieu of Host Marriott, and on the Closing Date,
Airline Foods, Inc. withdrew as a limited partner. In consideration for
agreeing to admit the additional limited partners to the Partnership, Airline
Foods, Inc. was paid $650,000 in cash at closing and received $45,350,000 of
investor notes. On April 22, 1992, the General Partner's name was changed from
Marriott Hotel Properties, Inc. to Hotel Properties Management, Inc.

On the Closing Date, the Partnership purchased from affiliates of Host
Marriott (i) a 99% limited partnership interest in the Warner Center Marriott
Hotel Limited Partnership, a Delaware limited partnership (the "Warner Center
Partnership"), which owned the 473-room Warner Center Marriott Hotel (the
"Warner Center Hotel") in Los Angeles, California, for $250,000 in cash and a
$12,750,000 deferred purchase note, and (ii) a 49% general partnership interest
in, and a loan receivable of $3,680,000 from, the Harbor Beach Partnership for
$2,500,000 in cash and a $7,500,000 deferred purchase note. The Partnership
also acquired a 1% interest in the remaining 51% general partner of the Harbor
Beach Partnership on the Closing Date for $150,000. This interest was converted
into a 0.5% interest in the Harbor Beach Partnership on July 1, 1986. On April
23, 1987, the Partnership exercised an option acquired on January 1, 1986, to
purchase an additional 2% interest in the remaining general partner of the

2
<PAGE>

Harbor Beach Partnership for $300,000, which was simultaneously converted to a
1% interest in the Harbor Beach Partnership, thereby giving the Partnership a
50.5% ownership interest in the Harbor Beach Partnership.

The Warner Center Partnership defaulted on its first mortgage on July 1,
1993, as the Warner Center Hotel was unable to generate sufficient cash flow to
meet its debt service requirements. This default followed two prior defaults on
March 1, 1991 and April 1, 1992, which were subsequently cured with short-term
restructurings with the lender. Efforts by the General Partner to negotiate an
additional restructuring with the lender were unsuccessful. On July 16, 1993,
the lender accelerated the maturity date of the first mortgage. On November 17,
1993 (the "Foreclosure Date"), ownership of the Warner Center Hotel was
transferred through foreclosure to the lender. Simultaneously with the
foreclosure, the Warner Center Partnership was dissolved. The foreclosure will
not have any further adverse effect on the financial condition of the
Partnership since this loan was non-recourse to the Partnership and its
partners, and the Warner Center Partnership had not contributed to Partnership
cash distributions. The Warner Center Hotel was managed by the Manager as part
of the Marriott Hotels, Resorts and Suites full-service system; upon dissolution
of the Warner Center Partnership, the Warner Center Hotel management agreement
was terminated.

Debt Financing
- - --------------

The Partnership refinanced the original Orlando Hotel loan on June 16,
1987, and borrowed $175 million (the "Term Loan") under a $195 million Term and
Revolving Credit Agreement. The Revolving Credit Agreement provided for some
interest payments to be funded from a $20 million revolving credit facility (the
"Revolving Loan"). The Term and Revolving Loans (the "Orlando Mortgage Debt")
matured on June 16, 1992, with $199 million in principal and interest due at
that time. Beginning on June 16, 1992, both the outstanding principal and
interest began accruing interest at the default rate of 10.52%. However,
effective July 9, 1992, the Partnership and the lender signed a letter of intent
to refinance the Orlando Mortgage Debt, and the interest rate on the outstanding
debt was converted to a floating rate equal to the lender's cost of funds plus
175 basis points. On January 12, 1993, the Partnership refinanced the Orlando
Mortgage Debt with the lender and repaid $29.3 million to the lender which was
applied $12 million to the outstanding principal balance, $13.5 million to
interest and $3.8 million to financing costs. Upon loan maturity on June 16,
1995, the lender granted the Partnership a forbearance on the loan, extending it
through October 31, 1995. On October 31, 1995, the Partnership successfully
completed a modification and extension of this loan. The Orlando Mortgage Debt
is non-recourse to the Partnership and its partners. The Orlando Mortgage Debt
bears a fixed rate of interest of 8.44%, requires semi-annual amortization of
principal totaling $30 million over the term of the loan, and matures on June
16, 2000 with unamortized principal of $127 million due at that time. As of
December 31, 1995, the outstanding principal balance was $152,979,000. The
Orlando Mortgage Debt is collateralized by the Orlando Hotel, all personal
property associated with the Orlando Hotel, the land on which the Orlando Hotel
and golf course are located and an assignment of certain operating agreements.
It is expected that the Orlando Mortgage Debt will be refinanced at or prior to
the maturity thereof, depending upon prevailing market conditions and interest
rates. However there are no current plans or proposals to refinance the Orlando
Mortgage Debt.

The initial financing on the Harbor Beach Hotel consisted of $86.6 million
of non-recourse mortgage debt to provide financing for construction of the
Harbor Beach Hotel. On June 30, 1986, this debt was refinanced with a major
insurance company and a $92 million replacement loan (the "Harbor Beach Mortgage
Debt") was obtained. Upon maturity on July 1, 1993, the lender granted the
Harbor Beach Partnership a forbearance of the loan. On March 29, 1994, the
Harbor Beach Partnership completed a restructuring of the Harbor Beach Mortgage
Debt. The restructured Harbor Beach Mortgage Debt

3
<PAGE>

carries a fixed rate of interest of 9.125%. Interest only was due and payable
for the first twelve payments through and including April 1, 1995. On May 1,
1995, monthly payments of principal and interest in the amount of $772,600 began
and will continue until maturity on May 1, 2000. The loan amortizes based on a
22-year effective amortization period. As of December 31, 1995, the outstanding
principal balance was $86,882,000. The Harbor Beach Mortgage Debt is non-
recourse to the Harbor Beach Partnership and its partners. The Harbor Beach
Mortgage Debt is collateralized by all property and assets of the Harbor Beach
Hotel. No debt service guaranty was provided during the March 1994
restructuring. On July 1, 1993, Host Marriott was released from its guarantee
of interest payments up to $9 million, of which no amounts had been advanced at
maturity. It is expected that the Harbor Beach Mortgage Debt will be refinanced
at or prior to the maturity thereof, depending upon prevailing market conditions
and interest rates. However there are no current plans or proposals to
refinance the Harbor Beach Mortgage Debt.

Orlando Ballroom Loan

During 1990, Host Marriott provided interim financing of up to $14 million
to fund the construction of a new ballroom and exhibition hall at the Orlando
Hotel. On December 31, 1990, the interim financing of $13.2 million was
converted to a permanent loan (the "Orlando Ballroom Loan") from Host Marriott.
On June 16, 1992, in conjunction with the refinancing of the Orlando Mortgage
Debt, the Orlando Ballroom Loan was converted from a term loan to a revolving
line of credit with a floating interest rate equal to the Bankers Trust Company
prime rate. The weighted average effective interest rate for the year ended
December 31, 1995, was 8.8%. As of December 31, 1995, the outstanding principal
balance was $6,420,000.

Harbor Beach Rooms Renovation Loan

On July 21, 1994, the Harbor Beach Partnership entered into a loan
agreement (the "Harbor Beach Rooms Renovation Loan") with Marriott International
Capital Corporation, a wholly-owned subsidiary of MII, in conjunction with a
rooms and suites refurbishment at the Harbor Beach Hotel. The loan provided
financing of up to $2.8 million, plus accrued interest through December 31,
1994, to fund costs in excess of funds available in the Harbor Beach
Partnership's property improvement fund. This unsecured loan carries a fixed
rate of interest of 8% and matures on December 31, 1999. Payments of principal
and interest based upon a five-year amortization period commenced in January
1995. Under the terms of the loan, the debt service payments are included as a
deduction in determining the fees paid to MHSI pursuant to the Operating Lease.
As of December 31, 1995, the outstanding principal balance was $2,379,000.

Material Contracts
- - ------------------

The Partnership has entered into a long-term management agreement with MII
for the Orlando Hotel, and the Harbor Beach Partnership has entered into a long-
term operating lease with MHSI for the Harbor Beach Hotel.

The Orlando Hotel Management Agreement has a 25-year term expiring on March
24, 2011, with renewal terms, at the option of MII, for up to five additional
10-year terms. The Management Agreement provides the Manager with a base
management fee equal to 3% of gross hotel sales. In addition, the Manager is
entitled to an incentive management fee equal to 20% of hotel operating profit
and additional incentive management fees equal to 30% of a defined amount. For
additional information see Item 13, "Certain Relationships and Related
Transactions."

The Harbor Beach Hotel Operating Lease has a 36-year term expiring on
October 29, 2020, with renewal terms, at the option of the Operating Tenant, for
up to six additional 10-year terms. The

4
<PAGE>

Operating Lease provides that the Operating Tenant pay annual rental to the
Harbor Beach Partnership. The Operating Tenant retains 50% of operating profit
of the Harbor Beach Hotel, as defined, in excess of performance rental. For
additional information see Item 13, "Certain Relationships and Related
Transactions."

Pursuant to the Management Agreement and the Operating Lease, the Hotels
are operated as part of the Marriott full-service hotel system. The Marriott
full-service hotel system consists of hotels, resorts, and suites operated under
the Marriott name. At December 31, 1995, the Marriott full-service hotel system
included 269 Marriott Hotels, Resorts and Suites located in 39 states, the
District of Columbia and 25 foreign countries with a total of 111,460 guest
rooms.

Full-service hotels operated by MII generally contain between 300 and 500
rooms. However, the 19 convention hotels (19,494 rooms) operated by MII,
including the Orlando Hotel, are larger and contain up to 1,900 rooms. Room
rates generally range between $90 and $245 per night depending upon location and
type of facility. Marriott full-service hotel facilities typically include
swimming pools, gift shops, convention and banquet facilities, a variety of
restaurants and lounges and parking facilities. The 27 Marriott resort hotels
(13,655 rooms), including the Harbor Beach Hotel, have additional recreational
facilities, such as tennis courts and golf courses.

Ground Lease
- - ------------

The Harbor Beach Partnership leases the land on which the Harbor Beach
Hotel is located from an unrelated third party. For a description of the terms
of the ground lease, see Item 2, "Properties."

Competition
- - -----------

The cyclical nature of the U.S. lodging industry has been demonstrated over
the past two decades. Low hotel profitability during the 1974-1975 recession
led to a prolonged slump in new construction and, over time, high occupancy
rates and real estate price increases in the late 1970's and early 1980's.
Changes in tax and banking laws during the early 1980's precipitated a
construction boom which peaked in 1986, but created an oversupply of hotel
rooms. This oversupply has decreased as room sales, which are determined by
occupancy levels and room rates, have continued to increase in 1996 as the
lodging industry as a whole, and the full-service hotel segment in particular,
have benefited from a recent increase in demand resulting from an improved
economic environment and a corresponding increase in business travel. However,
the increased demand for rooms has not yet fully absorbed the oversupply of
hotel rooms constructed in the 1980's. Hotel supply growth has been limited due
to many factors, including the limited availability of attractive building sites
for full-service hotels, the lack of available financing for new full-service
hotel construction and the availability of existing full-service properties for
sale at a discount to their replacement value. The General Partner believes
that room supply growth for full-service hotels will continue to be limited in
the near future.

Current trends in the hotel industry indicate that, through at least 1998,
the outlook for the lodging industry remains positive. Demand increases are
expected to continue to outpace supply additions. Rooms supply growth,
especially for the luxury and upscale segment, is forecasted to be limited as
compared to growth in budget and mid-priced hotels. Acquisition prices for
first class and luxury price properties are still at a significant discount to
construction or replacement cost. The favorable gap between demand increases
and supply additions should continue to drive room rate increases, with
occupancy rates leveling as targeted room rates are achieved.

5
<PAGE>

The Manager believes that by emphasizing management and personnel
development and maintaining a competitive price structure, the Partnerships'
share of the market will be maintained or increased. The inclusion of the
Orlando Hotel and the Harbor Beach Hotel within the nationwide MII full-service
hotel system provides advantages of name recognition, centralized reservations
and advertising, system-wide marketing and promotion, centralized purchasing and
training and support services. Additional competitive information is set forth
in Item 2, "Properties," with respect to the Hotels.

Conflicts of Interest
- - ---------------------

Because Host Marriott and its affiliates own and/or operate hotels other
than those owned by the Partnerships, potential conflicts of interest exist.
With respect to these potential conflicts of interest, Host Marriott and its
affiliates retain a free right to compete with the Partnerships' Hotels,
including the right to develop competing hotels now and in the future, in
addition to those existing hotels which may compete directly or indirectly.
Under Delaware law, the General Partner has a fiduciary duty to the Partnership
and is required to exercise good faith and loyalty in all its dealing with
respect to Partnership affairs.

Policies with Respect to Conflicts of Interest

It is the policy of the General Partner that the Partnership's relationship
with the General Partner, any of its affiliates or persons employed by the
General Partner are conducted on terms which are fair to the Partnership and
which are commercially reasonable.

The Partnership Agreement provides that agreements, contracts or
arrangements between the Partnership and the General Partner, other than
arrangements for rendering legal, tax, accounting, financial, engineering, and
procurement services to the Partnership by the General Partner or its
affiliates, which agreements will be on commercially reasonable terms, will be
subject to the following conditions:

(a) the General Partner or any affiliate must be actively engaged in the
business of rendering such services or selling or leasing such goods,
independently of its dealings with the Partnership and as an ordinary
ongoing business or must enter into and engage in such business with
Marriott system hotels or hotel owners generally and not exclusively with
the Partnerships;

(b) any such agreement, contract or arrangement must be fair to the
Partnership, and reflect commercially reasonable terms and shall be
embodied in a written contract which precisely describes the subject matter
thereof and all compensation to be paid therefor;

(c) no rebates or give-ups may be received by the General Partner or any
affiliate, nor may the General Partner or any affiliate participate in any
reciprocal business arrangements which would have the effect of
circumventing any of the provisions of the Partnership Agreement or the
Harbor Beach Partnership Agreement;

(d) no such agreement, contract or arrangement as to which the limited
partners had previously given approval may be amended in such manner as to
increase the fees or other compensation payable to the General Partner or
any affiliate or to decrease the responsibilities or duties of the General
Partner or any affiliate in the absence of the consent of the limited
partners holding a majority of the Units (excluding those Units held by the
General Partner or certain of its affiliates); and

6
<PAGE>

(e) any such agreement, contract or arrangement which relates to or secures
any funds advanced or loaned to any of the Partnership by the General
Partner or any affiliate must reflect commercially reasonable terms.

The Harbor Beach Partnership Agreement contains similar provisions with
respect to the Harbor Beach Partnership.

Employees
- - ---------

The Partnerships have no employees; however, employees of the General
Partner are available to perform administrative services for the Partnership.
The Partnership reimburses the General Partner for the cost of providing such
services. See Item 11, "Executive Compensation," for information regarding
payments to the General Partner for the cost of providing administrative
services to the Partnership.

The Hotels are staffed by employees of MII and the Operating Tenant.

ITEM 2. PROPERTIES

As of December 31, 1995, the Partnerships' properties consisted of two
hotels, both of which are currently in full operation and described below.

Orlando World Center Hotel
- - --------------------------

Location

The Orlando Hotel is a full-service Marriott hotel located on approximately
190 acres of fee-owned land two miles from WALT DISNEY WORLD Resort and is known
as Marriott's Orlando World Center. It is located approximately 15 miles from
the Orlando International Airport.

Description

The Orlando Hotel opened on March 24, 1986. The Orlando Hotel contains
1,503 guest rooms, including 85 suites, in a 27-story building. Designed as
part of the MII network of convention hotels, it has extensive meeting and
convention facilities totaling 200,000 square feet, all on one level of the
hotel, including (i) a 38,675 square foot grand ballroom, (ii) additional
ballroom space of 40,740 square feet which can be subdivided into meeting rooms
and exhibit space, (iii) a 50,960 square foot ballroom and exhibition hall which
was completed in 1990 and (iv) 14 meeting rooms. Hotel facilities also include
nine restaurants and lounges, an 18-hole championship golf course, eight lighted
tennis courts, four pools, a health club, golf and tennis pro shops, specialty
and gift shops, a game room and parking for 2,100 cars. The Partnership
purchased the Orlando Hotel in 1984 for approximately $211 million.

Competition

The primary competition for the Orlando Hotel comes from the following
four first-class convention and resort lodging-oriented hotels: (i) the
Sheraton Dolphin Hotel with 1,510 guest rooms and 202,000 square feet of meeting
space, (ii) the Westin Swan with 758 guest rooms and 52,000 square feet of
meeting space, (iii) the Peabody Hotel with 891 guest rooms and 54,000 square
feet of meeting space and (iv) the Omni Rosen Hotel, which opened in January
1996, with 1,334 guest rooms and 106,000 square feet of meeting space. In
addition, other hotels, including hotels owned by Disney, also compete

7
<PAGE>

with the Orlando Hotel. None of these hotels are operated as part of the MII
full-service hotel system. As a major convention hotel, the Orlando Hotel also
competes with similar facilities throughout the country.

Several new hotel projects are expected to enter the market in the near
future, including hotels by Disney and Sheraton. Disney's Boardwalk Resort,
which is expected to contain 400 suites, is projected to open in the fall of
1996. Disney's plans for 1997 include a Coronado Springs Resort with 1,900
guest rooms and 99,000 square feet of meeting space and an expansion of Disney's
All-Star Resort by 5,400 guest rooms. In addition, Sheraton has plans to
construct a 650 all-suite resort to open in early 1997 and to construct a major
convention hotel with 1,800 guest rooms with over 100,000 square feet of meeting
space. This convention hotel is scheduled to open in early 1998 to coincide
with the expansion of Universal Studios. As a result of the continued expansion
of Walt Disney World, hotel construction in the Orlando market is expected to
continue with additional hotels possible in the near term.

Harbor Beach Hotel
- - ------------------

Location

The Harbor Beach Hotel is a full-service Marriott hotel located on a 16.5
acre tract of leased beach-front property located in Fort Lauderdale, Florida
and is known as Marriott's Harbor Beach Resort. The Hotel is located
approximately five miles from the Fort Lauderdale/Hollywood International
Airport.

Description

The Harbor Beach Hotel opened in October 1984 with 624 guest rooms,
including 35 suites, in a 15-story building. The Harbor Beach Hotel has
approximately 30,000 square feet of meeting and banquet space, including (i) a
14,900 square foot grand ballroom, (ii) an 8,000 square foot junior ballroom
(iii) seven meeting rooms and (iv) two boardrooms. Hotel facilities also
include five restaurants, three lounges, a 1,100 foot private ocean beach with
50 private cabanas, an outdoor pool, five tennis courts, a health club, gift
shop, tennis pro shop and parking for 900 cars. The Harbor Beach Partnership
purchased the Harbor Beach Hotel in 1982 for approximately $87 million.

Competition

The primary competition for the Harbor Beach Hotel comes from the following
three first-class hotels: (i) the Hyatt Pier 66 with 388 guest rooms and 22,000
square feet of meeting space, (ii) the Boca Raton Hotel and Club with 963 guest
rooms and 70,000 square feet of meeting space and (iii) the Marriott Marco
Island Resort and Golf Club with 735 guest rooms and 48,000 square feet of
meeting space. The Marriott Marco Island Resort and Golf Club is managed by
MII, and other than limited joint marketing efforts, the Harbor Beach Hotel and
the Marriott Marco Island Resort are direct competitors. Host Marriott acquired
another competing area hotel, the Fort Lauderdale Marina Hotel, in January 1994.
In addition, other hotels in the Fort Lauderdale area also compete with the
Harbor Beach Hotel; however, these differ from the Harbor Beach Hotel in terms
of size, room rates, facilities, amenities and services offered, market
orientation and/or location. None of these other hotels are operated as part of
the MII full-service hotel system. As a major resort facility, the Harbor Beach
Hotel also competes with similar facilities throughout the country. No new
competition is expected to open in the Fort Lauderdale area in the near future.

8
<PAGE>

Ground Lease

The Harbor Beach Hotel is located on a site that is leased from an
unrelated third party for an initial term expiring November 30, 2080. The
Harbor Beach Partnership has the option to extend the term for an additional 25
years. The lease provides for annual rental of $1,430,000 for lease years 1993
and 1994 and $1,560,000 for lease years 1995 through 1999. Thereafter, annual
rentals for each succeeding five-year period increase by an amount equal to 10%
of the previous annual rental. Under the lease, the Harbor Beach Partnership
pays all costs, expenses, taxes and assessments relating to the Harbor Beach
Hotel and the underlying land, including real estate taxes. In the event the
ground lessor decides to sell the leased premises, the Harbor Beach Partnership
has a right of first refusal to purchase the leased premises. Upon expiration
or termination of the lease, title to the Harbor Beach Hotel and all
improvements revert to the ground lessor.

ITEM 3. LEGAL PROCEEDINGS

Neither the Partnerships nor the Hotels are presently subject to any
material litigation nor, to the General Partner's knowledge, is any material
litigation threatened against the Partnerships or the Hotels, other than 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 Partnerships.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No matters were submitted to a vote of the limited partners in 1995 or in
prior years. The Partnership instituted a consent solicitation on November 19,
1996, to obtain the approval of the limited partners to amend certain provisions
of the Partnership Agreement.

PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND
RELATED SECURITY HOLDER MATTERS

There is currently no public market for the Units and it is not anticipated
that a public market for the Units will develop. Transfers of Units are limited
to the first day of each fiscal quarter, and are subject to approval by the
General Partner in its sole and absolute discretion and certain other
restrictions. As of November 14, 1996, there were 1,165 holders of record of the
1,000 limited partnership Units.

In accordance with Sections 4.06 and 4.09 of the Partnership Agreement,
cash available for distribution for any fiscal year will be distributed at least
annually, as soon as practicable after the close of each fiscal year, to the
partners of record at the end of each fiscal quarter during such fiscal year as
follows:

(i) first, through and including the end of the fiscal quarter during which
the General Partner and the limited partners shall have received cumulative
distributions of refinancing and/or sales proceeds ("Capital Receipts")
equal to 50% of their capital contributions (this threshold has not been
met as of December 31, 1995), 1% to the General Partner and 99% to the
limited partners;

9
<PAGE>

(ii) next, through and including the end of the fiscal quarter during which
the General Partner and the limited partners shall have received cumulative
distributions of Capital Receipts equal to their capital contributions, 15%
to the General Partner and 85% to the limited partners; and

(iii) thereafter, 30% to the General Partner and 70% to the limited
partners.

Cash available for distribution means, with respect to any fiscal period,
the revenues of the Partnership from all sources during such fiscal period less
(i) all cash expenditures of the Partnership during such fiscal period,
including, without limitation, debt service and any fees for management services
and administrative expenses; and (ii) such reserves as may be determined by the
General Partner, in its sole discretion, to be necessary to provide for the
foreseeable needs of the Partnership, but shall not include Capital Receipts.

The Partnership made no cash distributions during fiscal year 1994.

On April 17, 1995, the Partnership made a cash distribution from 1993 and
1994 operations in the amount of $1,600,000 as follows: $16,000 to the General
Partner and $1,584,000 to the limited partners ($1,584 per Unit).

On November 15, 1995, the Partnership made an interim cash distribution
from 1995 operations in the amount of $505,050 as follows: $5,050 to the
General Partner and $500,000 to the limited partners ($500 per Unit). On April
17, 1996, the Partnership made a cash distribution in the amount of $2,915,150,
$29,150 to the General Partner and $2,886,000 to the limited partners ($2,886
per Unit), representing a final cash distribution from 1995 operations of
$2,078,787 ($20,787 to the General Partner and $2,058,000 to the limited
partners ($2,058 per Unit)) and an interim cash distribution from 1996
operations of $836,363 ($8,363 to the General Partner and $828,000 to the
limited partners ($828 per Unit)).

On November 1, 1996, the Partnership made an interim cash distribution from
1996 operations in the amount of $2,105,050 as follows: $21,050 to the General
Partner and $2,084,000 to the limited partners ($2,084 per unit).

In accordance with section 4.07, 4.08 and 4.09 of the Partnership
Agreement, Capital Receipts not retained by the Partnership will be distributed
to the owners of record on the last day of the fiscal quarter in which the
transaction is completed, as follows:

(i) first, 1% to the General Partner and 99% to the limited partners until
the partners have received cumulative distributions of Capital Receipts
equal to their capital contributions; and

(ii) thereafter, 30% to the General Partners and 70% to the limited
partners.

As of November 14, 1996, cumulative distributions of Capital
Receipts equaled $7,379,000 ($74,000 to the General Partner and $7,305,000 to
the limited partners ($7,305 per Unit)).

10
<PAGE>

ITEM 6. SELECTED FINANCIAL DATA

The following selected financial data presents historical operating
information for the Partnership for each of the five years ended December 31,
1995. Due to the foreclosure on the Warner Center Hotel in November 1993 (see
Note 6 in the accompanying consolidated financial statements), operating results
are not comparable for all years presented:
<TABLE>
<CAPTION>

1995 1994 1993 1992 1991
-------- -------- --------- -------- --------
(in thousands, except per unit amounts)
<S> <C> <C> <C> <C> <C>
Partnership Net income
(loss):

Revenues................................. $67,677 $59,759 $ 62,204 $63,912 $62,104
======= ======= ======== ======= =======

Net income (loss) before
extraordinar item and minority interest. $14,868 $ 7,834 $(24,572) $(1,707) $(5,193)

Extraordinary item....................... -- -- 40,356 -- --
------- ------- -------- ------- -------

Net income (loss) before
minority interest....................... $14,868 $ 7,834 $ 15,784 $(1,707) $(5,193)

Minority interest........................ (1,718) (523) (1,036) (185) (779)
------- ------- -------- ------- -------

Net income (loss)........................ $13,150 $ 7,311 $ 14,748 $(1,892) $(5,972)
======= ======= ======== ======= =======
</TABLE>

Net income (loss) per limited partner Unit (1,000 Units):

<TABLE>
<S> <C> <C> <C> <C> <C>
Net income (loss) before extraordinary
item and minority interest.............. $14,719 $ 7,756 $(24,326) $ (1,690) $ (5,141)

Extraordinary item...................... -- -- 39,952 -- --

Minority interest....................... (1,701) (518) (1,026) (183) (771)
-------- -------- -------- -------- --------

Net income (loss) per Unit.............. $ 13,018 $ 7,238 $ 14,600 $ (1,873) $ (5,912)
======== ======== ======== ======== ========

Total Assets............................ $251,217 $254,058 $257,620 $332,961 $330,043
======== ======== ======== ======== ========

Total Obligations....................... $253,483 $267,369 $278,242 $368,331 $363,521
======== ======== ======== ======== ========

Cash Distributions per limited partner
Unit (1,000 Units)..................... $ 2,084 $ -- $ -- $ -- $ 5,748
======== ======== ======== ======== ========
</TABLE>

11
<PAGE>

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS

GENERAL
- - -------

The following discussion and analysis addresses the results of operations
of the Partnership for the fiscal years ended December 31, 1995, 1994 and 1993.
The consolidated operating results of the Partnership for 1995 and 1994 are not
comparable to 1993 due to the foreclosure of the Warner Center Hotel and
subsequent dissolution of the Warner Center Partnership in November 1993.
During the period from 1993 through 1995, consolidated Partnership hotel sales
decreased from $118.5 million to $114.4 million primarily due to the foreclosure
of the Warner Center Hotel, which had total sales of $18.3 million in 1993.
This was offset by a $14.1 million increase in total sales at the Orlando Hotel
during the period from 1993 to 1995, which resulted from strong group demand in
the Orlando market. Consolidated Partnership hotel revenues grew from $43.6
million in 1993, which included $5.0 million in hotel revenues from the Warner
Center Hotel, to $47.3 million in 1995. Rental income grew from $17.8 million
to $19.7 million during the period from 1993 to 1995 as a result of strong
operating results at the Harbor Beach Hotel.

Growth in the Partnership's Hotels total room sales, and thus hotel
revenues and rental income, is primarily a function of combined average
occupancy and average room rates, as well as control of hotel operating costs.
In addition, due to the amount of meeting/convention business at the Orlando
Hotel, food and beverage operations, especially in the banquet and catering
areas, have a direct effect on the Partnership's hotel revenues. Combined
average occupancy for the Partnership's Hotels grew from 74% in 1993 to 79% in
1995, and the combined average room rate for the Hotels during this period
increased from $125 in 1993 to $139 in 1995 due to strong demand growth in the
Orlando and Fort Lauderdale markets combined with the foreclosure of the Warner
Center Hotel, which historically achieved lower average occupancies and room
rates than the two Florida hotels. REVPAR, or revenue per available room,
represents the combination of the average daily room rate charged and the
average daily occupancy achieved and is a commonly used indicator of hotel
performance (although it is not a GAAP measure of revenue). REVPAR does not
include food and beverage or other ancillary revenues generated by the
Partnership's Hotels. The consolidated REVPAR for the Partnership's Hotels for
each of the periods ended December 31, 1995, 1994 and 1993 was $110, $100 and
$93, respectively. Combined food and beverage sales decreased from $46.1
million in 1993 to $45.7 million in 1995 primarily due to the foreclosure of the
Warner Center Hotel, which had food and beverage sales of $7.0 million in 1993.
This was offset by a $6.7 million increase in food and beverage sales at the
Orlando Hotel during the three-year period ended December 31, 1995.

The Partnership derives substantial operating leverage from increases in
hotel revenues and rental income, since the majority of operating costs and
expenses of the Partnership are fixed. This operating leverage is offset by
variable expenses related to the Orlando Hotel, including base and incentive
management fees under the Orlando Hotel Management Agreement. Net operating
cash flow from the Orlando Hotel is applied to payment of debt service on the
Orlando Mortgage Debt, current and deferred incentive management fees payable to
MII, debt service on the Orlando Ballroom Loan and cash distributions to the
partners of the Partnership. Net rental income derived from the Harbor Beach
Hotel is applied to payment of debt service on the Harbor Beach Mortgage Debt,
debt service on the Harbor Beach Rooms Renovation Loan, ground rent pursuant to
the terms of the Harbor Beach ground lease and cash distributions to the
partners of the Harbor Beach Partnership. The Partnership's allocable share of
cash distributions from the Harbor Beach Partnership are distributed to the
partners of the Partnership.

12
<PAGE>

RESULTS OF OPERATIONS
- - ---------------------

1995 Compared to 1994

Hotel Revenues. Hotel revenues increased approximately $6.1 million, or
14.7%, over 1994 as a result of a substantial increase in corporate group and
transient business. The increased demand in both of these segments allowed the
Orlando Hotel to restrict discounted rates and achieve a higher average rate.
REVPAR at the Orlando Hotel increased 8% over 1994 to $104 due to a 4%
improvement in the average room rate to $132 combined with a 2.7 percentage
point increase in average occupancy to 79%; as a result, room sales at the
Orlando Hotel increased $4.2 million, or 7.8%, over 1994. Food and beverage
sales increased $5.4 million, or 13.4%, over 1994 as a direct result of
increased catering volume associated with a 23% increase in corporate group
business. In 1996, the Orlando Hotel expects group demand to remain strong and
plans to capitalize on existing opportunities for increased transient business
during the summer months. As a result, 1996 hotel revenues are expected to
increase by approximately 4% over 1995.

Direct hotel operating costs and expenses increased $4.8 million, or 7.8%,
over 1994 primarily due to an increase in certain variable costs related to the
increase in room sales. However, as a percentage of total sales, these direct
hotel operating costs and expenses decreased to 58.7% in 1995 as compared to
60.2% in 1994.

Rental Income. Rental income from the Harbor Beach Hotel increased by
approximately $2.5 million, or 14.3%, when compared to 1994 primarily due to
strong group demand and a rebound in international business from Europe and
South America. In 1994, business was negatively impacted by highly publicized
crime incidents in the South Florida region, as well as a reduction in the
number of rooms available for sale during the rooms refurbishment. REVPAR
increased 14% over 1994 to $125 due to a 2% increase in average room rate to
$157 combined with an 8.3 percentage point increase in average occupancy to 80%,
which translated into a rooms profit improvement of 15%. Average occupancy
improved as a result of an increase in both group and transient business of 15%
and 8%, respectively. Increased catering volume associated with the growth in
group business resulted in a $2.3 million, or 13.7%, increase in food and
beverage sales and a $1.2 million, or 19.2%, increase in food and beverage
profit when compared to 1994. For 1996, rental income is currently expected to
increase by approximately 8%, as advance group bookings have increased from 1995
levels, and the Harbor Beach Hotel expects continued growth in demand in the
international market.

Interest and other revenues. Interest and other revenues decreased by $0.6
million in 1995, or 47.2%, when compared to 1994. In 1994, the Partnership
recognized a $0.9 million gain on the sale of approximately two acres of land
adjacent to the Orlando Hotel. Interest income increased by approximately $0.3
million over 1994 to $0.6 million, primarily due to interest earned on cash that
was held in reserve during 1995 in anticipation of the refinancing of the
Orlando Mortgage Debt.

Indirect hotel operating costs and expenses. Indirect hotel operating
costs and expenses increased by $1.1 million, or 3.9%, from $29.8 million in
1994 to $30.9 million in 1995. The principal components of this category are
discussed below:

Depreciation and amortization. Depreciation and amortization decreased by
------------------------------
$0.6 million, or 4.8%, when compared to 1994 due to a portion of the Hotels'
furniture and equipment becoming fully depreciated in 1994.

Incentive management fees. In accordance with the Orlando Hotel Management
--------------------------
Agreement, incentive management fees increased by $1.0 million, or 16.0%, over
1994 as a result of improved

13
<PAGE>

operating results at the Orlando Hotel. Cash flow from the operations of the
Orlando Hotel was sufficient to pay all incentive management fees earned by the
Manager in 1995 and 1994.

Base management fees. In accordance with the Orlando Hotel Management
---------------------
Agreement, base management fees increased 10.5%, from $3.1 million in 1994 to
$3.4 million in 1995, due to improved total sales at the Orlando Hotel.

Ground rent, insurance and other. Ground rent, insurance and other
---------------------------------
increased $0.6 million, or 11.1%, when compared to 1994. Pursuant to the Harbor
Beach Hotel ground lease, ground rent expense increased $0.1 million, or 8.3%,
over 1994. Repairs and maintenance expense related to the Harbor Beach Hotel
increased $0.2 million, or 10.8%, over 1994. Partnership administrative
expenses increased $0.1 million, or 39.9%, over 1994 primarily due to the
payment of a $0.1 million agency fee related to the modification and extension
of the Orlando Hotel Mortgage Debt.

Interest expense. Interest expense decreased 1.2% from $22.1 million in
1994 to $21.9 million in 1995 primarily due to principal payments on the Orlando
Hotel Mortgage Debt and the Harbor Beach Mortgage Debt. This was offset
slightly by an increase in the interest rate on the Orlando Mortgage Debt from
6.7% to 8.4% in connection with the 1995 loan modification and extension.

Net income. Net income for 1995 increased $5.8 million, or 79.9%, over
1994 primarily due to higher hotel revenues and rental income, offset slightly
by increased incentive and base management fees and an increase in minority
interest in income.

1994 Compared to 1993

Hotel Revenues. Hotel revenues decreased by $2.3 million, or 5.4%,
primarily due to the inclusion in 1993 of hotel revenues of $5.0 million from
the Warner Center Hotel through the Foreclosure Date. Hotel revenues from the
Orlando Hotel increased $2.7 million, or 6.9%, due to strong group demand in the
Orlando market, combined with successful cost containment strategies implemented
by the Manager at the beginning of 1994. REVPAR at the Orlando Hotel for 1994
increased 4% over 1993 due to a 3% increase in average room rate to $127 and a
1.0 percentage point increase in average occupancy. As a result, rooms sales at
the Orlando Hotel increased $2.1 million, or 4.1%, and rooms profit increased
$1.3 million, or 3.3%, when compared to 1994. The growth in average room rate
and average occupancy were partially offset by a slight decrease in the rooms
profit margin as a result of increased reservation costs associated with higher
group travel agent commissions. Food and beverage sales grew $1.2 million, or
3.2%, over 1994 due to increased banquet volume associated with the increased
group business.

Rental income. Rental income from the Harbor Beach Hotel decreased $0.5
million, or 2.9%, from 1993 as business was negatively impacted by highly
publicized crime incidents in South Florida, as well as continued growth in the
cruise line and casino industries. REVPAR decreased 2% when compared to 1993
due to a 3.2 percentage point decrease in average occupancy to 71%, which was
offset slightly by a 2% increase in average room rate to $153. The reduction in
rooms available for sale during the 1994 rooms refurbishment project resulted in
a significant decrease in group business when compared to 1993;

14
<PAGE>

however, the reduced supply of rooms allowed hotel management to restrict
discounted rates and achieve a higher average room rate for 1994.

Interest and other revenues. Interest and other revenues increased $0.4
million, or 49.9%, when compared to 1993. In 1994, the Partnership recognized a
$951,000 gain on the sale of approximately two acres of land adjacent to the
Orlando Hotel. In 1993, the Harbor Beach Partnership recorded income of $0.5
million which was received from the lessor under the Harbor Beach ground lease
in connection with a sale of the lease.

Indirect hotel operating costs and expenses. Indirect hotel operating
costs and expenses decreased by $8.2 million, or 21.6%, from $38.0 million in
1993 to $29.8 million in 1994, primarily due to the foreclosure of the Warner
Center Hotel in 1993. The principal components of this category are discussed
below:

Depreciation and amortization. Depreciation and amortization decreased
------------------------------
$2.3 million, or 15.6%, due to the foreclosure of the Warner Center Hotel, as
well as a portion of the Hotels' furniture and equipment becoming fully
depreciated in 1993.

Incentive management fees. In accordance with the Orlando Hotel and Warner
--------------------------
Center Hotel Management Agreements, incentive management fees increased by $0.3
million, or 4.4%, over 1993 due to improved operating results at the Orlando
Hotel, offset by 1993 incentive management fees of $0.4 million related to the
Warner Center Hotel. Incentive management fees earned by the Manager related to
the Orlando Hotel increased 11.1%, from $5.5 million in 1993 to $6.1 million in
1994.

Base management fees. Base management fees decreased $0.5 million, or
---------------------
12.7%, from 1993 primarily due to the foreclosure of the Warner Center Hotel.
Base management fees of $0.6 million related to the Warner Center Hotel were
earned in 1993. Base management fees earned by the Manager related to the
Orlando Hotel increased $0.1 million, or 3.3%, over 1993 due to improved total
sales at the Orlando Hotel.

Property Taxes. Property taxes decreased $0.7 million, or 17.3%, from 1993
---------------
due to the foreclosure of the Warner Center Hotel.

Ground rent, insurance and other. Ground rent, insurance and other
---------------------------------
decreased $5.1 million, or 50.0%, when compared to 1993. Ground rent decreased
$0.5 million, or 26.3%, due to the foreclosure of the Warner Center Hotel. The
Partnership recorded a $3.4 million loss in 1993 in connection with the
abandonment of a sewage treatment plant at the Orlando Hotel. In addition, the
Harbor Beach Partnership incurred expenses of approximately $0.3 million in 1993
related to hurricane damage at the Harbor Beach Hotel which were not reimbursed
under the Harbor Beach Hotel's insurance policies.

Interest Expense. Interest expense decreased $6.7 million, or 23.1%,
primarily due to the foreclosure of the Warner Center Hotel; interest expense
for 1993 included $5.7 million related to the Warner Center Partnership. In
addition, significant principal amortization on the Orlando Hotel Mortgage Debt
and the Harbor Beach Mortgage Debt, combined with a reduction in the interest
rate on the Harbor Beach Mortgage Debt from 9.375% to 9.125% during 1993
contributed to the decrease.

Write-down of Warner Center Hotel to estimated fair market value. The
Warner Center Partnership was required by generally accepted accounting
principles to write down the value of the Warner Center Hotel's assets ($44.7
million) to their estimated fair market value as of the Foreclosure Date ($24.7
million). This resulted in a loss to the Warner Center Partnership of $20.0
million in 1993.

15
<PAGE>

Minority interest in income. Based on its 50.5% ownership interest, the
Partnership controls the Harbor Beach Partnership and as a result, the accounts
of the Harbor Beach Partnership are consolidated in the consolidated financial
statements of the Partnership. Minority interest in income related to the
Harbor Beach Partnership decreased from $0.7 million in 1993 to $0.5 million in
1994 primarily due to decreased rental income, as discussed above, and income
recorded in 1993 related to the sale of the Harbor Beach ground lease. These
were offset by decreased interest expense on the Harbor Beach Mortgage Debt.
The Partnership also accounted for its investment in the Warner Center
Partnership using the equity method. Minority interest in income related to the
Warner Center Partnership was $0.3 million in 1993.

Extraordinary item. In 1993, the Partnership recognized a $40.4 million
extraordinary gain related to the dissolution of the Warner Center Partnership
which consisted of two portions: 1) a gain of $27.0 million on the foreclosure
of the Warner Center Hotel, which represented the difference between the Warner
Center Hotel Mortgage Debt balance of $51.7 million extinguished as a result of
the foreclosure and the estimated fair market value of the Warner Center Hotel
as of the Foreclosure Date of $24.7 million, (see Write-down of Warner Center
Hotel to estimated fair market value described above), and 2) a gain of $13.4
million resulting from debt extinguished due to the dissolution.

Net income. Net income for 1994 decreased $7.4 million, or 50.4%, when
compared to 1993 due primarily to the foreclosure of the Warner Center Hotel,
decreased rental income and a loss recorded in 1993 from the abandonment of
fixed assets, offset by increased hotel revenues at the Orlando Hotel and
decreased interest expense.

CAPITAL RESOURCES AND LIQUIDITY
- - -------------------------------

Principal Sources and Uses of Cash

The Partnership's principal source of cash is from operations. Its
principal uses of cash are to fund the property improvement funds of the Hotels,
to pay required principal amortization of the mortgage debt and other debt
incurred to fund costs of capital improvements at the Hotels, financing costs
and cash distributions to the partners. Total consolidated cash provided by
operations was $8.9 million, $20.9 million and $25.8 million for the years ended
December 31, 1993, 1994 and 1995, respectively. Cash contributed to the
property improvement funds of the Hotels, were $6.7 million, $6.0 million and
$7.8 million for the years ended 1993, 1994 and 1995, respectively. Principal
repayments made on the mortgage debt of the Hotels totaled $23.2 million, $9.8
million and $9.0 million for the years ended December 31, 1993, 1994 and 1995,
respectively. Financing costs related to the mortgage debt of the Partnership
Hotels totaled $3.9 million, $0.3 million and $2.3 million for the years ended
December 31, 1993, 1994 and 1995, respectively. Cash distributed to the
partners was $2.1 million in 1995, and there were no distributions paid to the
partners in 1994 and 1993. Cash distributions paid to minority interest were
$2.0 million, $0.5 million and $1.5 million for the years ended December 31,
1993, 1994 and 1995, respectively. Cash contributions from minority interest to
the Harbor Beach Partnership were $0.5 million in 1993 and $39,000 in 1994.

Principal repayments to Host Marriott related to the Orlando ballroom loan
and the Orlando Hotel rooms renovation loan totaled $1.4 million, $4.5 million
and $2.7 million for the years ended December 31, 1993, 1994 and 1995,
respectively. Principal repayments to Marriott International Capital
Corporation ("MICC"), a wholly-owned subsidiary of MII, related to a rooms
renovation loan at the Harbor Beach Hotel totaled $0.5 million in 1995. MICC
advanced $2.8 million to the Harbor Beach Partnership during 1994.

16
<PAGE>

On April 28, 1993, the lessor on the Harbor Beach Hotel ground lease sold
its rights under the lease to an unrelated party. A provision under the sale of
the lease provided for the early refund to the Harbor Beach Partnership of the
remaining $1.3 million balance of an initial $2.5 million security deposit paid
to the lessor and a $0.5 million payment to facilitate the modification of the
lease. The lease modification payment was deposited into an escrow account with
the Harbor Beach Mortgage Debt lender and was used to fund costs of the 1994
refinancing of the Harbor Beach Mortgage Debt.

The General Partner believes that cash from operations will provide
adequate funds for the operational needs of the Partnership and the Harbor Beach
Partnership for the foreseeable future. The interest rates on the Orlando Hotel
Mortgage Debt and the Harbor Beach Mortgage Debt are fixed at 8.44% and 9.13%,
respectively. Both loans mature in the year 2000, at which time the loan-to-
value ratios and debt service coverages of the Hotels are expected to enhance
the Partnership's and the Harbor Beach Partnership's ability to secure
replacement financing.

Property Improvement Funds

The Orlando Hotel Management Agreement and the Harbor Beach Hotel Operating
Lease provide for the establishment of a property improvement fund for each
Hotel. Pursuant to these agreements, contributions to the funds are equal to a
percentage of total sales of each Hotel and are used to provide for the funding
of routine capital expenditures and the replacement of furniture, fixtures and
equipment. Upon maturity of the Orlando Hotel Mortgage Debt on June 16, 1995,
contributions to the Orlando Hotel fund increased to 5% of total sales. Total
contributions to the Orlando Hotel fund were $4.0 million, $4.1 million and $5.1
million for 1993, 1994 and 1995, respectively. Total capital expenditures at
the Orlando Hotel were $2.8 million, $2.1 million and $4.8 million for 1993,
1994 and 1995, respectively. In addition, principal and interest paid to Host
Marriott on the Orlando rooms renovation loan totaled $1.5 million in 1993 and
$0.4 million in 1994. The balance of the Orlando Hotel fund was $2.8 million as
of December 31, 1995.

Contributions to the Harbor Beach Hotel's property improvement fund for
1993 and 1994 were equal to 4% of total hotel sales and increased to 5% of total
hotel sales in 1995. Total contributions to the Harbor Beach Hotel fund were
$1.9 million, $1.9 million and $2.6 million for 1993, 1994 and 1995,
respectively. Total capital expenditures at the Harbor Beach Hotel were $1.2
million, $4.7 million and $1.3 million for 1993, 1994 and 1995, respectively.
The balance of the Harbor Beach Hotel fund was $1.5 million as of December 31,
1995.

The Orlando Hotel is scheduled to undergo a two-phase rooms renovation
project which will enhance the Orlando Hotel's ability to compete in the highly
competitive and rapidly expanding Orlando market. Phase one of the project is
scheduled to commence in the summer of 1996 and is expected to cost
approximately $6.8 million. Projections indicate that the $6.4 million second
phase, which is scheduled to commence in the summer of 1997, will require
funding in excess of amounts available in the Orlando Hotel property improvement
fund. The General Partner is anticipating that financing of approximately $2.0
million will be provided by the Manager. It is expected that the loan would
accrue interest at market rates, and repayments would be made from future
contributions to the Orlando Hotel property improvement fund. The anticipated
shortfall is due to several reasons: 1) pursuant to the terms of the 1993
refinancing of the Orlando Hotel Mortgage Debt, the contribution to the Orlando
Hotel property improvement fund was reduced from 5% of total sales to 4% of
total sales; 2) the Partnership utilized approximately $3.0 million from the
property improvement fund for capital expenditures that were to have been funded
by Partnership funds exclusive of the property improvement fund; 3) payments of
principal and interest on the Orlando rooms renovation loan from Host Marriott,
which was incurred in 1990, were funded by a portion of the contributions to the
property improvement fund; and 4) the nature of the

17
<PAGE>

business of the Orlando Hotel, which generally produces more wear and tear on
the furniture, carpeting and other fixtures of the Orlando Hotel and increases
the amount of cash necessary to ensure that the physical condition and product
quality of Orlando Hotel is maintained. The General Partner expects that
contributions to the Orlando Hotel property improvement fund will be sufficient
to repay the anticipated advance from MII and will provide a sufficient reserve
for the future capital repair and replacement needs of the Orlando Hotel.

During the fourth quarter of 1994, the Harbor Beach Hotel completed a $4.4
million guest rooms and suites renovation. Financing for the project was
provided from the Harbor Beach Hotel's property improvement fund and a $2.8
million unsecured loan from MICC. The loan carries a fixed rate of interest of
8% and is scheduled to mature on December 31, 1999. Payment of principal and
interest based upon a five-year amortization period commenced in January 1995.
Under the terms of the loan, the debt service payments are included as a
deduction in determining the fees paid to the Operating Tenant. As of December
31, 1995, the outstanding principal balance was $2.4 million. The General
Partner expects that contributions to the Harbor Beach Hotel property
improvement fund will be a sufficient reserve for the future capital repair and
replacement needs of the Harbor Beach Hotel.

Orlando Mortgage Debt

The original Orlando Hotel loan agreement provided for a principal loan of
$165.0 million to fund construction of the Orlando Hotel plus an accrual loan of
$20.0 million to fund certain interest payments in excess of minimum
requirements. On June 16, 1987, the Partnership borrowed $175.0 million under a
$195.0 million Term and Revolving Credit Agreement (the "Orlando Mortgage Debt")
with the Sanwa Bank Limited. The Revolving Credit Agreement provided for some
interest payments to be funded from a $20.0 million revolving credit facility.
The proceeds of this borrowing were used to purchase the original Orlando Hotel
loan, repay advances from Host Marriott, pay transaction costs and provide $4.9
million in cash distributions to the partners.

The Orlando Mortgage Debt matured on June 16, 1992, with $199.0 million in
principal and interest due at that time. Effective July 9, 1992, the
Partnership and the lender signed a letter of intent for the refinancing of the
Orlando Mortgage Debt. On January 12, 1993, the Partnership completed a
refinancing of the Orlando Mortgage Debt. The refinanced loan carried a fixed
interest rate of 6.705% through maturity on June 16, 1995, and semi-annual
principal amortization was required for the years 1993 through 1995, with $9.5
million, $8.5 million and $4.0 million due in each respective year. Host
Marriott provided a $10.0 million guarantee (the "Host Marriott Guarantee") of
principal and interest payments; advances under the guarantee accrued interest
at the Morgan Guaranty Trust Company prime rate.

The Partnership paid $29.3 million to the lender at closing, which was
applied $12.0 million to the outstanding principal balance, $13.5 million to
interest due through January 12, 1993, and $3.8 million to financing costs.
These payments were funded through cash reserved from 1992 and 1991 operations,
$3.2 million advanced under the Host Marriott Guarantee and $8.1 million
advanced under the $13.2 million Orlando Ballroom Loan from Host Marriott. The
advance under the Host Marriott Guarantee was repaid in 1993 from operating cash
flow available after payments on the Orlando Mortgage Debt. In addition,
contributions to the Orlando Hotel's property improvement fund were reduced from
5% to 4% of total sales through June 16, 1995.

As a result of strong operating results at the Orlando Hotel, cash flow
from operations was sufficient to enable the Partnership to meet the debt
service requirements of the Orlando Mortgage Debt through maturity in June 1995.
Interest expense on the Orlando Mortgage Debt was $11.4 million and $12.0
million for the years ended December 31, 1994 and 1993, respectively. No
additional advances

18
<PAGE>

were required under the Host Marriott Guarantee. In addition, on June 8, 1994,
the Partnership sold approximately two acres of land adjacent to the Orlando
Hotel to Marriott Ownership Resorts, Inc., an affiliate of Marriott
International, Inc. ("MII"), for use in the expansion of its existing time share
complex. Proceeds from the transaction, net of selling costs, totaled $1.1
million and were used to repay principal on the Orlando Mortgage Debt. The
transaction resulted in recognition of a $0.9 million gain on sale for the year
ended December 31, 1994. As of December 31, 1994, $161.0 million was
outstanding under the Orlando Mortgage Debt.

The Orlando Mortgage Debt matured on June 16, 1995. Upon maturity of the
debt, the lender granted the Partnership a forbearance on the loan under which,
for the period June 16, 1995 through October 31, 1995, the Partnership paid
interest monthly in arrears at a floating rate equal to the applicable Federal
Funds rate plus 225 basis points. On October 31, 1995, the Partnership
successfully completed a modification and extension of the Orlando Mortgage
Debt. The mortgage debt carries a fixed interest rate of 8.44%. Under the
modified debt, continued semi-annual amortization of principal is required. The
loan matures on June 16, 2000 with unamortized principal of $127.0 million due
at that time. In addition, no debt service guarantee was required to be
provided. The costs associated with the modification and extension totaled
approximately $2.3 million and there were no excess proceeds from the
transaction available for distribution. The outstanding Orlando Mortgage Debt
principal balance as of December 31, 1995, was $153.0 million.

Harbor Beach Mortgage Debt

The original $92.0 million Harbor Beach Mortgage Debt from Aetna Life
Insurance Company bore interest at a fixed rate of 9.375% and required interest
only payments through July 1988 and monthly payments of principal and interest
in the amount of $765,000 thereafter until maturity on July 1, 1993. The Harbor
Beach Mortgage Debt matured with $89.2 million in principal and interest due at
that time. The lender granted the Harbor Beach Partnership a forbearance of the
loan for a fee of $165,000. Under the agreement, the Harbor Beach Partnership
continued to pay the lender principal and interest at the contract rate of
9.375%. Interest expense for the year ended December 31, 1993, was $8.3
million.

On March 29, 1994, the Harbor Beach Partnership completed a modification
and extension of the Harbor Beach Mortgage Debt. The modified loan accrues
interest at fixed rate of 9.125% and is payable monthly in arrears. Interest
only was payable for the first twelve payments through and including April 1,
1995. The difference between the interest only payment and $772,600 (the
"Payment Amount") was contributed to an escrow account (the "Capital Reserve
Escrow") with the lender to fund capital improvements at the Harbor Beach Hotel.
The Payment Amount represents the amount necessary to amortize the outstanding
principal balance as of March 29, 1994, over a 22-year effective amortization
period. The Harbor Beach Mortgage Debt matures on May 1, 2000 and is
collateralized by all property and assets of the Harbor Beach Hotel. No debt
service guarantee was provided. Interest expense was $8.0 million and $8.1
million for the years ended December 31, 1995 and 1994, respectively. The
outstanding Harbor Beach Mortgage Debt principal balance as of December 31, 1995
and 1994, was $86.9 million and $87.9 million, respectively.

Warner Center Mortgage Debt

The Warner Center Partnership entered into a loan agreement with
Connecticut General Life Insurance Company to provide $47.0 million of non-
recourse debt to fund construction of the Warner Center Hotel, which was
converted to permanent financing on July 23, 1987 (the "Warner Center Mortgage
Debt"). The Warner Center Mortgage Debt carried a fixed interest rate of 10.47%
and required no amortization of principal until maturity on July 23, 1997. The
loan was secured by the Warner Center

19
<PAGE>

Hotel and an assignment of the Warner Center Hotel's management agreement. As
additional security, Host Marriott provided a $5.3 million guarantee of debt
service payments. Payments under the guarantee constituted advances to the
Warner Center Partnership and accrued interest at the Bankers Trust Company
prime rate plus 1%.

On February 28, 1991, Host Marriott's debt service guarantee expired. On
March 1, 1991, the Warner Center Partnership defaulted on the Warner Center
Mortgage Debt when it was unable to meet the required debt service payment with
available cash flow. Operating cash flow generated from the Warner Center Hotel
was paid to the lender on March 1, 1991 and April 1, 1991; however, this cash
was insufficient to cover the debt service requirements. On September 10, 1991,
the General Partner completed a restructuring of the loan for the period from
February 1, 1991 through January 31, 1992, which temporarily took the loan out
of default.

On April 1, 1992, the Warner Center Partnership re-entered default on its
Warner Center Mortgage Debt as the Warner Center Hotel was unable to generate
sufficient cash flow to meet its debt service requirements. On September 25,
1992, the General Partner completed a second restructuring of the loan for the
period March 1, 1992 through May 31, 1993. Pursuant to the terms of the second
restructuring, the Warner Center Partnership continued to pay interest at 10.47%
with interest shortfalls being funded through a $1.2 million debt service
reserve established from the Warner Center Hotel's property improvement fund.
On September 25, 1992, the entire reserve balance was funded to the lender to
pay past due interest.

The Warner Center Partnership defaulted on its Warner Center Mortgage Debt
on July 1, 1993, as cash flow from hotel operations was insufficient to pay debt
service and Host Marriott's limited debt service guarantee was exhausted. On
the Foreclosure Date, ownership of the Warner Center Hotel was transferred
through foreclosure to the lender. Accounting for the foreclosure in accordance
with generally accepted accounting principles required the write-down of the
Warner Center Hotel's assets to their estimated fair market value at the time of
the foreclosure. This resulted in the recognition of a loss of $20.0 million
for the year ended December 31, 1993. Additionally, the Partnership was
required to record an extraordinary gain of $40.4 million which consisted of two
portions: 1) a gain of $27.0 million on the foreclosure, which represented the
difference between the mortgage debt of $51.7 million extinguished as a result
of the foreclosure and the estimated fair market value of the Warner Center
Hotel as of the Foreclosure Date, and 2) a gain of $13.4 million resulting from
the debt extinguished due to the dissolution of the Warner Center Partnership.
Advances under the Host Marriott debt service guarantee which were forgiven
totaled $5.4 million with related accrued interest of $2.0 million, and a note
payable to Host Marriott which was forgiven totaled $187,000 with accrued
interest of $10,000. Also, accrued base management fees due to MII which were
forgiven amounted to $269,000 as of the Foreclosure Date.

As a result of the foreclosure of the Warner Center Hotel, the Warner
Center Partnership was dissolved. The foreclosure and subsequent dissolution
will not have further adverse effect on the financial condition of the
Partnership since this loan was non-recourse to the Partnership and the partners
and this Hotel had not contributed to Partnership cash distributions.

Orlando Ballroom Loan

During 1990, Host Marriott agreed to provide interim financing of up to
$14.0 million to fund the construction of a new ballroom and exhibition hall at
the Orlando Hotel. Construction was completed in February 1990. On December
31, 1990, the interim financing was converted to a permanent loan from Host
Marriott with $13.2 million advanced, which accrued interest at the Bankers
Trust Company prime rate. On June 16, 1992, in conjunction with the refinancing
of the Orlando Mortgage Debt, the Orlando

20
<PAGE>

Ballroom Loan was converted to a revolving line of credit with a floating
interest rate equal to the Bankers Trust Company prime rate. During 1992, the
Partnership repaid principal of $13.2 million on the Orlando Ballroom Loan and
subsequently reborrowed $5.1 million to fund an escrow account for past due
interest on the Orlando Mortgage Debt. On January 12, 1993, Host Marriott
advanced $8.1 million to the Partnership in conjunction with the refinancing of
the Orlando Mortgage Debt. The advance was applied to the Orlando Mortgage Debt
principal and accrued interest at closing of the refinanced loan. Payment of
principal and interest on the Orlando Ballroom Loan is subordinate to the
payment of amounts due under the Orlando Mortgage Debt, repayment of any
outstanding debt service guarantee advances and payment of the first 50% of
incentive management fees to MII. As of December 31, 1995 and 1994, the
outstanding principal balance was $6.4 million and $9.1 million, respectively.
The weighted average interest rate was 8.8% for 1995, 7.1% for 1994 and 6.0% for
1993.

Orlando Rooms Renovation Loan

The Partnership secured a loan from Host Marriott to fund up to $11.0
million for a rooms renovation project at the Orlando Hotel which began in
August 1990 and was completed in April 1991. Advances under the loan accrued
interest at the Bankers Trust Company prime rate, and payments of principal and
interest were funded out of contributions to the property improvement fund.
Total renovation costs of $10.2 million were funded through Host Marriott loan
advances of $6.7 million and property improvement fund expenditures of $3.5
million. The outstanding principal balance was paid in full during 1994. The
weighted average interest rate for the years ended December 31, 1994 and 1993
was 6.0%.

Inflation
- - ---------

For the three fiscal years ended December 31, 1995, the rate of inflation
has been relatively low and, accordingly, has not had a significant impact on
the Partnership's consolidated revenues and net income. The Manager and the
Operating Tenant are generally able to pass through increased costs to customers
through higher room rates. In 1995, the increase in average room rates at the
Hotels exceeded those of direct competitors as well as the general level of
inflation. As stated above, the Orlando Mortgage Debt and the Harbor Beach
Mortgage Debt bear fixed interest rates, thereby eliminating exposure to the
impact of future increases in interest rates.

Seasonality
- - -----------

Demand, and thus occupancy and room rates, is affected by normally
recurring seasonal patterns. Demand tends to be higher during the months of
November through April than during the remainder of the year. This seasonality
tends to affect the results of operations, increasing the revenue and rental
income during these months. In addition, this seasonality may also increase the
liquidity of the Partnership during these months.

New Statement of Financial Accounting Standards
- - -----------------------------------------------

The Partnership is required to adopt Statement of Financial Accounting
Standards ("SFAS") No. 121 "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to Be Disposed Of" no later than its year ending
December 31, 1996. The Partnership does not expect that the adoption of SFAS
No. 121 will have a material effect on its financial statements.

21
<PAGE>

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
<TABLE>
<CAPTION>

Index Page
----- ----
<S> <C>

Report of Independent Public Accountants.............. 23

Consolidated Statement of Operations.................. 24

Consolidated Balance Sheet............................ 25

Consolidated Statement of Cash Flows.................. 26

Statement of Changes in Partners' Capital (Deficit)... 28

Notes to Consolidated Financial Statements............ 29
</TABLE>

22
<PAGE>

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

- - --------------------------------------------------------------------------------
TO THE PARTNERS OF MARRIOTT HOTEL PROPERTIES LIMITED PARTNERSHIP:

We have audited the accompanying consolidated balance sheet of Marriott Hotel
Properties Limited Partnership (a Delaware limited partnership) and subsidiaries
as of December 31, 1995 and 1994, and the related consolidated statements of
operations, changes in partners' capital (deficit) and cash flows for each of
the three years in the period ended December 31, 1995. These financial
statements are the responsibility of the General Partner's management. Our
responsibility is to express an opinion on these financial statements based on
our audits. We did not audit the 1995 and 1994 financial statements of
Lauderdale Beach Association, which statements reflect total assets and total
revenues of 25 percent and 29 percent in 1995, respectively, and 25 percent and
29 percent in 1994, respectively, of the consolidated totals. Those statements
were audited by other auditors whose report has been furnished to us and our
opinion, insofar as it relates to the amounts included for that entity, is based
solely on the report of the other auditors.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform an audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits and the report of other auditors provide a reasonable
basis for our opinion.

In our opinion, based on our audits and the report of other auditors, the
financial statements referred to above present fairly, in all material respects,
the financial position of Marriott Hotel Properties Limited Partnership and
subsidiaries as of December 31, 1995 and 1994, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1995, in conformity with generally accepted accounting principles.

ARTHUR ANDERSEN LLP

Washington, D.C.
April 4, 1996

23
<PAGE>

CONSOLIDATED STATEMENT OF OPERATIONS

Marriott Hotel Properties Limited Partnership and Subsidiaries
For the Years Ended December 31, 1995, 1994 and 1993
(in thousands, except per Unit amounts)
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>

1995 1994 1993
-------- -------- ---------
<S> <C> <C> <C>
REVENUES
Hotels (Note 3)................................ $47,251 $41,201 $ 43,550
Rental income.................................. 19,747 17,273 17,797
Interest and other............................. 679 1,285 857
------- ------- --------
67,677 59,759 62,204
------- ------- --------

OPERATING COSTS AND EXPENSES
Interest (including interest paid to related
parties of $1.0 million, $1.0 million and
$0.9 million in 1995, 1994 and 1993,
respectively)................................ 21,864 22,128 28,785
Depreciation and amortization.................. 11,739 12,327 14,601
Incentive management fees (paid to related
parties)...................................... 7,047 6,073 5,819
Base management fees (paid to related parties). 3,431 3,104 3,556
Property taxes................................. 3,104 3,230 3,904
Ground rent, insurance and other............... 5,624 5,063 10,129
Write-down of Warner Center Hotel to estimated
fair market value............................. -- -- 19,982
------- ------- --------

52,809 51,925 86,776
------- ------- --------

INCOME (LOSS) BEFORE EXTRAORDINARY ITEM
AND MINORITY INTEREST.......................... 14,868 7,834 (24,572)

EXTRAORDINARY ITEM
Gain on debt extinguishment resulting from
Warner Center Hotel foreclosure................ -- -- 40,356
------- ------- --------

INCOME BEFORE MINORITY INTEREST.................. 14,868 7,834 15,784

MINORITY INTEREST IN INCOME...................... (1,718) (523) (1,036)
------- ------- --------

NET INCOME....................................... $13,150 $ 7,311 $ 14,748
======= ======= ========

ALLOCATION OF NET INCOME
General Partner................................ $ 132 $ 73 $ 148
Limited Partners............................... 13,018 7,238 14,600
------- ------- --------

$13,150 $ 7,311 $ 14,748
======= ======= ========

NET INCOME PER LIMITED PARTNER UNIT (1,000 Units) $13,018 $ 7,238 $ 14,600
======= ======= ========
</TABLE>
The accompanying notes are an integral part of these financial statements.

24
<PAGE>

CONSOLDIATED BALANCE SHEET

Marriott Hotel Properties Limited Partnership and Subsidiaries
December 31, 1995 and 1994
(in thousands)
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>

1995 1994
-------- --------
<S> <C> <C>
ASSETS
Property and equipment, net............................. $222,458 $228,122
Minority interest....................................... 11,185 11,418
Due from Marriott International, Inc. and its affiliates 7,136 6,895
Property improvement funds.............................. 4,363 2,615
Deferred financing costs, net of accumulated
amortization........................................... 2,266 1,053
Prepaid land rent and other receivables................. 259 263
Restricted cash......................................... -- 949
Cash and cash equivalents............................... 3,550 2,743
-------- --------

$251,217 $254,058
======== ========

LIABILITIES AND PARTNERS' CAPITAL (DEFICIT)
Mortgage debt........................................... $239,860 $248,830
Note payable and amounts due to Host Marriott
Corporation............................................ 6,484 9,149
Note payable and amounts due to Marriott International,
Inc.................................................... 6,052 8,628
Accounts payable and accrued interest................... 1,087 762
-------- --------

Total Liabilities...................................... 253,483 267,369
-------- --------

PARTNERS' CAPITAL (DEFICIT)
General Partner
Capital contribution.................................. 1,010 1,010
Capital distributions................................. (462) (441)
Cumulative net losses................................. (461) (593)
-------- --------

87 (24)
-------- --------
Limited Partners
Capital contributions, net of offering costs of $10,978.. 89,022 89,022
Investor notes receivable................................ (47) (47)
Capital distributions.................................... (45,654) (43,570)
Cumulative net losses.................................... (45,674) (58,692)
-------- --------

(2,353) (13,287)
-------- --------

Total Partners' Deficit.................................. (2,266) (13,311)
-------- --------

$251,217 $254,058
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.

25
<PAGE>

CONSOLIDATED STATEMENT OF CASH FLOWS

Marriott Hotel Properties Limited Partnership and Subsidiaries
For the Years Ended December 31, 1995, 1994 and 1993
(in thousands)
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>

1995 1994 1993
-------- -------- --------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income...................................... $ 13,150 $ 7,311 $ 14,748
Extraordinary item.............................. -- -- 40,356
-------- -------- --------
Income (loss) before extraordinary item......... 13,150 7,311 (25,608)
Noncash items:
Depreciation and amortization.................. 11,739 12,327 14,601
Minority interest in income.................... 1,718 523 1,036
Amortization of deferred financing costs as
interest...................................... 1,041 1,659 2,435
Loss (gain) on disposal of property and
equipment..................................... 48 (948) 3,303
Deferred portion of base and incentive
management fees............................... -- 1,608 2,023
Interest roll-up on note payable to Marriott
International, Inc............................ -- 64 --
Write down of Warner Center Hotel to estimated
fair market value............................. -- -- 19,982
Interest on debt service guarantee advances.... -- -- 330
Changes in operating accounts:
Payment of deferred incentive management fees.. (1,972) -- --
Due to/from Marriott International, Inc........ (360) (931) 1,075
Accounts payable and accrued interest.......... 325 (703) (9,827)
Due to Host Marriott Corporation............... 62 (3) (171)
Prepaid land rent and other receivables........ 4 (23) (322)
-------- -------- --------

Cash provided by operations................ 25,755 20,884 8,857
-------- -------- --------

INVESTING ACTIVITIES
Additions to property and equipment............. (6,123) (6,822) (4,665)
Changes in property improvement funds........... (1,748) (1,579) 241
Withdrawal from (deposits to) capital reserve
escrow......................................... 949 (949) --
Proceeds from sale of land...................... -- 1,109 --
Return of security deposit...................... -- -- 1,250
-------- -------- --------

Cash used in investing activities.......... (6,922) (8,241) (3,174)
-------- -------- --------

FINANCING ACTIVITIES
Repayments of mortgage debt and capital lease
obligations.................................... (8,970) (9,842) (23,289)
Repayments to Host Marriott Corporation......... (2,727) (4,489) (1,415)
Financing costs................................. (2,254) (309) (3,940)
Capital distributions to partners............... (2,105) -- --
Capital distributions to minority interest...... (1,485) (495) (2,003)
(Repayments of) proceeds from note payable to
Marriott International, Inc.................... (485) 2,800 --
Proceeds from loan escrow account............... -- 340 7,899
Capital contributions from minority interest.... -- 39 456
Proceeds from line of credit from Host Marriott
Corporation.................................... -- -- 8,067
-------- -------- --------

Cash used in financing activities.......... (18,026) (11,956) (14,225)
-------- -------- --------
</TABLE>

26
<PAGE>

INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS... $ 807 $ 687 $(8,542)

CASH AND CASH EQUIVALENTS at beginning of year..... 2,743 2,056 10,598
------- ------- -------

CASH AND CASH EQUIVALENTS at end of year........... $ 3,550 $ 2,743 $ 2,056
======= ======= =======

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for mortgage and other interest......... $20,893 $21,122 $35,665
======= ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.

27
<PAGE>

STATEMENT OF CHANGES IN
PARTNERS' CAPITAL (DEFICIT)

Marriott Hotel Properties Limited Partnership and Subsidiaries
For the Years Ended December 31, 1995, 1994 and 1993
(in thousands)

General Limited
Partner Partner Total
--------- --------- --------
<S> <C> <C> <C>
Balance, December 31, 1992..................... $(245) $(35,125) $(35,370)

Net income.................................... 148 14,600 14,748
----- -------- --------

Balance, December 31, 1993..................... (97) (20,525) (20,622)

Net income.................................... 73 7,238 7,311
----- -------- --------

Balance, December 31, 1994..................... (24) (13,287) (13,311)

Net income.................................... 132 13,018 13,150

Capital distributions......................... (21) (2,084) (2,105)
----- -------- --------

Balance, December 31, 1995..................... $ 87 $ (2,353) $ (2,266)
===== ======== ========

</TABLE>
The accompanying notes are an integral part of these financial statements.

28
<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Marriott Hotel Properties Limited Partnership and Subsidiaries
December 31, 1995 and 1994
- - --------------------------------------------------------------------------------

NOTE 1. THE PARTNERSHIP

Description of the Partnership

Marriott Hotel Properties Limited Partnership (the "Partnership"), a Delaware
limited partnership, was formed on August 22, 1984, to acquire, construct, own
and operate the 1,503-room Marriott Orlando World Center Hotel (the "Orlando
Hotel"). On October 8, 1993, Marriott Corporation's operations were divided
into two separate companies: Host Marriott Corporation and Marriott
International, Inc. ("MII"). On December 29, 1995, Host Marriott Corporation's
operations were divided into two separate companies: Host Marriott Corporation
("Host Marriott") and Host Marriott Services Corporation. The Orlando Hotel is
managed as part of the Marriott Hotels, Resorts and Suites full-service hotel
system by MII (the "Manager").

Between November 1, 1985 and November 27, 1985 (the "Closing Date"), 1,000
limited partnership interests (the "Units"), representing a 99% interest in the
Partnership, were sold in a private placement. The General Partner is Hotel
Properties Management, Inc. (the "General Partner"), a Delaware corporation and
a wholly-owned subsidiary of Host Marriott, with a 1% general partnership
interest. On the Closing Date, the Partnership purchased from affiliates of
Host Marriott (i) a 99% limited partnership interest in the Warner Center
Marriott Hotel Limited Partnership (the "Warner Center Partnership"), which
owned the 473-room Warner Center Marriott Hotel (the "Warner Center Hotel") in
Los Angeles, California and (ii) a 49% general partnership interest in, and a
loan receivable of $3,680,000 from, Lauderdale Beach Association (the "Harbor
Beach Partnership"), a general partnership that owns Marriott's 624-room Harbor
Beach Resort (the "Harbor Beach Hotel") in Ft. Lauderdale, Florida. As a result
of certain transactions, the Partnership now owns a 50.5% interest in the Harbor
Beach Partnership. The limited partners paid $10,000,000 in cash on the Closing
Date ($10,000 per Unit) and received investor notes aggregating $65,600,000 due
in five annual installments through May 15, 1990.

The Harbor Beach Hotel is leased to Marriott Hotel Services, Inc. (the
"Operating Tenant"), a wholly-owned subsidiary of MII, and is operated as part
of the Marriott Hotels, Resorts and Suites full-service hotel system.

The Warner Center Partnership defaulted on its first mortgage on July 1, 1993
(see Note 6). On July 16, 1993, the Lender officially recorded the default with
the State of California and commenced foreclosure proceedings. The transfer of
ownership of the Warner Center Hotel to the Lender occurred on November 17, 1993
(the "Foreclosure Date"). The foreclosure was followed by the dissolution of
the Warner Center Partnership. The foreclosure did not have further adverse
effect on the financial condition of the Partnership since the Warner Center
Partnership loan was non-recourse to the Partnership and the partners.

Partnership Allocations and Distributions

The Partnership generally allocates net profits and losses, cash available for
distribution and tax credits as follows: (i) first, 1% to the General Partner
and 99% to the limited partners until cumulative distributions of sale and
refinancing proceeds ("Capital Receipts") equal to 50% of capital contributions
have been distributed; (ii) next, 15% to the General Partner and 85% to the
limited partners until cumulative distributions of Capital Receipts equal to all
capital contributions have been distributed; and (iii) thereafter, 30% to the
General Partner and 70% to the limited partners.

Capital Receipts not retained by the Partnership will generally be distributed
(i) first, 1% to the General Partner and 99% to the limited partners until the
General Partner and the limited partners (collectively the "Partners") have
received cumulative distributions of Capital Receipts equal to their capital
contributions; and (ii) thereafter, 30% to the General Partner and 70% to the
limited partners.

29
<PAGE>

- - --------------------------------------------------------------------------------
Gains are generally allocated (i) first, to Partners with negative capital
accounts, (ii) next, in amounts necessary to bring each Partner's capital
account balance equal to their invested capital, defined as the excess of paid-
in capital contributions over cumulative distributions of Capital Receipts, and
(iii) thereafter, 30% to the General Partner and 70% to the limited partners.

Upon the sale of substantially all of the assets, gains and sales proceeds will
be distributed based on a specific allocation, as stated in the partnership
agreement, in order to provide the limited partners (if proceeds are sufficient)
a 15% cumulative return, as defined, to the extent not previously received from
cash distributions.

For financial reporting purposes, net losses of the Partnership are allocated 1%
to the General Partner and 99% to the limited partners.

The Harbor Beach Partnership generally allocates profits and losses, cash
distributions, gains and losses, and Capital Receipts in the ratio of ownership
interests.

NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Accounting

The Partnership's records are maintained on the accrual basis of accounting and
its fiscal year coincides with the calendar year.

Use of Estimates

The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.

Working Capital and Supplies

Pursuant to the terms of the management agreement discussed in Note 8, the
Partnership is required to provide the Manager with working capital and supplies
to meet the operating needs of the Orlando Hotel. The Manager converts cash
advanced by the Partnership into other forms of working capital consisting
primarily of operating cash, inventories, and trade receivables and payables
which are maintained and controlled by the Manager. Upon the termination of the
management agreement, the Manager is required to convert working capital and
supplies into cash and return it to the Partnership. As a result of these
conditions, the individual components of working capital and supplies controlled
by the Manager are not reflected in the accompanying consolidated balance sheet.

30
<PAGE>

- - --------------------------------------------------------------------------------
Revenues and Expenses

Hotel Revenues represents house profit from the Orlando Hotel (and also for the
Warner Center Hotel for 1993) since the Partnership has delegated substantially
all of the operating decisions related to the generation of house profit of the
Hotels to the Manager. House profit reflects hotel operating results which flow
to the Partnership as property owner and represents gross hotel sales less
property-level expenses, excluding depreciation and amortization, base and
incentive management fees, real and personal property taxes, ground and
equipment rent, insurance and certain other costs, which are disclosed
separately in the Consolidated Statement of Operations.

Principles of Consolidation

The consolidated financial statements for the year ended December 31, 1995 and
1994, include the accounts of the Partnership and the Harbor Beach Partnership
(collectively the "Partnerships"). The accompanying financial statements for
the year ended December 31, 1993, also include the accounts of the Warner Center
Partnership. The accounts of the Warner Center Partnership for 1993 reflect
operations for the period from January 1, 1993, through the Foreclosure Date.
The 49.5% general partnership interest in the Harbor Beach Partnership owned by
an unrelated party is reported as minority interest. The Partnership has
recorded the minority shareholder's allocable share of losses on the
accompanying consolidated balance sheet as minority interest because all
individual partners with deficit capital accounts must fund the amount of that
deficit upon dissolution or liquidation of the Harbor Beach Partnership. The
Partnership periodically assesses the minority interest asset based on the
underlying operations of the Harbor Beach Partnership. All significant
intercompany balances and transactions have been eliminated.

Property and Equipment

Property and equipment is recorded at cost. Depreciation and amortization are
computed using the straight-line method over the following estimated useful
lives of the assets, less a 10% estimated residual value on the original
building cost and land improvements related to the Orlando Hotel:

Land improvements 40 to 50 years
Building and improvements 40 to 50 years
Leasehold improvements 40 years
Furniture and equipment 3 to 10 years

All property and equipment is pledged as security for the mortgage debt
described in Note 6.

On June 8, 1994, the Partnership sold approximately two acres of land adjacent
to the Orlando Hotel to Marriott Ownership Resorts, Inc. ("MORI"), an affiliate
of MII. Proceeds from the transaction, net of selling costs, totaled $1.1
million and were used to pay down principal on the Orlando Mortgage Debt (see
Note 6). This transaction resulted in recognition of $951,000 of gain which is
included in Interest and Other Revenues on the Consolidated Statement of
Operations for the year ended December 31, 1994.

On the Foreclosure Date, ownership of the Warner Center Hotel was transferred
through foreclosure to the Lender (see Note 6).

31
<PAGE>

- - --------------------------------------------------------------------------------
Deferred Financing Costs

Deferred financing costs represent the costs incurred in connection with
obtaining the mortgage debt (see Note 6) and are amortized over the term
thereof. The Orlando Mortgage Debt, which is described in Note 6, was
refinanced on October 31, 1995. Deferred financing costs associated with the
refinancing of the Orlando Mortgage Debt totaled $2,276,000. Deferred financing
costs associated with the restructuring of the Harbor Beach Mortgage Debt (see
Note 6) amounted to $350,000. Accumulated amortization of deferred financing
costs were $360,000 and $3,285,000 at December 31, 1995 and 1994, respectively.

Cash and Cash Equivalents

The Partnership considers all highly liquid investments with a maturity of three
months or less at date of purchase to be cash equivalents.

Income Taxes

Provision for Federal and state income taxes has not been made in the
accompanying financial statements since the Partnership does not pay income
taxes, but rather allocates its profits and losses to the individual partners.
Significant differences exist between the net loss for financial reporting
purposes and the net loss reported in the Partnership's tax return. These
differences are due primarily to the use, for income tax purposes, of
accelerated depreciation methods, shorter depreciable lives of the assets,
differences in the timing of the recognition of base and incentive management
fee expense and the expensing of certain costs incurred during construction
which have been capitalized in the accompanying financial statements. As a
result of these differences, the excess of the tax basis in net Partnership
liabilities over the net liabilities reported in the accompanying financial
statements amounted to $93,026,000 and $85,993,000 as of December 31, 1995 and
1994, respectively.

New Statement of Financial Accounting Standards

The Partnership is required to adopt Statement of Financial Accounting Standards
("SFAS") No. 121 "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of" no later than its year ending December 31,
1996. The Partnership does not expect that the adoption of SFAS No. 121 will
have a material effect on its financial statements.

32
<PAGE>

- - --------------------------------------------------------------------------------
NOTE 3. HOTEL REVENUES

Hotel Revenues consist of Hotel operating results for the Orlando Hotel for the
two years ended December 31, 1995, and for the Orlando and Warner Center Hotels
for the year ended December 31, 1993 (Warner Center Hotel through the
Foreclosure Date) (in thousands):
<TABLE>
<CAPTION>
1995 1994 1993
-------- -------- -------
<S> <C> <C> <C>
HOTEL SALES
Rooms........................... $ 56,881 $ 52,731 $60,469
Food and beverage............... 45,708 40,290 46,070
Other........................... 11,762 10,447 11,994
-------- -------- -------
114,351 103,468 118,533
-------- -------- -------

HOTEL EXPENSES
Departmental Direct Costs
Rooms.......................... 11,665 11,337 13,087
Food and beverage.............. 28,784 25,828 30,866
Other hotel operating expenses.. 26,651 25,102 31,030
-------- -------- -------
67,100 62,267 74,983
-------- -------- -------

HOTEL REVENUES................... $ 47,251 $ 41,201 $43,550
======== ======== =======

</TABLE>

NOTE 4. PROPERTY AND EQUIPMENT

Property and equipment consists of the following as of December 31 (in
thousands):
<TABLE>
<CAPTION>
1995 1994
---------- ---------
<S> <C> <C>

Land and improvements........................... $ 30,893 $ 30,741
Building and improvements....................... 150,861 150,012
Leasehold improvements.......................... 80,646 79,567
Furniture and equipment......................... 62,811 62,898
--------- --------
325,211 323,218
Less accumulated depreciation and amortization.. (102,753) (95,096)
--------- --------

$222,458 $ 228,122
========= ========

</TABLE>

33
<PAGE>

- - --------------------------------------------------------------------------------
NOTE 5. ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS

The estimated fair values of financial instruments are shown below. The fair
values of financial instruments not included in this table are estimated to be
equal to their carrying amounts.
<TABLE>
<CAPTION>

As of December 31, 1995 As of December 31, 1994
----------------------- -----------------------
Estimated Estimated
Carrying Fair Carrying Fair
Amount Value Amount Value
-------- --------- -------- ---------
(in thousands)
<S> <C> <C> <C> <C>

Mortgage debt $239,860 $248,287 $248,830 $248,830

Note payable due to Host
Marriott Corporation $ 6,420 $ 6,420 $ 9,149 $ 9,149

Incentive management fees
payable to
Marriott International,
Inc. $ 3,520 $ 2,775 $ 5,492 $ 2,424

Note payable due to
Marriott International,
Inc. $ 2,379 $ 2,379 $ 2,864 $ 2,864

</TABLE>

The estimated fair value of mortgage debt is based on the expected future debt
service payments discounted at estimated market rates. Notes payable due to
Host Marriott Corporation and Marriott International, Inc. and Incentive
management fees payable to Marriott International, Inc. are valued based on the
expected future payments from operating cash flow discounted at risk adjusted
rates.

NOTE 6. DEBT

The Partnerships have entered into various long-term loan agreements to provide
non-recourse mortgage financing for the Hotels. Combined mortgage debt
maturities, at December 31, 1995, are (in thousands):
<TABLE>
<CAPTION>

<S> <C>
1996....................... $ 8,781
1997....................... 8,523
1998....................... 7,168
1999....................... 5,826
2000....................... 209,562
--------

$239,860
========
</TABLE>

Orlando Mortgage

On January 12, 1993 (the "Orlando Closing Date"), the General Partner refinanced
the Orlando Hotel Mortgage Debt (the "Orlando Mortgage Debt"). On the Orlando
Closing Date, the Partnership paid $29.3 million to the Lender which was applied
$12.0 million to the outstanding principal balance, $13.5 million to interest
due through the Orlando Closing Date and $3.8

34
<PAGE>

- - --------------------------------------------------------------------------------
million to financing costs. The Orlando Mortgage Debt carried a fixed rate of
interest of 6.705% and required semi-annual principal amortization totaling $22
million through its maturity on June 16, 1995 (the "Maturity Date"). In 1994
net proceeds of $1.1 million from the sale of land adjacent to the Orlando Hotel
(see Note 2) were used to pay down the principal balance. As of December 31,
1994, $160,979,000 was outstanding under the Orlando Mortgage Debt.

Pursuant to the terms of the refinancing, Host Marriott provided a guarantee of
debt service payments up to $10 million. Payments under the guarantee
constituted advances to the Partnership and were to accrue interest at the
Morgan Guaranty Trust Company prime rate. As of the Maturity Date, no amounts
were outstanding under the guarantee.

On the Maturity Date, the Lender granted the Partnership a forbearance on the
loan extending it from June 16, 1995, through October 31, 1995. The Partnership
paid interest monthly in arrears at a floating rate equal to the applicable
Federal Funds rate plus 225 basis points. During the forbearance period, the
weighted average interest rate was 7.94%. On October 31, 1995, the Partnership
successfully completed a modification and extension of the Orlando Mortgage
Debt. The mortgage debt carries a fixed rate of interest of 8.44% and requires
semi-annual amortization of principal. The loan matures on June 16, 2000 with
unamortized principal of $127.0 million due at that time. No debt service
guarantee was provided. As of December 31, 1995, the outstanding principal
balance was $152,979,000.

The Orlando Mortgage Debt is secured by the Orlando Hotel, all personal property
associated with the Orlando Hotel, the land on which the Orlando Hotel and golf
course are located and an assignment of certain operating agreements.

Harbor Beach Mortgage

The original Harbor Beach loan agreement provided $86.6 million for construction
of the Harbor Beach Hotel. On June 30, 1986, this debt was refinanced with a
major insurance company. The $92 million replacement loan (the "Harbor Beach
Mortgage Debt") bore interest at a fixed rate of 9.375% and required payments of
interest only through July 1988 and monthly payments of principal and interest
in the amount of $765,000 thereafter until maturity on July 1, 1993. Upon
maturity, the Lender granted the Harbor Beach Partnership a forbearance of the
loan for a fee of $165,000. Under the forbearance agreement, the Harbor Beach
Partnership continued to pay the Lender through March 29, 1994, payments of
principal and interest in accordance with the terms of the Harbor Beach Mortgage
Debt.

On March 29, 1994 (the "Harbor Beach Closing Date"), the Harbor Beach
Partnership completed the restructuring of the Harbor Beach Mortgage Debt. The
restructured mortgage debt carries a fixed rate of interest of 9.125% (the
"Contract Interest Rate") and is payable monthly in arrears. Interest only at
the Contract Interest Rate was due and payable for the first twelve payments
through and including April 1, 1995. For the period from the Harbor Beach
Closing Date through April 1, 1995, the difference between the interest only
payment and $772,600 (the "Payment Amount") was contributed to an escrow account
with the Lender to fund capital improvements at the Harbor Beach Hotel. The
balance of the escrow fund was included in Restricted Cash in the financial
statements as of December 31, 1994. The Payment Amount represents the amount
necessary to amortize the outstanding principal balance, as of the Harbor Beach
Closing Date, over a 22-year effective amortization period. The loan matures on
May 1, 2000. The restructured mortgage debt is collateralized by all property
and assets of the Harbor Beach Hotel. No debt service guarantee was provided.
As of December 31, 1995 and 1994, the outstanding principal balance was
$86,882,000 and $87,852,000, respectively.

35
<PAGE>

- - --------------------------------------------------------------------------------
Warner Center Mortgage

The Warner Center Partnership entered into a loan agreement with Connecticut
General Life Insurance Company (the "Lender") to provide $47 million of non-
recourse mortgage debt to fund construction of the Warner Center Hotel, which
was converted to permanent financing on July 23, 1987 (the "Warner Center
Mortgage Debt"). The Warner Center Mortgage Debt carried interest at a fixed
rate of 10.47% per annum (the "Contract Rate") and required no amortization of
principal until maturity on July 23, 1997. The loan was secured by the Warner
Center Hotel and an assignment of the Warner Center Hotel's management
agreement. As additional security, Host Marriott provided a $5,300,000
guarantee of debt service payments. Payments under the guarantee constituted
loans to the Warner Center Partnership and accrued interest at the Bankers Trust
Company prime rate plus 1%.

The Warner Center Partnership defaulted on its first mortgage on July 1, 1993,
as cash flow from hotel operations was insufficient to pay debt service and
Host Marriott's limited debt service guarantee was exhausted. On November 17,
1993, ownership of the Warner Center Hotel was transferred through foreclosure
to the Lender. Accounting for the foreclosure required the write down of the
Warner Center Hotel's assets to their estimated fair market value at the time of
the foreclosure. This resulted in recording a loss of $20.0 million for the
year ended December 31, 1993. Additionally, the Partnership recorded an
extraordinary gain of $40.4 million which consisted of two portions: 1) a gain
of $27.0 million on the foreclosure, which represented the difference between
the mortgage debt of $51.7 million extinguished as a result of the foreclosure
and the estimated fair market value of the Warner Center Hotel as of the
Foreclosure Date, and 2) a gain of $13.4 million resulting from debt
extinguished due to the dissolution of the Warner Center Partnership. Advances
on the debt service guarantee from Host Marriott which were forgiven amounted to
$5,405,000 with accrued interest of $2,063,000, and a note payable to Host
Marriott which was forgiven totaled $187,000 with accrued interest of $10,000.

Notes Payable to Host Marriott

Orlando Ballroom Loan
- - ---------------------

During 1990, Host Marriott agreed to provide interim financing of up to $14
million to fund the construction of a new ballroom and exhibition hall at the
Orlando Hotel. Construction was completed in February 1990. On December 31,
1990, the interim financing was converted to a permanent loan from Host Marriott
with $13.2 million advanced. Interest only, at the Bankers Trust Company prime
rate, was payable from the Partnership's cash flow after debt service. On June
16, 1992, in conjunction with the refinancing of the Orlando Mortgage Debt, the
Orlando ballroom loan was converted from a term loan to a revolving line of
credit with a floating interest rate equal to the Bankers Trust Company prime
rate. The weighted average effective interest rate for the years ended December
31, 1995 and 1994 was 8.8% and 7.1%, respectively (rate as of December 31, 1995,
was 8.5%). As of December 31, 1995 and 1994, the outstanding principal balance
was $6,420,000 and $9,149,000, respectively.

Orlando Rooms Renovation Loan
- - -----------------------------

The Partnership secured a loan with Host Marriott to fund up to $11 million for
a rooms renovation project which began in August 1990 and was completed in April
1991. Advances under the Host Marriott loan accrued interest at the Bankers
Trust Company prime rate. Total renovation costs of $10.2 million were funded
through Host Marriott loan advances of $6.7 million and property improvement
fund expenditures of $3.5 million. Interest during the renovation phase was
capitalized into the cost of the project. The weighted average effective
interest rate on the Host Marriott loan for the year ended December 31, 1994,
was 6.0%. The outstanding principal balance was paid in full during 1994.
Payments of interest and principal were funded from the property improvement
fund.

36
<PAGE>

- - --------------------------------------------------------------------------------
Other Debt

Harbor Beach Rooms Renovation Loan
- - ----------------------------------

On July 21, 1994, the Harbor Beach Partnership entered into a loan agreement
with Marriott International Capital Corporation, a wholly-owned subsidiary of
MII, in conjunction with a rooms and suites refurbishment at the Harbor Beach
Hotel. The loan provided financing of up to $2.8 million, plus accrued interest
through December 31, 1994, to fund costs in excess of funds available in the
Harbor Beach Partnership's property improvement fund. This unsecured loan
carries a fixed rate of interest of 8%. Accrued interest totaling $64,000 was
rolled into the principal balance at December 31, 1994. Payments of principal
and interest based upon a five-year amortization period commenced in January
1995. Under the terms of the loan, the debt service payments are included as a
deduction in determining the fees paid to MHSI, as described in Note 8. As of
December 31, 1995 and 1994, the outstanding principal balance was $2,379,000 and
$2,864,000, respectively.

NOTE 7. LEASES

The Harbor Beach Partnership, through an assignment of a lease on January 15,
1982, acquired all rights of the Lessee to a 99-year lease with a 25-year
renewal option for the land on which the Harbor Beach Hotel is located. On
April 28, 1993, the lessor sold its rights under the lease to an unrelated
party. A provision under the sale of the lease provided for the early refund to
the Harbor Beach Partnership of the remaining $1,250,000 balance of an initial
$2,500,000 security deposit paid to the lessor and a $500,000 payment to
facilitate the modification of the lease. Lease payments are made quarterly in
advance in accordance with a lease year that operates from December 1 through
November 30. The annual rental for the lease year ended November 1994 was
$1,430,000 and increased to $1,560,000 in December 1994 for lease years 1995
through 1999. After lease year 1999, annual rentals for each succeeding five-
year period increase by an amount equal to 10% of the previous annual rental.

Minimum annual rentals during the term of the lease are (in thousands):
<TABLE>
<CAPTION>

Year
----
<S> <C>
1996.......................... $ 1,560
1997.......................... 1,560
1998.......................... 1,560
1999.......................... 1,573
2000.......................... 1,716
Thereafter.................... 314,572
-----------

Total Minimum Lease Payments.. $ 322,541
===========
</TABLE>

The Warner Center Partnership leased land on which the Warner Center Hotel was
located from an unrelated party for an initial term of 30 years with five
successive 10-year renewal options. Upon the Foreclosure Date, the lease
obligation reverted to the Lender. Ground rent expense under the Warner Center
Partnership land lease was $514,000 for the period from January 1, 1993, through
the Foreclosure Date.

37
<PAGE>

- - --------------------------------------------------------------------------------
NOTE 8. MANAGEMENT AND OPERATING LEASE AGREEMENTS

The Partnership has entered into a long-term management agreement with the
Manager, and the Harbor Beach Partnership has entered into a long-term operating
lease with the Operating Tenant. As a result of the dissolution of the Warner
Center Partnership, the Warner Center Hotel's management agreement was
terminated. The Hotels are operated as part of the Marriott Hotels, Resorts and
Suites full-service hotel system. Significant provisions under the agreements
are as follows:

Orlando Hotel. The management agreement provides for an initial term of 25
years, commencing with the opening of the Orlando Hotel (March 24, 1986), and
five 10-year renewals at the Manager's option. The Manager is paid a base
management fee of 3% of gross hotel sales and is also entitled to an incentive
management fee equal to 20% of operating profit, as defined, and an additional
incentive management fee equal to 30% of the following amount: (i) 80% of
operating profit in each fiscal year less (ii) the greater of (a) $25,000,000 or
(b) debt service on the Orlando Mortgage Debt plus $7,000,000. Payment of the
incentive management fee is subordinate to debt service and retention of
specified amounts of operating profit by the Partnership. Unpaid incentive
management fees are deferred without interest and are payable from future
operating cash flow, as defined, but are due upon termination of the management
agreement only if the termination is the result of a default by the Partnership.
Unpaid incentive management fees as of December 31, 1995 and 1994, were
$3,520,000 and $5,492,000, respectively.

Under the management agreement, the Manager is required to furnish the Orlando
Hotel with certain services ("Chain Services") which are generally provided on a
central or regional basis to all hotels in the Marriott full-service hotel
system. Chain Services include central training, advertising and promotion, a
national reservation system, computerized payroll and accounting services, and
such additional services as needed which may be more efficiently performed on a
centralized basis. Costs and expenses incurred in providing such services are
allocated among all domestic full-service hotels managed, owned or leased by MII
or its subsidiaries. In addition, the Hotel participates in MII's Honored Guest
Awards Program ("HGA"). The cost of this program is charged to all hotels in
the Marriott full-service hotel system based upon the HGA sales at each hotel.
The total amount of Chain Services and HGA costs allocated to the Orlando Hotel
was $3,336,000, $2,825,000 and $2,359,000 for the years ended December 31, 1995,
1994 and 1993, respectively.

Warner Center Hotel. The management agreement provided for an initial term of
30 years, commencing with the opening of the Warner Center Hotel (February 28,
1986), and three 10-year renewals at the Manager's option. The Manager was paid
a base management fee of 3% of gross sales; however, to facilitate a
restructuring of the Warner Center Mortgage Debt, the Manager had agreed to
defer 1% of its base management fee during the period beginning March 1, 1992
through May 31, 1993. As a result of the dissolution of the Warner Center
Partnership, the management agreement was terminated. Unpaid incentive
management fees as of the Foreclosure Date, which were forgiven, amounted to
$5,236,000. Also, deferred base management fees due to the Manager which were
forgiven amounted to $269,000 as of the Foreclosure Date.

The Manager was also reimbursed for its cost of providing Chain Services to the
Warner Center Hotel. The total amount of Chain Services and HGA costs allocated
to the Warner Center Hotel was $628,000 for the period from January 1, 1993,
through the Foreclosure Date.

Harbor Beach Hotel. The operating lease provides for an initial 36-year term
commencing with the opening of the Harbor Beach Hotel (October 29, 1984), with
options to renew for six successive 10-year periods based on certain defined
conditions. The annual rental paid to the Harbor Beach Partnership includes
the following:

38
<PAGE>

- - --------------------------------------------------------------------------------
. basic rental: annual rental payable under the land lease and insurance costs

. percentage rental: determined by multiplying the applicable percentage set
annually by the Harbor Beach Partnership by revenues

. performance rental: first $9,720,000 of operating profit of the Harbor Beach
Hotel, as defined

. additional performance rental: 50% of operating profit of the Harbor Beach
Hotel, as defined, in excess of $9,720,000

. contingent rental: up to 50% of operating profit of the Harbor Beach Hotel,
as defined, in excess of $9,720,000 if the aggregate annual rental is
otherwise insufficient to cover debt service.

Pursuant to the terms of the Harbor Beach rooms renovation loan (see Note 6),
the annual performance rental is adjusted upward by the annual debt service
required under the loan. For the five-year period beginning with 1995 and
ending in 1999, annual performance rental is increased by $696,557 to
$10,416,557. Subsequent to year-end 1999, performance rental will return to
$9,720,000.

Percentage rental is intended to cover the cost of utilities, repairs and
maintenance, and the required contribution to the property improvement fund (4%
for 1994 and 5% for 1995 and thereafter) and is therefore adjusted annually in
order to equal the actual applicable costs. Any payments of contingent rental
reduce future payments of additional performance rental (subject to limitations)
in subsequent years. No contingent rental has been accrued as of December 31,
1995 and 1994.

Rental income under the Harbor Beach Partnership operating lease for the three
years ended December 31, 1995, was (in thousands):

Basic Rental.................................. $ 1,616 $ 1,469 $ 1,704
Percentage Rental............................. 5,921 4,978 5,056
Performance Rental............................ 10,417 9,720 9,720
Additional Performance Rental................. 1,793 1,106 1,317
------- ------- -------

$19,747 $17,273 $17,797
======= ======= =======
</TABLE>

Cost and accumulated depreciation of the rental property were $99,077,000 and
$33,990,000, respectively, at December 31, 1995, and $100,068,000 and
$32,470,000, respectively, at December 31, 1994.

Working Capital Advances

Pursuant to the terms of the Orlando Hotel management agreement, the Partnership
is required to provide the Manager with working capital and supplies to meet the
operating needs of the Orlando Hotel. The Manager converts cash advanced by the
Partnership into other forms of working capital consisting primarily of
operating cash, inventories, and trade receivables and payables which are
maintained and controlled by the Manager. Upon termination of the hotel
management agreement, the working capital and supplies are to be returned to the
Partnership. The individual components of working capital and supplies
controlled by the Manager are not reflected in the Partnership's Consolidated
Balance Sheet. As of December 31, 1995, and 1994, $4,707,000 has been advanced
to the Manager for working capital and supplies which is included in Due from
Marriott

39
<PAGE>

- - --------------------------------------------------------------------------------
International, Inc. on the accompanying Consolidated Balance Sheet. The
supplies advanced to the Manager are recorded at their estimated net realizable
value. As of December 31, 1995 and 1994, accumulated amortization related to
the revaluation of these supplies totaled $762,000.

Upon foreclosure of the Warner Center Hotel in 1993, working capital and
supplies that had been provided by the Warner Center Partnership were
transferred to the Lender.

Property Improvement Funds

The management agreement and the operating lease provide for the establishment
of a property improvement fund for each of the Hotels. Contributions to the
property improvement funds are equal to a percentage of gross sales of each
hotel. Pursuant to the terms of the Orlando Mortgage Debt refinancing,
contributions to the fund for the Orlando Hotel were 4% through maturity of the
refinanced mortgage in June 1995. Contributions increased to 5% subsequent to
maturity and will remain at 5% thereafter. Contributions to the fund for the
Orlando Hotel totaled $5,120,000 and $4,139,000 for the years ended December 31,
1995 and 1994, respectively. Contributions to the fund for the Harbor Beach
Hotel were 4% for 1993 and 1994 and increased to 5% in 1995. Contributions to
the fund for the Harbor Beach Hotel totaled $2,610,000 and $1,850,000 for the
years ended December 31, 1995 and 1994, respectively. The property improvement
fund of the Warner Center Hotel was transferred to the Lender as a result of the
Warner Center Hotel foreclosure.

NOTE 9. COMPARATIVE LEASED HOTEL OPERATING RESULTS

The Harbor Beach Hotel is a leased property whose income to the Partnership is
included in the "Consolidated Statement of Operations" as rental income. The
following is a comparative summary of hotel operating results for the Harbor
Beach Hotel for the three years ended December 31, 1995 (in thousands):

<TABLE>
<CAPTION>
1995 1994 1993
------- ------- -------
HOTEL SALES
<S> <C> <C> <C>
Rooms.............................................. $28,384 $24,835 $25,431
Food and beverage.................................. 19,366 17,037 17,850
Other.............................................. 4,857 4,659 5,133
------- ------- -------
52,607 46,531 48,414
------- ------- -------
HOTEL EXPENSES
Department Direct Costs
Rooms............................................ 5,332 4,768 4,809
Food and beverage................................ 12,140 10,974 11,765
Other operating expenses........................... 21,219 19,127 19,697
------- ------- -------
38,691 34,869 36,271
------- ------- -------

HOTEL REVENUES...................................... $13,916 $11,662 $12,143
======= ======= =======
</TABLE>

40
<PAGE>

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE

None.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The Partnership has no directors or officers. The business policy making
functions of the Partnership are carried out through the directors and executive
officers of Hotel Properties Management, Inc., the General Partner, who are
listed below:

Current Position in Hotel
Name Properties Management, Inc. Age
- - ------------------- ---------------------------------- -------
Bruce F. Stemerman President, Chief Accounting Officer,
Treasurer and Director 41
Robert E. Parsons, Jr. Vice President and Director 41
William E. Einstein Vice President and Director 44
Christopher G. Townsend Vice President, Director, and Secretary 49

Business Experience

Bruce F. Stemerman was elected President of the General Partner in November
1995 and Treasurer of the General Partner in 1996. He has been a Director and
Chief Accounting Officer of the General Partner since October 1993 and was Vice
President--Finance from October 1993 to November 1995. Mr. Stemerman joined Host
Marriott in 1989 as Director--Partnership Services. He was promoted to Vice
President--Lodging Partnerships in 1994 and to Senior Vice President--Asset
Management in 1996. Prior to joining Host Marriott, Mr. Stemerman spent ten
years with Price Waterhouse. He also serves as a director and an officer of
numerous Host Marriott subsidiaries.

Robert E. Parsons, Jr. has been a Vice President of the General Partner
since November 1995 and a Director of the General Partner since September 1988.
From 1988 to October 1995, Mr. Parsons was President of the General Partner.
Mr. Parsons joined Host Marriott's Corporate Financial Planning staff in 1981,
was made Director-Project Finance of Host Marriott's Treasury Department in
1984, and in 1986 he was made Vice President-Project Finance of Host Marriott's
Treasury Department. He was made Assistant Treasurer of Host Marriott in 1988.
Mr. Parsons was named Senior Vice President and Treasurer of Host Marriott in
1993. He was named Executive Vice President and Chief Financial Officer of Host
Marriott in October 1995. He also serves as a director and an officer of
numerous Host Marriott subsidiaries.

William E. Einstein has been a Vice President of the General Partner since
August 1991 and was made Director in October 1993. Mr. Einstein joined Host
Marriott in 1982 as Manager--Income Taxes. He was made Director--Income Taxes
in 1985 and Vice President--Income Taxes in 1990. Mr. Einstein became Vice
President--Partnership Services in 1991, and was promoted to Vice President--
Taxes for Host Marriott in October 1993. He also serves as a director and an
officer of numerous Host Marriott subsidiaries.

Christopher G. Townsend has been Vice President, Director and Secretary of
the General Partner since September 1988. Mr. Townsend joined Host Marriott's
Law Department in 1982 as a Senior

41
<PAGE>

Attorney. In 1984, Mr. Townsend was made Assistant Secretary of Host Marriott
and in 1986 was made Assistant General Counsel. In 1993, he was made Senior
Vice President, Corporate Secretary and Deputy General Counsel of Host Marriott.
He also serves as a director and an officer of numerous Host Marriott
subsidiaries.

ITEM 11. EXECUTIVE COMPENSATION

As noted in Item 10 above, the Partnership has no directors or officers nor
does it have any employees. Under the Partnership Agreement, however, the
General Partner has the exclusive right to conduct the business and affairs of
the Partnership subject only to the Management Agreement described in Items 1
and 13. The General Partner is required to devote to the Partnership such time
as may be necessary for the proper performance of its duties, but the officers
and the directors of the General Partner are not required to devote their full
time to the performance of such duties. No officer or director of the General
Partner devotes a significant percentage of time to Partnership matters. To the
extent that any officer or director does devote time to the Partnership, the
General Partner is entitled to reimbursement for the cost of providing such
services. Any such costs may include a charge for overhead, but without a
profit to the General Partner. For the fiscal years ending December 31, 1995,
1994 and 1993, administrative expenses reimbursed to the General Partner totaled
$129,000, $200,000 and $198,000, respectively. For information regarding all
payments made by the Partnership to Host Marriott and subsidiaries, see Item 13
"Certain Relationships and Related Transactions."

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT

As of November 14, 1996, no person owned of record, or to the Partnership's
knowledge owned beneficially, more than 5% of the total number of Units. The
General Partner owns a total of 10.5 Units representing a 1.05% limited
partnership interest in the Partnership.

There are no Units owned by the executive officers and directors of the
General Partner, as a group.

The officers and directors of MII, as a group, own the following units:

Amount and Nature of Percent
Title of Class Beneficial Ownership of Class
- - --------------------------- -------------------------- ---------------
Limited Partnership Units 3.0 Units 0.3%

There are no Units owned by individuals who are directors of both the
General Partner and MII.

Concurrently with the filing of this report, an affiliate of Host Marriott
and the General Partner commenced a tender offer for 450 of the outstanding
Units of limited partnership interest. Completion of the tender offer is
conditional upon, among other things, the acquisition of at least 450 of the
outstanding limited partner Units and approval of amendments to the Partnership
Agreement that would allow the General Partner to vote any limited partner Units
it acquires and take certain other actions. If the tender offer is completed,
both the number of Unit holders and the number of Units that might otherwise be
available for transfer will be reduced. In accordance with the terms of the
Partnership Agreement, it may be necessary for the General Partner to suspend
transfers of Units for twelve months following consummation of the tender offer
if such transfers would cause more than 50% of the outstanding Units

42
<PAGE>

to be transferred during the prior twelve month period. This reduction and
suspension could adversely affect the liquidity and market value of the
remaining Units. In the event more than 450 Units are tendered pursuant to the
tender offer, the Purchaser will accept for payment 450 Units on a pro rata
basis based upon the number of Units properly tendered.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Management and Operating Lease Agreements
- - -----------------------------------------

As described below, the Partnerships are parties to important ongoing
agreements with MII pursuant to which the Orlando Hotel is managed by MII and
the Harbor Beach Hotel is leased to MHSI.

Prior to October 8, 1993, MII was a wholly-owned subsidiary of Host
Marriott, which was then known as Marriott Corporation. On October 8, 1993,
Marriott Corporation's operations were divided into two separate companies, Host
Marriott and MII. MII now conducts its management business as a separate,
publicly-traded company and is not a parent or subsidiary of Host Marriott,
although the two corporations have various business and other relationships.

Orlando Hotel Management Agreement

The Partnership entered into the Management Agreement with MII to manage and
operate the Orlando Hotel. The Management Agreement is for a term of 25 years
from the opening date with renewal terms, at the option of MII, of up to five
additional 10-year periods. The Management Agreement provides the Manager with
a base management fee equal to 3% of gross hotel sales. In addition, the
Manager is entitled to receive incentive management fees equal to 20% of hotel
operating profit and additional incentive fees equal to 30% of the following
amount: (i) 80% of hotel operating profit less (ii) the greater of (a) $25
million or (b) debt service on the Orlando Mortgage Debt plus $7 million.
Payment of the incentive management fee is subordinate to debt service and
retention of specified amounts of hotel operating profit by the Partnership.

Unpaid incentive management fees ("Deferred Incentive Management Fees")
accrue without interest and are payable from future hotel operating cash flow
available following payment of any then current incentive management fees and
retention of specified amounts of hotel operating profit by the Partnership. As
of December 31, 1995, Deferred Incentive Management Fees were $3,520,000.

The Manager is required to furnish the Orlando Hotel with certain services
("Chain Services") that are generally provided on a central or regional basis to
all hotels in the MII full-service hotel system. The major cost components
included in Chain Services are computer, reservations, advertising, training and
sales costs. Costs and expenses incurred in providing such services are
allocated among all domestic full-service hotels managed, owned or leased by MII
or its subsidiaries with no profit to MII. The methods of allocating the costs
and expenses are based upon one or a combination of the following: (i) percent
of

43
<PAGE>

sales, (ii) total number of hotel rooms, (iii) total number of reservations
booked, and (iv) total number of management employees.

The following table sets forth the amounts paid to the Manager for the years
ended December 31, 1995, 1994 and 1993. The table also includes accrued but
unpaid incentive management fees:

<TABLE>
<CAPTION>
Year Ended December 31,
1995 1994 1993
------- ------- -------
(in thousands)
<S> <C> <C> <C>
Base management fees................................ $ 3,431 $ 3,104 $ 3,006
Chain services and HGA costs........................ 3,336 3,019 2,560
Incentive management fees........................... 9,019 4,465 3,884
------- ------- -------
Total paid......................................... $15,786 $10,588 $ 9,450
======= ======= =======
Accrued but unpaid incentive
management fees.................................... $ -- $ 1,608 $ 1,581
======= ======= =======
</TABLE>

The Management Agreement also provides for the establishment of a property
improvement fund for the Orlando Hotel to cover the cost of certain non-routine
repairs and maintenance to the hotel which are normally capitalized and the cost
of replacements and renewals to the hotel property and improvements.
Contributions to the property improvement fund are based on a percentage of
gross hotel sales. Contributions to the fund were 4% through maturity of the
refinanced Orlando Mortgage Debt in June 1995. Contributions increased to 5%
subsequent to maturity and will remain at 5% thereafter.

Pursuant to the Management Agreement, the Partnership provided the Manager
with working capital and supplies to meet the operating needs of the Orlando
Hotel. This advance bears no interest and remains the property of the
Partnership throughout the term of the Management Agreement. The Partnership is
required to advance upon request of the Manager any additional funds necessary
to maintain the working capital and supplies at levels determined by the Manager
to be necessary to satisfy the needs of the hotel as its operations may require
from time to time. Upon termination of the Management Agreement, the Manager
will return to the Partnership any unused working capital and supplies. At the
inception of the Partnership, $4.7 million was advanced to the Manager for
working capital and supplies.

The Management Agreement also provides that the Partnership may terminate
the agreement and remove the Manager if, during any three consecutive fiscal
years after fiscal year 1992, the average of hotel operating profit fails to
equal or exceed the lesser of (i) 10% of the original cost of the hotel or (ii)
the sum of the average annual amount of the interest portion of the Orlando
Mortgage Debt plus $5 million. The Manager may, however, prevent termination by
paying to the Partnership such amounts as are necessary to achieve the above
performance standards.

Harbor Beach Hotel Operating Lease

The Harbor Beach Partnership entered into the Operating Lease with MHSI, a
subsidiary of MII, to operate the Harbor Beach Hotel. The Operating Lease is
for a term of 36 years from the opening of the hotel with renewal terms, at the
option of MHSI, of up to six additional 10-year periods. The annual rental paid
to the Harbor Beach Partnership includes the following:

Basic rental: annual rental payable under the land lease and insurance
costs.

Percentage rental: determined by multiplying the applicable percentage set
annually by the Harbor Beach Partnership by revenues.

44
<PAGE>

Performance rental: first $9,720,000 of operating profit of the Harbor
Beach Hotel, as defined.

Additional performance rental: 50% of operating profit of the Harbor Beach
Hotel, as defined, in excess of $9,720,000.

Contingent rental: up to 50% of operating profit of the Harbor Beach Hotel,
as defined, in excess of $9,720,000 if the aggregate annual rental is otherwise
insufficient to cover debt service.

Pursuant to the terms of Harbor Beach rooms renovation loan, the annual
performance rental is adjusted upward by the annual debt service required under
the loan. For the five-year period beginning with 1995 and ending in 1999,
annual performance rental is increased by $696,557 to $10,416,557. Subsequent
to year-end 1999, performance rental will return to $9,720,000.

Percentage rental is adjusted annually to equal the costs it was intended to
cover. Any payments of contingent rental reduce future payments of additional
performance rental (subject to limitations) in subsequent years.

The following table sets forth the rental income under the Harbor Beach
operating lease for the years ended December 31, 1995, 1994 and 1993 (in
thousands):

<TABLE>
<CAPTION>
Year Ended December 31,
1995 1994 1993
------- ------- -------
<S> <C> <C> <C>

Basic rental.....................................$ 1,616 $ 1,469 $ 1,704
Percentage rental................................ 5,921 4,978 5,056
Performance rental............................... 10,417 9,720 9,720
Additional performance rental.................... 1,793 1,106 1,317
------- ------- -------
Total rental income............................$19,747 $17,273 $17,797
======= ======= =======
</TABLE>

The Operating Lease provides that the Harbor Beach Partnership may terminate
the Operating Lease and remove the Operating Tenant if the payments of
performance rental in any three consecutive fiscal years beginning with fiscal
year 1991 are less than $7.2 million. The Operating Tenant may, however,
prevent termination by paying to the Harbor Beach Partnership such amounts as
are necessary to achieve the above performance standards.

Payments to Host Marriott, MII and their Affiliates
- - ---------------------------------------------------

The following table sets forth amounts paid by the Partnerships to Host
Marriott, MII and their subsidiaries for the years ended December 31, 1995, 1994
and 1993 (in thousands):

Year Ended December 31,
1995 1994 1993
------- ------- -------
<S> <C> <C> <C>
Payments to Host Marriott and affiliates:

Interest and principal paid on Orlando Ballroom
Loan............................................$ 3,531 $ 5,000 $ 921
Interest and principal paid on Orlando Rooms
Renovation Loan................................. -- 433 1,523
Administrative expenses.......................... 129 200 198
------- ------- -------
$ 3,660 $ 5,633 $ 2,642
======= ======= =======
Payments to MII and affiliates:

Interest and principal paid on Harbor Beach
Rooms Renovation Loan.........................$ 697 $ -- $ --
======= ======= =======
</TABLE>

45
<PAGE>

PART IV

ITEM 14. EXHIBITS, SUPPLEMENTAL FINANCIAL STATEMENT SCHEDULES, AND
REPORTS ON FORM 8-K

(a) List of Documents Filed as Part of This Report

(1) Financial Statements
All financial statements of the registrant as set forth under Item 8
of this Report on Form 10-K.

(2) Financial Statement Schedules
The following financial information is filed herewith on the pages
indicated.

III. Real Estate and Accumulated Depreciation

All other schedules are omitted because they are not applicable or the
required information is included in the consolidated financial statements or
notes thereto.

(3) EXHIBITS

Exhibit # Description
--------- -----------

2.a. Purchase Agreement between Airline Foods, Inc. and Marriott Hotel
Properties Limited Partnership dated November 27, 1985, to
acquire the 99% limited partner interest in the Partnership.
Incorporated by reference from Exhibit 2a. of the amended
registration statement on Form 10 dated September 29, 1986.

2.b. Purchase Agreement between Airline Foods, Inc. and Marriott Hotel
Properties Limited Partnership dated November 27, 1985, to
acquire the 99% limited partner interest in the Warner Center
Partnership. Incorporated by reference from Exhibit 2b. of the
amended registration statement on Form 10 dated September 29,
1986.

2.c. Purchase Agreement between Host International, Inc. and Marriott
Hotel Properties Limited Partnership dated November 27, 1985, to
acquire a 49% interest in the Harbor Beach Partnership.
Incorporated by reference from Exhibit 2c. of the amended
registration statement on Form 10 dated September 29, 1986.

2.d. [reference to Warner Center Foreclosure Documents] *

3.a. Amended and Restated Agreement of Limited Partnership of Marriott
Hotel Properties Limited Partnership dated November 27, 1985.
Incorporated by reference from Exhibit 3a. of the amended
registration statement on Form 10 dated September 29, 1986.

3.b. Amended and Restated Partnership Agreement of Lauderdale Beach
Association dated July 1, 1986. Incorporated by reference from
Exhibit 3c. of the 1986 Form 10-K.

3.c. Certificate of Incorporation and By-Laws of Marriott Orlando
Capital Corporation dated April 30, 1987. Incorporated by
reference from Exhibit 3d. of the 1987 Form 10-K.

46
<PAGE>

10.a. Management Agreement between Marriott Hotel Properties Limited
Partnership and Marriott Hotels, Inc. dated October 25, 1985.
Incorporated by reference from Exhibit 10a. of the amended
registration statement on Form 10 dated September 29, 1986.

10.b. Lease between Lauderdale Beach Association and Marriott Hotels,
Inc. dated October 26, 1984, subsequently assigned to Marriott
Hotel Services, Inc. on January 1, 1985. Incorporated by
reference from Exhibit 10c. of the amended registration
statement on Form 10 dated September 29, 1986.

10.c. Letter dated June 16, 1987, between Marriott Hotels, Inc.,
Marriott Hotel Properties Limited Partnership and The Sanwa
Bank Limited, amending Exhibit 10.a. Incorporated by reference
from Exhibit 10d. of the 1987 Form 10-K.

10.d. Assignment and Assumption of Lease Agreement dated April 28,
1993 between Holiday Hotel Corporation, Poinsettia Corporation,
Lubbock Corporation and The Northwestern Mutual Life Insurance
Company. Ground Lease Agreement between Holiday Hotel
Corporation, Poinsettia Corporation, Lubbock Corporation and
Cavendish Properties, Inc., dated November 30, 1981, and
amendments dated January 30, 1982, December 21, 1982 and June
30, 1986, respectively. Assignment of Lease dated January 30,
1982, between Cavendish Properties, Inc. and Lauderdale Beach
Association. *

10.e. Real Estate Purchase Agreement dated January 25, 1993, between
Holiday Hotel Corporation, Poinsettia Corporation, Lubbock Cor-
poration and The Northwestern Mutual Life Insurance Company. *

10.f. Amended and Restated Loan Agreement between Marriott Hotel
Properties Inc. and Marriott Hotel Properties Limited
Partnership dated April 9, 1991. *

10.g. Loan Agreement between Marriott Properties, Inc. and Marriott
Hotel Properties Limited Partnership dated April 17, 1991, and
amendments thereto dated December 31, 1991 and June 1, 1992,
respectively. *

10.h. Amended and Restated Term Loan Agreement between Lauderdale
Beach Association and Aetna Life Insurance Company dated July
1, 1993. *

10.i. Loan Agreement between Marriott International Capital
Corporation and Lauderdale Beach Association dated July 21,
1994. *

10.j. Amended and Restated Term Loan Agreement between Marriott Hotel
Properties Limited Partnership and The Sanwa Bank Limited dated
June 16, 1995. *

27. Financial Data Schedule

* To be filed by Amendment.

(b) REPORTS ON FORM 8-K

No reports on Form 8-K were filed during 1995.

47
<PAGE>

SIGNATURE
---------

Pursuant to the requirements of Section 13 or 15 (d) of the Securities
Exchange Act of 1934, the registrant has duly caused this Form 10-K to be signed
on its behalf by the undersigned, thereunto duly authorized, on
November 18, 1996.

MARRIOTT HOTEL PROPERTIES LIMITED PARTNERSHIP

By: HOTEL PROPERTIES MANAGEMENT, INC.
General Partner

By: /s/ Bruce F. Stemerman
-----------------------------
Bruce F. Stemerman
President, Chief Accounting Officer and Treasurer

Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on November 18, 1996.

Signature Title
- - --------- -----
(HOTEL PROPERTIES MANAGEMENT, INC.)

/s/ Bruce F. Stemerman
- - --------------------------- President, Chief Accounting Officer and Treasurer
Bruce F. Stemerman (Principal Executive Officer and
Principal Accounting Officer)

/s/ Robert E. Parsons, Jr.
- - --------------------------- Vice President and Director
Robert E. Parsons, Jr. (Principal Financial Officer)

/s/ William E. Einstein
- - --------------------------- Vice President and Director
William E. Einstein

/s/ Christopher G. Townsend
- - --------------------------- Vice President, Director and Secretary
Christopher G. Townsend

48
<PAGE>

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SCHEDULE III

TO THE PARTNERS OF MARRIOTT HOTEL PROPERTIES LIMITED PARTNERSHIP:

We have audited in accordance with generally accepted auditing standards,
the consolidated financial statements of Marriott Hotel Properties Limited
Partnership, included in this registration statement and have issued our report
thereon dated April 4, 1996. Our audits were made for the purpose of forming an
opinion on the basic financial statements taken as a whole. The schedule
appearing on pages 50 and 51 is the responsibility of the General Partner's
management and is presented for purposes of complying with the Securities and
Exchange Commission's rules and is not part of the basic consolidated financial
statements. This schedule has been subjected to the auditing procedures applied
in the audit of the basic consolidated financial statements and, in our opinion,
fairly states in all material respects the financial data required to be set
forth therein in relation to the basic financial statements taken as a whole.

ARTHUR ANDERSEN LLP

Washington, D.C.
April 4, 1996

49
<PAGE>

SCHEDULE III

MARRIOTT HOTEL PROPERTIES LIMITED PARTNERSHIP
REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 1995
(in thousands)
<TABLE>
<CAPTION>

Initial Costs Gross Amount at December 31, 1995
--------------------------- --------------------------------------------
Subsequent
Buildings & Costs Buildings &
Debt Land Improvements Capitalized Land Improvements Total
------------ -------- -------------- ------------- ---------- -------------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Orlando World Center
Orlando, Florida $ 152,979 $ 27,447 $ 135,351 $ 16,654 $ 28,591 $ 105,861 $ 179,452

Harbor Beach Resort
Ft. Lauderdale,
Florida 86,881 1,837 63,806 17,305 2,302 80,646 82,948
------------ -------- -------------- ------------- ---------- -------------- -----------

Total $ 239,860 $ 29,284 $ 199,157 $ 33,959 $ 30,893 $ 231,507 $ 262,400
============ ======== ============== ============= ========== ============== ===========

<CAPTION>
Date of
Accumulated Completion of Date Depreciation
Depreciation Construction Acquired Life
------------ ------------- ----------- ------------------
<S> <C> <C> <C> <C>
Orlando World Center
Orlando, Florida $ 31,591 1986 1985 40 to 50 years

Harbor Beach Resort
Ft. Lauderdale,
Florida 21,819 1984 1985 40 years

Total $ 53,410
===========
</TABLE>

50
<PAGE>

SCHEDULE III
Page 2 of 2

MARRIOTT HOTEL PROPERTIES LIMITED PARTNERSHIP
REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 1995
(in thousands)
<TABLE>
<CAPTION>
1993 1994 1995
---------- ---------- ----------
<S> <C> <C> <C>
Notes:
(a) The changes in the total cost of land, buildings and improvements for the three
years ended December 31, 1995 were as follows:

Balance at beginning of year.................................................. $ 307,839 $ 256,584 $ 260,320
Capital expenditures....................................................... 1,015 3,899 2,080
Dispositions............................................................... (52,270) (163) --
---------- ---------- ----------
Balance at end of year........................................................ $ 256,584 $ 260,320 $ 262,400
========== ========== ==========

(b) The changes in accumulated depreciation and amortization for the three years
ended December 31, 1995 were as follows:

Balance at beginning of year................................................. $ 42,821 $ 40,221 $ 46,626
Depreciation and amortization............................................. 6,877 6,548 6,784
Dispositions and other.................................................... (9,477) (143) --
---------- ---------- ----------
Balance at end of year....................................................... $ 40,221 $ 46,626 $ 53,410
========== ========== ==========
</TABLE>
(c) The aggregate cost of land, buildings and improvements for Federal income
tax purposes was approximately $171,147 at December 31, 1995.

<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM DECEMBER 31,
1995 FORM 10-K AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000

<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<CASH> 3,550
<SECURITIES> 6,888<F1>
<RECEIVABLES> 18,321
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 28,759
<PP&E> 325,211
<DEPRECIATION> (102,753)
<TOTAL-ASSETS> 251,217
<CURRENT-LIABILITIES> 1,087
<BONDS> 252,396
0
0
<COMMON> 0
<OTHER-SE> (2,266)
<TOTAL-LIABILITY-AND-EQUITY> 251,217
<SALES> 0
<TOTAL-REVENUES> 67,677
<CGS> 0
<TOTAL-COSTS> 30,945
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 21,864
<INCOME-PRETAX> 14,868
<INCOME-TAX> 0
<INCOME-CONTINUING> 14,868
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> (1,718)<F2>
<NET-INCOME> 13,150
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
<FN>
<F1>THIS IS OTHER ASSETS
<F2>THIS IS MINORITY INTEREST IN INCOME.
</FN>

</TABLE>