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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED SEPTEMBER 11, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File No. 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 Identification Number)
incorporation or organization)
10400 Fernwood Road, Bethesda, MD 20817-1109
(Address of principal executive (Zip Code)
Offices)
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)
Indicated by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months, and (2) has been subject to such filing
requirements for the past 90 days. Yes |X| No.
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<PAGE>
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MARRIOTT HOTEL PROPERTIES LIMITED PARTNERSHIP
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TABLE OF CONTENTS
PAGE NO.
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Statement of Operations
Twelve and Thirty-Six Weeks Ended September 11, 1998
(Unaudited) and September 12, 1997 (Unaudited).................1
Condensed Consolidated Balance Sheet
September 11, 1998 (Unaudited) and December 31, 1997...........2
Condensed Consolidated Statement of Cash Flows
Thirty-Six Weeks Ended September 11, 1998 (Unaudited)
and September 12, 1997 (Unaudited)...........................3
Notes to Condensed Consolidated Financial Statements
(Unaudited)....................................................4
Item 2 . Management's Discussion and Analysis of Financial Condition and
Results of Operations..........................................6
PART II - OTHER INFORMATION
Item 1. Legal Proceedings..................................................13
Item 6. Exhibits and Reports on Form 8-K...................................13
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MARRIOTT HOTEL PROPERTIES LIMITED PARTNERSHIP AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
(in thousands, except per Unit amounts)
<TABLE>
Twelve Weeks Ended Thirty-Six Weeks Ended
September 11, September 12, September 11, September 12,
1998 1997 1998 1997
-------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
REVENUES
Hotel (Note 3).......$ 10,889 $ 8,159 $ 43,846 $ 39,026
Rental income (Note 4) 2,388 1,955 17,399 16,961
-------------- -------------- ------------ -------------
13,277 10,114 61,245 55,987
-------------- -------------- ------------ -------------
OPERATING COSTS AND EXPENSES
Depreciation......... 2,446 2,280 7,338 6,841
Incentive management
fee................ 2,214 959 8,542 7,146
Base management fee.. 866 731 2,961 2,755
Ground rent, property
taxes and other.... 2,866 2,186 7,404 6,554
------------- -------------- ------------ -------------
8,392 6,156 26,245 23,296
------------- -------------- ------------ -------------
OPERATING PROFIT......... 4,885 3,958 35,000 32,691
Interest expense...... (4,433) (4,723) (13,632) (14,616)
Other revenue......... 470 302 975 587
------------- -------------- ------------ -------------
NET INCOME (LOSS) BEFORE
MINORITY INTEREST..... 922 (463) 22,343 18,662
MINORITY INTEREST........ 687 780 (2,916) (3,002)
------------- -------------- ------------ -------------
NET INCOME...............$ 1,609 $ 317 $ 19,427 $ 15,660
============= ============== ============ =============
ALLOCATION OF NET INCOME
General Partner.......$ 16 $ 3 $ 194 $ 157
Limited Partners....... 1,593 314 19,233 15,503
------------- -------------- ------------ -------------
$ 1,609 $ 317 $ 19,427 $ 15,660
============= ============== ============ =============
NET INCOME PER
LIMITED PARTNER
UNIT (1,000 Units)....$ 1,593 $ 314 $ 19,233 $ 15,503
============= ============== ============ =============
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
<PAGE>
MARRIOTT HOTEL PROPERTIES LIMITED PARTNERSHIP AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEET
(in thousands)
<TABLE>
September 11, December 31,
1998 1997
(unaudited)
ASSETS
<S> <C> <C>
Property and equipment, net...............$ 222,737 $ 222,216
Property improvement funds................ 8,696 6,056
Minority interest......................... 8,611 7,912
Due from Marriott International, Inc.
and affiliates.......................... 7,939 10,042
Other assets.............................. 4,134 4,189
Cash and cash equivalents................. 20,484 10,694
--------------- ---------------
$ 272,601 $ 261,109
=============== ===============
LIABILITIES AND PARTNERS' CAPITAL
LIABILITIES
Mortgage debt.............................$ 238,536 $ 235,946
Notes payable and amounts due to Marriott
International, Inc. and affiliates...... 3,390 4,987
Accounts payable and accrued interest..... 688 196
Amounts due to Host Marriott Corporation.. 307 132
--------------- ---------------
Total Liabilities..................... 242,921 241,261
--------------- ---------------
PARTNERS' CAPITAL
General Partner........................... 406 307
Limited Partners.......................... 29,274 19,541
--------------- ---------------
Total Partners' Capital............... 29,680 19,848
--------------- ---------------
$ 272,601 $ 261,109
=============== ===============
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
<PAGE>
MARRIOTT HOTEL PROPERTIES LIMITED PARTNERSHIP AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
(in thousands)
<TABLE>
Thirty-Six Weeks Ended
September 11, September 12,
1998 1997
-------------- --------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income.................................$ 19,427 $ 15,660
Noncash items.............................. 10,433 10,203
Changes in operating accounts.............. 518 2,516
-------------- --------------
Cash provided by operating activities.... 30,378 28,379
-------------- --------------
INVESTING ACTIVITIES
Additions to property and equipment........ (7,859) (7,703)
Changes in property improvement funds...... (2,640) (260)
-------------- --------------
Cash used in investing activities........ (10,499) (7,963)
--------------- --------------
FINANCING ACTIVITIES
Capital distributions to partners......... (9,595) (1,514)
Construction loan advances................ 4,619 --
Principal repayments of mortgage debt..... (2,029) (4,507)
Repayments to Marriott International, Inc.
and affiliates.......................... (1,565) (428)
Capital distributions to minority interest (1,485) (1,485)
Payment of financing costs................ (34) --
Repayments to Host Marriott Corporation... -- (2,295)
Proceeds from note payable to Marriott
International, Inc. and affiliates...... -- 1,200
Collection of investor notes receivable... -- 47
-------------- ---------------
Cash used in financing activities....... (10,089) (8,982)
-------------- ---------------
INCREASE IN CASH AND CASH EQUIVALENTS........ 9,790 11,434
CASH AND CASH EQUIVALENTS at beginning
of period............................... 10,694 1,607
--------------- ---------------
CASH AND CASH EQUIVALENTS at end of period...$ 20,484 $ 13,041
=============== ===============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for mortgage and other interest.$ 12,908 $ 11,623
=============== ===============
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
<PAGE>
MARRIOTT HOTEL PROPERTIES LIMITED PARTNERSHIP AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. The accompanying condensed consolidated financial statements have been
prepared by Marriott Hotel Properties Limited Partnership (the
"Partnership") without audit. Certain information and footnote disclosures
normally included in financial statements presented in accordance with
generally accepted accounting principles have been condensed or omitted
from the accompanying statements. The Partnership believes the disclosures
made are adequate to make the information presented not misleading.
However, the condensed consolidated financial statements should be read in
conjunction with the Partnership's financial statements and notes thereto
included in the Partnership's Form 10-K for the fiscal year ended December
31, 1997.
In the opinion of the Partnership, the accompanying unaudited condensed
consolidated financial statements reflect all adjustments (which include
only normal recurring adjustments) necessary to present fairly the
financial position of the Partnership as of September 11, 1998, and the
results of operations for the twelve and thirty-six weeks ended September
11, 1998 and September 12, 1997. Interim results are not necessarily
indicative of fiscal year performance because of seasonal and short-term
variations.
The Partnership owns Marriott's Orlando World Center (the "Orlando Hotel")
and a 50.5% interest in a partnership owning Marriott's Harbor Beach Resort
(the "Harbor Beach Partnership"), whose financial statements are
consolidated herein. The remaining 49.5% general partnership interest in
the Harbor Beach Partnership is reported as minority interest. All
significant intercompany balances and transactions have been eliminated.
For financial reporting purposes, net profits and net losses of the
Partnership are allocated 99% to the limited partners and 1% to Hotel
Properties Management, Inc. (the "General Partner"), an affiliate of Host
Marriott Corporation ("Host Marriott"). Significant differences exist
between the net profits and net losses for financial reporting purposes and
the net profits and net losses reported for Federal income tax purposes.
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 management fee expense and
the deduction of certain costs incurred during construction which have been
capitalized in the accompanying condensed consolidated financial
statements.
2. Certain reclassifications were made to prior year condensed financial
statements to conform to the 1998 presentation.
3. Hotel revenues represent house profit from the Orlando Hotel since the
Partnership has delegated substantially all of the operating decisions
related to the generation of house profit of the Orlando Hotel to Marriott
International, Inc. (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, property taxes and
certain other costs, which are disclosed separately in the condensed
consolidated statement of operations.
On November 20, 1997, the Emerging Issues Task Force ("EITF") of the
Financial Accounting Standards Board reached a consensus on EITF 97-2
"Application of FASB Statement No. 94 and APB Opinion No. 16 to Physician
Practice Management Entities and Certain Other Entities with Contractual
Management Arrangements." EITF 97-2 addresses the circumstances in which a
management entity may include the revenues and expenses of a managed entity
in its financial statements.
<PAGE>
The Partnership has considered the impact of EITF 97-2 and concluded that
it should be applied to its hotel. Accordingly, upon adoption, hotel sales
and property-level expenses will be reflected on the statement of
operations. This change in accounting principle will be adopted in the
financial statements during the fourth quarter of 1998 as of and for the
year ended December 31, 1998 with retroactive effect in prior periods to
conform to the new presentation. Application of EITF 97-2 will increase
both hotel revenues and operating expenses by approximately $18.0 million
and $16.2 million for the twelve weeks ended September 11, 1998 and
September 12, 1997, respectively, and $54.9 million and $52.8 million for
the thirty-six weeks ended September 11, 1998 and September 12, 1997,
respectively, and will have no impact on operating profit or net income.
Hotel revenues consist of the following hotel operating results for the
Orlando Hotel (in thousands):
<TABLE>
Twelve Weeks Ended Thirty-Six Weeks Ended
September 11, September 12, September 11, September 12,
1998 1997 1998 1997
-------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
HOTEL SALES
Rooms............$ 12,852 $ 11,328 $ 48,019 $ 45,693
Food and beverage 13,953 10,450 42,154 36,926
Other............ 2,050 2,605 8,530 9,219
-------------- ------------- ------------- -------------
28,855 24,383 98,703 91,838
-------------- ------------- ------------- -------------
HOTEL EXPENSES
Departmental Direct Costs
Rooms.......... 3,023 2,605 9,415 9,082
Food and
beverage...... 8,512 7,026 25,332 23,051
Other hotel
operating
expenses....... 6,431 6,593 20,110 20,679
-------------- ------------- ------------ -------------
17,966 16,224 54,857 52,812
--------------- ------------- ------------ -------------
HOTEL REVENUES.....$ 10,889 $ 8,159 $ 43,846 $ 39,026
=============== ============= ============ =============
</TABLE>
4. Rental income under the Harbor Beach Partnership operating lease was (in
thousands):
<TABLE>
Twelve Weeks Ended Thirty-Six Weeks Ended
September 11, September 12, September 11, September 12,
1998 1997 1998 1997
------------- -------------- ------------- -------------
<S> <C> <C> <C> <C>
Basic rental.......$ 403 $ 403 $ 1,209 $ 1,174
Percentage rental.. 1,385 1,017 4,664 4,530
Performance rental. -- -- 10,417 10,417
Additional
peformance rental 600 535 1,109 840
------------- -------------- ------------- -------------
RENTAL INCOME......$ 2,388 $ 1,955 $ 17,399 $ 16,961
============= ============== ============= =============
</TABLE>
5. On April 15, 1998, the Partnership successfully completed the financing
for the expansion of the Orlando World Center (the "Construction Loan").
The lender is obligated to provide up to $88 million to fund costs related
to the construction of a 500-room tower, new parking garage, expansion of
the existing JW's Steakhouse restaurant, redesign of the existing golf
course and construction of 15,000 square feet of additional meeting space.
During the construction period, the Partnership is required to make monthly
payments of principal and interest at the fixed interest rate of 7.48% with
such interest payments funded by the Construction Loan. Principal payments
will be funded by hotel operations. Upon completion of the expansion, the
Partnership will be required to pay principal and interest at the fixed
interest rate of 7.48% amortized over the remaining term of the
Construction Loan. The Construction Loan matures on January 1, 2008. As of
September 11, 1998, the Partnership has received Construction Loan advances
of $4.6 million which were used to pay construction costs.
<PAGE>
6. Host Host Marriott Corporation ("Host Marriott"), the parent company of
the General Partner of the Partnership, has adopted a plan to restructure
its business operations so that it will qualify as a real estate investment
trust ("REIT"). As part of this restructuring (the "REIT Conversion"), Host
Marriott and its consolidated subsidiaries will contribute their
full-service hotel properties and certain other businesses and assets to
Host Marriott, L.P., a Delaware limited partnership (the "Operating
Partnership"), in exchange for units of limited partnership interest in the
Operating Partnership ("OP Units") and the assumption of liabilities. As
part of the REIT Conversion, Host Marriott proposes to merge into HMC
Merger Corporation (to be renamed "Host Marriott Corporation"), a Maryland
corporation ("Host REIT"), and thereafter continue and expand its
full-service hotel ownership business. Host REIT expects to qualify as a
REIT beginning with its first full taxable year commencing after the REIT
Conversion is completed, which Host Marriott currently expects to be the
year beginning January 1, 1999 (but which might not be until the year
beginning January 1, 2000). Host REIT will be the sole general partner of
the Operating Partnership.
The Operating Partnership is proposing to acquire by merger (the "Merger")
the Partnership. The Limited Partners in the Partnership have been given an
opportunity to receive, on a tax-deferred basis, OP Units in the Operating
Partnership in exchange for their current limited partnership interests. At
any time prior to 5:00 p.m. on the fifteenth trading day following the
effective date of the Merger, the Limited Partners can elect to exchange
the OP Units received in connection with the Merger for either common stock
of Host REIT or a 6.56% callable note due December 15, 2005 of the
Operating Partnership. Exercise of either the election to receive common
stock or a note would be a taxable transaction.
Beginning one year after the Merger, Limited Partners who retain OP Units
may exchange such OP Units for Host REIT common stock on a one-for-one
basis (or their cash equivalent, as determined by Host REIT).
On June 2, 1998, the Operating Partnership filed a Registration Statement
on Form S-4 with the Securities and Exchange Commission. In October 1998,
the Prospectus/Consent Solicitation Statement, which formed a part of such
Registration Statement, was mailed to the Limited Partners who have until
December 12, 1998 to vote on this Merger, unless extended.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS
Certain matters discussed in this Form 10-Q include forward-looking statements
including, without limitation, statements related to the proposed real estate
investment trust ("REIT") conversion, the terms, structure and timing thereof,
and the expected effects of the proposed REIT conversion and business and
operating strategies in the future. All forward-looking statements involve known
and unknown risks, uncertainties and other factors which may cause the actual
transactions, results, performance or achievements to be materially different
from any future transactions, results, performance or achievements expressed or
implied by such forward-looking statements. Certain of the transactions
described herein are subject to certain consents of shareholders, lenders,
debtholders and partners of Host Marriott and its affiliates and of other third
parties and various other conditions and contingencies, and future results,
performance and achievements will be affected by general economic, business and
financing conditions, competition and government actions. The cautionary
statements set forth in reports filed under the Securities Act of 1934 contained
important factors with respect to such forward-looking statements, including:
(i) national and local economic and business conditions that will, among other
things, affect demand for hotels and other properties, the level of rates and
occupancy that can be achieved by such properties and the availability and terms
of financing; (ii) the ability to maintain the properties in a first-class
manner; (iii) the ability to compete effectively; (iv) the ability to obtain
required consents of shareholders, lenders, debtholders, partners and ground
lessors in connection with Host Marriott's proposed conversion to a REIT and to
consummate all of the transactions constituting the REIT conversion; (v) changes
in travel patterns, taxes and government regulations; (vi) governmental
approvals, actions and initiatives; (vii) the effects of tax legislative action;
and (viii) the timing of Host Marriott's election to be taxed as a REIT and the
ability to satisfy complex rules in order to qualify for taxation as a REIT for
federal income tax purposes and to operate effectively within the limitations
imposed by these rules. Although the Partnership believes the expectations
reflected in such forward-looking statements are based upon reasonable
assumptions, it can give no assurance that its expectations will be attained or
that any deviations will not be material. The Partnership undertakes no
obligation to publicly release the result of any revisions to these
forward-looking statements that may be made to reflect any future events or
circumstances.
RESULTS OF OPERATIONS
The chart below summarizes REVPAR, or revenue per available room, for 1998 and
1997:
<TABLE>
Twelve Weeks Ended
September 11, September 12,
1998 1997 % Increase
---------------- --------------- -----------
<S> <C> <C> <C>
Orlando World Center $ 102 $ 90 13%
Harbor Beach $ 103 $ 96 7%
Combined Average $ 102 $ 92 11%
</TABLE>
<TABLE>
Thirty-Six Weeks Ended
September 11, September 12,
1998 1997 % Increase
---------------- --------------- -----------
<S> <C> <C> <C>
Orlando World Center $ 127 $ 121 5%
Harbor Beach $ 152 $ 146 4%
Combined Average $ 134 $ 128 5%
</TABLE>
Total consolidated Partnership revenues for the third quarter and year-to-date
ended September 11, 1998 increased 31% and 9%, respectively, over the comparable
periods in 1997. This was due to strong operating results at both the Orlando
Hotel and the Harbor Beach Hotel (the "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, or generally accepted
accounting principle measurement of revenue). On a combined basis, third quarter
and year-to-date REVPAR increased 11% to $102, and 5% to $134, respectively, due
to increases in average room rate and average occupancy. For the third quarter,
combined average room rate improved 4% over the same period in 1997 to $128, and
combined average occupancy increased five percentage points to 80%. On a
year-to-date basis, combined average room rate increased 5% over the comparable
period in 1997 to $161 and combined average occupancy remained stable at 83%.
Hotel Revenues
Third quarter and year-to-date revenues reported by the Orlando World Center
increased 33% and 12%, respectively, over 1997. REVPAR for third quarter
increased 13% over the comparable period in 1997 to $102 as a result of a six
percentage point increase in occupancy to 78% and a 6% increase in average room
rate to $131. As a result of the increase in REVPAR, rooms profit for the
quarter increased $1.1 million over 1997, an increase of 13%. Due to improved
corporate group business, food and beverage sales and profit for the quarter and
year-to-date increased $2.0 million, or 59%, and $2.9 million, or 21%,
respectively, over the same periods in 1997. The strong year-to-date performance
was a result of a 5% increase in REVPAR to $127. This increase was attributed to
a two percentage point increase in occupancy to 84% and a 3% increase in average
room rate to $152. The hotel achieved its increase in average room rate as a
result of rate increases across all segments and the hotel's ability to restrict
discounted transient room rates. The increase in occupancy was primarily due to
an increase in corporate group roomnights during third quarter.
Rental Income. Third quarter and year-to-date rental income from the Harbor
Beach Hotel improved 22% and 3%, respectively, over 1997 primarily due to
increases in REVPAR.
For the third quarter, REVPAR increased 7% over 1997 to $103 as a result of a
three percentage point increase in occupancy to 84% combined with a 3% increase
in average room rate to $123. On a year-to-date basis, REVPAR increased 4% to
$152 when compared to the same period in 1997. This increase was due to a 7%
increase in average room rate to $184 offset by a two percentage point decrease
in occupancy to 83%.
Operating Costs and Expenses. The Partnership operating costs and expenses
increased 36% to $8.4 million and 13% to $26.2 million for the twelve and
thirty-six weeks ended September 11, 1998, respectively, when compared to the
same periods in 1997. The principal components of this category are discussed
below:
Incentive management fees. Incentive management fees increased $1.3
million, or 131%, for the third quarter and increased $1.4 million, or 20%, on a
year-to-date basis due to the improved operations at the Orlando Hotel.
Depreciation. Depreciation increased approximately $200,000, or 7%, for
third quarter 1998 as compared to the same quarter in 1997. On a year-to-date
basis, depreciation increased approximately $500,000, or 7%, as compared to
1997.
Ground Rent, Property Taxes and Other. Ground rent, property taxes and
other expenses increased approximately $700,000, or 31%, for the third quarter
and increased approximately $900,000, or 13% on a year-to-date basis primarily
due to an increase in real estate taxes for the Orlando Hotel.
Operating Profit. Operating profit increased approximately $900,000, or 23%, and
$2.3 million, or 7%, for the twelve and thirty-six weeks ended September 11,
1998, respectively, when compared to the same periods in 1997.
Interest Expense. Interest expense for third quarter and year-to-date decreased
6% and 7%, respectively, as compared to the same periods in 1997 due to reduced
principal balances on the mortgage debt of the hotels resulting from required
principal amortization.
Minority interest
Based upon its 50.5% ownership interest, the Partnership controls the Harbor
Beach Partnership, and as a result, the condensed consolidated financial
statements of the Partnership include the accounts of the Harbor Beach
Partnership. Minority interest represents the net income from the Harbor Beach
Partnership allocable to the co-general partner. Minority interest decreased
from $3.0 million year-to-date 1997 to $2.9 million year-to-date 1998 primarily
due to the decrease in net income from the Harbor Beach Partnership primarily
due to an increase in depreciation expense.
<PAGE>
Net income
For third quarter 1998, the Partnership achieved net income of $1.6 million, an
increase of $1.3 million over the same period in 1997. On a year-to-date basis,
net income increased $3.8 million to $19.4 million over the same period in 1997.
These increases were primarily due to increases in hotel revenues and rental
income, as discussed above.
CAPITAL RESOURCES AND LIQUIDITY
The Partnership's financing needs have historically been funded through loan
agreements with independent financial institutions, Host Marriott Corporation
("Host Marriott") and its affiliates or Marriott International, Inc. (the
"Manager") and its affiliates. The General Partner believes that the Partnership
will have sufficient capital resources and liquidity to continue to conduct its
business in the ordinary course.
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, pay the
required principal amortization of the mortgage debt and other debt incurred to
fund costs of the capital improvements at the Hotels and cash distributions to
the partners.
Total consolidated cash provided by operations for the thirty-six weeks ended
September 11, 1998, and September 12, 1997, was $30.4 million and $28.4 million,
respectively. The increase was primarily due to an increase in hotel revenues
and rental income when compared to 1997, partially offset by additional
incentive management fees paid in 1997.
For the thirty-six weeks ended September 11, 1998 and September 12, 1997, cash
used in investing activities was $10.5 million and $8.0 million, respectively,
consisting primarily of additions to property and equipment. This increase is
primarily due to the commencement of the Orlando Hotel expansion project in May
1998. Capital expenditures of $4.6 million have been funded by the construction
loan in 1998. Contributions to the property improvement funds were $7.1 million
and $6.5 million for the first three quarters of 1998 and 1997, respectively,
while expenditures from the property improvement funds were $3.1 million and
$7.7 million for the first three quarters of 1998 and 1997, respectively. The
decrease in capital expenditures from 1998 to 1997 is primarily due to the
completion of a rooms renovation at the Orlando Hotel in 1997. The General
Partner believes that the property improvement funds will provide adequate funds
in the short and long term to meet the Hotels capital needs.
For the thirty-six weeks ended September 11, 1998 and September 12, 1997, cash
used in financing activities was $10.1 million and $9.0 million, respectively.
The increase in cash used in financing activities was primarily the result of
higher capital distributions from 1998 operations offset by the receipt of
construction loan advances. Of the $4.6 million year-to-date construction loan
advances, approximately $75,000 is capitalized interest. During the thirty-six
weeks ended September 11, 1998, the Partnership distributed $9.6 million to its
partners ($9,500 per limited partner unit). This distribution represented $540
per limited partner unit from 1997 operations and $8,960 per limited partner
unit related to second quarter year-to-date 1998 operations. In addition, the
Partnership is planning to distribute $6.6 million ($6,500 per limited partner
unit) from third quarter operations in November 1998.
<PAGE>
YEAR 2000 ISSUE
The "Year 2000 Issue" has arisen because many existing computer programs and
chip-based embedded technology systems use only the last two digits to refer to
a year, and therefore do not properly recognize a year that begins with "20"
instead of the familiar "19." If not corrected, many computer applications could
fail or create erroneous results. The following disclosure provides information
regarding the current status of the Partnership's Year 2000 compliance program.
The Partnership processes its records on computer hardware and software systems
maintained by Host Marriott Corporation ("Host Marriott"), the parent company of
the General Partner of the Partnership. Host Marriott has adopted a compliance
program because it recognizes the importance of minimizing the number and
seriousness of any disruptions that may occur as a result of the Year 2000
Issue. Host Marriott's compliance program includes an assessment of Host
Marriott's hardware and software computer systems and embedded systems, as well
as an assessment of the Year 2000 issues relating to third parties with which
the Partnership has a material relationship or whose systems are material to the
operations of the Partnership's Hotels. Host Marriott's efforts to ensure that
its computer systems are Year 2000 compliant have been segregated into two
separate phases: in-house systems and third-party systems.
In-House Systems. Host Marriott has invested in the implementation and
maintenance of accounting and reporting systems and equipment that are intended
to enable the Partnership to provide adequately for its information and
reporting needs and which are also Year 2000 compliant. Substantially all of
Host Marriott's in-house systems have already been certified as Year 2000
compliant through testing and other mechanisms and Host Marriott has not delayed
any systems projects due to the Year 2000 Issue. Host Marriott is in the process
of engaging a third party to review its Year 2000 in-house compliance. Host
Marriott believes that future costs associated with Year 2000 Issues for its
in-house systems will be insignificant and will therefore not impact the
Partnership's business, financial condition and results of operations. Host
Marriott has not developed, and does not plan to develop, a separate contingency
plan for its in-house systems due to their current Year 2000 compliance.
However, Host Marriott does have detailed contingency plans for its in-house
systems covering a variety of possible events, including natural disasters,
interruption of utility service and similar events.
Third-Party Systems. The Partnership relies upon operational and accounting
systems provided by third parties, primarily the Manager of its Hotels, to
provide the appropriate property-specific operating systems (including
reservation, phone, elevator, security, HVAC and other systems) and to provide
it with financial information. Based on discussions with the third parties that
are critical to the Partnership's business, including the Manager of its Hotels,
Host Marriott believes that these parties are in the process of studying their
systems and the systems of their respective vendors and service providers and,
in many cases, have begun to implement changes, to ensure that they are Year
2000 compliant. To the extent these changes impact property-level systems, the
Partnership may be required to fund capital expenditures for upgraded equipment
and software. Host Marriott does not expect these charges to be material, but is
committed to making these investments as required. To the extent that these
changes relate to the Manager's centralized systems (including reservations,
accounting, purchasing, inventory, personnel and other systems), the
Partnership's management agreement generally provides for these costs to be
charged to the Partnership's Hotels. Host Marriott expects that the Manager will
incur Year 2000 costs for its centralized systems in lieu of costs related to
system projects that otherwise would have been pursued and therefore, its
overall level of centralized charges allocated to the Hotels will not materially
increase as a result of the Year 2000 compliance effort. Host Marriott believes
that this deferral of certain system projects will not have a material impact on
its future results of operations, although it may delay certain productivity
enhancements at the Partnership's Hotels. Host Marriott will continue to monitor
the efforts of these third parties to become Year 2000 compliant and will take
appropriate steps to address any non-compliance issues. The Partnership believes
that in the event of material Year 2000 non-compliance caused by a breach of the
Manager's duties, the Partnership will have the right to seek recourse against
the Manager under its third party management agreement. The management agreement
generally does not specifically address the Year 2000 compliance issue.
Therefore the amount of any recovery in the event of Year 2000 non-compliance at
a property, if any, is not determinable at this time.
Host Marriott will work with the third parties to ensure that appropriate
contingency plans will be developed to address the most reasonably likely worst
case Year 2000 scenarios, which may not have been identified fully. In
particular, Host Marriott has had extensive discussions regarding the Year 2000
Issue with Marriott International, the Manager of the Hotels. Due to the
significance of Marriott International to the Partnership's business, a detailed
description of Marriott International's state of readiness follows.
Marriott International has adopted an eight-step process toward Year 2000
readiness, consisting of the following: (i) Awareness: fostering understanding
of, and commitment to, the problem and its potential risks; (ii) Inventory:
identifying and locating systems and technology components that may be affected;
(iii) Assessment: reviewing these components for Year 2000 compliance, and
assessing the scope of Year 2000 issues; (iv) Planning: defining the technical
solutions and labor and work plans necessary for each particular system; (v)
Remediation/Replacement: completing the programming to renovate or replace the
problem software or hardware; (vi) Testing and Compliance Validation: conducting
testing, followed by independent validation by a separate internal verification
team; (vii) Implementation: placing the corrected systems and technology back
into the business environment; and (viii) Quality Assurance: utilizing a
dedicated audit team to review and test significant projects for adherence to
quality standards and program methodology.
Marriott International has grouped its systems and technology into three
categories for purposes of Year 2000 compliance: (i) information resource
applications and technology (IT Applications) -- enterprise-wide systems
supported by Marriott International's centralized information technology
organization ("IR"); (ii) Business-initiated Systems ("BIS") - systems that have
been initiated by an individual business unit, and that are not supported by
Marriott International's IR organization; and (iii) Building Systems - non-IT
equipment at properties that use embedded computer chips, such as elevators,
automated room key systems and HVAC equipment. Marriott International is
prioritizing its efforts based on how severe an effect noncompliance would have
on customer service, core business processes or revenues, and whether there are
viable, non-automated fallback procedures (System Criticality).
Marriott International measures the completion of each phase based on documented
and quantified results, weighted for System Criticality. As of the end of the
1998 third quarter, the awareness and inventory phases were complete for IT
Applications and nearly complete for BIS and Building Systems. For IT
Applications, the Assessment, Planning and Remediation/Replacement phases were
each over 80 percent complete, and Testing and Compliance Validation had been
completed for a number of key systems, with most of the remaining work in its
final stage. For BIS and Building Systems, Assessment and Planning were in the
mid- to upper-range of completion, with a substantial amount of work in process,
while the progress level for Remediation/Replacement and Testing and Compliance
Validation had not yet been documented and quantified. Quality Assurance is also
in progress for IT Applications and is scheduled to begin for BIS and Business
Systems in the near future. Marriott International's goal is to substantially
complete the Remediation/Replacement and Testing phases for its System Critical
IT Applications by the end of 1998, with 1999 reserved for unplanned
contingencies and for Compliance Validation and Quality Assurance. For System
Critical BIS and Building Systems, the same level of completion is targeted for
June 1999 and September 1999, respectively.
Marriott International has initiated Year 2000 compliance communications with
its significant third party suppliers, vendors and business partners, including
its franchisees. Marriott International is focusing its efforts on the business
interfaces most critical to its customer service and revenues, including those
third parties that support the most critical enterprise-wide IT Applications,
franchisees generating the most revenues, suppliers of the most widely used
Building Systems and BIS, the top 100 suppliers, by dollar volume, of non-IT
products, and financial institutions providing the most critical payment
processing functions. Responses have been received from a majority of the firms
in this group.
Marriott International is also establishing a common approach for testing and
addressing Year 2000 compliance issues for its managed and franchised
properties. This includes a guidance protocol for operated properties, and a
Year 2000 "Toolkit" for franchisees containing relevant Year 2000 compliance
information. Marriott International is also utilizing a Year 2000 best-practices
sharing system.
Risks. There can be no assurance that Year 2000 remediation by the Partnership
or third parties will be properly and timely completed, and failure to do so
could have a material adverse effect on the Partnership, its business and its
financial condition. The Partnership cannot predict the actual effects to it of
the Year 2000 Issue, which depends on numerous uncertainties such as: (i)
whether significant third parties properly and timely address the Year 2000
Issue; and (ii) whether broad-based or systemic economic failures may occur.
Host Marriott is also unable to predict the severity and duration of any such
failures, which could include disruptions in passenger transportation or
transportation systems generally, loss of utility and/or telecommunications
services, the loss or distortion of hotel reservations made on a centralized
reservation system and errors or failures in financial transactions or payment
processing systems such as credit cards. Due to the general uncertainty inherent
in the Year 2000 Issue and the Partnership's dependence on third parties, the
Partnership is unable to determine at this time whether the consequences of Year
2000 failures will have a material impact on the Partnership. Host Marriott's
Year 2000 compliance program is expected to significantly reduce the level of
uncertainty about the Year 2000 Issue and Host Marriott believes that the
possibility of significant interruptions of normal operations should be reduced.
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Neither the Partnership 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 6. EXHIBITS AND REPORTS ON FORM 8-K
b. Reports on Form 8-K
1. A Form 8-K was filed with the Securities and Exchange Commission on
September 16, 1998. This filing, Item 5 -- Other Events, discloses
that the General Partner sent the limited partners of the Partnership
a letter to inform them that September 18, 1998 will be the record
date for voting in the forthcoming consent solicitation. Those
Limited Partners whose ownership is reflected on the records of the
General Partner as of September 18, 1998 will be eligible to vote on
the merger and proposed amendments. A copy of the letter was included
as an Item 7 - Exhibit in this Form 8-K filing.
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this Form 10-Q to be signed on its behalf by the
undersigned, thereunto duly authorized.
MARRIOTT HOTEL PROPERTIES
LIMITED PARTNERSHIP
By: HOTEL PROPERTIES MANAGEMENT, INC.
General Partner
October 26, 1998 By: /s/Earla L. Stowe
Earla L. Stowe
Vice President and Chief Accounting Officer
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Quarterly Report 10-Q and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<CIK> 0000784711
<NAME> Marriott Hotel Properties Limited Partnership
<MULTIPLIER> 1,000
<CURRENCY> U.S. Dollar
<S> <C>
<PERIOD-TYPE> 9-Mos
<FISCAL-YEAR-END> Dec-31-1998
<PERIOD-START> Jan-01-1998
<PERIOD-END> Sep-11-1998
<EXCHANGE-RATE> 1.00
<CASH> 20,484
<SECURITIES> 0
<RECEIVABLES> 7,939
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 21,441
<PP&E> 352,307
<DEPRECIATION> (129,570)
<TOTAL-ASSETS> 272,601
<CURRENT-LIABILITIES> 4,385
<BONDS> 238,536
0
0
<COMMON> 0
<OTHER-SE> 29,680
<TOTAL-LIABILITY-AND-EQUITY> 272,601
<SALES> 0
<TOTAL-REVENUES> 61,245
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 28,186
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 13,632
<INCOME-PRETAX> 19,427
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 19,427
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
<FN>
<F1>This includes minority interest
</FN>
</TABLE>
