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, 1998
OR
|_| Transition Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
Commission File Number: 033-20022
MARRIOTT RESIDENCE INN LIMITED PARTNERSHIP
(Exact name of registrant as specified in its charter)
Delaware 52-1558094
- - -------------------------------------------- --------------------------------
(State or other jurisdiction of (IRS 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 X No ____ Not applicable ______.
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
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<PAGE>
MARRIOTT RESIDENCE INN LIMITED PARTNERSHIP
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TABLE OF CONTENTS
PAGE NO.
PART I
Item 1. Business........................................................1
Item 2. Properties......................................................4
Item 3. Legal Proceedings...............................................5
Item 4. Submission of Matters to a Vote of Security Holders.............6
PART II
Item 5. Market For The Partnership's Limited Partnership Units
and Related Security Holder Matters.............................6
Item 6. Selected Financial Data.........................................7
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations.......................................8
Item 8. Financial Statements and Supplementary Data....................16
Item 9. Changes In and Disagreements With Accountants on Accounting
and Financial Disclosure.......................................29
PART III
Item 10. Directors and Executive Officers...............................29
Item 11. Management Remuneration and Transactions.......................30
Item 12. Security Ownership of Certain Beneficial Owners and Management.30
Item 13. Certain Relationships and Related Transactions.................30
PART IV
Item 14. Exhibits, Supplemental Financial Statement Schedules
and Reports on Form 8-K........................................33
<PAGE>
7
<PAGE>
PART I
ITEM 1. BUSINESS
Description of the Partnership
Marriott Residence Inn Limited Partnership, a Delaware limited partnership (the
"Partnership"), was formed on January 18, 1988 to acquire, own and operate 15
Marriott Residence Inn properties (the "Inns") and the land on which the Inns
are located. The Inns are located in seven states and contain a total of 2,129
suites as of December 31, 1998. The Partnership commenced operations on March
29, 1988.
The Partnership is engaged solely in the business of owning and operating the
Inns and therefore is engaged in one industry segment. The principal offices of
the Partnership are located at 10400 Fernwood Road, Bethesda, Maryland 20817.
The Inns are operated as part of the Residence Inn by Marriott system and
are managed by Residence Inn by Marriott, Inc. (the "Manager"), a wholly-owned
subsidiary of Marriott International, Inc. ("MII"), under a long-term management
agreement (the "Management Agreement"). The Management Agreement expires in 2007
with renewals at the option of the Manager for one or more of the Inns for up to
five successive terms of 10 years thereafter. See Item 13 "Certain Relationships
and Related Transactions."
The objective of the Residence Inn by Marriott system, including the Inns, is to
provide consistently superior lodging at a fair price with an appealing,
friendly and contemporary residential character. Residence Inn by Marriott Inns
generally have fewer guest rooms than traditional full-service hotels, in most
cases containing approximately 120 guest suites, as compared to full-service
Marriott hotels which typically contain 350 or more guest rooms.
The Inns are extended-stay, limited service hotels which cater primarily to
business and family travelers who stay more than five consecutive nights. The
Inns typically have 88 to 144 studio, one bedroom, two bedroom and two-story
penthouse suites. They are generally located in suburban settings throughout the
United States and feature a series of residential style buildings with
landscaped walkways, courtyards and recreational areas. See Item 2 "Properties."
Residence Inns do not have restaurants, but offer a complimentary continental
breakfast. In addition, most of the Inns provide a complimentary hospitality
hour. Each suite contains a fully-equipped kitchen and many suites have
woodburning fireplaces.
The Partnership's financing needs have been funded through loan agreements
with independent financial institutions. See "Debt Financing."
Organization of the Partnership
Between March 29, 1988 and April 22, 1988 (the "Closing Date"), 65,600 limited
partnership interests (the "Units") were sold in a public offering. The offering
price per Unit was $1,000. RIBM One Corporation ("RIBM One"), the sole general
partner of the Partnership prior to December 22, 1998, contributed $662,627 for
its 1% general partnership interest. On the Closing Date, the Partnership
acquired the Inns and the land on which the Inns are located from Host Marriott
for $178.8 million. Of the total purchase price, $123 million was paid from the
proceeds of mortgage financing and the remainder from the sale of the Units.
On April 17, 1998, Host Marriott, the parent of RIBM One, announced that its
Board of Directors authorized the company to reorganize its business operations
to qualify as a real estate investment trust ("REIT") to become effective as of
January 1, 1999 (the "REIT Conversion"). On December 29, 1998, Host Marriott
announced that it had completed substantially all the steps necessary to
complete the REIT Conversion and expected to qualify as a REIT under the
applicable federal income tax laws beginning January 1, 1999. Subsequent to the
REIT Conversion, Host Marriott is referred to as Host REIT. In connection with
the REIT Conversion, Host REIT contributed substantially all of its hotel assets
to a newly-formed partnership Host Marriott LP ("Host LP").
Prior to December 22, 1998, the sole general partner of the Partnership, with a
1% interest, was RIBM One, a wholly owned subsidiary of Host Marriott
Corporation. In connection with Host Marriott Corporation's conversion to a real
estate investment trust, the following steps occurred. Host Marriott Corporation
formed RIBM One LLC, a Delaware single member limited liability company, having
two classes of member interests (Class A - 1% economic interest, managing; Class
B - 99% economic interest, non-managing). RIBM One merged into RIBM One LLC on
December 22, 1998 and RIBM One ceased to exist. On December 28, 1998, Host
Marriott Corporation contributed its entire interest in RIBM One LLC to Host
Marriott, L.P. ("Host LP"), which is owned 78% by Host Marriott Corporation and
22% by outside partners. Finally on December 30, 1998, Host Marriott contributed
its 99% Class B interest in RIBM One LLC to Rockledge Hotel Properties, Inc.
("Rockledge"), a Delaware corporation which is owned 95% by Host LP (economic
non-voting interest) and 5% by Host Marriott Statutory/Charitable Employee
Trust, a Delaware statutory business trust (100% of voting interest). As a
result, the sole general partner of the Partnership is RIBM One LLC (the
"General Partner"), with a Class A 1% managing economic interest owned by Host
LP and a Class B 99% non-managing economic interest owned by Rockledge.
Debt Financing
The Partnership's debt consists of a $100 million senior mortgage the
"Senior Mortgage") and a $30 million second mortgage (the "Second Mortgage").
The Senior Mortgage of $100 million bears interest at a fixed interest rate of
8.6%, requires monthly amortization of principal on a 20 year schedule and
matures on September 30, 2002. The Second Mortgage of $30 million bears interest
at a fixed interest rate of 15.25%, requires monthly amortization of principal
on a 20 year schedule and matures on September 30, 2002.
In addition to the required monthly principal amortization, during each of the
four years from 1996 through 1999, the Partnership is required to pay, on a cash
available basis, an additional $2 million annually toward principal amortization
on the Senior Mortgage. Additionally, during the entire seven year term, the
Partnership has the option to pay up to an additional $1 million principal
payment annually on the Second Mortgage and up to another $1 million optional
principal payment which would be applied in a 2:1 ratio to the Senior and Second
Mortgage, respectively.
The terms of the Senior and Second Mortgages include requirements of the
Partnership to maintain certain defined ratios of operating cash available after
debt service to total debt service. In the event the Partnership fails to
maintain the required debt service ratios, all Inn operating cash flow, plus all
cash or other amounts to which the Partnership is entitled from any source, must
be paid directly to a cash collateral account until the ratios are restored to
their required levels. The Partnership has met all required ratios during the
loan term.
Both the Senior and Second Mortgages are secured by the Inns, the land on which
they are located, a security interest in all personal property associated with
the Inns including furniture and equipment, inventory, contracts and other
general intangibles and an assignment of the Partnership's rights under the
Management Agreement, as defined below.
The weighted average interest rate on the Partnership's debt for the years ended
December 31, 1998 and 1997 was 10.13%.
Material Contracts
Management Agreement
The primary provisions of the Management Agreement are discussed in Item 13,
"Certain Relationships and Related Transactions."
Competition
The United States lodging industry generally is comprised of two broad segments:
full service hotels and limited service hotels. Full service hotels generally
offer restaurant and lounge facilities and meeting spaces, as well as a wide
range of services, typically including bell service and room service. Limited
service hotels generally offer accommodations with limited or no services and
amenities. As extended-stay, the Inns compete effectively with both full service
and limited service hotels in their respective markets by providing streamlined
services and amenities exceeding those provided by typical limited service
hotels at prices that are significantly lower than those available at full
service hotels.
The lodging industry in general, and the extended-stay segment in particular, is
highly competitive, but the degree of competition varies from location to
location and time to time. The Inns compete with several other major lodging
brands. Competition in the industry is based primarily on the level of service,
quality of accommodations, convenience of locations and room rates. The
following are key participants in the extended-stay segment of the lodging
industry: Residence Inn, Homewood Suites, Hawthorne Suites, Summerfield Suites,
Extended Stay America and AmeriSuites.
Conflicts of Interest
Because Host LP, the managing member of the General Partner, MII and their
affiliates own and/or operate hotels other than the Partnership's Inns and MII
and its affiliates license others to operate hotels under the various brand
names owned by MII and its affiliates, potential conflicts of interest exist.
With respect to these potential conflicts of interest, Host Marriott, MII and
their affiliates retain a free right to compete with the Partnership's Inns,
including the right to develop, own, and operate competing hotels now and in the
future in markets in which the Inns are located, in addition to those existing
hotels which may currently compete directly or indirectly with the Inns.
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 dealings 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 affiliate of the General Partner, or persons employed
by the General Partner or its affiliates be conducted on terms that are fair to
the Partnership and that are commercially reasonable. Agreements and
relationships involving the General Partner or its affiliates and the
Partnership are on terms consistent with the terms on which the General Partner
or its affiliates have dealt with unrelated parties.
The Amended and Restated Agreement of Limited Partnership as amended (the
"Partnership Agreement"), provides that any agreements, contracts or
arrangements between the Partnership and the General Partner or any of its
affiliates, except for rendering legal, tax, accounting, financial, engineering,
and procurement services to the Partnership by employees of the General Partner
or its affiliates, will be on commercially reasonable terms and will be subject
to the following additional conditions:
(i) the General Partner or any such affiliate must have the ability to render
such services or to sell or lease such goods;
(ii) such agreements, contracts or arrangements must be fair to the
Partnership and reflect commercially reasonable terms and must be
embodied in a written contract which precisely describes the subject
matter thereof and all compensation to be paid therefor;
(iii) no rebates or give-ups may be received by the General Partner or any such
affiliate, nor may the General Partner or any such affiliate participate
in any reciprocal business arrangements which would have the effect of
circumventing any of the provisions of the Partnership Agreement; and
(iv) no such agreement, contract or arrangement as to which the limited
partners had previously given approval may be amended in such a manner as
to increase the fees or other compensation payable by the Partnership to
the General Partner or any of its affiliates or to decrease the
responsibilities or duties of the General Partner or any such affiliate
in the absence of the consent of the holders of a majority in interest of
the limited partners.
Employees
Neither the General Partner nor the Partnership has any employees. Host LP
provides the services of certain employees (including the General Partner's
executive officers) of Host LP to the Partnership and the General Partner. The
Partnership and the General Partner anticipate that each of the executive
officers of the General Partner will generally devote a sufficient portion of
his or her time to the business of the Partnership. However, each of such
executive officers also will devote a significant portion of his or her time to
the business of Host LP and its other affiliates. No officer or manager of the
General Partner or employee of Host LP devotes a significant percentage of time
to Partnership matters. To the extent that any officer, manager or employee does
devote time to the Partnership, the General Partner or Host LP, as applicable,
is entitled to reimbursement for the cost of providing such services. See Item
11 "Management Remuneration and Transactions" for information regarding payments
made to Host LP or its subsidiaries for the cost of providing administrative
services to the Partnership.
Potential Transaction
The General Partner has retained Merrill Lynch to explore alternatives to
provide liquidity for the Partnership and maximize the value of the limited
partners' investment. However, there can be no assurance that a transaction will
result from these activities.
ITEM 2. PROPERTIES
Introduction
The Inns consist of 15 Residence Inn by Marriott Inns as of December 31, 1998.
The Inns, which range in age between 11 and 14 years, are geographically
diversified among seven states: four in Ohio, three in California, three in
Georgia, two in Missouri, and one in each of Illinois, Colorado and Michigan.
The extended-stay segment of the lodging industry experienced increased
competition throughout 1998 as new extended-stay purpose-built competitors
entered the market. This trend is expected to continue in 1999. In response to
this increased competition, Residence Inn by Marriott's strategy is to
differentiate the brand on the basis of superior service offerings and delivery.
On a combined basis, competitive forces affecting the Inns are not, in the
opinion of the General Partner, more adverse than the overall competitive forces
affecting the lodging industry generally. See Item 1, "Business--Competition."
<PAGE>
Name and Location of Partnership Inns
Inn Number of Suites Date Opened
- - ------------------------------- ------------------------- ------------------
California
Costa Mesa 144 1986
La Jolla 287 1986
Long Beach 216 1987
Colorado
Boulder 128 1986
Georgia
Atlanta Buckhead 136 1987
Atlanta Cumberland 130 1987
Atlanta Dunwoody 144 1984
Illinois
Chicago Lombard 144 1987
Michigan
Southfield 144 1986
Missouri
St. Louis Chesterfield 104 1986
St. Louis Galleria 152 1986
Ohio
Cincinnati North 144 1985
Columbus North 96 1985
Dayton North 64 1987
Dayton South 96 1985
=========================
TOTAL 2,129
=========================
ITEM 3. LEGAL PROCEEDINGS
The Partnership and the Inns are involved in routine litigation and
administrative proceedings arising in the ordinary course of business, some of
which are expected to be covered by liability insurance and which collectively
are not expected to have a material adverse effect on the business, financial
condition or results of operations of the Partnership.
On February 11, 1998, four individual limited partners in partnerships sponsored
by Host Marriott Corporation ("Host Marriott") filed a class action lawsuit,
styled Ruben, et al. v. Host Marriott Corporation, et al., Civil Action No.
16186, in Delaware State Chancery Court against Host Marriott and the general
partners of Courtyard by Marriott Limited Partnership, Courtyard by Marriott II
Limited Partnership, Marriott Residence Inn Limited Partnership, Marriott
Residence Inn II Limited Partnership, and Fairfield Inn by Marriott Limited
Partnership (collectively, the "Five Partnerships"). The plaintiffs alleged that
the proposed merger of the Five Partnerships (the "Merger") into an umbrella
partnership real estate investment trust proposed by CRF Lodging Company, L.P.
in a preliminary registration statement filed with the Securities and Exchange
Commission, dated December 22, 1997, constituted a breach of the fiduciary
duties owed to the limited partners of the Five Partnerships by Host Marriott
and the general partners of the Five Partnerships. In addition, the plaintiffs
alleged that the Merger breached various agreements relating to the Five
Partnerships. The plaintiffs sought, among other things, the following:
certification of a class; injunctive relief to block consummation of the Merger
or, in the alternative, rescission of the Merger; and damages. The defendants,
in light of market conditions, decided to abandon their efforts to complete the
Merger. As a result of this decision, the plaintiffs voluntarily dismissed the
lawsuit.
<PAGE>
On March 16, 1998, limited partners in several partnerships sponsored by Host
Marriott filed a lawsuit, styled Robert M. Haas, Sr. and Irwin Randolf Joint
Tenants, et al., v. Marriott International Inc., et. al., Case No. 98-CI-04092
(the "Haas Case"), in the 57th Judicial District Court of Bexar County, Texas
against Marriott International, Inc. ("Marriott International"), Host Marriott,
various of their subsidiaries, J.W. Marriott, Jr., Stephen Rushmore, and
Hospitality Valuation Services, Inc. (collectively, the "Defendants"). The
lawsuit relates to the following limited partnerships: Courtyard by Marriott
Limited Partnership, Courtyard by Marriott II Limited Partnership, Marriott
Residence Inn Limited Partnership, Marriott Residence Inn II Limited
Partnership, Fairfield Inn by Marriott Limited Partnership, Desert Springs
Marriott Limited Partnership, and Atlanta Marriott Marquis Limited Partnership
(collectively, the "Seven Partnerships"). The plaintiffs allege that the
Defendants conspired to sell hotels to the Seven Partnerships for inflated
prices and that they charged the Seven Partnerships excessive management fees to
operate the Seven Partnerships' hotels. The plaintiffs further allege, among
other things, that the Defendants committed fraud, breached fiduciary duties,
and violated the provisions of various contracts. The plaintiffs are seeking
unspecified damages. The Defendants, which do not include the Seven
Partnerships, believe that there is no truth to the plaintiffs' allegations and
that the lawsuit is totally devoid of merit. The Defendants intend to vigorously
defend against the claims asserted in the lawsuit. They have filed an answer to
the plaintiffs' petition and asserted a number of defenses. A related case
concerning Courtyard by Marriott II Limited Partnership was filed by the
plaintiffs' lawyers in the same court, involves similar allegations against the
Defendants, and has been certified as a class action. Trial in this related case
is presently scheduled for May 1999. Due to the prosecution of the related case,
there has been no meaningful activity in the Haas case. Although the Seven
Partnerships have not been named as defendants in the lawsuit, the partnership
agreements relating to the Seven Partnerships include an indemnity provision
which requires the Seven Partnerships, under certain circumstances, to indemnify
the general partners against losses, expenses and fees.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
PART II
ITEM 5. MARKET FOR THE PARTNERSHIP'S LIMITED PARTNERSHIP UNITS AND
RELATED SECURITY HOLDER MATTERS
There is currently no established public trading market for the Units and it is
not anticipated that a public market for the Units will develop. Assignments of
Units are limited to the first date of each fiscal quarter and are subject to
approval by the General Partner. As of December 31, 1998, there were 3,944
holders of record of the 65,600 Units.
The Partnership generally distributes cash available for distribution as
follows: (i) first, 99% to the limited partners and 1% to the General Partner,
until the partners have received, with respect to such year, an amount equal to
10% of their Invested Capital, defined as the excess of original capital
contributions over cumulative distributions of net refinancing and sales
proceeds ("Capital Receipts") (ii) second, remaining cash available for
distribution will be distributed as follows, depending on the amount of Capital
Receipts previously distributed:
(a) 99% to the limited partners and 1% to the General Partner, if the
partners have received aggregate cumulative distributions of Capital
Receipts of less than 50% of their original capital contributions; or
(b) 85% to the limited partners and 15% to the General Partner, if the
partners have received aggregate cumulative distributions of Capital
Receipts equal to or greater than 50% but less than 100% of their
original capital contributions; or
(c) 70% to the limited partners and 30% to the General Partner, if the
partners have received aggregate cumulative distributions of Capital
Receipts equal to 100% or more of their original capital contributions.
Cash available for distribution means, with respect to any fiscal period, the
cash revenues of the Partnership from all sources during the fiscal period,
other than Capital Receipts less (i) all cash expenditures of the Partnership
during such fiscal period, including, without limitation, debt service,
repayment of advances made by the General Partner, fees for management services
and administrative expenses (excluding expenditures incurred by the Partnership
in connection with a transaction resulting in Capital Receipts), and (ii) such
reserves as may be determined by the General Partner in its reasonable
discretion to be necessary to provide for the foreseeable cash needs of the
Partnership or for the maintenance, repair, or restoration of the Inns.
As of December 31, 1998, the Partnership has distributed a total of $43,669,801
to the partners ($659 per limited partner unit) since inception. In February
1998, $3,313,131 ($50 per limited partner unit) was distributed from 1997
operations. In February 1997, the Partnership distributed $1,656,566 from 1996
operations ($25 per limited partner unit). In 1996, $4,969,697 ($75 per limited
partner unit) was distributed, of this amount, $1,656,566 was from 1996
operations ($25 per limited partner unit) and the remaining $3,313,131 was from
1995 operations ($50 per limited partner unit). No distributions of Capital
Receipts have been made since inception.
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data present historical operating information
for the Partnership for each of the five years in the period ended December 31,
1998 presented in accordance with generally accepted accounting principles.
<TABLE>
1998 1997 1996 1995 1994
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Income Statement Data:(in thousands, except per unit amounts)
Revenues...........................................$ 66,135 $ 62,087 $ 60,824 $ 56,725 $ 53,440
Operating profit................................... 16,775 17,364 16,151 14,400 11,662
Net income (loss).................................. 4,868 4,914 3,087 1,517 (1,588)
Net income (loss) per limited partner unit
(65,600 Units).................................. 73 74 47 23 (24)
Balance Sheet Data:
Total assets.......................................$ 148,353 $ 151,971 $ 151,658 $ 157,061 $ 155,640
Total liabilities.................................. 138,219 143,392 146,337 149,858 149,092
Cash distributions per limited partner unit
(65,600 Units).................................. 50 25 75 13 50
</TABLE>
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
.........AND RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS
Certain matters discussed in this form 10-K include forward-looking statements
and as such may 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. The
cautionary statements set forth in reports filed under the Securities Act of
1934 contain important factors with respect to such forward-looking statements,
including: (i) national and local economic and business conditions what 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 compete effectively; (iii) changes
in travel patterns, taxes and government regulations; (iv) governmental
approvals, actions and initiatives; and (v) the effects of tax legislative
action. 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.
GENERAL
The following discussion and analysis addresses results of operations for the
fiscal years ended December 31, 1998, 1997 and 1996. During the period from 1996
through 1998, Partnership sales grew from $60.8 million to $66.1 million. Growth
in suite sales, and thus Inn sales, is primarily a function of combined average
occupancy and combined average daily suite rates. During the period from 1996
through 1998, the Inns' combined average daily suite rate increased
approximately $8 from $88 to $96, while the combined average occupancy increased
just over one percentage point from 83.5% to 84.9%.
The Partnership's operating costs and expenses are, to a great extent, fixed.
Therefore, the Partnership derives substantial operating leverage from increases
in revenue. The variable expenses include (i) base management and Residence Inn
system fees under the Management Agreement, which are 2% of gross sales, and 4%
of suite sales, respectively; and (ii) incentive management fees under the
Management Agreement equal to 15% of Operating Profit (20% when Operating Profit
equals or exceeds $23.5 million), as defined, payable out of 50% of available
cash flow as defined.
RESULTS OF OPERATIONS
Revenues represent the gross sales generated by the Partnership's Inns. 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.
The Partnership considered the impact of EITF 97-2 on its financial statements
and determined that EITF 97-2 requires the Partnership to include property-level
sales and operating expenses of its Inns in its statements of revenues and
expenses for the period during which the Partnership operated the Inns through a
management agreement. The Partnership has given retroactive effect to the
adoption of EITF 97-2 in the accompanying statement of revenues and expenses.
Application of EITF 97-2 to the financial statements for the fiscal years ended
December 31, 1998, 1997 and 1996 increased both revenues and operating expenses
by $31.8 million, $29.0 million and $28.7 million, respectively, and had no
impact on operating profit or net income.
The following table shows selected combined operating statistics for the Inns.
Revenue per available room ("REVPAR") represents the combination of the average
daily room rate charged and the average occupancy achieved, and is a commonly
used indicator of hotel performance.
Year Ended December 31,
1998 1997 1996
Combined average occupancy............ 84.9% 83.4% 83.5%
Combined average daily suite rate.....$ 96.15 $ 91.44 $ 88.02
REVPAR................................$ 81.63 $ 76.26 $ 73.50
1998 Compared to 1997:
Revenues. Total 1998 Inn sales of $66.1 million represented a $4 million, or 6%,
increase over 1997 results. This increase was achieved primarily through an
increase in Inn revenue per available room ("REVPAR"), which represents the
combination of the combined average daily suite rate charged and the combined
average occupancy achieved, and is a commonly used indicator of hotel
performance. REVPAR does not include other ancillary revenues generated by the
Inns. REVPAR increased $5 in 1998 as a result of a $5 increase in the average
suite rate from $91 in 1997 to $96 in 1998. Combined average occupancy increased
by approximately two percentage points to 84.9%. As a result, 1998 combined
average suite sales increased by $4 million, or 7%, to $63.1 million from $59.1
million in 1997.
Operating Costs and Expenses. Operating costs and expenses increased to $49.4
million in 1998 from $44.7 million in 1997 primarily due to a $2.7 million
increase in property-level costs and expenses and a $1.3 million increase in
incentive management fee expense. Property-level cost and expenses increased
primarily due to increase in salaries and wages at the Inns necessary in order
to attract and retain quality personnel. Repairs and maintenance expense also
increased as a result of efforts to standardize the landscaping and lawn care at
the Inns during 1998. Finally, property-level cost and expenses were lower in
1997,compared to 1998 due to the $800,000 adjustment to decrease the sales and
use tax liability in 1997. Incentive management fee is equal to 15% of Operating
Profit as defined in the Management Agreement (20% in any year in which
Operating Profit is equal to or greater than $23.5 million). In 1998, the
incentive management fee was calculated as 20% of Operating Profit equal to
$23.6 million. In 1997, the incentive management fee was calculated as 15% of
Operating Profit equal to $22.6 million. Thus the increase in incentive
management fee was due to improved Operating Profit and Operating Profit
exceeding the $23.5 million threshold in 1998. As a percentage of Inn revenues,
operating costs and expenses represented 75% of revenues for 1998 and 72% in
1997.
Operating Profit. As a result of the changes in revenues and operating costs and
expenses discussed above, operating profit decreased $600,000 to $16.8 million,
or 25% of total revenues, in 1998 from $17.4 million, or 28% of revenues in
1997.
Interest Expense. Interest expense decreased 4.6% to $12.2 million in 1998
from $12.8 million in 1997 due to principal amortization of the Senior and
Second Mortgages.
Net Income. Net income decreased $46,000 in 1998 to 7.4% of revenues from $4.9
million, or 7.9% of total revenues, in 1997 due primarily to the changes in
revenues and expenses discussed above.
<PAGE>
1997 Compared to 1996:
Revenues. Total 1997 Inn sales of $62.1 million represented a $1.3 million, or
2%, increase over 1996 results. This increase was achieved primarily through a
$3 increase in REVPAR that was primarily the result of an increase in the
combined average daily suite rate from $88 in 1996 to $91 in 1997. Combined
average occupancy remained stable at approximately 83%. As a result, 1997
combined average suite sales increased by $1.1 million, or 2%, to $59.1 million
from $58.0 million in 1996.
Operating Costs and Expenses. Operating costs and expenses remained stable at
$44.7 million in 1997 compared to 1996. While suite expenses increased $847,000,
this was offset by a decrease in selling, administrative and other expenses of
$670,000. As a percentage of Inn revenues, operating costs and expenses
represented 72% of revenues for 1997 and 73% in 1996.
Operating Profit. As a result of the changes in revenues and operating costs and
expenses discussed above, operating profit increased $1.2 million to $17.4
million, or 28% of total revenues, in 1997 from $16.2 million, or 27% of
revenues in 1996.
Interest Expense. Interest expense decreased 5% to $12.8 million in 1997 from
$13.4 million in 1996 due to principal amortization of the Senior and Second
Mortgages.
Net Income. Net income increased $1.8 million to $4.9 million, or 7.9% of
revenues, in 1997 from $3.1 million, or 5.1% of total revenues, in 1996 due
primarily to the changes in revenues and expenses discussed above.
CAPITAL RESOURCES AND LIQUIDITY
The Partnership's financing needs have historically been funded through loan
agreements with independent financial institutions. The General Partner believes
that cash from Inn operations and Partnership reserves will be adequate in the
short term and is working with the Manager to address the long term operational
and capital needs of the Partnership.
Principal Sources and Uses of Cash
The Partnership's principal source of cash is cash from operations. Its
principal uses of cash are to make debt service payments, fund the property
improvement fund, and to make distributions to the limited partners.
Cash provided by operating activities was $14.8 million, $12.7 million and $10.8
million for the years ended December 31, 1998, 1997 and 1996, respectively. The
$2.1 million increase in cash from operations in 1998 over 1997 was primarily
due to the $1.0 million increase in incentive management fee earned and deferred
compared to the prior year as well as an $800,000 decrease to the sales and use
tax liability in 1997 and a $421,000 increase in rent collections from the
Manager. Cash from operations increased $1.9 million in 1997 over 1996 primarily
due to $1.1 million in increased rent collections from the Manager as well as a
$638,000 decrease in mortgage interest expense due to the payment of the
optional principal amortization on the debt. The Partnership paid $11.8 million,
$12.4 million and $13.0 million in interest in 1998, 1997 and 1996,
respectively.
Cash used in investing activities was $4.6 million, $3.9 million and $3.2
million, respectively, in 1998, 1997 and 1996. The Partnership's cash used in
investing activities primarily consists of contributions to the property
improvement fund and capital expenditures for improvements to the Inns.
Contributions to the property improvement fund were $4.0 million, $3.1 million
and $3.0 million for the years ended December 31, 1998, 1997 and 1996, while
capital expenditures were $5.5 million, $5.5 million and $3.6 million,
respectively, during these same time periods. Contributions to the property
improvement fund increased $864,000 in 1998 due to the $4 million increase in
revenues and the increase in the required property improvement fund contribution
to 6% of revenues in 1998 from 5% in 1997.
Cash used in financing activities was $11.8 million, $6.6 million and $11.5
million, respectively, in 1998, 1997 and 1996. The Partnership's cash used in
financing activities primarily consists of capital distributions to partners and
the repayment of mortgage debt. During 1998, 1997 and 1996, the Partnership
repaid $8.5 million, $4.9 million and $6.3 million, respectively, of principal
on the Senior and Second Mortgages. Optional principal repayments on the
mortgage debt were $5 million, $2 million and $4 million in 1998, 1997 and 1996,
respectively. Capital distributions to the partners were $3.3 million, $1.7
million and $5.0 million, respectively, in 1998, 1997 and 1996. The $3.3 million
distributed in 1998 was from 1997 cash flow from operations. The $1.7 million
distributed in 1997 was from 1996 cash flow from operations. Of the $5.0 million
distributed in 1996, $1.7 million was from 1996 cash flow from operations and
$3.3 million was from 1995 cash flow from operations.
The General Partner believes that cash from Inn operations and Partnership
reserves will be adequate in the short and long term for the operational and
capital needs of the Partnership.
Debt Financing
The Partnership's mortgage debt is comprised of a $100 million note (the "Senior
Mortgage") which bears interest at a fixed rate of 8.6% and a $30 million note
(the "Second Mortgage") which bears interest at a fixed rate of 15.25% for an
initial blended interest rate of 10.13%. Both the Senior Mortgage and Second
Mortgage require monthly amortization of principal and mature on September 30,
2002. In addition to the required monthly amortization, during each of the four
years from 1996 through 1999, the Partnership is required to pay, on a cash
available basis, an additional $2 million annually toward principal amortization
on the Senior Mortgage. Additionally, during the entire seven year term, the
Partnership has the option to pay up to an additional $1 million principal
payment annually on the Second Mortgage and up to another $1 million optional
principal payment which would be applied in a 2:1 ratio to the Senior and Second
Mortgage, respectively.
Both the Senior Mortgage and the Second Mortgage are secured by the Inns, the
land on which they are located, a security interest in all personal property
associated with the Inns including furniture and equipment, inventory, contracts
and other general intangibles and an assignment of the Partnership's rights
under the management agreement.
Operating profit from the Inns in excess of debt service on the Senior and
Second Mortgages is distributed in the following order of priority: (i) to pay
the Partnership its annual 10% priority return, (ii) to the Manager in payment
of deferred base management fees, (iii) 50% of the remaining operating profit is
paid to the Manager for incentive management fees and 50% is retained by the
Partnership until the amount retained by each party, separately, equals 5% of
the Partnership's invested capital, and (iv) once the Partnership has retained
the additional 5% return, 75% of any remaining operating profit is paid to the
Manager for incentive management fees and 25% is retained by the Partnership.
Property Improvement Fund
The Management Agreement requires annual contributions to a property improvement
fund to ensure that the physical condition and product quality of the Inns are
maintained. Contributions to this fund are based on a percentage of annual total
Inn sales. Based on current capital budgets, the Partnership's FF&E reserves
were insufficient beginning in 1998. The shortfall is primarily due to the need
to complete total suite refurbishments at the majority of the Partnership's Inns
in the next several years. As a result of this expected future shortfall, the
General Partner established a reserve in 1996 for the future capital needs of
the Partnership's Inns. 1996 cash distributions to partners were net of this
reserve. To minimize the shortfall, the Partnership increased the contribution
rate from 5% to 6% in 1998 and then will reduce the rate to 5.5% for 1999. In
the first quarter of 1999, the Partnership provided a loan to the property
improvement fund of $1,450,000 for 1998 that will earn interest at the rate of
Prime plus one percent and will be repaid over a five-year period from operating
cash flow. Under the terms of the loan, the debt service payments are
subordinate to the mortgage debt and are included as a deduction in determining
the incentive management fee paid to the Manager. An additional $1,200,000 loan
will be provided for 1999 that will earn interest at the rate of Prime plus one
percent and will be repaid from the property improvement fund. The balance in
the property improvement fund totaled $200,000 as of December 31, 1998. Total
capital expenditures for 1998, 1997 and 1996 were $5.5 million, $5.5 million and
$3.6 million, respectively.
Deferred Management Fees
The Manager earns a base management fee equal to 2% of the Inns' gross sales.
Through 1990, payment of the base management fee was subordinate to qualifying
debt service payments and retention by the Partnership of annual cash flow from
operations of $6,626,263. Deferred base management fees are payable from
operating cash flow, but only after the payment of (i) debt service, (ii) a
priority return to the Partnership and (iii) certain other priorities as defined
in the Management Agreement. Beginning in 1991 and thereafter, base management
fees are paid currently. Pursuant to the terms of the Management Agreement, the
Partnership paid deferred base management fees of $872,000, $627,000 and
$515,000 for fiscal years ended December 31, 1998, 1997 and 1996, respectively.
Deferred base management fees do not accrue interest. As of December 31, 1998,
there were no deferred base management fees. As of December 31, 1997, cumulative
deferred base management fees totaled $872,000.
In addition, the Manager is entitled to an incentive management fee equal to 15%
of Operating Profit, as defined in the Management Agreement (20% in any year in
which Operating Profit is equal to or greater than $23.5 million). The incentive
management fee is payable out of 50% of cash flow from operations remaining
after payments of qualifying debt service, retention by the Partnership of
annual cash flow from operations of $6,626,263 and the deferred base management
fee. Of this amount, the Partnership retains an additional 50% of the excess
cash flow, up to 5% of its invested capital. Thereafter, the incentive
management fee is payable out of 75% of the remaining cash flow from operations.
Through 1989, the Manager was not entitled to accrue any unpaid incentive
management fees. Incentive management fees earned after 1989 are payable in the
future from operating cash flow, as defined. Unpaid incentive management fees
are paid from cash flow available for incentive management fees following
payment of the then current incentive management fees. For the year ended
December 31, 1998, $4.7 million in incentive management fees was earned, of
which $400,000 was paid. In each of the years ended December 31, 1997 and
December 31, 1996, $3.4 million in incentive management fees were earned and
deferred. As of December 31, 1998 and 1997, deferred incentive management fees
were $27.0 million and $22.7 million, respectively.
Competition
The extended-stay lodging segment continues to be highly competitive. An
increase in supply growth began in 1996 with the introduction of a number of new
national brands. In 1999, it is expected that Residence Inn will continue
outperforming both national and local competitors. The brand is continuing to
carefully monitor the introduction of new extended-stay brands and growth of
existing brands including Homewood Suites, Hawthorne Suites, Summerfield Suites,
Staybridge by Holiday Inn and Hilton Residential Suites.
Inflation
The rate of inflation has been relatively low in the past four years. The
Manager is generally able to pass through increased costs to customers through
higher room rates and prices. In 1998, the increase in average suite rates of
Residence Inns exceeded inflationary costs.
Seasonality
Demand, and thus room occupancy, is affected by normally recurring seasonal
patterns. For most of the Inns, demand is higher in the spring and summer months
(March through October) than during the remainder of the year.
Year 2000 Issues
Year 2000 issues have 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.
Host Marriott has adopted the 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 Host Marriott 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, 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.
Third-Party Systems. The Partnership relies upon operational and accounting
systems provided by third parties, primarily the Manager of its Inns, 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 Inns, 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. However, Host Marriott has not received any oral or written
assurances that these third parties will be Year 2000 compliant on time. To the
extent these changes impact property-level systems, the Partnership may be
required to fund capital expenditures for upgraded equipment and software. The
Partnership 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 properties. 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 systems charges allocated to the Inns 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 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
problem with MII, the parent of the Manager of the Partnership's Hotels. Due to
the significance of MII to the Partnership's business, a detailed description of
MII's state of readiness follows.
MII 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.
MII 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 MII'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 MII'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. MII 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).
MII measures the completion of each phase based on documented and quantified
results, weighted for System Criticality. As of December 31, 1998, 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 and Testing phases were each over 95 percent complete,
and Compliance Validation had been completed for nearly half of key systems,
with most of the remaining work in its final stage. BIS and Building Systems,
Assessment and Planning are nearly complete. Remediation/Replacement and Testing
are 20% complete for BIS, and MII is on track for completion of initial Testing
of Building Systems by the end of first quarter 1999. Compliance Validation is
in progress of both BIS and Building Systems. MII remains on target for
substantial completion of Remediation/Replacement and Testing for System
Critical BIS and Building Systems by June 1999 and September 1999, respectively.
Quality Assurance is in progress for IT Applications, BIS and Building Systems.
<PAGE>
Year 2000 compliance communications with MII's significant third party
suppliers, vendors and business partners, including its franchisees are ongoing.
MII's efforts are focused on the connections most critical to customer service,
core business processes 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. A majority of
these respondents have either given assurances of timely Year 2000 compliance or
have identified the necessary actions to be taken by them or MII to achieve
timely Year 2000 compliance for their products.
MII has established 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. MII is also
utilizing a Year 2000 best-practices sharing system.
Risks. There can be no assurances 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 centralized
reservations systems 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>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index
Page
Marriott Residence Inn Limited Partnership Financial Statements:
Report of Independent Public Accountants....................... 18
Statement of Operations........................................ 19
Balance Sheet.................................................. 20
Statement of Changes in Partners' Capital...................... 21
Statement of Cash Flows........................................ 22
Notes to Financial Statements.................................. 23
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
TO THE PARTNERS OF MARRIOTT RESIDENCE INN LIMITED PARTNERSHIP:
We have audited the accompanying balance sheet of Marriott Residence Inn Limited
Partnership (a Delaware limited partnership) as of December 31, 1998 and 1997,
and the related statements of operations, changes in partners' capital and cash
flows for each of the three years in the period ended December 31, 1998. These
financial statements and schedule are the responsibility of the General
Partner's management. Our responsibility is to express an opinion on these
financial statements and schedule based on our audits.
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 provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Marriott Residence Inn Limited
Partnership as of December 31, 1998 and 1997, and the results of its operations
and its cash flows for each of the three years in the period ended December 31,
1998 in conformity with generally accepted accounting principles.
As discussed in Note 2 to the financial statements, the Partnership has given
retroactive effect to the change to include property-level sales and operating
expenses of its Inns in the statement of operations.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed in the index at Item
14(a)(2) is presented for the purpose of complying with the Securities and
Exchange Commission's rules and is not a required part of the basic financial
statements. This schedule has been subjected to the auditing procedures applied
in the audit of the basic 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.
February 26, 1999
<PAGE>
STATEMENT OF OPERATIONS
Marriott Residence Inn Limited Partnership
For the Years Ended December 31, 1998, 1997 and 1996
(in thousands, except per Unit amounts)
<TABLE>
1998 1997 1996
----------- ----------- --------
<S> <C> <C> <C>
REVENUES
Suites...........................................$ 63,105 $ 59,082 $ 58,019
Other operating departments...................... 3,030 3,005 2,805
----------- ----------- -----------
Total Inn Revenues........................... 66,135 62,087 60,824
----------- ----------- -----------
OPERATING COSTS AND EXPENSES
Inn property-level costs and expenses
Suites......................................... 13,543 12,603 11,756
Other department costs and expenses............ 1,447 1,152 1,024
Selling, administrative and other.............. 16,802 15,290 15,960
----------- ----------- -----------
Total Inn property-level costs and expenses.. 31,792 29,045 28,740
Depreciation..................................... 5,703 5,328 5,620
Incentive management fee......................... 4,720 3,383 3,366
Residence Inn system fee......................... 2,524 2,363 2,321
Property taxes................................... 2,274 2,213 2,229
Base management fee.............................. 1,323 1,242 1,216
Equipment rent and other......................... 1,024 1,149 1,181
----------- ----------- -----------
49,360 44,723 44,673
----------- ----------- -----------
OPERATING PROFIT.................................... 16,775 17,364 16,151
Interest expense................................. (12,200) (12,788) (13,411)
Interest income.................................. 293 338 347
----------- ----------- -----------
NET INCOME..........................................$ 4,868 $ 4,914 $ 3,087
=========== =========== ===========
ALLOCATION OF NET INCOME
General Partner..................................$ 49 $ 49 $ 31
Limited Partners................................. 4,819 4,865 3,056
----------- ----------- -----------
$ 4,868 $ 4,914 $ 3,087
=========== =========== ===========
NET INCOME PER LIMITED PARTNER UNIT
(65,600 Units)...................................$ 73 $ 74 $ 47
=========== =========== ===========
The accompanying notes are an integral part of these
financial statements.
</TABLE>
<PAGE>
BALANCE SHEET
Marriott Residence Inn Limited Partnership
December 31, 1998 and 1997
(in thousands)
<TABLE>
1998 1997
------------- --------
ASSETS
<S> <C> <C>
Property and equipment, net..........................................................$ 140,283 $ 140,448
Due from Residence Inn by Marriott, Inc.............................................. 2,041 2,462
Property improvement fund............................................................ 223 1,160
Deferred financing costs, net of accumulated amortization............................ 1,779 2,251
Cash and cash equivalents............................................................ 4,027 5,650
------------- -------------
$ 148,353 $ 151,971
============= =============
LIABILITIES AND PARTNERS' CAPITAL
LIABILITIES
Mortgage debt......................................................................$ 110,084 $ 118,576
Incentive management fee due to Residence Inn by Marriott, Inc..................... 27,029 22,709
Base management fee due to Residence Inn by Marriott, Inc.......................... -- 872
Accounts payable and accrued expenses.............................................. 1,106 1,235
------------- -------------
Total Liabilities.............................................................. 138,219 143,392
------------- -------------
PARTNERS' CAPITAL
General Partner
Capital contribution............................................................. 663 663
Capital distributions............................................................ (436) (403)
Cumulative net losses............................................................ (49) (98)
------------- -------------
178 162
------------- -------------
Limited Partners
Capital contribution, net of offering costs of $7,550............................ 58,050 58,050
Capital distributions............................................................ (43,233) (39,953)
Cumulative net losses............................................................ (4,861) (9,680)
------------- -------------
9,956 8,417
------------- -------------
Total Partners' Capital................................................... 10,134 8,579
------------- -------------
$ 148,353 $ 151,971
============= =============
The accompanying notes are an integral part of these
financial statements.
</TABLE>
<PAGE>
STATEMENT OF CHANGES IN PARTNERS' CAPITAL
Marriott Residence Inn Limited Partnership
For the Years Ended December 31, 1998, 1997 and 1996
(in thousands)
<TABLE>
General Limited
Partner Partners Total
<S> <C> <C> <C>
Balance, December 31, 1995.............................................$ 148 $ 7,055 $ 7,203
Capital distributions............................................. (50) (4,919) (4,969)
Net income........................................................ 31 3,056 3,087
------------- ------------- -------------
Balance, December 31, 1996............................................. 129 5,192 5,321
Capital distributions............................................. (16) (1,640) (1,656)
Net income........................................................ 49 4,865 4,914
------------- ------------- -------------
Balance, December 31, 1997............................................. 162 8,417 8,579
Capital distributions............................................. (33) (3,280) (3,313)
Net income........................................................ 49 4,819 4,868
------------- ------------- -------------
Balance, December 31, 1998.............................................$ 178 $ 9,956 $ 10,134
============= ============= =============
The accompanying notes are an integral part of these
financial statements.
</TABLE>
<PAGE>
STATEMENT OF CASH FLOWS
Marriott Residence Inn Limited Partnership
For the Years Ended December 31, 1998, 1997 and 1996
(in thousands)
<TABLE>
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income................................................................$ 4,868 $ 4,914 $ 3,087
Noncash items:
Depreciation............................................................ 5,703 5,328 5,620
Incentive management fee due to Residence Inn by Marriott, Inc.......... 4,320 3,383 3,366
Amortization of deferred financing costs as interest.................... 472 472 473
Gain on dispositions of property and equipment.......................... -- -- (10)
Changes in operating accounts:
Due to (from) Residence Inn by Marriott, Inc............................ 421 -- (1,133)
Accounts payable and accrued expenses................................... (129) (753) (68)
Repayment of base management fee due to
Residence Inn by Marriott, Inc........................................ (872) (627) (515)
----------- ----------- -----------
Cash provided by operating activities............................. 14,783 12,717 10,820
----------- ----------- -----------
INVESTING ACTIVITIES
Additions to property and equipment....................................... (5,538) (5,504) (3,561)
Change in property improvement fund....................................... 937 1,607 379
----------- ----------- -----------
Cash used in investing activities................................. (4,601) (3,897) (3,182)
----------- ----------- -----------
FINANCING ACTIVITIES
Principal payments on mortgage debt....................................... (8,492) (4,943) (6,304)
Capital distributions to partners......................................... (3,313) (1,656) (4,969)
Payment of financing costs................................................ -- -- (207)
----------- ----------- -----------
Cash used in financing activities................................. (11,805) (6,599) (11,480)
----------- ----------- -----------
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS............................. (1,623) 2,221 (3,842)
CASH AND CASH EQUIVALENTS at beginning of year............................... 5,650 3,429 7,271
----------- ----------- -----------
CASH AND CASH EQUIVALENTS at end of year.....................................$ 4,027 $ 5,650 $ 3,429
=========== =========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest............................................$ 11,805 $ 12,354 $ 12,992
=========== =========== ===========
The accompanying notes are an integral part of these
financial statements.
</TABLE>
<PAGE>
NOTES TO FINANCIAL STATEMENTS
Marriott Residence Inn Limited Partnership
December 31, 1998 and 1997
NOTE 1. THE PARTNERSHIP
Description of the Partnership
Marriott Residence Inn Limited Partnership (the "Partnership"), a Delaware
limited partnership, was formed March 29, 1988 to acquire, own and operate 15
Residence Inn by Marriott hotels (the "Inns") and the land on which the Inns are
located. The Inns are located in seven states in the United States: four in
Ohio, three in California, three in Georgia, two in Missouri and one in each of
Illinois, Colorado and Michigan, and as of December 31, 1998, have a total of
2,129 suites.
On April 17, 1998, Host Marriott, the parent of RIBM One Corporation ("RIBM
One"), the sole general partner of the Partnership prior to December 22, 1998,
announced that its Board of Directors authorized the company to reorganize its
business operations to qualify as a real estate investment trust ("REIT") to
become effective as of January 1, 1999 (the "REIT Conversion"). On December 29,
1998, Host Marriott announced that it had completed substantially all the steps
necessary to complete the REIT Conversion and expected to qualify as a REIT
under the applicable federal income tax laws beginning January 1, 1999.
Subsequent to the REIT Conversion, Host Marriott is referred to as Host REIT. In
connection with the REIT Conversion, Host REIT contributed substantially all of
its hotel assets to a newly-formed partnership Host Marriott LP ("Host LP").
Prior to December 22, 1998, the sole general partner of the Partnership,
with a 1% interest, was RIBM One, a wholly owned subsidiary of Host Marriott
Corporation. In connection with Host Marriott Corporation's conversion to a
REIT, the following steps occurred. Host Marriott Corporation formed RIBM One
LLC, a Delaware single member limited liability company, having two classes of
member interests (Class A - 1% economic interest, managing; Class B - 99%
economic interest, non-managing). RIBM One merged into RIBM One LLC on December
22, 1998 and RIBM One ceased to exist. On December 28, 1998, Host Marriott
Corporation contributed its entire interest in RIBM One LLC to Host LP, which is
owned 78% by Host Marriott Corporation and 22% by outside partners. Finally on
December 30, 1998, Host Marriott contributed its 99% Class B interest in RIBM
One LLC to Rockledge Hotel Properties, Inc. ("Rockledge"), a Delaware
corporation which is owned 95% by Host LP (economic non-voting interest) and 5%
by Host Marriott Statutory/Charitable Employee Trust, a Delaware statutory
business trust (100% of voting interest). As a result, the sole general partner
of the Partnership is RIBM One LLC (the "General Partner"), with a Class A 1%
managing economic interest owned by Host LP and a Class B 99% non-managing
economic interest owned by Rockledge.
Between March 29, 1988 and April 22, 1988 (the "Closing Date"), 65,600 limited
partnership interests (the "Units") were sold in a public offering. The offering
price per Unit was $1,000. RIBM One contributed $662,627 for its 1% general
partnership interest. The Inns are managed by Residence Inn by Marriott, Inc.
(the "Manager"), a wholly-owned subsidiary of Marriott International, Inc.
("MII"), as part of the Residence Inn by Marriott hotel system.
Partnership Allocations and Distributions
Net profits for Federal income tax purposes are generally allocated to the
partners in proportion to the distributions of cash available for distribution.
The Partnership generally distributes cash available for distribution as
follows: (i) first, 99% to the limited partners and 1% to the General Partner,
until the partners have received, with respect to such year, an amount equal to
10% of their Net Capital Investment, defined as the excess of original capital
contributions over cumulative distributions of net refinancing and sales
proceeds ("Capital Receipts"); (ii) second, remaining cash available for
distribution will be distributed as follows, depending on the amount of Capital
Receipts previously distributed:
(a) 99% to the limited partners and 1% to the General Partner, if the
partners have received aggregate cumulative distributions of Capital
Receipts of less than 50% of their original capital contributions; or
(b) 85% to the limited partners and 15% to the General Partner, if the
partners have received aggregate cumulative distributions of Capital
Receipts equal to or greater than 50% but less than 100% of their
original capital contributions; or
(c) 70% to the limited partners and 30% to the General Partner, if the
partners have received aggregate cumulative distributions of Capital
Receipts equal to 100% or more of their original capital contributions.
Losses and net losses are allocated 99% to the limited partners and 1% to the
General Partner.
Capital Receipts not retained by the Partnership will generally be
distributed (i) first, 99% to the limited partners and 1% to the General Partner
until the partners have received cumulative distributions from all sources equal
to a cumulative simple return of 12% per annum on their Net Capital Investment,
as defined, and an amount equal to their contributed capital, payable only from
Capital Receipts; (ii) next, if the Capital Receipts are from a sale, 100% to
the General Partner until it has received 2% of the gross proceeds from the
sale; and (iii) thereafter, 70% to the limited partners and 30% to the General
Partner.
Gains will generally be allocated (i) first, to those partners whose capital
accounts have negative balances until such negative balances are brought to
zero; (ii) second, to all partners in amounts necessary to bring each of their
respective capital account balances equal to their Invested Capital, as defined,
plus a 12% return on such Invested Capital; (iii) next, to the General Partner
in an amount necessary to bring the General Partner's capital account balance to
an amount which is equal to 2% of the gross proceeds from the sale; and (iv)
thereafter, 70% to the limited partners and 30% to the General Partner.
Proceeds from the sale of substantially all of the assets of the Partnership
will be distributed to the partners in accordance with their capital account
balances as adjusted to take into account the gain or loss resulting from such
sale.
For financial reporting purposes, profits and losses are allocated among the
partners based upon their stated interests in cash available for distribution.
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.
Revenues and Expenses
Revenues primarily represent the gross sales generated by the Partnership's
Inns.
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.
The Partnership has considered the impact of EITF 97-2 on its financial
statements and determined that EITF 97-2 requires the Partnership to include
property-level sales and operating expenses of its Inns in its statement of
operations. The Partnership has given retroactive effect to the adoption of EITF
97-2 in the accompanying statement of operations. Application of EITF 97-2 to
the financial statements for the fiscal years ended December 31, 1998, 1997 and
1996 increased both revenues and operating expenses by approximately $31.8
million, $29.0 million and $28.7 million, respectively, and had no impact on
operating profit or net income.
Property and Equipment
Property and equipment are recorded at cost. Depreciation is computed using the
straight-line method over the estimated useful lives of the assets as follows:
Land and improvements 40 years
Buildings and 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 5.
The Partnership assesses impairment of its real estate properties based on
whether estimated undiscounted future cash flows from such properties on an
individual property basis will be less than their net book value. If a property
is impaired, its basis is adjusted to fair market value. No such adjustment was
needed as of December 31, 1998 or December 31, 1997.
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 partners. Significant
differences exist between the net income or loss for financial reporting
purposes and the net income or loss reported in the Partnership's tax return.
These differences are due primarily to the use, for income tax purposes, of
accelerated depreciation methods and shorter depreciable lives of the assets and
differences in the timing of the recognition of base and incentive management
fees. As a result of these differences, the Partnership's net assets reported in
the accompanying financial statements exceed the tax basis of such net assets at
December 31, 1998 and 1997 by $20,443,702 and $17,448,000, respectively.
Deferred Financing Costs
Deferred financing costs represent the costs incurred in connection with the
mortgage debt refinancing totaling $3,298,000. These costs are being amortized
using the straight-line method, which approximates the effective interest
method, over the seven year term of the loan. At December 31, 1998 and 1997,
accumulated amortization of deferred financing costs totaled $1,519,000 and
$1,047,000, respectively.
Cash and Cash Equivalents
The Partnership considers all highly liquid investments with a maturity of three
months or less at date of purchase to be cash equivalents.
Reclassifications
Certain reclassifications were made to prior year financial statements to
conform to the 1998 presentation.
<PAGE>
NOTE 3. PROPERTY AND EQUIPMENT
Property and equipment consists of the following as of December 31 (in
thousands):
1998 1997
------------- --------------
Land and improvements.................$ 46,441 $ 46,441
Buildings and improvements............ 115,892 114,458
Furniture and equipment............... 42,409 39,540
Construction in progress.............. 1,235 --
------------- --------------
205,977 200,439
Less accumulated depreciation......... (65,694) (59,991)
------------- --------------
$ 140,283 $ 140,448
============= ==============
NOTE 4. ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair value of financial instruments are shown below. The fair
value of financial instruments not included in this table are estimated to be
equal to their carrying amounts (in thousands):
<TABLE>
As of December 31, 1998 As of December 31, 1997
----------------------------- --------------------------
Estimated Estimated
Carrying Fair Carrying Fair
Amount Value Amount Value
<S> <C> <C> <C> <C>
Mortgage debt......................................$ 110,084 $ 117,500 $ 118,576 $ 124,500
Incentive management fee due to Residence
Inn by Marriott, Inc............................$ 27,029 $ 2,980 $ 22,709 $ 2,200
Base management fee due to Residence
Inn by Marriott, Inc............................$ -- $ -- $ 872 $ 700
</TABLE>
The estimated fair value of debt obligations is based on the expected future
debt service payments discounted at risk adjusted rates. Base and incentive
management fees payable are valued based on the expected future payments from
operating cash flow discounted at risk adjusted rates.
NOTE 5. MORTGAGE DEBT
The Partnership's mortgage debt is comprised of a $100 million note (the "Senior
Mortgage") which bears interest at a fixed rate of 8.6% and a $30 million note
(the "Second Mortgage") which bears interest at a fixed rate of 15.25% for a
blended interest rate of 10.13%. Both the Senior Mortgage and Second Mortgage
require monthly amortization of principal and mature on September 30, 2002. In
addition to the required monthly amortization, during each of the four years
from 1996 through 1999, the Partnership is required to pay, on a cash available
basis, an additional $2 million annually toward principal amortization on the
Senior Mortgage. Additionally, during the entire seven year term, the
Partnership has the option to pay up to an additional $1 million principal
payment annually on the Second Mortgage and up to another $1 million optional
principal payment which would be applied in a 2:1 ratio to the Senior and Second
Mortgage, respectively. The weighted-average interest rate for the years ended
December 31, 1998 and 1997 was 10.13%. During 1998 and 1997, the Partnership
made payments of $5,538,000 and $4,431,000 on the Senior Mortgage and $2,954,000
and $512,000 on the Second Mortgage, respectively. At December 31, 1998, the
outstanding principal balance of the Senior Mortgage was $85,154,000 and the
outstanding principal balance of the Second Mortgage was $24,930,000. At
December 31, 1997, the outstanding principal balance of the Senior Mortgage was
$90,692,000 and the outstanding principal balance of the Second Mortgage was
$27,884,000.
/Both the Senior Mortgage and the Second Mortgage are secured by the Inns, the
land on which they are located, a security interest in all personal property
associated with the Inns including furniture and equipment, inventory, contracts
and other general intangibles and an assignment of the Partnership's rights
under the management agreement.
Principal amortization of the Senior and Second Mortgages at December 31, 1998
is as follows (in thousands):
1999......................$ 6,402
2000...................... 5,026
2001...................... 5,569
2002...................... 93,087
-------------
$ 110,084
NOTE 6. MANAGEMENT AGREEMENT
The Manager operates the Inns pursuant to a long-term management agreement with
an initial term expiring December 28, 2007. The Manager has the option to extend
the agreement on one or more of the Inns for up to five 10-year terms. The
Manager earns a base management fee equal to 2% of gross sales. Through 1990,
payment of the base management fee was subordinated to qualifying debt service
payments and retention by the Partnership of annual cash flow from operations of
$6,626,263. Deferred base management fees are payable from operating cash flow,
as defined. Beginning in 1991 and thereafter, base management fees are paid
currently. Pursuant to the terms of the management agreement, the Partnership
paid deferred base management fees of $872,000, $627,000 and $515,000 for the
fiscal years ended December 31, 1998, 1997 and 1996, respectively.
In addition, the Manager is entitled to an incentive management fee equal to 15%
of operating profit, as defined (20% in any year in which operating profit is
equal to or greater than $23.5 million). The incentive management fee is payable
out of 50% of cash flow from operations remaining after payments of qualifying
debt service, retention by the Partnership of annual cash flow from operations
of $6,626,263 and the deferred base management fee. After the Partnership has
retained an additional 5% return, the incentive management fee is payable out of
75% of the remaining cash flow from operations. Through 1989, the Manager was
not entitled to accrue any unpaid incentive management fees. Incentive
management fees earned after 1989 are payable in the future from operating cash
flow, as defined. Unpaid incentive management fees are paid from cash flow
available for incentive management fees following payment of the then current
incentive management fees. Through December 31, 1998, $400,000 in incentive
management fees have been paid to the Manager.
The management agreement also provides for a Residence Inn system fee equal
to 4% of suite sales. In addition, the Manager is reimbursed for each Inn's pro
rata share of the actual costs and expenses incurred by the Manager in providing
certain services ("Chain Services") on a central or regional basis to all hotels
operated by the Manager. As franchiser of the Residence Inn by Marriott system,
the Manager maintains a marketing fund to pay the costs associated with certain
system-wide advertising, promotional, and public relations materials and
programs, and operating a toll-free reservation system. Each Inn contributes
2.5% of suite sales to the marketing fund. For the years ended December 31,
1998, 1997 and 1996, the Partnership paid a Residence Inn system fee of
$2,524,000, $2,363,000 and $2,321,000, respectively reimbursed the Manager for
$1,318,000, $1,051,000 and $1,031,000, respectively of Chain Services and
contributed $1,578,000, $1,477,000 and $1,450,000 to the marketing fund,
respectively. In addition, the Inns participate in MII's Marriott's Rewards
Program ("MRP"). Residence Inns began participating in MRP in 1998. The costs of
this program are charged to all hotels in the full-service. Residence Inn by
Marriott, Courtyard by Marriott and Fairfield Inn by Marriott systems based upon
the MRP sales at each hotel. MRP costs charged to the Partnership under the
Management Agreement were $117,000 in 1998.
The Partnership is required to provide the Manager with working capital to meet
the operating needs of the Inns. 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 management
agreement, the working capital will be returned to the Partnership. The
individual components of working capital controlled by the Manager are not
reflected in the Partnership's balance sheet. As of December 31, 1998 and 1997,
$775,000 has been advanced to the Manager for working capital.
<PAGE>
The management agreement provides for the establishment of a property
improvement fund for the Inns which provides for the replacement of furniture,
fixtures and equipment ("FF&E"). Contributions to the property improvement fund
are equal to 6% of gross revenues of each Inn in 1998 and 5% in 1997 and 1996.
Contributions to the property improvement fund for 1998, 1997 and 1996 were
$3,968,000, $3,104,000 and $3,041,000, respectively. Based on capital budgets,
the Partnership's property improvement fund was forecasted to be insufficient
beginning in 1998. The shortfall is primarily due to the need to complete total
suite refurbishments at the majority of the Inns in the next several years. As a
result of this expected future shortfall, the General Partner established a
reserve in 1996 for the future capital needs of the Inns. 1996 cash
distributions to the partners were net of this reserve. To minimize the
shortfall, the Partnership increased the contribution rate from 5% to 6% in 1998
and then reduced the rate to 5.5% for 1999. In the first quarter of 1999, the
Partnership provided a loan to the property improvement fund of $1,450,000 for
1998 that will earn interest at the rate of Prime plus one percent and will be
repaid over a five-year period from operating cash flow. Under the terms of the
loan agreement, the debt service payments are subordinate to the mortgage debt
and are included as a deduction in determining the incentive management fee paid
to the Manager. An additional $1,200,000 loan will be provided for 1999 that
will earn interest at the rate of Prime plus one percent and will be repaid from
the property improvement fund. The General Partner believes that cash from Inn
operations and Partnership reserves will be adequate in the short term and is
working with the Manager to address the long term operational and capital needs
of the Partnership.
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
The Partnership has no managers or officers. The business and policy making
functions of the Partnership are carried out through the managers and executive
officers of RIBM One LLC, the General Partner, who are listed below:
Age at
Name Current Position December 31, 1998
Robert E. Parsons President and Manager 43
Christopher G. Townsend Executive Vice President, Secretary and Manager 51
W. Edward Walter Treasurer 43
Earla L. Stowe Vice President 37
Business Experience
Robert E. Parsons, Jr. joined Host Marriott's Corporate Financial Planning
staff in 1981 and was made Assistant Treasurer in 1988. In 1993, Mr. Parsons was
elected Senior Vice President and Treasurer of Host Marriott, and in 1995, he
was elected Executive Vice President and Chief Financial Officer of Host
Marriott. He also serves as a director, manager and officer of numerous Host
Marriott subsidiaries.
Christopher G. Townsend joined Host Marriott's Law Department in 1982 as a
Senior Attorney. In 1984 he was made Assistant Secretary of Host Marriott. In
1986 he was made an Assistant General Counsel. He was made Senior Vice
President, Corporate Secretary and Deputy General Counsel of Host Marriott in
1993. In January 1997, he was made General Counsel of Host Marriott. He also
serves as a director, manager and an officer of numerous Host Marriott
subsidiaries.
W. Edward Walter joined Host Marriott in 1996 as Senior Vice President
- - -Acquisitions and in 1998 was made Treasurer of Host Marriott. He also serves as
a director, manager and officer of numerous Host Marriott subsidiaries. Prior to
joining Host Marriott, Mr. Walter was a partner at Trammell Crow Residential
Company and President of Bailey Capital Corporation, a real estate firm focusing
on tax exempt real estate investments.
Earla L. Stowe joined Host Marriott in 1982 and held various positions in the
tax department until 1988. She joined the Partnership Services department as an
accountant in 1988 and in 1989 she became an Assistant Manager--Partnership
Services. She was promoted to Manager--Partnership Services in 1991 and to
Director--Asset Management in 1996. Ms.
Stowe was promoted to Senior Director - Corporate Accounting in 1998.
<PAGE>
ITEM 11. MANAGEMENT REMUNERATION AND TRANSACTIONS
As noted in Item 10 above, the Partnership has no managers 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
managers of the General Partner are not required to devote their full time to
the performance of such duties. No officer or manager of the General Partner
devotes a significant percentage of time to Partnership matters. To the extent
that any officer or manager does devote time to the Partnership, the General
Partner or Host LP, as applicable, is entitled to reimbursement for the cost of
providing such services. For the fiscal years ending December 31, 1998, 1997 and
1996, the Partnership reimbursed Host Marriott or its subsidiaries $229,000,
$157,000 and $218,000, respectively, for the cost of providing all
administrative and other services as General Partner. 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 December 31, 1998, no person owned of record, or to the Partnership's
knowledge owned beneficially, more than 5% of the total number of limited
partnership Units. The General Partner does not own any limited partnership
interest in the Partnership.
The executive officers and managers of the General Partner, Host LP, MII and
their respective affiliates own 80 limited partnership units as of December 31,
1998.
The Partnership is not aware of any arrangements which may, at a subsequent
date, result in a change in control of the Partnership.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Management Agreement
Term
The Management Agreement has an initial term expiring on December 28, 2007. The
Manager may renew the term, as to one or more of the Inns, at its option, for up
to five successive terms of 10 years each. The Partnership may terminate the
Management Agreement if, during any three consecutive years after 1992,
specified minimum operating results are not achieved. However, the Manager may
prevent termination by paying to the Partnership the amount by which the minimum
operating results were not achieved.
Management Fees
The Management Agreement provides for annual payments of (i) the base management
fee equal to 2% of gross sales from the Inns, (ii) the Residence Inn system fee
equal to 4% of gross suite sales from the Inns, and (iii) the incentive
management fee equal to 15% of operating profit, as defined (20% in any year in
which operating profit is equal to or greater than $23.5 million). During 1998,
1997 and 1996, respectively, the Partnership paid a Residence Inn system fee of
$2,524,000, $2,363,000 and $2,321,000. See "Deferral Provisions" for a
discussion of the payment of base and incentive management fees. Deferral
Provisions
Through 1990, payment of the base management fee was subordinated to qualifying
debt service payments and retention by the Partnership of annual cash flow from
operations of $6,626,263. Deferred base management fees are payable from
operating cash flow, as defined, but only after payment of debt service and the
Partnership's 10% priority return. Beginning in 1991 and thereafter, base
management fees are paid currently. For the years ended December 31, 1998, 1997
and 1996, respectively, the Partnership paid current base management fees of
$1,323,000, $1,242,000 and $1,216,000. During 1998, 1997 and 1996, $872,000,
$627,000 and $515,000, respectively, of deferred base management fees were
repaid. Deferred base management fees as of December 31, 1997 were $872,000.
There were no deferred base management fees at December 31, 1998.
The incentive management fee is payable out of 50% of cash flow from operations
remaining after payments of qualifying debt service, retention by the
Partnership of annual cash flow from operations of $6,626,263 and the deferred
base management fee. After the cash flow retained by the Partnership reaches 5%
of invested capital plus any owner funded capital improvements, the incentive
management fee is payable out of 75% of the remaining cash flow from operations.
Through 1989, the Manager was not entitled to accrue any unpaid incentive
management fees. Incentive management fees earned after 1989 are payable in the
future from operating cash flow, as defined. Unpaid incentive management fees
are paid from cash flow available for incentive management fees following
payment of the then current incentive management fees. Through December 31,
1998, $400,000 in incentive management fees were paid to the Manager. During
1998, incentive management fees were $4.7 million of which $4.3 million were
deferred. During 1997 and 1996, $3.4 million of incentive management fees were
deferred. Deferred incentive management fees were $27.0 million and $22.7
million as of December 31, 1998 and 1997, respectively.
Chain Services, Marketing Fund and Marriott's Rewards Program
The Manager is reimbursed for each Inn's pro rata share of the actual costs and
expenses incurred by the Manager in providing certain services ("Chain
Services") on a central or regional basis to all hotels operated by the Manager.
As franchiser of the Residence Inn by Marriott system, the Manager maintains a
marketing fund to pay the costs associated with certain system-wide advertising,
promotional, and public relations materials and programs, and operating a
toll-free reservation system. Each Inn contributes 2.5% of gross suite sales to
the marketing fund. For the years ended December 31, 1998, 1997 and 1996, the
Partnership reimbursed the Manager for $1,318,000, $1,051,000 and $1,031,000 of
Chain Services and contributed $1,578,000, $1,477,000 and $1,450,000 to the
marketing fund, respectively. In addition, the Inns participate in MII's
Marriott's Rewards Program ("MRP). Residence Inns began participating in MRP in
1998. The costs of this program are charged to all hotels in the full-service,
Residence Inn by Marriott, Courtyard by Marriott and Fairfield Inn by Marriott
systems based upon the MRP sales at each hotel. MRP costs charged to the
Partnership under the Management Agreement were $117,000 in 1998. Chain
Services, contributions to the marketing fund and MRP costs are included in
selling, administrative and other expenses detailed in the Statement of
Operations.
Working Capital
The Partnership is required to provide the Manager with working capital to meet
the operating needs of the Inns. The Manager converts cash advanced by the
Partnership into other forms of working capital consisting primarily of
inventories, trade receivables and payables which are maintained and controlled
by the Manager. Upon termination of the management agreement, the working
capital will be returned to the Partnership. The individual components of
working capital controlled by the Manager are not reflected in the Partnership's
balance sheet. As of December 31, 1998 and 1997, $775,000 has been advanced to
the Manager for working capital which is included in Due from Residence Inn by
Marriott, Inc. in the accompanying balance sheet (see Item 8).
Property Improvement Fund
The Management Agreement provides for the establishment of a property
improvement fund for the Inns which provides for the replacement of furniture,
fixtures and equipment. For the year ended December 31, 1998, contributions to
the property improvement fund were equal to 6% of gross sales of each Inn. For
the years ended December 31, 1997 and 1996, contributions to the property
improvement fund were equal to 5% of gross sales of each Inn. Contributions to
the property improvement fund during the fiscal years ended December 31, 1998,
1997 and 1996 were $3,968,000, $3,104,000 and $3,041,000, respectively.
Payments to MII and Subsidiaries
The following table sets forth the amount paid to MII and its subsidiaries under
the Management Agreement for the years ended December 31, 1998, 1997 and 1996
(in thousands):
1998 1997 1996
----------- ----------- --------
Residence Inn system fee............$ 2,524 $ 2,363 $ 2,321
Marketing fund contribution......... 1,578 1,477 1,450
Base management fee................. 1,323 1,242 1,216
Chain services...................... 1,318 1,051 1,031
Deferred base management fee........ 872 627 515
Incentive management fee............ 400 -- --
MRP costs........................... 117 -- --
----------- ----------- -----------
$ 8,132 $ 6,760 $ 6,533
=========== =========== ============
Payments to Host Marriott and Subsidiaries
The following sets forth amounts paid by the Partnership to Host Marriott and
its subsidiaries, including the General Partner, for the years ended December
31, 1998, 1997 and 1996 (in thousands):
1998 1997 1996
----------- ----------- ----------
Administrative expenses reimbursed......$ 229 $ 157 $ 218
Cash distributions...................... 33 16 50
----------- ----------- ----------
$ 262 $ 173 $ 268
=========== =========== ==========
<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.
Schedule III - Real Estate and Accumulated Depreciation
All other schedules are omitted because they are not applicable or the required
information is included in the financial statements or notes thereto.
(3) Exhibits
Exhibit
Number Description Page
- - ----------- ------------------------------------------------------ --------
* 3.1 Amended and Restated Agreement of Limited Partnership N/A
of Marriott Residence Inn Limited Partnership by and
among RIBM One Corporation (General Partner),
Christopher G. Townsend (Organizational Limited
Partner), and Limited Partners dated March 29, 1988.
3.2 First Amendment to Amended and Restated Agreement of 39
Limited Partnership of Marriott Residence Inn Limited
Partnership, dated December 28, 1998.
*10.1 First Amendment to Loan Agreement by and between N/A
Marriott Residence Inn Limited Partnership (Borrower)
and German American Capital Corporation (Lender),
dated April 23, 1996.
*10.2 Loan Agreement by and between Marriott Residence Inn N/A
Limited Partnership (Borrower) and German American
Capital Corporation (Lender), dated October 10, 1995.
*10.3 Indemnity Agreement by Marriott Residence Inn Limited N/A
Partnership (Borrower) and RIBM One Corporation
(collectively, the Indemnitors) in favor of German
American Capital Corporation (Lender), dated October
10, 1995.
*10.4 Four Party Agreement by and among Marriott Residence N/A
Inn Limited Partnership (Borrower), German American
Capital Corporation (Senior Lender), Starwood
Mezzanine Investors, L.P. (Subordinate Lender) and
Residence Inn by Marriott, Inc. (Manager), dated
October 10, 1995.
*10.5 Loan Agreement by and between Marriott Residence Inn N/A
Limited Partnership (Borrower) and Starwood Mezzanine
Investors, L.P. (Lender), dated October 10, 1995.
*10.6 Loan Agreement by and between Marriott Residence Inn N/A
Limited Partnership and The Sanwa Bank Limited, dated
as of April 20, 1988.
*10.7 Revolving Credit Agreement by and between Marriott N/A
Residence Inn Limited Partnership and The Sanwa Bank
Limited, dated as of April 20, 1988.
*10.8 Manager's Letter Agreement between Residence Inn by N/A
Marriott, Inc. and Marriott Residence Inn Limited
Partnership, dated October 10, 1995.
*10.9 Management Agreement by Marriott Residence Inn N/A
Limited Partnership (Owner) and Residence Inn by
Marriott, Inc. (Manager), dated March 29, 1988.
- - -------------------------------
* Incorporated by reference to the Partnership's previously
filed documents.
<PAGE>
(b) Reports on Form 8-K
A Form 8-k was filed with the Securities and Exchange
Commission ("SEC") on October 9, 1998. This filing, Item
5-Other Events, discloses that the General Partner sent a
letter dated October 1, 1998 to inform the limited partners
that the proposed Consolidation to form a new REIT focused
on limited service hotels is no longer being pursued. In
addition, the letter informs the limited partners that, to
date, there have been no acceptable offers from third
parties to purchase the Partnership's hotels. A copy of the
letter was included as an Item7-Exhibit in this Form 8-K
filing.
A Form 8-K was filed with the Securities and Exchange
Commission on November 30,1998. In this filing, Item 5 -
Other Events discloses that on June 11, 1998, August 24,
1998 and November 24, 1998 the General Partner sent to the
Limited Partners of the Partnership a letter that
accompanied the Partnership's Quarterly Reports on Form
10-Q. Each letter disclosed the quarterly activities of the
Partnership. Copies of these letters were included as Item 7
- Exhibits in this Form 8-K filing.
<PAGE>
40
SCHEDULE III
Page 1 of 2
MARRIOTT RESIDENCE INN LIMITED PARTNERSHIP
REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 1998
(in thousands)
<TABLE>
Initial Costs
------------------------
Land Subsequent
and Building and Costs
Description Debt Improvements Improvements Capitalized
- - -------------------- --------- ------------- ------------ --------------
<S> <C> <C> <C> <C>
La Jolla $ 19,376 $ 11,579 $ 14,462 $ 1,156
Long Beach 10,679 7,167 11,455 677
St. Louis Galleria 9,247 1,989 5,010 1,730
Boulder 8,587 1,451 6,686 512
Costa Mesa 8,146 3,678 6,955 441
Atlanta Buckhead 7,706 3,894 5,519 668
Atlanta Cumberland 7,045 4,099 4,627 381
Atlanta Dunwoody 7,045 2,116 7,387 670
Chicago Lombard 6,825 3,665 5,746 372
Southfield 6,715 2,031 8,195 723
Cincinnati North 4,844 1,183 9,587 584
St. Louis Chesterfield 4,624 1,539 5,372 614
Other properties, each
less than 5% of total 9,245 2,007 14,553 1,853
--------- ----------- ----------- ---------
$ 110,084 $ 46,398 $ 105,554 $ 10,381
========= =========== =========== =========
</TABLE>
<TABLE>
Gross Amount at December 31, 1998
------------------------------------
Land Date of
and Building and Accumulated Completion of Date
Improvements Improvements Total Depreciation Depreciation
------------- Construction Acquired Life
<S> <C> <C> <C> <C> <C> <C> <C>
La Jolla $ 11,580 $ 15,617 $27,197 $ 4,479 1986 1988 40 years
Long Beach 7,234 12,065 19,299 3,318 1987 1988 40 years
St. Louis Galleria 2,014 6,715 8,729 1,851 1986 1988 40 years
Boulder 1,451 7,198 8,649 1,978 1986 1988 40 years
Costa Mesa 3,678 7,396 11,074 2,055 1986 1988 40 years
Atlanta Buckhead 3,903 6,178 10,081 1,821 1987 1988 40 years
Atlanta Cumberland 4,099 5,008 9,107 1,477 1987 1988 40 years
Atlanta Dunwoody 2,116 8,057 10,173 2,291 1984 1988 40 years
Chicago Lombard 3,665 6,118 9,783 1,762 1987 1988 40 years
Southfield 2,031 8,918 10,949 2,582 1986 1988 40 years
Cincinnati North 1,183 10,171 11,354 2,866 1985 1988 40 years
St. Louis Chesterfield 1,543 5,982 7,525 1,662 1986 1988 40 years
Other properties, each
less than 5% of total 1,944 16,469 18,413 5,091 1985-1987 1988 40 years
----------- ----------- ------ -----------
$ 46,441 $ 115,892 $162,333 $ $33,233
=========== =========== ======== =========
</TABLE>
<PAGE>
SCHEDULE III
Page 2 of 2
MARRIOTT RESIDENCE INN LIMITED PARTNERSHIP
REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 1998
(in thousands)
<TABLE>
Notes:
1996 1997 1998
----------- ----------- -------
<S> <C> <C> <C>
(a) Reconciliation of Real Estate:
Balance at beginning of year.................$ 158,281 $ 159,033 $ 160,899
Capital Expenditures......................... 752 1,866 1,434
Dispositions................................. -- -- --
----------- ----------- -----------
Balance at end of year.......................$ 159,033 $ 160,899 $ 162,333
=========== =========== ===========
(b) Reconciliation of Accumulated Depreciation:
Balance at beginning of year.................$ 22,544 $ 26,140 $ 29,640
Depreciation................................. 3,596 3,500 3,593
----------- ----------- -----------
Balance at end of year.......................$ 26,140 $ 29,640 $ 33,233
=========== =========== ===========
(c) The aggregate cost of land, buildings and improvements for Federal income
tax purposes is approximately $160.6 million at December 31, 1998.
(d) The debt balance is $110.1 million as of December 31, 1998 and includes
$85.2 million of Senior Mortgage Debt and $24.9 million of Second Mortgage
Debt.
</TABLE>
<PAGE>
SIGNATURES
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 this 31st of March,
1999.
MARRIOTT RESIDENCE INN
LIMITED PARTNERSHIP
By: RIBM ONE LLC
General Partner
/s/ Earla L. Stowe
Earla L. Stowe
Vice President
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
the capacities and on the date indicated above.
Signature Title
(RIBM ONE LLC)
/s/ Robert E. Parsons, Jr. President and Manager
Robert E. Parsons, Jr.
/s/ Christopher G. Townsend Executive Vice President, Secretary and Manager
Christopher G. Townsend
/s/ W. Edward Walter Treasurer
W. Edward Walter
/s/ Earla L. Stowe Vice President
Earla L. Stowe
<PAGE>
SIGNATURES
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 this 31st of March,
1999.
MARRIOTT RESIDENCE INN
LIMITED PARTNERSHIP
By: RIBM ONE LLC
General Partner
Earla L. Stowe
Vice President
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
the capacities and on the date indicated above.
Signature Title
(RIBM ONE LLC)
Robert E. Parsons, Jr.President and Manager
Christopher G. TownsendExecutive Vice President, Secretary and Manager
W. Edward WalterTreasurer
Earla L. StoweVice President
FIRST AMENDMENT TO AMENDED AND
RESTATED AGREEMENT OF LIMITED PARTNERSHIP
OF
MARRIOTT RESIDENCE INN LIMITED PARTNERSHIP
THIS FIRST AMENDMENT TO AMENDED AND RESTATED AGREEMENT OF LIMITED
PARTNERSHIP OF MARRIOTT RESIDENCE INN LIMITED PARTNERSHIP (this "First
Amendment"), dated as of December 28, 1998, is entered into by RIBM One LLC, a
Delaware limited liability company, as general partner (the "General Partner"),
of Marriott Residence Inn Limited Partnership (the "Partnership"), for itself
and on behalf of the limited partners of the Partnership.
WHEREAS, the Partnership was formed pursuant to a Certificate of
Limited Partnership filed with the Office of the Secretary of State of the State
of Delaware on January 18, 1988;
WHEREAS, in connection with certain restructuring transactions
involving its parent company, RIBM One Corporation merged with and into the
General Partner, a newly formed Delaware limited liability company; and
WHEREAS, in accordance with Section 11.02 of the Partnership Agreement,
the General Partner wishes to amend the Partnership Agreement to reflect its
successor name by merger and to make certain clean up changes.
NOW, THEREFORE, in consideration of the premises and for other good and
valuable consideration, the receipt and sufficiency of which hereby are
acknowledged, the General Partner hereby amends the Partnership Agreement as
follows:
1. The introductory paragraph of the Partnership Agreement is hereby
amended to replace the phrase "RIBM One Corporation, a Delaware corporation"
with the phrase "RIBM One LLC, a Delaware limited liability company."
2. The definitions of "General Partner" and "Host in Section 1.01 of
the Partnership Agreement are hereby amended and restated in their entirety as
follows:
"General Partner" means RIBM One LLC, a Delaware limited
liability company and wholly-owned subsidiary of Host, in its
capacity as general partner of the Partnership, and its
successors and assigns.
"Host" means Host Marriott Corporation, a Delaware
corporation, and its successors and assigns.
3. Section 3.01 of the Partnership Agreement is hereby amended
and restated in its entirety as follows:
Section 3.01. General Partner. The General Partner of the
Partnership is and shall be RIBM One LLC, a Delaware limited
liability company and wholly-owned subsidiary of Host, in its
capacity as general partner of the Partnership, and its
successors and assigns, having its principal executive offices
at 10400 Fernwood Road, Bethesda, Maryland 20058.
4. All defined terms contained in this First Amendment, unless
otherwise defined herein, shall have the meaning contained in the Partnership
Agreement. Except as modified herein, all terms and conditions of the
Partnership Agreement shall remain in full force and effect, which terms and
conditions the General Partner hereby ratifies and affirms.
[Page Break Intentionally Inserted]
<PAGE>
IN WITNESS WHEREOF, the undersigned has executed this First Amendment
as of the date first set forth above.
RIBM ONE LLC,
as the successor General Partner
of Marriott Residence Inn Limited
Partnership and on behalf of existing
Limited Partners
By:
Name: Christopher G. Townsend
Title: Executive Vice President
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
(Replace this text with the legend)
</LEGEND>
<CIK> 0000829092
<NAME> MARRIOTT RESIDENCE INN LIMITED PARTNERSHIP
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLAR
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-1-1998
<PERIOD-END> DEC-31-1998
<EXCHANGE-RATE> 1.00
<CASH> 4,027
<SECURITIES> 0
<RECEIVABLES> 2,041
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 2,002
<PP&E> 205,977
<DEPRECIATION> (65,694)
<TOTAL-ASSETS> 148,353
<CURRENT-LIABILITIES> 28,135
<BONDS> 110,084
0
0
<COMMON> 0
<OTHER-SE> 10,134
<TOTAL-LIABILITY-AND-EQUITY> 148,353
<SALES> 0
<TOTAL-REVENUES> 66,135
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 18,249
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 12,200
<INCOME-PRETAX> 4,868
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,868
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
