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, 1999
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 ____ .
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
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PAGE NO.
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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...........................7
Item 6. Selected Financial Data..........................................8
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations.....................................8
Item 7A. Quantitative and Qualitative Disclosures About Market Risk......13
Item 8. Financial Statements and Supplementary Data.....................14
Item 9. Changes In and Disagreements with Accountants on Accounting
and Financial Disclosure.....................................26
PART III
Item 10. Directors and Executive Officers................................26
Item 11. Management Remuneration and Transactions........................27
Item 12. Security Ownership of Certain Beneficial Owners and Management..27
Item 13. Certain Relationships and Related Transactions..................27
PART IV
Item 14. Exhibits, Supplemental Financial Statement Schedules
and Reports on Form 8-K......................................30
<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, 1999. 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" section below.
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
Corporation ("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. In
connection with the REIT Conversion, the following steps occurred. Host Marriott
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 contributed its entire interest in RIBM One LLC to Host LP, which is
owned 78% by Host Marriott and 22% by outside partners. Finally on December 30,
1998, Host LP 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
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 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 bears interest at a fixed interest rate of 15.25%,
requires monthly payments of interest and principal based on a 20-year
amortization schedule and matures on September 30, 2002.
In addition to the required monthly principal payments, during each of the four
years from 1996 through 1999, the Partnership was required to pay, on a cash
available basis, an additional $2 million principal payment annually 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. During 1996 and 1998, the Partnership made optional
principal payments totaling $9 million of which $5.4 million was applied to the
Senior Mortgage and $3.6 million was applied to the Second Mortgage.
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.
<PAGE>
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 hotels, 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. 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 by Hilton, 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.
ITEM 2. PROPERTIES
Introduction
The Inns consist of 15 Residence Inn by Marriott Inns as of December 31, 1999.
The Inns, which range in age between 12 and 15 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 1999 as new extended-stay competitors entered the market.
This trend is expected to continue in 2000. 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. See Item 1 "Business -
Competition."
<PAGE>
Name and Location of Partnership Inns
<TABLE>
Inn Number of Suites Date Opened
- ------------------------------------ ------------------------- ------------------
<S> <C> <C>
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 SUITES 2,129
=========================
</TABLE>
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 March 16, 1998, limited partners in several partnerships sponsored by Host
Marriott, filed a lawsuit, styled Robert M. Haas, Sr. and Irwin Randolph Joint
Tenants, et al. v. Marriott International, Inc., et al., Case No. 98-CI-04092,
in the 57th Judicial District Court of Bexar County, Texas against Marriott
International, Inc., Host Marriott, various of their subsidiaries, J.W.
Marriott, Jr., Stephen Rushmore, and Hospitality Valuation Services, Inc.
(collectively, the "Defendants"). The lawsuit now relates to the following
limited partnerships: Courtyard by Marriott Limited Partnership, Marriott
Residence Inn Limited Partnership, Marriott Residence Inn II Limited
Partnership, Fairfield Inn by Marriott Limited Partnership, Host DSM Limited
Partnership (formerly known as Desert Springs Marriott Limited Partnership) and
Atlanta II Limited Partnership (formerly known as Atlanta Marriott Marquis
Limited Partnership), collectively, the "Six Partnerships". The plaintiffs
allege that the Defendants conspired to sell hotels to the Six Partnerships for
inflated prices and that they charged the Six Partnerships excessive management
fees to operate the Six Partnerships' hotels. The plaintiffs further allege,
among other things, that the Defendants committed fraud, breached fiduciary
duties and violated the provisions of various contracts. A related case
concerning Courtyard by Marriott II Limited Partnership ("Courtyard II") filed
by the plaintiffs' lawyers in the same court involves similar allegations
against the Defendants, and has been certified as a class action. As a result of
this development, Courtyard II is no longer involved in the above-referenced
Haas lawsuit, Case No. 98-CI-04092.
On March 9, 2000, the Defendants entered into a settlement agreement with
counsel to the plaintiffs to resolve the Haas and Courtyard II litigation. The
settlement is subject to numerous conditions, including participation
thresholds, court approval and various consents. Under the terms of the
settlement, the limited partners of the Partnership who elect to participate
would be paid $228.38 per Unit ($14,981,728 in the aggregate, if the holders of
all Units participate) in exchange for dismissal of the litigation and a
complete release of all claims. This amount would be reduced by the amount of
attorneys' fees awarded by the court. In addition to this cash payment, the
Manager would waive $29,781,000 of deferred incentive management fees. Limited
partners who opt out of the settlement would receive no payment but would retain
their individual claims against the Defendants. The Defendants may terminate the
settlement if the holders of more than 10% of the Partnership's 65,600 limited
partner Units choose not to participate, if the holders of more than 10% of the
limited partner units in any one of the other partnerships involved in the
litigation choose not to participate or if certain other conditions are not
satisfied. The Manager will continue to manage the Partnership's Inns under
long-term agreements. The details of the settlement will be contained in a
court-approved notice to the Partnership's limited partners.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
<PAGE>
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, 1999, there were 3,858
holders of record of the Partnership's 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, 1999, the Partnership has distributed a total of $43,669,801
to the partners ($659 per limited partner unit) since inception. The Partnership
made no distributions during the year ended December 31, 1999. 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
($25 per limited partner unit). No distributions of Capital Receipts have been
made since inception.
For future cash distributions, see "Capital Resources and Liquidity" under Item
7, "Management's Discussion and Analysis of Financial Condition and Results of
Operations".
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data present historical operating information
for the Partnership for each of the five years in the period ended December 31,
1999 presented in accordance with accounting principles generally accepted in
the United States.
<TABLE>
1999 1998 1997 1996 1995
----------- ----------- ----------- ----------- -----------
(in thousands, except per unit amounts)
<S> <C> <C> <C> <C> <C>
Income Statement Data:
Revenues...........................................$ 66,198 $ 66,135 $ 62,087 $ 60,824 $ 56,725
Operating profit................................... 16,477 16,775 17,364 16,151 14,400
Net income......................................... 5,466 4,868 4,914 3,087 1,517
Net income per limited partner unit
(65,600 Units).................................. 83 73 74 47 23
Balance Sheet Data:
Total assets.......................................$ 148,975 $ 148,353 $ 151,971 $ 151,658 $ 157,061
Total liabilities.................................. 133,375 138,219 143,392 146,337 149,858
Cash distributions per limited partner unit
(65,600 Units).................................. -- 50 25 75 13
</TABLE>
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 contained important factors with respect to such forward-looking
statements, including: (i) national and local economic and business conditions
that will affect, among other things, demand for products and services at the
Inns and other properties, the level of suite and room rates and occupancy that
can be achieved by such properties and the availability and terms of financing;
(ii) the ability to compete effectively in areas such as access, location,
quality of accommodations and suite and room rate structures; (iii) changes in
travel patterns, taxes and government regulations which influence or determine
wages, prices, construction procedures and costs; (iv) governmental approvals,
actions and initiatives including the need for compliance with environmental and
safety requirements, and changes in laws and regulations or the interpretation
thereof; 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, 1999, 1998 and 1997. During the period from 1997
through 1999, Partnership sales grew from $62.1 million to $66.2 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 1997
through 1999, the Inns' combined average daily suite rate increased
approximately $7 from $91 to $98, while the combined average occupancy decreased
slightly from 83.4% to 83%.
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 $23.5 million), as defined, payable out of 50% of available
cash flow as defined.
RESULTS OF OPERATIONS
The following table shows selected combined operating statistics for the Inns.
Revenue per available room ("REVPAR") represents the combination of the average
daily room rate charged and the average occupancy achieved, and is a commonly
used indicator of hotel performance.
Year Ended December 31,
-----------------------
1999 1998 1997
----------- ----------- -----------
Combined average occupancy............ 83.0% 84.9% 83.4%
Combined average daily suite rate.....$ 98.06 $ 96.15 $ 91.44
REVPAR................................$ 81.24 $ 81.63 $ 76.26
1999 Compared to 1998:
Revenues. Total 1999 Inn sales of $66.2 million represents a slight increase
over 1998 results. The flat results were primarily due to a stable Inn REVPAR.
REVPAR does not include other ancillary revenues generated by the Inns. The
combined average occupancy decreased 1.9 percentage points from 84.9% in 1998 to
83.0% in 1999. This was offset by a corresponding increase in the combined
average daily suite rate from $96.15 in 1998 to $98.06 in 1999. As a result, the
combined average suite sales remained steady at $63.1 million for 1999 and 1998.
Operating Costs and Expenses. Operating costs and expenses increased to $49.7
million in 1999 from $49.4 million in 1998 primarily due to a $1.3 million
increase in depreciation expense that was offset by a $1.2 million decrease in
incentive management fee expense. The incentive management fee is equal to 15%
of operating profit as defined by the Management Agreement (20% in any year in
which operating profit is equal to or greater than $23.5 million). In 1999,
operating profit was $23.4 million; therefore, the incentive management fee was
calculated as 15% of operating profit. However, in 1998, operating profit was
$23.6 million; therefore, the incentive management fee was calculated at the
higher percentage of 20% of operating profit. Thus, resulting in a decrease in
incentive management fee expense in 1999.
Inn property-level costs and expenses increased to $32.3 million in 1999 as
compared to $31.8 million in 1998. The increase is due to an increase in salary
and benefits as the Inns endeavor to maintain competitive wage scales.
Depreciation expense increased due to fixed asset purchases in 1999. As a
percentage of Inn revenues, operating costs and expenses represented 75% of
revenues for 1999 and 1998.
Operating Profit. As a result of the changes in revenues and operating costs and
expenses discussed above, operating profit, as shown on the Statement of
Operations, decreased $300,000 to $16.5 million, or 25% of total revenues in
1999 from $16.8 million, or 25% of total revenues in 1998.
Interest expense. Interest expense decreased 7.4% to $11.3 million in 1999 from
$12.2 million in 1998 due to principal amortization on the Senior and Second
Mortgages.
Net Income. Net income increased by $598,000 in 1999 to 8.25% of revenues from
$4.9 million, or 7.4% of total revenues, in 1998 primarily due to the changes in
revenues and expenses discussed above.
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 REVPAR. 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.
CAPITAL RESOURCES AND LIQUIDITY
The Partnership's financing needs have been historically funded through loan
agreements with independent financial institutions. Beginning in 1998, the
Partnership's property improvement fund was insufficient to meet current needs.
The shortfall is primarily due to the need to complete total suite
refurbishments at a majority of the Partnership's Inns. These refurbishments are
part of the routine capital expenditure cycle for maintaining Inns that are 12
to 15 years old. To address the shortfall, the Partnership provided a $1.45
million loan to the property improvement fund in first quarter 1999 and provided
a $1.2 million loan to the fund in first quarter 2000.
<PAGE>
In light of the increased competition in the extended-stay market described
above, the Manager has also proposed additional improvements that are intended
to enhance the overall value and competitiveness of the Inns. These proposed
improvements include design, structural and technological improvements to
modernize and enhance the functionality and appeal of the Inns. Based upon
information provided by the Manager, approximately $48 million may be required
over the next five years for the routine renovations and all of the proposed
additional improvements. Based on the anticipated capital expenditure needs of
the Inns over the next few years, it appears unlikely that cash distributions
will be possible for 2000 and 2001.
The General Partner believes that cash from Inn operations and Partnership
reserves will be sufficient to make the required debt service payments and to
fund a portion of the capital expenditures at the Inns. The General Partner is
reviewing the Manager's proposed Inn renovations and improvements to identify
those projects that have the greatest value to 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 $14.9 million, $14.8 million and $12.7
million for the years ended December 31, 1999, 1998 and 1997, respectively. Cash
from operations in 1999 increased $136,000 as compared to 1998 due to an
improvement in Inn operations due to the increase in the combined average suite
rate. The $2.1 million increase in cash from operations in 1998 over 1997 was
primarily due to an improvement in Inn operations in 1998 as compared to 1997
and an increase in accounts payable and accrued expenses in 1998. The
Partnership paid $11.8 million, $11.8 million and $12.4 million in interest in
1999, 1998 and 1997, respectively.
Cash used in investing activities was $6.1 million, $4.6 million and $3.9
million for the years ended December 31, 1999, 1998 and 1997, respectively. 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
$5.1 million, $4.0 million and $3.1 million for the years ended December 31,
1999, 1998 and 1997, while capital expenditures were $5.5 million for each of
these years. The $1.1 million increase in contributions in 1999 from 1998 is due
primarily to a $1.45 million loan funded by the Partnership to the property
improvement fund in 1999 offset by the decrease in the contribution rate from 6%
in 1998 to 5.5% in 1999. 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. Capital expenditures in 1999, 1998 and 1997
include $904,000, $535,000 and $627,000, respectively, paid from the
Partnership's operating cash account for owner funded projects.
Cash used in financing activities was $6.8 million, $11.8 million and $6.6
million for the years ended December 31, 1999, 1998 and 1997, respectively. The
Partnership's financing activities are intended to consist primarily of capital
distributions to partners and repayment of mortgage debt. During 1999, 1998 and
1997, the Partnership repaid $6.8 million, $8.5 million and $4.9 million,
respectively, of principal on the Senior and Second Mortgages. There were no
optional prepayments on mortgage debt or capital distributions to the partners
in 1999. Optional principal repayments on the mortgage debt were $5 million and
$2 million in 1998 and 1997, respectively. Capital distributions to the partners
were $3.3 million and $1.7 million, respectively, in 1998 and 1997. 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.
<PAGE>
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 payments of principal and interest and mature on September 30,
2002. In addition to the required monthly payment, during each of the four years
from 1996 through 1999, the Partnership was required to pay, on a cash available
basis, an additional $2 million principal payment annually 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. During 1996 and 1998, the Partnership made optional principal
payments totaling $9 million of which $5.4 million was applied to the Senior
Mortgage and $3.6 million was applied to the Second Mortgage.
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 capital budgets provided by the Manager, the Partnership's
property improvement fund 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 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. In addition, to minimize the shortfall, the
Partnership increased the contribution rate from 5% to 6% in 1998; however, the
contribution rate was reduced 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. An additional $1,200,000 loan was provided for 1999. This advance was
funded in the first quarter of 2000. The balance in the property improvement
fund totaled $867,000 as of December 31, 1999. Contributions to the property
improvement fund for 2000 and forward are equal to 5% of gross Inn sales.
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 were 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 the remaining balance of deferred base management fees of
$872,000 in 1998. Therefore, as of December 31, 1999, there were no deferred
base management fees.
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, 1999, $3.5 million in incentive management fees was earned, of
which $769,000 was paid. $3.4 million in incentive management fees were earned
and deferred in 1998. As of December 31, 1999 and 1998, deferred incentive
management fees were $29.8 million and $27 million, respectively. If the
litigation settlement referred to in Item 3 "Legal Proceedings," is consummated,
$29,781,000, of these fees will be waived by the Manager.
Competition
Residence Inn by Marriott continues to be highly competitive and report stable
system-wide operating results when compared to the prior year due to successful
marketing efforts and a continued guest commitment. 1999 has been a challenge as
extended-stay hotel competitors continue to increase their presence in the
market. In response, during 1999 the Manager continued to heighten its efforts
to become the pre-eminent leader in this hospitality category, focusing on
customers that prefer a quality residential experience. The Manager is
continuing to monitor the introduction and growth of new extended-stay brands
including Homewood Suites by Hilton, Hawthorne Suites, Summerfield Suites,
Extended Stay America and AmeriSuites. In addition, a renewed focus will be
placed on strengthening each Inn's sales efforts in order to solidify the
existing relationships with current clients and to establish new ones.
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 1999, the increase in average suite rates of
Residence Inns kept pace with 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.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Partnership does not have significant market risk with respect to interest
rates, foreign currency exchanges or other market rate or price risks, and the
Partnership does not hold any financial instruments for trading purposes. As of
December 31, 1999, all of the Partnership's debt has a fixed interest rate.
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index
Marriott Residence Inn Limited Partnership Financial Statements: Page
Report of Independent Public Accountants............................... 15
Statement of Operations................................................ 16
Balance Sheet.......................................................... 17
Statement of Changes in Partners' Capital.............................. 18
Statement of Cash Flows................................................ 19
Notes to Financial Statements.......................................... 20
<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, 1999 and 1998,
and the related statements of operations, changes in partners' capital and cash
flows for the three years ended December 31, 1999. These financial statements
and the schedule referred to below 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 auditing standards generally accepted
in the United States. Those standards require that we plan and perform the 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, 1999 and 1998, and the results of its operations
and its cash flows for the three years ended December 31, 1999 in conformity
with accounting principles generally accepted in the United States.
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 our 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
Vienna, Virginia
March 17, 2000
<PAGE>
Statement of Operations
Marriott Residence Inn Limited Partnership
For the Years Ended December 31, 1999, 1998 and 1997
(in thousands, except per Unit amounts)
<TABLE>
<S> <C> <C> <C>
1999 1998 1997
----------- ----------- -----------
REVENUES
Suites....................................................................$ 63,112 $ 63,105 $ 59,082
Other operating departments............................................... 3,086 3,030 3,005
----------- ----------- -----------
Total Inn revenues.................................................... 66,198 66,135 62,087
----------- ----------- -----------
OPERATING COSTS AND EXPENSES
Inn property-level costs and expenses
Suites.................................................................. 14,078 13,543 12,603
Other department costs and expenses..................................... 2,889 1,447 1,152
Selling, administrative and other....................................... 15,290 16,802 15,290
----------- ----------- -----------
Total Inn property-level costs and expenses........................... 32,257 31,792 29,045
Depreciation.............................................................. 6,952 5,703 5,328
Incentive management fee.................................................. 3,521 4,720 3,383
Residence Inn system fee.................................................. 2,524 2,524 2,363
Property taxes............................................................ 2,230 2,274 2,213
Base management fee....................................................... 1,324 1,323 1,242
Equipment rent and other.................................................. 913 1,024 1,149
----------- ----------- -----------
49,721 49,360 44,723
----------- ----------- -----------
OPERATING PROFIT............................................................. 16,477 16,775 17,364
Interest expense.......................................................... (11,315) (12,200) (12,788)
Interest income........................................................... 304 293 338
----------- ----------- -----------
NET INCOME...................................................................$ 5,466 $ 4,868 $ 4,914
=========== =========== ===========
ALLOCATION OF NET INCOME
General Partner...........................................................$ 55 $ 49 $ 49
Limited Partners.......................................................... 5,411 4,819 4,865
----------- ----------- -----------
$ 5,466 $ 4,868 $ 4,914
=========== =========== ===========
NET INCOME PER LIMITED PARTNER UNIT
(65,600 Units)............................................................$ 83 $ 73 $ 74
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
Balance Sheet
Marriott Residence Inn Limited Partnership
December 31, 1999 and 1998
(in thousands)
<TABLE>
1999 1998
------------- -------------
ASSETS
<S> <C> <C>
Property and equipment, net..........................................................$ 138,792 $ 140,283
Due from Residence Inn by Marriott, Inc.............................................. 1,984 2,041
Property improvement fund............................................................ 867 223
Deferred financing costs, net of accumulated amortization............................ 1,307 1,779
Cash and cash equivalents............................................................ 6,025 4,027
------------- -------------
$ 148,975 $ 148,353
============= =============
LIABILITIES AND PARTNERS' CAPITAL
LIABILITIES
Mortgage debt......................................................................$ 103,282 $ 110,084
Incentive management fees due to Residence Inn by Marriott, Inc.................... 29,781 27,029
Accounts payable and accrued expenses.............................................. 312 1,106
------------- -------------
Total Liabilities............................................................ 133,375 138,219
------------- -------------
PARTNERS' CAPITAL
General Partner
Capital contribution............................................................. 663 663
Capital distributions............................................................ (436) (436)
Cumulative net income(loss)...................................................... 6 (49)
------------- -------------
233 178
------------- -------------
Limited Partners
Capital contribution, net of offering costs of $7,550............................ 58,050 58,050
Capital distributions............................................................ (43,233) (43,233)
Cumulative net income(loss)...................................................... 550 (4,861)
------------- -------------
15,367 9,956
------------- -------------
Total Partners' Capital...................................................... 15,600 10,134
------------- -------------
$ 148,975 $ 148,353
============= =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
Statement of Changes in Partners' Capital
Marriott Residence Inn Limited Partnership
For the Years Ended December 31, 1999, 1998 and 1997
(in thousands)
<TABLE>
General Limited
Partner Partners Total
------------- ------------- -------------
<S> <C> <C> <C>
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
Net income........................................................ 55 5,411 5,466
------------- ------------- -------------
Balance, December 31, 1999.............................................$ 233 $ 15,367 $ 15,600
============= ============= =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
Statement of Cash Flows
Marriott Residence Inn Limited Partnership
For the Years Ended December 31, 1999, 1998 and 1997
(in thousands)
<TABLE>
<S> <C> <C> <C>
1999 1998 1997
----------- ----------- -----------
OPERATING ACTIVITIES
Net income................................................................$ 5,466 $ 4,868 $ 4,914
Noncash items:
Depreciation............................................................ 6,952 5,703 5,328
Deferral of incentive management fees due to
Residence Inn by Marriott, Inc........................................ 2,752 4,320 3,383
Amortization of deferred financing costs as interest.................... 472 472 472
Loss on dispositions of property and equipment.......................... 14 -- --
Changes in operating accounts:
Due from Residence Inn by Marriott, Inc................................. 57 421 --
Accounts payable and accrued expenses................................... (794) (129) (753)
Repayment of base management fee due to
Residence Inn by Marriott, Inc........................................ -- (872) (627)
----------- ----------- -----------
Cash provided by operating activities............................. 14,919 14,783 12,717
----------- ----------- -----------
INVESTING ACTIVITIES
Additions to property and equipment....................................... (5,475) (5,538) (5,504)
Change in property improvement fund....................................... (644) 937 1,607
----------- ----------- -----------
Cash used in investing activities................................. (6,119) (4,601) (3,897)
----------- ----------- -----------
FINANCING ACTIVITIES
Principal payments on mortgage debt....................................... (6,802) (8,492) (4,943)
Capital distributions to partners......................................... -- (3,313) (1,656)
----------- ---------- -----------
Cash used in financing activities................................. (6,802) (11,805) (6,599)
------------ ---------- -----------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS............................. 1,998 (1,623) 2,221
CASH AND CASH EQUIVALENTS at beginning of year............................... 4,027 5,650 3,429
----------- ---------- ----------
CASH AND CASH EQUIVALENTS at end of year.....................................$ 6,025 $ 4,027 $ 5,650
=========== =========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest............................................$ 11,770 $ 11,805 $ 12,354
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
Notes to Financial Statements
Marriott Residence Inn Limited Partnership
December 31, 1999 and 1998
NOTE 1. THE PARTNERSHIP
Description of the Partnership
Marriott Residence Inn Limited Partnership (the "Partnership"), a Delaware
limited partnership, was formed on 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, 1999, have a total of
2,129 suites. 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.
On April 17, 1998, Host Marriott Corporation ("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. In
connection with the REIT Conversion, 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 contributed its entire interest in RIBM One LLC to Host LP,
which is owned 78% by Host Marriott and 22% by outside partners. Finally on
December 30, 1998, Host LP 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.
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 accounting principles
generally accepted in the United States 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.
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 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 the net book value of the property.
If a property is impaired, its basis is adjusted to fair market value. No such
adjustment was needed as of December 31, 1999 or December 31, 1998.
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 tax basis of net
assets exceeds the net assets reported in the accompanying financial statements
at December 31, 1999 and 1998 by $23,850,679 and $20,443,702, 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, 1999 and 1998,
accumulated amortization of deferred financing costs totaled $1,991,000 and
$1,519,000, respectively.
Cash and Cash Equivalents
The Partnership considers all highly liquid investments with a maturity of three
months or less at date of purchase to be cash equivalents.
Reclassifications
Certain reclassifications were made to the prior year financial statements to
conform to the 1999 presentation.
NOTE 3. PROPERTY AND EQUIPMENT
Property and equipment consists of the following as of December 31 (in
thousands):
1999 1998
------------- --------------
Land and improvements...........................$ 46,441 $ 46,441
Buildings and improvements...................... 121,566 115,892
Furniture and equipment......................... 40,768 42,409
Construction in progress........................ 821 1,235
------------- --------------
209,596 205,977
Less accumulated depreciation................... (70,804) (65,694)
------------- --------------
$ 138,792 $ 140,283
============= ==============
<PAGE>
NOTE 4. ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair values of financial instruments are shown below. The fair
values of financial instruments not included in this table are estimated to be
equal to their carrying amounts (in thousands):
<TABLE>
As of December 31, 1999 As of December 31, 1998
----------------------- -----------------------
Estimated Estimated
Carrying Fair Carrying Fair
Amount Value Amount Value
------------- -------------- ------------- -------------
<S> <C> <C> <C> <C>
Senior mortgage debt...............................$ 79,529 $ 79,228 $ 85,154 $ 88,959
Second mortgage debt...............................$ 23,753 $ 27,045 $ 24,930 $ 31,362
Incentive management fees due to Residence
Inn by Marriott, Inc............................$ 29,781 $ -- $ 27,029 $ 2,980
</TABLE>
The estimated fair values of debt obligations are based on the expected future
debt service payments discounted at risk adjusted rates. Incentive management
fees payable are valued based on the expected future payments from operating
cash flow discounted at risk adjusted rates. As discussed in Note 7, if the
March 9, 2000 litigation settlement agreement is consummated, the Manager would
waive $29,781,000 of deferred incentive management fees payable as of December
31, 1999. Accordingly, the estimated fair value of the incentive management
fees payable at December 31, 1999 is $0.
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 payments of principal and interest and mature on September 30,
2002. In addition to the required monthly payments, during each of the four
years from 1996 through 1999, the Partnership was 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. During 1999 and 1998, the Partnership made principal
payments of $5,625,000 and $5,538,000 on the Senior Mortgage and $1,177,000 and
$2,954,000 on the Second Mortgage, respectively. At December 31, 1999, the
outstanding principal balance of the Senior Mortgage was $79,529,000 and the
outstanding principal balance of the Second Mortgage was $23,753,000. 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
$24,930,000.
Both the Senior Mortgage and the Second Mortgage are secured by the Inns, the
land on which they are located, a security interest in all personal property
associated with the Inns including furniture and equipment, inventory, contracts
and other general intangibles and an assignment of the Partnership's rights
under the management agreement.
Principal amortization of the Senior and Second Mortgages at December 31, 1999
is as follows (in thousands):
2000......................$ 4,626
2001...................... 5,569
2002...................... 93,087
-------------
$ 103,282
=============
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 were 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, during 1998, the
Partnership repaid the remaining balance of deferred base management fee of
$872,000.
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). In 1997 and 1999, incentive management
fees were calculated as 15% of operating profit. However in 1998, incentive
management fees were calculated as 20% of operating profit. 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. If the Partnership retains 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. During 1999 and 1998,
$769,000 and $400,000, respectively, in incentive management fees were paid to
the Manager. As of December 31, 1999 and 1998, deferred incentive management
fees were $29.8 million and $27 million, respectively. If the litigation
settlement referred to in Note 7 is consummated, $29,781,000, of these fees will
be waived by 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,
1999, 1998 and 1997, the Partnership paid a Residence Inn system fee of
$2,524,000, $2,524,000 and $2,363,000, respectively reimbursed the Manager for
$1,306,000, $1,318,000 and $1,051,000, respectively of Chain Services and
contributed $1,575,000, $1,578,000 and $1,477,000 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 $224,000 and $117,000 in 1999 and 1998, respectively.
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, 1999 and 1998,
$775,000 has been advanced to the Manager for working capital and is included in
Due from Residence Inn by Marriott, Inc. on the balance sheet.
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 5.5% of gross revenues of each Inn in 1999, 6% in 1998 and 5% in
1997. Contributions to the property improvement fund for 1999, 1998 and 1997
were $5,091,000, $3,968,000 and $3,104,000, respectively. Based on capital
budgets, the Partnership's property improvement fund was 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 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. In addition, to minimize the shortfall, the
Partnership increased the contribution rate from 5% to 6% in 1998; however, the
contribution rate was reduced to 5.5% in 1999. In the first quarter of 1999, the
Partnership provided a loan to the property improvement fund of $1,450,000 for
1998. An additional $1,200,000 loan for 1999 was funded in the first quarter of
2000. Contributions to the property improvement fund for 2000 and forward are
equal to 5% of gross Inn sales.
<PAGE>
NOTE 7. LITIGATION
On March 16, 1998, limited partners in several partnerships sponsored by Host
Marriott, filed a lawsuit, styled Robert M. Haas, Sr. and Irwin Randolph Joint
Tenants, et al. v. Marriott International, Inc., et al., Case No. 98-CI-04092,
in the 57th Judicial District Court of Bexar County, Texas against Marriott
International, Inc., Host Marriott, various of their subsidiaries, J.W.
Marriott, Jr., Stephen Rushmore, and Hospitality Valuation Services, Inc.
(collectively, the "Defendants"). The lawsuit now relates to the following
limited partnerships: Courtyard by Marriott Limited Partnership, Marriott
Residence Inn Limited Partnership, Marriott Residence Inn II Limited
Partnership, Fairfield Inn by Marriott Limited Partnership, Host DSM Limited
Partnership (formerly known as Desert Springs Marriott Limited Partnership) and
Atlanta II Limited Partnership (formerly known as Atlanta Marriott Marquis
Limited Partnership), collectively, the "Six Partnerships". The plaintiffs
allege that the Defendants conspired to sell hotels to the Six Partnerships for
inflated prices and that they charged the Six Partnerships excessive management
fees to operate the Six Partnerships' hotels. The plaintiffs further allege,
among other things, that the Defendants committed fraud, breached fiduciary
duties and violated the provisions of various contracts. A related case
concerning Courtyard by Marriott II Limited Partnership ("Courtyard II") filed
by the plaintiffs' lawyers in the same court involves similar allegations
against the Defendants, and has been certified as a class action. As a result of
this development, Courtyard II is no longer involved in the above-referenced
Haas lawsuit, Case No. 98-CI-04092.
On March 9, 2000, the Defendants entered into a settlement agreement with
counsel to the plaintiffs to resolve the litigation. The settlement is subject
to numerous conditions, including participation thresholds, court approval and
various consents. Under the terms of the settlement, the limited partners of the
Partnership who elect to participate would be paid $228.38 per Unit ($14,981,728
in the aggregate, if the holders of all Units participate) in exchange for
dismissal of the litigation and a complete release of all claims. This amount
would be reduced by the amount of attorneys' fees awarded by the court. In
addition to this cash payment, the Manager would waive $29,781,000 of deferred
incentive management fees. Limited partners who opt out of the settlement would
receive no payment but would retain their individual claims against the
Defendants. The Defendants may terminate the settlement if the holders of more
than 10% of the Partnership's 65,600 limited partner Units choose not to
participate, if the holders of more than 10% of the limited partner units in any
one of the other partnerships involved in the litigation choose not to
participate or if certain other conditions are not satisfied. The Manager will
continue to manage the Partnership's Inns under long-term agreements.
<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:
<TABLE>
Age at
Name Current Position December 31, 1999
- ----------------------- ----------------------------------------------- -----------------
<S> <C> <C>
Robert E. Parsons President and Manager 44
Christopher G. Townsend Executive Vice President, Secretary and Manager 52
W. Edward Walter Treasurer 44
Earla L. Stowe Vice President 38
</TABLE>
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 is also an Executive Vice President and Chief Financial Officer of
Host LP and 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 is also
a Senior Vice President, Corporate Secretary and General Counsel of Host LP and
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 is also a
Senior Vice President and Treasurer of Host LP and 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, 1999, 1998 and
1997, the Partnership reimbursed Host Marriott or its subsidiaries $109,000,
$229,000 and $157,000, 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, 1999, 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,
1999.
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 1999,
1998 and 1997, respectively, the Partnership paid a Residence Inn system fee of
$2,524,000, $2,524,000 and $2,363,000. 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 were 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, 1999, 1998
and 1997, respectively, the Partnership paid current base management fees of
$1,324,000, $1,323,000 and $1,242,000. Pursuant to the terms of the Management
Agreement, the Partnership paid the remaining balance of deferred base
management fees of $872,000 in 1998. Therefore, as of December 31, 1999, there
were no deferred base management fees.
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. For the year ended
December 31, 1999, $3.5 million in incentive management fees was earned, of
which $769,000 was paid. $3.4 million in incentive management fees were earned
and deferred in 1998. As of December 31, 1999 and 1998, deferred incentive
management fees were $29.8 million and $27 million, respectively. If the
litigation settlement referred to in Item 3, "Legal Proceedings", is
consummated, $29,781,000, of these fees will be waived by the Manager.
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, 1999, 1998 and 1997, the
Partnership reimbursed the Manager for $1,306,000, $1,318,000 and $1,051,000 of
Chain Services and contributed $1,575,000, $1,578,000 and $1,477,000 to the
marketing fund, respectively. In addition, the Inns participate in MII's
Marriott's Rewards Program ("MRP"). Residence Inns began participating in the
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 $224,000, in 1999 and
$117,000 in 1998. Chain Services, contributions to the marketing fund and MRP
costs are included in selling, administrative and other expenses 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, 1999 and 1998, $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, 1999, contributions to
the property improvement fund were equal to 5.5% of gross sales of each Inn. For
the years ended December 31, 1998, contributions to the property improvement
fund were equal to 6% of gross sales of each Inn and 5% for 1997. Contributions
to the property improvement fund during the fiscal years ended December 31,
1999, 1998 and 1997 were $5,091,000, $3,968,000 and $3,104,000, respectively.
Beginning in 1998, the Partnership's property improvement fund was insufficient
to meet current needs. The shortfall is primarily due to the need to complete
total suite refurbishments at the majority of the Partnership's Inns. To address
the shortfall, the Partnership provided a $1.45 million loan to the property
improvement fund in first quarter 1999 for 1998. An additional $1,200,000 loan
was provided for 1999 and was funded in the first quarter of 2000. Contributions
to the property improvement fund for 2000 and forward are equal to 5% of gross
Inn sales.
Payments to MII and Subsidiaries
The following table sets forth the amount paid to MII and its subsidiaries under
the Management Agreement for the years ended December 31, 1999, 1998 and 1997
(in thousands):
1999 1998 1997
----------- ----------- -----------
Residence Inn system fee..............$ 2,524 $ 2,524 $ 2,363
Marketing fund contribution........... 1,575 1,578 1,477
Base management fee................... 1,324 1,323 1,242
Chain services........................ 1,306 1,318 1,051
Incentive management fee.............. 769 400 --
MRP costs............................. 224 117 --
Deferred base management fee.......... -- 872 627
----------- ----------- -----------
$ 7,722 $ 8,132 $ 6,760
=========== =========== ===========
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, 1999, 1998 and 1997 (in thousands):
1999 1998 1997
----------- ----------- -----------
Administrative expenses reimbursed..$ 109 $ 229 $ 157
Cash distributions.................. -- 33 16
----------- ----------- -----------
$ 109 $ 262 $ 173
=========== =========== ===========
<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
<TABLE>
Exhibit
Number Description Page
-------------- ------------------------------------------------------- ---------
<S> <C> <C>
*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 N/A
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.
</TABLE>
---------------------------------
* 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 SEC on December 10, 1999. This
filing, Item 5-Other Events, discloses that on December 8,
1999, the General Partner sent to the limited partners of
the Partnership a letter that accompanied the Partnership's
Quarterly Report on Form 10-Q for the quarter ended
September 10, 1999. The letter disclosed the quarterly
activities of the Partnership. A copy of the letter was
included as an Item 7-Exhibit in this Form 8-K filing.
<PAGE>
SCHEDULE III
Page 1 of 2
MARRIOTT RESIDENCE INN LIMITED PARTNERSHIP
REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 1999
(in thousands)
<TABLE>
Initial Costs
-------------
Building Subsequent
Land and and Costs
Description Debt Improvements Improvements Capitalized
- ------------------------ --------- ------------ ------------ -----------
<S> <C> <C> <C> <C>
La Jolla $ 18,178 $ 11,579 $ 14,462 $ 1,431
Long Beach 10,019 7,167 11,455 1,254
St. Louis Galleria 8,676 1,989 5,010 2,064
Boulder 8,056 1,451 6,686 666
Costa Mesa 7,643 3,678 6,955 561
Atlanta Buckhead 7,230 3,894 5,519 893
Atlanta Cumberland 6,609 4,099 4,627 776
Atlanta Dunwoody 6,609 2,116 7,387 1,369
Chicago Lombard 6,403 3,665 5,746 1,429
Southfield 6,300 2,031 8,195 1,393
Cincinnati North 4,544 1,183 9,587 799
Other properties, each
less than 5% of total 13,015 3,546 19,925 3,420
- --------- ----------- ----------- ---------
$ 103,282 $ 46,398 $ 105,554 $ 16,055
========= =========== =========== =========
</TABLE>
<TABLE>
Gross Amount at December 31, 1999
---------------------------------
Building Date of
Land and and Accumulated Completion of Date Depreciation
Description Improvements Improvements Total Depreciation Construction Acquired Life
- ------------- ------------ ------------ --------- ------------ ------------- -------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
La Jolla $ 11,580 $ 15,892 $ 27,472 $ 4,964 1986 1988 40 years
Long Beach 7,235 12,641 19,876 3,683 1987 1988 40 years
St. Louis Galleria 2,014 7,049 9,063 2,082 1986 1988 40 years
Boulder 1,451 7,352 8,803 2,199 1986 1988 40 years
Costa Mesa 3,678 7,516 11,194 2,281 1986 1988 40 years
Atlanta Buckhead 3,903 6,403 10,306 2,023 1987 1988 40 years
Atlanta Cumberland 4,099 5,403 9,502 1,674 1987 1988 40 years
Atlanta Dunwoody 2,116 8,756 10,872 2,698 1984 1988 40 years
Chicago Lombard 3,665 7,175 10,840 1,991 1987 1988 40 years
Southfield 2,031 9,588 11,619 2,971 1986 1988 40 years
Cincinnati North 1,183 10,386 11,569 3,186 1985 1988 40 years
Other properties, each
less than 5% of total 3,486 23,405 26,891 7,467 1985-1987 1988 40 years
- ----------- ----------- --------- ----------
$ 46,441 $ 121,566 $ 168,007 $ 37,219
=========== =========== ========= ==========
</TABLE>
<PAGE>
SCHEDULE III
Page 2 of 2
MARRIOTT RESIDENCE INN LIMITED PARTNERSHIP
REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 1999
(in thousands)
Notes:
<TABLE>
1997 1998 1999
----------- ----------- -----------
(a) Reconciliation of Real Estate:
<S> <C> <C> <C>
Balance at beginning of year..........................................$ 159,033 $ 160,899 $ 162,333
Capital Expenditures.................................................. 1,866 1,434 5,716
Dispositions.......................................................... -- -- (42)
----------- ----------- -----------
Balance at end of year................................................$ 160,899 $ 162,333 $ 168,007
=========== =========== ===========
(b) Reconciliation of Accumulated Depreciation:
Balance at beginning of year..........................................$ 26,140 $ 29,640 $ 33,233
Depreciation.......................................................... 3,500 3,593 3,986
----------- ----------- -----------
Balance at end of year................................................$ 29,640 $ 33,233 $ 37,219
=========== =========== ===========
</TABLE>
(c) The aggregate cost of land, buildings and improvements for Federal income
tax purposes is approximately $165.6 million at December 31, 1999.
<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 27th day of
March of 2000.
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
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
SCHEDULE 1
This schedule contains summary financial information extracted from the Annual
Report 10-K and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<CIK> 0000829092
<NAME> Marriott Residence Inn Limited Partnership
<MULTIPLIER> 1000
<CURRENCY> U.S. Dollar
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<EXCHANGE-RATE> 1.00
<CASH> 6,025
<SECURITIES> 0
<RECEIVABLES> 1,984
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 2,174
<PP&E> 209,596
<DEPRECIATION> (70,804)
<TOTAL-ASSETS> 148,975
<CURRENT-LIABILITIES> 30,093
<BONDS> 103,282
0
0
<COMMON> 0
<OTHER-SE> 15,600
<TOTAL-LIABILITY-AND-EQUITY> 148,975
<SALES> 0
<TOTAL-REVENUES> 66,198
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 49,417
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 11,315
<INCOME-PRETAX> 5,466
<INCOME-TAX> 0
<INCOME-CONTINUING> 5,466
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,466
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
