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Securities and Exchange Commission
Washington, D.C. 20549
Form 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the Quarter ended June 14, 1996
OR
[_] Transition Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
Commission File Number: 0-16728
COURTYARD BY MARRIOTT II LIMITED PARTNERSHIP
--------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 52-1533559
- - - ------------------------------------- --------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
10400 Fernwood Road
Bethesda, Maryland
20817
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(Address of principal executive offices)
Registrant's telephone number, including area code: 301-380-2070
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months and (2) has been subject to such filing requirements for
the past 90 days. Yes X No
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Courtyard By Marriott II Limited Partnership
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TABLE OF CONTENTS
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PAGE NO.
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PART I - FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Item 1. Financial Statements
<S> <C>
Condensed Consolidated Statement of Operations
Twelve and Twenty-Four Weeks Ended June 14, 1996 and
June 16, 1995...................................................... 1
Condensed Consolidated Balance Sheet
June 14, 1996 and December 31, 1995................................ 2
Condensed Consolidated Statement of Cash Flows
Twelve and Twenty-Four Weeks ended June 14, 1996 and
June 16, 1995...................................................... 3
Notes to Condensed Consolidated Financial Statements................ 4
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations............................... 9
</TABLE>
PART II - OTHER INFORMATION
<TABLE>
<S> <C>
Item 1. Legal Proceedings.................................................. 11
Item 5. Other Information.................................................. 11
</TABLE>
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
COURTYARD BY MARRIOTT II LIMITED PARTNERSHIP
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
(in thousands, except per unit amounts)
<TABLE>
<CAPTION>
Twelve Weeks Ended Twenty-Four Weeks Ended
June 14, June 16, June 14, June 16,
1996 1995 1996 1995
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
REVENUES................... $ 33,050 $ 30,070 $ 61,039 $ 56,962
--------- --------- --------- ---------
OPERATING COSTS AND
EXPENSES
Interest.................. 10,863 8,855 21,238 17,182
Depreciation.............. 6,397 6,384 12,794 12,762
Ground rent, taxes and
other.................... 5,053 4,446 9,875 9,147
Base and Courtyard
management fees.......... 3,770 3,527 7,244 6,811
Incentive management fee.. 3,107 2,689 5,542 4,974
--------- --------- --------- ---------
29,190 25,901 56,693 50,876
--------- --------- --------- ---------
NET INCOME................. $ 3,860 $ 4,169 $ 4,346 $ 6,086
========= ========= ========= =========
ALLOCATION OF NET INCOME
General Partner........... $ 193 $ 209 $ 217 $ 304
Limited Partners.......... 3,667 3,960 4,129 5,782
--------- --------- --------- ---------
$ 3,860 $ 4,169 $ 4,346 $ 6,086
========= ========= ========= =========
NET INCOME PER LIMITED
PARTNER UNIT (1,470 Units). $ 2,494 $ 2,695 $ 2,808 $ 3,933
========= ========= ========= =========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
1
<PAGE>
COURTYARD BY MARRIOTT II LIMITED PARTNERSHIP
CONDENSED CONSOLIDATED BALANCE SHEET
(In thousands)
<TABLE>
<CAPTION>
June 14, December 31,
1996 1995
------------ ------------
(Unaudited)
<S> <C> <C>
ASSETS
Property and equipment, net................ $ 466,377 $ 474,480
Due from Courtyard Management Corporation.. 11,097 7,078
Other assets............................... 52,014 51,580
Restricted cash............................ 6,966 6,684
Cash and cash equivalents.................. 17,125 27,708
---------- ----------
$ 553,579 $ 567,530
========== ==========
</TABLE>
LIABILITIES AND PARTNERS' CAPITAL (DEFICIT)
<TABLE>
<CAPTION>
LIABILITIES
<S> <C> <C>
Debt..................................................... $ 533,564 $ 531,100
Management fees due to Courtyard Management Corporation.. 35,515 35,809
Due to Marriott International, Inc. and affiliates....... 9,233 9,402
Due to Host Marriott Corporation......................... -- 7,469
Accounts payable and accrued liabilities................. 9,729 19,250
--------- ---------
Total Liabilities....................................... 588,041 603,030
--------- ---------
PARTNERS' CAPITAL (DEFICIT)
General Partner.......................................... 5,477 5,260
Limited Partners......................................... (39,939) (40,760)
--------- ---------
Total Partners' Deficit................................. (34,462) (35,500)
--------- ---------
$ 553,579 $ 567,530
========= =========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
2
<PAGE>
COURTYARD BY MARRIOTT II LIMITED PARTNERSHIP
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Twenty-Four Weeks Ended
June 14, June 16,
1996 1995
----------- ----------
(in thousands)
<S> <C> <C>
OPERATING ACTIVITIES
Net income............................... $ 4,346 $ 6,086
Noncash items............................ 13,663 13,332
Changes in operating accounts............ (1,473) (7,246)
--------- ---------
Cash provided by operating activities.. 16,536 12,172
--------- ---------
INVESTING ACTIVITIES
Additions to property and equipment...... (4,691) (2,854)
Change in property improvement funds..... (490) (2,172)
--------- ---------
Cash used in investing activities...... (5,181) (5,026)
--------- ---------
FINANCING ACTIVITIES
Proceeds from debt....................... 537,600 --
Repayments of debt....................... (535,136) --
Payment of financing costs............... (14,323) (304)
Repayment of advances from Host Marriott
Corporation............................. (6,489) --
Capital distributions.................... (3,308) (2,714)
Change in reserve accounts............... (282) (1,111)
--------- ---------
Cash used in financing activities...... (21,938) (4,129)
--------- ---------
(DECREASE)/INCREASE IN CASH AND CASH
EQUIVALENTS.............................. (10,583) 3,017
CASH AND CASH EQUIVALENTS at beginning of
period................................... 27,708 14,160
--------- ---------
CASH AND CASH EQUIVALENTS at end of period $ 17,125 $ 17,177
========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid for mortgage and other interest $ 17,200 $20,540
========= =======
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
3
<PAGE>
COURTYARD BY MARRIOTT II LIMITED PARTNERSHIP
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. The accompanying condensed consolidated financial statements have been
prepared by the Courtyard By Marriott II Limited Partnership (the
"Partnership") without audit. Certain information and footnote disclosures
normally included in financial statements presented in accordance with
generally accepted accounting principles have been condensed or omitted
from the accompanying statements. The Partnership believes the disclosures
made are adequate to make the information presented not misleading.
However, the condensed consolidated financial statements should be read in
conjunction with the Partnership's consolidated financial statements and
notes thereto included in the Partnership's Form 10-K for the fiscal year
ended December 31, 1995. In the opinion of the Partnership, the
accompanying unaudited condensed consolidated financial statements reflect
all adjustments (which include only normal recurring adjustments) necessary
to present fairly the financial position of the Partnership as of June 14,
1996 and December 31, 1995, and the results of operations for the twelve
and twenty-four weeks ended June 14, 1996 and June 16, 1995. Interim
results are not necessarily indicative of fiscal year performance because
of seasonal and short-term variations.
For financial reporting purposes, the net income of the Partnership is
allocated 95% to the Limited Partners and 5% to CBM Two Corporation (the
"General Partner"). Significant differences exist between the net income
for financial reporting purposes and the net income reported for Federal
income tax purposes. These differences are due primarily to the use for
income tax purposes of accelerated depreciation methods, shorter
depreciable lives for the assets, differences in the timing of the
recognition of certain fees and straight-line rent adjustments.
2. Revenues represent house profit which is hotel sales less hotel-level
expenses, excluding certain operating costs and expenses such as
depreciation, base, Courtyard and incentive management fees, real and
personal property taxes, ground and equipment rent, insurance and certain
other costs. Revenues consist of the following for the twelve and twenty-
four weeks ended (in thousands):
<TABLE>
<CAPTION>
Twelve Weeks Ended Twenty-Four Weeks Ended
June 14, June 16, June 14, June 16,
1996 1995 1996 1995
-------- -------- --------- --------
<S> <C> <C> <C> <C>
HOTEL SALES
Rooms..................... $ 56,119 $ 52,497 $ 107,695 $ 101,167
Food and beverage......... 4,380 4,198 8,529 8,177
Other..................... 2,328 2,088 4,502 4,172
--------- --------- --------- ---------
62,827 58,783 120,726 113,516
--------- --------- --------- ---------
HOTEL EXPENSES
Departmental direct costs
Rooms.................... 11,624 11,208 23,004 21,847
Food and beverage........ 3,765 3,491 7,327 6,843
Other..................... 14,388 14,014 29,356 27,864
--------- --------- --------- ---------
29,777 28,713 59,687 56,554
--------- --------- --------- ---------
REVENUES................... $ 33,050 $ 30,070 $ 61,039 $ 56,962
========= ========= ========= =========
</TABLE>
4
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3. Mortgage Debt Refinancing
Partnership Structure
On January 24, 1996, the Partnership completed a refinancing of the
Partnership's existing debt through the private placements of $127.4 million of
senior secured notes (the "Senior Notes") and $410.2 million of multi-class
commercial mortgage pass-through certificates (the "Certificates"), as described
more fully below.
In connection with the refinancing, the limited partners approved certain
amendments to the partnership agreement and the management agreement
("Management Agreement") whereby Courtyard Management Corporation (the
"Manager") manages the Partnership's 70 hotels (the "Hotels"). The partnership
agreement amendment, among other things, allowed the formation of certain
subsidiaries of the Partnership, including Courtyard II Finance Company
("Finance"), a wholly-owned subsidiary of the Partnership, which along with the
Partnership is the co-issuer of the Senior Notes.
Additionally, the Partnership formed a wholly-owned subsidiary, Courtyard II
Associates Management Corporation ("Managing General Partner"). Managing
General Partner was formed to be the managing general partner with a 1% general
partner interest in Courtyard II Associates, L.P. ("Associates"), a Delaware
limited partnership. The Partnership owns a 1% general partner interest and a
98% limited partner interest in Associates. On January 24, 1996, the
Partnership contributed 69 Hotels and their related assets to Associates.
Formation of Associates resulted in the Partnership's primary assets being its
direct and indirect interest in Associates. Additionally, substantially all of
Associates' net equity will be restricted to dividends, loans or advances to the
Partnership.
Associates holds a 99% membership interest in CBM Associates II LLC ("Associates
II") and Managing General Partner holds the remaining 1% membership interest.
On January 24, 1996, the Partnership contributed the Hotel located in Deerfield,
IL (the "Deerfield Hotel") and its related assets to Associates II.
Each of the Managing General Partner, Associates and Associates II was formed as
a single-purpose bankruptcy-remote entity to facilitate the refinancing.
CBM Funding Corporation ("CBM Funding"), a wholly-owned subsidiary of
Associates, also was formed to make a mortgage loan (the "Mortgage Loan") to
Associates from the proceeds of the sale of the Certificates.
Debt Refinancing - Overview
On January 24, 1996, net proceeds from the placement of the Senior Notes and the
Certificates and existing Partnership cash were used to (i) repay bank mortgage
indebtedness of $275 million related to 36 Hotels and $230.5 million related to
29 Hotels, (ii) repay $25.6 million of industrial revenue bond indebtedness
("IRB Debt"), (iii) repay $6.5 million owed to Host Marriott Corporation ("Host
Marriott") in connection with advances related to the IRB Debt and (iv) pay
certain costs of structuring and issuing the Senior Notes and the Certificates.
Upon repayment of the bank mortgage indebtedness, Host Marriott was released
from its obligations under (i) the mortgage debt service guarantees, (ii) the
foreclosure guarantee and (iii) the ground rent facility.
Debt Refinancing - Senior Notes
The Senior Notes of $127.4 million were issued by the Partnership and Finance.
The Senior Notes bear interest at 10 3/4%, require semi-annual payments of
interest and require no payments of principal until maturity on February 1,
2008. The Senior Notes are secured by a first priority pledge by the
Partnership of (i) its 99% partnership interest (consisting of 98% limited
partner interest and a 1% general partner interest) in Associates and
5
<PAGE>
(ii) its 100% equity interest in the Managing General Partner. Finance has
nominal assets, does not conduct any operations and does not provide any
additional security for the Senior Notes.
The terms of the Senior Notes include requirements of the Partnership to
establish and fund a debt service reserve account in an amount equal to one six-
month interest payment on the Senior Notes ($6,848,000) and to maintain certain
levels of excess cash flow, as defined. The debt service reserve is included in
restricted cash on the accompanying condensed consolidated balance sheet. In
the event the Partnership fails to maintain the required level of excess cash
flow, the Partnership will be required to (i) suspend distribution to its
partners and other restricted payments, as defined, (ii) to fund a separate
supplemental debt service reserve account (the "Supplemental Debt Service
Reserve") in an amount up to two six-month interest payments on the Senior Notes
and (iii) if such failure were to continue, to offer to purchase a portion of
the Senior Notes at par. The Partnership is dependent on distribution of excess
cash flow from Associates to pay debt service on the Senior Notes.
The Senior Notes are not redeemable prior to February 1, 2001. Thereafter, the
Senior Notes may be redeemed, at the option of the Partnership, at a premium
declining to par in 2004. The Senior Notes are non-recourse to the Partnership
and its partners.
Debt Refinancing - Certificates
The Certificates in an initial principal amount of $410.2 million were issued by
CBM Funding. Proceeds from the sale of the Certificates were utilized by CBM
Funding to provide a Mortgage Loan to Associates. The Certificates/Mortgage
Loan require monthly payments of principal and interest based on a 17-year
amortization schedule. The Mortgage Loan matures on January 28, 2008. However,
the maturity date of the Certificates/Mortgage Loan may be extended until
January 28, 2013 with the consent of 66 2/3% of the holders of the outstanding
Certificates affected thereby. The Certificates were issued in the following
classes and pass-through rates of interest.
<TABLE>
<CAPTION>
Initial Certificate Pass-Through
Class Balance Rate
------------- ------------------ --------------
<S> <C> <C>
Class A-1 $ 45,500,000 7.550%
Class A-2 $ 50,000,000 6.880%
Class A-3P & I $ 129,500,000 7.080%
Class A-3IO Not Applicable 0.933%
Class B $ 75,000,000 7.480%
Class C $ 100,000,000 7.860%
Class D $ 10,200,000 8.645%
</TABLE>
The Class A-3IO Certificates receive payments of interest only based on a
notional balance equal to the Class A-3P & I Certificate.
The Certificates/Mortgage Loan maturities are as follows (in thousands):
<TABLE>
<S> <C>
1996 $ 10,283
1997 13,216
1998 14,242
1999 15,347
2000 16,539
Thereafter 340,573
--------
$410,200
========
</TABLE>
6
<PAGE>
The Mortgage Loan is secured primarily by 69 cross-defaulted and cross-
collateralized mortgages representing first priority mortgage liens on (i) the
fee or leasehold interest in the 69 Hotels, related furniture, fixtures and
equipment and the property improvement fund, (ii) the fee interest in the land
leased from MII or its affiliates on which 53 Hotels are located, (iii) a pledge
of Associates' membership interest in and the related right to receive
distributions from Associates II which owns the Deerfield Hotel and (iv) an
assignment of the Restated Management Agreement, as defined below. The Mortgage
Loan is non-recourse to Associates, the Partnership and its partners.
Operating profit from the Hotels in excess of debt service on the Mortgage Loan
is available to be distributed to the Partnership. Amounts distributed to the
Partnership are used for the following, in order of priority: (i) for debt
service on the Senior Notes, (ii) to fund the Supplemental Debt Service Reserve,
if necessary, (iii) to offer to purchase a portion of the Senior Notes at par,
if necessary, (iv) for working capital as discussed later in this note and (v)
for distributions to the partners of the Partnership.
Marriott International, Inc. Ground Leases
In connection with the refinancing, the Partnership, as lessee, transferred its
rights and obligations pursuant to the 53 ground leases with Marriott
International, Inc. ("MII") and affiliates to Associates. Additionally, MII and
affiliates agreed to defer receipt of their ground lease payments to the extent
that the Partnership or Associates has insufficient funds for debt service
payments on the Senior Notes and the Mortgage Loan.
Restated Management Agreement
To facilitate the refinancing, effective December 30, 1995, the original
Management Agreement was restated into two separate management agreements.
Associates entered into a management agreement with the Manager for the 69
Hotels which Associates directly owns and Associates II entered into a
management agreement for the Deerfield Hotel which Associates II owns,
(collectively, the "Restated Management Agreement").
The Restated Management Agreement contains provisions which differ from the
original Management Agreement. The primary new provisions are as follows:
. The initial term expires in 2013. The Manager may renew the terms, as
to one or more of the Hotels, at its option, for up to three
successive terms of 10-years each and one final term of five years.
. One percent of the Courtyard management fee will be deferred through
maturity of the Senior Notes and the Mortgage Loan to the extent that
the Partnership or Associates has insufficient funds for debt service
payments on the Senior Notes and the Mortgage Loan. This change
eliminated the previous deferral of the total Courtyard management fee
to debt service through December 31, 1997.
. The priority return to the Partnership, as defined, was reduced from
10% of invested capital to 7% in 1996, 8% in 1997, 9% in 1998 and then
returning to 10% for 1999 and thereafter. Operating profit from the
Hotels (which reflects the deduction of the base and Courtyard
management fees and MII ground rent) will be used to pay the
following, in order of priority: (i) debt service on the Senior Notes
and Mortgage Loan, (ii) to repay working capital loans to the Manager,
(iii) to repay deferred ground rent to MII and their affiliates, (iv)
to repay ground lease advances to MII and its affiliates, (v) the
priority return to the Partnership which is 7% of invested capital for
1996, (vi) eighty percent of the remaining operating profit is applied
to the payment of current incentive management fees, (vii) to repay
advances to the Partnership, (viii) to repay foreclosure avoidance
advances to the Manager and (ix) fifty percent of the remaining
operating profit to repay deferred management fees to the Manager and
fifty percent of remaining operating profit is paid to the
Partnership.
7
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. The property improvement fund contribution equals 5% of gross Hotel
sales for all Partnership Hotels and may be increased, at the option
of the Manager, to 6% of gross Hotel sales in 2001.
Working Capital Agreement
Associates and Associates II are required to provide the Manager with working
capital to meet the operating needs of the Hotels. The refinancing required
certain enhancements to the cash management system of the Manager as well as a
change in the timing of when the Manager remits net Hotel operating results to
the Partnership such that additional working capital may be required for the
operation of the Hotels. Therefore, on January 24, 1996, the Partnership,
Associates and the Manager entered into a working capital maintenance agreement
(the "Working Capital Agreement") and deposited $2.5 million as additional
working capital for the operation of the Hotels. Prior to December 31, 1996,
Associates and the Manager will determine the amount of working capital for the
operation of the Hotels. Prior to December 31, 1996, Associates and the Manager
will determine the amount of working capital that is required. Associates has
agreed to provide up to another $2.5 million, if necessary.
In addition, the Working Capital Agreement provides that the Partnership and
Associates, collectively, reserve $2 million by February 1, 1997 and additional
amounts such that the total balance is $5 million by February 1, 1998 (the
"Working Capital Reserve"). The Working Capital Reserve will be available for
payment of Hotel operating expenses in the event that there is a downgrade in
the long-term senior unsecured debt of MII to below a certain level, as
described in the Mortgage Loan.
The obligation to fund the amounts required by the Working Capital Agreement is
subordinate to debt service on the Senior Notes and the Mortgage Loan.
4. Exchange Offers
Senior Notes
On June 4, 1996, Courtyard by Marriott II Limited Partnership and its wholly
owned subsidiary, Courtyard II Finance Company, completed an exchange offer of
its unregistered 10 3/4% Series B Senior Secured Notes with an aggregate
principal amount of $127.4 million ("Old Notes") due 2008 for an equal amount of
registered notes ("New Notes"). The form and terms of the New Notes are
substantially identical to the form and terms of the Old Notes, except that the
New Notes have been registered under the Securities Act of 1933, as amended and
will not have any restrictions for transfer.
Multiclass Mortgage Pass-Through Certificates
On June 30, 1996, CBM Funding Corporation, a subsidiary of the Partnership,
completed an exchange offer of its Multiclass Mortgage Pass-Through
Certificates, Series 1996-1A with a principal balance of $406.2 million at that
time, ("Old Certificates") for an equal amount of Multiclass Mortgage Pass-
Through Certificates, Series 1996-1B ("New Certificates"). The form and terms
of the New Certificates are substantially identical to the form and terms of the
Old Certificates, except that the New Certificates are registered under the
Securities Act of 1933, as amended and their transfers are not restricted.
5. In the first quarter of 1996, the Partnership adopted Statement of
Financial Accounting Standards ("SFAS") No. 121 "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of." Adoption of SFAS No. 121 did not have an effect on its consolidated
financial statements.
8
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
CAPITAL RESOURCES AND LIQUIDITY
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 limited partners. During the
second quarter 1996, the Partnership utilized 1996 cash flow after debt service
to make an interim cash distribution totalling $3.3 million or $2,250 per
limited partner unit.
Cash provided by operations for the twenty-four weeks ended June 14, 1996, and
June 16, 1995, was $16.5 million and $12.2 million, respectively. The increase
in cash from operations is primarily the result of variations in the timing of
interest payments as a result of the debt offering on January 24, 1996. During
the first half of 1995, the Partnership paid $20.5 million in interest as
compared to $17.2 million during the first half of 1996.
Debt Refinancing
On January 24, 1996, the Partnership completed a refinancing of the
Partnership's existing debt through the private placements of $127.4 million of
senior secured notes ("Senior Notes") and $410.2 million of multi-class
commercial mortgage pass-through certificates (the "Certificates"). The $537.6
million of proceeds from the refinancing was used to (i) repay bank mortgage
indebtedness of $275 million related to 36 Hotels and $230.5 million related to
29 Hotels, (ii) repay $25.6 million of industrial revenue bond indebtedness
("IRB Debt"), (iii) repay $6.5 million owed to Host Marriott in connection with
advances related to the IRB Debt and (iv) pay certain costs of structuring and
issuing the Senior Notes and the Certificates.
The General Partner believes that cash from hotel operations combined with the
ability to defer certain management fees to the Manager and ground rent payments
to Marriott International, Inc. and affiliates will provide adequate funds in
the short term and long term for the operational and capital needs of the
Partnership.
RESULTS OF OPERATIONS
Revenues (hotel sales less direct hotel operating costs and expenses) increased
by $3 million and $4.1 million, respectively, for the twelve and twenty-four
weeks ended June 14, 1996. This represents a 10% and a 7.2% increase,
respectively, for the quarter and year-to-date when compared to the comparable
period in 1995. The increase in revenues was achieved primarily through an
increase in hotel sales offset by an increase in hotel operating costs and
expenses.
For the twelve and twenty-four weeks ended June 14, 1996, hotel sales increased
$4 million and $7.2 million, respectively. This represents a 6.9% increase for
the quarter and a 6.4% increase year-to-date as compared to the comparable
periods in 1995. The increase in sales was achieved primarily through an
increase in the combined average room rate. The combined average room rate
increased $4.93 to $77.27 for the quarter and $4.58 to $76.61 year-to-date as
compared to the comparable periods in 1995. The increase in average room rates
was due to the elimination of lower room rated business.
Combined average occupancy for the second quarter 1996 remained stable at 84%
while the combined average occupancy for the twenty-four weeks ended June 14,
1996 remained stable at 81%. For the twenty-four weeks ended on June 14, 1996,
40 of the Partnership's 70 Hotels posted occupancy rates exceeding 80%. REVPAR,
or revenue per available room, represents the combination of the combined
average daily room rate charged and the
9
<PAGE>
combined average occupancy achieved. REVPAR for the twelve and twenty-four
weeks ended June 14, 1996, was $64.91 and $62.05, respectively. REVPAR for the
second quarter 1996 increased 6.6% as compared to the second quarter 1995 while
year-to-date 1996 REVPAR increased 6.5% as compared to the comparable period in
1995.
Direct hotel operating costs and expenses increased from $56.6 million for the
twenty-four weeks ended June 16, 1995 to $59.7 million for the comparable period
in 1996. For the second quarter 1996, these expenses increased $1 million as
compared to second quarter 1995. As a percentage of total hotel sales, these
costs and expenses decreased slightly to 49.4% in the first half of 1996 as
compared to 49.8% for the comparable period in 1995.
Interest expense increased by 23.6% to $21.2 million for the twenty-four weeks
ended June 14, 1996, from $17.2 million for the comparable period in 1995. For
the second quarter 1996, interest expense increased $2 million as compared to
the second quarter 1995. The increase is due to the refinancing of the
Partnership's debt at fixed rates which are higher than the prior year's
variable interest rates. The weighted average interest rate for first half of
1996 was 8.4% as compared to 6.9% for the first half of 1995.
Ground rent, taxes and other increased 8% primarily due to an increase in
equipment rent during the twenty-four weeks ended June 14, 1996.
The increase in base and Courtyard management fees of 6.4%, from $6.8 million
for the first half of 1995 to $7.2 million for the same period in 1996 is due to
the improved combined hotel sales for the 70 Hotels.
During the twenty-four weeks ended June 14, 1996, $5.5 million of incentive
management fees were earned by the Manager as compared to $5.0 million earned
during the comparable period in 1995. The increase in incentive management fees
earned was the result of improved combined hotel operating results.
For the twenty-four weeks ended June 14, 1996, the Partnership had net income of
$4.3 million, a decrease of $1.7 million, from net income of $6.0 million for
the same period in 1995. This decrease was primarily due to higher interest
expense offset by higher revenues.
10
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Certain Limited Partners of the Partnership have filed a lawsuit in Texas state
court against the General Partner, the Manager and certain of their respective
affiliates, officers and directors. These partners have alleged that the
General Partner and the Manager have improperly operated the business affairs of
the Partnership and its hotels. The General Partner believes that all of these
claims are without foundation and that the litigation will be vigorously
contested.
The Partnership and the Partnership Hotels 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 conditions or results of operations of the Partnership.
ITEM 5. OTHER INFORMATION
On June 4, 1996, Courtyard by Marriott II Limited Partnership and its wholly
owned subsidiary, Courtyard II Finance Company, completed an exchange offer of
its unregistered 10 3/4% Series B Senior Secured Notes with an aggregate
principal amount of $127,400,000 ("Old Notes") due 2008 for an equal amount of
registered notes ("New Notes"). The form and terms of the New Notes are
substantially identical to the form and terms of the Old Notes, except that the
New Notes have been registered under the Securities Act of 1933, as amended and
will not have any restrictions for transfer.
On June 30, 1996, CBM Funding Corporation, a subsidiary of the Partnership,
completed an exchange offer of its Multiclass Mortgage Pass-Through
Certificates, Series 1996-1A with a principal balance of $406.2 million at that
time, ("Old Certificates") for an equal amount of Multiclass Mortgage Pass-
Through Certificates, Series 1996-1B ("New Certificates"). The form and terms
of the New Certificates are substantially identical to the form and terms of the
Old Certificates, except that the New Certificates are registered under the
Securities Act of 1933, as amended and their transfers are not restricted.
11
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this Form 10-Q to be signed on its behalf by the
undersigned, thereunto duly authorized.
COURTYARD BY MARRIOTT II
LIMITED PARTNERSHIP
By: CBM TWO CORPORATION
General Partner
July 26, 1996 By: /s/ Bruce F. Stemerman
--------------------------------
Bruce F. Stemerman
Vice President, Finance
and Chief Accounting Officer
12
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE SECOND
QUARTER 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-14-1996
<CASH> 24,091
<SECURITIES> 52,014<F1>
<RECEIVABLES> 11,097
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 87,202
<PP&E> 678,957
<DEPRECIATION> (212,580)
<TOTAL-ASSETS> 553,579
<CURRENT-LIABILITIES> 9,729
<BONDS> 578,312
0
0
<COMMON> 0
<OTHER-SE> (34,462)<F2>
<TOTAL-LIABILITY-AND-EQUITY> 553,579
<SALES> 0
<TOTAL-REVENUES> 61,039
<CGS> 0
<TOTAL-COSTS> 35,455
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 21,238
<INCOME-PRETAX> 4,346
<INCOME-TAX> 0
<INCOME-CONTINUING> 4,346
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,346
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
<FN>
<F1>THIS REPRESENTS OTHER ASSETS.
<F2>THIS REPRESENTS PARTNERS DEFICIT.
</FN>
</TABLE>
