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Securities and Exchange Commission
Washington, D.C. 20549
Form 10-Q
o Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the Quarter ended June 20, 1997
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
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(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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<PAGE>
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Courtyard By Marriott II Limited Partnership
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TABLE OF CONTENTS
PAGE NO.
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Statement of Operations
Twelve and Twenty-Four Weeks Ended June 20, 1997 and June 14, 1996...... 1
Condensed Consolidated Balance Sheet
June 20, 1997 and December 31, 1996...................................... 2
Condensed Consolidated Statement of Cash Flows
Twelve and Twenty-Four Weeks ended June 20, 1997 and June 14, 1996....... 3
Notes to Condensed Consolidated Financial Statements............ 4
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.......................... 6
PART II - OTHER INFORMATION
Item 1. Legal Proceedings................................................. 9
<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>
Twelve Weeks Ended Twenty-Four Weeks Ended
June 20, June 14, June 20, June 14,
1997 1996 1997 1996
------------- ------------ ------------ --------
<S> <C> <C> <C> <C>
REVENUES
Hotel revenues................................$ 35,295 $ 33,050 $ 67,972 $ 61,039
Interest income and other..................... 678 457 1,156 1,048
------------- ------------ ------------ ------------
......................................... 35,973 33,507 69,128 62,087
------------- ------------ ------------ ------------
OPERATING COSTS AND EXPENSES
Interest................... ................... 10,349 10,863 21,748 21,238
Depreciation .................................. 6,297 6,397 12,594 12,794
Ground rent, taxes and other................... 5,591 5,510 11,526 10,923
Base and Courtyard
management fees............................... 3,992 3,770 7,784 7,244
Incentive management fee....................... 3,382 3,107 6,385 5,542
------------- ------------ ------------ ------------
.......................................... 29,611 29,647 60,037 57,741
- --------------------------------------------------------------- ------------ ------------ ------------
NET INCOME........................................$ 6,362 $ 3,860 $ 9,091 $ 4,346
============= ============ ============ ============
ALLOCATION OF NET INCOME
General Partner......... ......................$ 318 $ 193 $ 454 $ 217
Limited Partners............................... 6,044 3,667 8,637 4,129
------------- ------------ ------------ ------------
..........................................$ 6,362 $ 3,860 $ 9,091 $ 4,346
- --------------------------------------------------============= ============ ============ ============
NET INCOME PER LIMITED
PARTNER UNIT (1,470 Units)........................$ 4,112 $ 2,494 $ 5,876 $ 2,808
============= ============ ============ ============
See Notes to Condensed Consolidated Financial Statements.
1
</TABLE>
<PAGE>
COURTYARD BY MARRIOTT II LIMITED PARTNERSHIP
CONDENSED CONSOLIDATED BALANCE SHEET
(In thousands)
<TABLE>
June 20, December 31,
1997 1996
(Unaudited)
<S> <C> <C>
ASSETS
Property and equipment, net.......................$ 458,355 $ 458,687
Due from Courtyard Management Corporation.... .... 10,910 13,315
Other assets...................................... 48,062 54,052
Restricted cash................................... 13,664 6,848
Cash and cash equivalents......................... 19,750 14,197
-------------- ----------------
...............................................$ 550,741 $ 547,099
============== ================
LIABILITIES AND PARTNERS' CAPITAL (DEFICIT)
LIABILITIES
Debt............................................ $ 520,833 $ 526,253
Management fees due to Courtyard
Management Corporation. ........................ 34,402 36,442
Due to Marriott International, Inc.
and affiliates................................. 9,114 9,169
Accounts payable and accrued liabilities.......... 13,284 7,176
-------------- ----------------
Total Liabilities.............................. 577,633 579,040
-------------- ----------------
PARTNERS' CAPITAL (DEFICIT)
General Partner................................... 6,241 5,787
Limited Partners.................................. (33,133) (37,728)
-------------- ----------------
Total Partners' Deficit........................ (26,892) (31,941)
-------------- ----------------
................................................$ 550,741 $ 547,099
============== ================
See Notes to Condensed Consolidated Financial Statements.
2
</TABLE>
<PAGE>
COURTYARD BY MARRIOTT II LIMITED PARTNERSHIP
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
<TABLE>
Twenty-Four Weeks Ended
June 20, June 14,
1997 1996
(in thousands)
<S> <C> <C>
OPERATING ACTIVITIES
Net income ....................................$ 9,091 $ 4,346
Noncash items.................................. 11,280 13,663
Changes in operating accounts.................. 8,480 (1,473)
-------------- ---------------
Cash provided by operating activities..... 28,851 16,536
-------------- ---------------
INVESTING ACTIVITIES
Additions to property and equipment........... (12,262) (4,691)
Change in property improvement funds........... 5,242 (490)
-------------- ---------------
Cash used in investing activities........... (7,020) (5,181)
-------------- ---------------
FINANCING ACTIVITIES
Change in reserve accounts..................... (6,816) (282)
Repayments of debt ............................ (5,420) (535,136)
Capital distributions........................... (4,042) (3,308)
Proceeds from debt ............................. -- 537,600
Payment of financing costs.......................... -- (14,323)
Repayment of advances from Host Marriott Corporation -- (6,489)
--------- ---------------
Cash used in financing activities... ........ (16,278) (21,938)
-------------- ---------------
INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS..... 5,553 (10,583)
CASH AND CASH EQUIVALENTS at beginning of period..... 14,197 27,708
-------------- ---------------
CASH AND CASH EQUIVALENTS at end of period.......... $ 19,750 $ 17,125
============== ===============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid for mortgage and other interest..... $ 19,673 $ 17,200
============== ===============
See Notes to Condensed Consolidated Financial Statements.
3
</TABLE>
<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, 1996.
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 20, 1997 and December 31,
1996, and the results of operations for the twelve and twenty-four weeks
ended June 20, 1997 and June 14, 1996. 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.
Certain reclassifications were made to the prior year financial statements
to conform to the 1997 presentation.
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>
Twelve Weeks Ended Twenty-Four Weeks Ended
June 20, June 14, June 20, June 14,
1997 1996 1997 1996
------------ ------------- ------------- --------
<S> <C> <C> <C> <C>
HOTEL SALES
Rooms........................... $ 59,969 $ 56,119 $ 116,725 $ 107,695
Food and beverage................ 4,248 4,380 8,359 8,529
Other............................ 2,305 2,328 4,642 4,502
----------- ------------- ------------- ------------
.............................. 66,522 62,827 129,726 120,726
- ------------------------------------------------------ ------------- ------------
HOTEL EXPENSES
Departmental direct costs
Rooms......................... 12,369 11,624 24,009 23,004
Food and beverage.............. 3,591 3,765 7,025 7,327
Other.............................. 15,267 14,388 30,720 29,356
---------- ------------- ------------- ------------
............................... 31,227 29,777 61,754 59,687
- ------------------------------------------------------ ------------- ------------
REVENUES............................... 35,295 $ 33,050 $ 67,972 $ 61,039
========== ============= ============= ============
4
</TABLE>
<PAGE>
3. Pursuant to the terms of the Certificates/Mortgage Loan, the Partnership is
required to establish with the lender a separate escrow account for
payments of insurance premiums and real estate taxes for each mortgaged
property if the credit rating of Marriott International, Inc. is downgraded
by Standard and Poor's Rating Services. The Manager, Courtyard Management
Corporation, is a wholly-owned subsidiary of Marriott International, Inc.
On April 1, 1997, Marriott International, Inc.'s credit rating was
downgraded and the Partnership subsequently transferred $4.2 million into
the escrow reserve from the Manager's existing tax and insurance reserve
account. During the second quarter of 1997, an additional $600,000 was
transferred into the reserve account resulting in an ending escrow balance
of $4.8 million. The escrow reserve is included in restricted cash and
the resulting tax and insurance liability is included in accounts payable
and accrued liabilities in the accompanying balance sheet.
5
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS
Certain matters discussed herein are forward-looking statements within the
meaning of the Private Litigation Reform Act of 1995 and as such may involve
known and unknown risks, uncertainties, and other factors which may cause the
actual results, performance or achievements of the Partnership to be different
from any future results, performance or achievements expressed or implied by
such forward-looking statements. 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. These risks are detailed from time to time in the Partnership's
filings with the Securities and Exchange Commission. 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.
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. Cash provided by
operations for the twenty-four weeks ended June 20, 1997, and June 14, 1996, was
$28.9 million and $16.5 million, respectively. The increase is due to improved
operations and an increase in accrued expenses. Pursuant to the terms of the
Certificates/Mortgage Loan, the Partnership is required to establish with the
lender a seperate escrow account for payments of insurance premiums and real
estate taxes for each mortgaged property if the credit rating of Marriott
International, Inc. is downgraded by Standard and Poor's Rating Services. The
Manager, Courtyard Management Corporation, is a wholly-owned subsidiary of
Marriott International, Inc. On April 1, 1997, Marriott International, Inc.'s
credit rating was downgraded and the Partnership subsequently transferred $4.2
million into the escrow reserve from the Manager's existing tax and insurance
reserve account. During the second quarter of 1997, an additional $600,000 was
transferred into the reserve account resulting in an ending escrow balance of
$4.2 million. The escrow reserve is included in restricted cash and the
resulting tax and insurance liability is included in accounts payable and
accrued liabilities in the accompanying balance sheet.
Cash used in investing activities was $7.0 million for the first two quarters of
1997 and $5.2 million for the first two quarters of 1996. Cash used in investing
activities for 1997 includes capital expenditures of $12.3 million, primarily
related to renovations and replacements at the Partnership's hotels.
Cash used in financing activities was $16.3 million for the first two quarters
of 1997, while cash from financing activities was $21.9 million for the first
two quarters of 1996. Cash used in financing activities for the first half of
1997 includes $5.4 million of principal repayments on the debt, $4.0 million of
cash distributions to limited partners and $6.8 million transferred to reserve
accounts.
The Partnership reserved an additional $6.8 million during the first two
quarters of 1997. During the first quarter of 1997, $2 million was transferred
to a Working Capital Reserve and during the second quarter of 1997, $4.8 million
was deposited into the real estate tax and insurance premium escrow reserve.
During the twenty-four weeks ended June 20, 1997, the Partnership paid $19.7
million of interest and $5.4 million of principal on the commercial mortgage
backed securities as compared to $17.2 million of interest and $4 million of
principal on the commercial mortgage backed securities during the same period in
1996.
6
<PAGE>
In April of 1997, the Partnership utilized 1996 cash flow after debt service to
make a final cash distribution totaling $4 million or $2,750 per limited partner
unit, bringing the total distribution from 1996 operations to $11 million or
$7,500 per limited partner unit.
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 to meet the operational and capital needs of the
Partnership.
RESULTS OF OPERATIONS
Revenues (hotel sales less direct hotel operating costs and expenses) increased
by $2.2 million and $6.9 million, respectively, for the twelve and twenty-four
weeks ended June 20, 1997. This represents a 6.8% and an 11.4% increase,
respectively, for the quarter and year-to-date when compared to the comparable
periods in 1996. The increase in revenue 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 20, 1997, hotel sales increased
$3.7 million and $9.0 million, respectively. This represents a 5.9% increase for
the quarter and a 7.5% increase year-to-date as compared to the comparable
periods in 1996. The increase in sales was achieved primarily through an
increase in the combined average room rate. The combined average room rate
increased $5.57 to $82.84 for the quarter and $5.77 to $82.38 year-to-date as
compared to the comparable periods in 1996. The increase in average room rate is
primarily due to aggressive weekday pricing.
Combined average occupancy for the second quarter 1997 decreased slightly by 0.2
percentage points to 83.4% while the combined average occupancy for the
twenty-four weeks ended June 20, 1997 increased slightly by 0.6 percentage
points to 81.6%. The slight decrease in occupancy during the quarter is mainly
due to increased competition and aggressive rate increases in some markets. For
the twenty-four weeks ended on June 20, 1997, 47 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 combined average occupancy achieved. REVPAR for the twelve and twenty-four
weeks ended June 20, 1997, was $69.09 and $67.22, respectively. REVPAR for the
second quarter 1997 increased 7% as compared to the second quarter 1996 while
year-to-date 1997 REVPAR increased 8.3% as compared to the comparable period in
1996.
Direct hotel operating costs and expenses increased from $59.7 million for the
twenty-four weeks ended June 14, 1996 to $61.8 million for the comparable period
in 1997. For the second quarter 1997, these expenses increased $1.4 million as
compared to the second quarter 1996. However, as a percentage of total hotel
sales, these costs and expenses decreased to 47.6% in the first half of 1997 as
compared to 49.4% for the comparable period in 1996. This resulted in higher
room and food and beverage profit margins. Room profit and food and beverage
profit increased by 9.5% and 11%, respectively, for the twenty-four weeks ended
on June 20, 1997, as compared to the same period in 1996.
Interest Expense. Interest expense increased slightly by 2.4% to $21.7 million
for the twenty-four weeks ended June 20, 1997 from $21.2 million for the
comparable period in 1996. The increase in the year-to-date interest is due to
the refinancing of the mortgage debt at fixed rates which are higher than the
variable interest rates which were in effect through January 24, 1996. For the
second quarter 1997, interest expense decreased $0.5 million as compared to the
second quarter 1996. The decrease in interest expense for the quarter is due to
principal amortization of the Mortgage Loan. The weighted average interest rate
for the first half of 1997 was 8.6% as compared to 8.4% for the first half of
1996.
7
<PAGE>
Base and Courtyard Management Fees. The increase in base and Courtyard
management fees of 7.5%, from $7.2 million for the twenty-four weeks ended June
14, 1996 to $7.8 million for the comparable period in 1997 is due to the
improved combined hotel sales for the 70 Hotels.
Ground Rent, Taxes and Other. Ground rent, taxes and other increased by 5.5%
primarily due to increases in ground rent and property tax expenses during the
first half 1997. However, as a percentage of total hotel sales, ground rent
remained stable at 4.5% while property tax expense decreased slightly from 3.6%
to 3.5%.
During the twenty-four weeks ended June 20, 1997, $6.4 million of incentive
management fees were earned as compared to $5.5 million earned in the comparable
period in 1996. The increase in incentive management fees earned was the result
of improved combined hotel operating results.
For the twenty-four weeks ended June 20, 1997, the Partnership had net income of
$9.1 million, an increase of $4.8 million, from net income of $4.3 million for
the comparable period in 1996. This increase was primarily due to higher
revenues as discussed above, offset by increases in interest expense and
management fees.
8
<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 intends to vigorously defend against them.
The Partnership and the 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.
9
<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
August 4, 1997 By: /s/ Earla L. Stowe
Earla L. Stowe
Vice President and
Chief Accounting Officer
10
<PAGE>
<TABLE> <S> <C>
<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>
<CIK> 0000832179
<NAME> COURTYARD BY MARRIOTT II LIMITED PARTNERSHIP
<MULTIPLIER> 1,000
<CURRENCY> US DOLLAR
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-20-1997
<EXCHANGE-RATE> 1,000
<CASH> 33,414
<SECURITIES> 48,062 <F1>
<RECEIVABLES> 10,910
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 92,386
<PP&E> 697,797
<DEPRECIATION> (239,442)
<TOTAL-ASSETS> 550,741
<CURRENT-LIABILITIES> 13,284
<BONDS> 564,349
0
0
<COMMON> 0
<OTHER-SE> (26,892) <F2>
<TOTAL-LIABILITY-AND-EQUITY> 550,741
<SALES> 0
<TOTAL-REVENUES> 69,128
<CGS> 0
<TOTAL-COSTS> 38,289
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<INTEREST-EXPENSE> 21,748
<INCOME-PRETAX> 9,091
<INCOME-TAX> 0
<INCOME-CONTINUING> 9,091
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 9,091
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
<FN>
<F1> THIS REPRESENTS OTHER ASSETS.
<F2> THIS REPRESENTS PARTNERS DEFICIT.
</FN>
</TABLE>
