Securities and Exchange Commission
Washington, D.C. 20549
Form 10-Q
8 Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the Quarter ended September 12, 1997
OR
0 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 of other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
10400 Fernwood Road
Bethesda, Maryland
20817
- ------------------------------------------------------------------------------
(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 __
================================================================================
<PAGE>
Courtyard By Marriott II Limited Partnership
===============================================================================
TABLE OF CONTENTS
PAGE NO.
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Statement of Operations
Twelve and Thirty-Six Weeks Ended September 12, 1997 and September 6, 1996..1
Condensed Consolidated Balance Sheet
September 12, 1997 and December 31, 1996.....................................2
Condensed Consolidated Statement of Cash Flows
Thirty-Six Weeks ended September 12, 1997 and September 6, 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>
10
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 Thirty-Six Weeks Ended
September 12, September 6, September 12, September 6,
1997 1996 1997 1996
-------------- ------------ -------------- ---------
<S> <C> <C> <C> <C>
REVENUES
Hotel revenues........................................$ 33,456 $ 31,855 $ 101,428 $ 92,894
Interest income and other............................. 833 708 1,989 1,756
------------- ------------ -------------- -------------
34,289 32,563 103,417 94,650
------- ---------- -------------- ---------
OPERATING COSTS AND EXPENSES
Interest.............................................. 10,511 10,832 32,259 32,070
Depreciation ......................................... 6,307 6,397 18,901 19,191
Ground rent, taxes and other.......................... 5,938 5,848 17,464 16,771
Base and Courtyard management fees.................... 3,937 3,758 11,721 11,002
Incentive management fee.............................. 3,062 2,883 9,447 8,425
------------- ------------ -------------- -------------
29,755 29,718 89,792 87,459
------- ---------- ---------- ---------
NET INCOME...............................................$ 4,534 $ 2,845 $ 13,625 $ 7,191
============= ============ ============== =============
ALLOCATION OF NET INCOME
General Partner.......................................$ 227 $ 142 $ 681 $ 359
Limited Partners...................................... 4,307 2,703 12,944 6,832
------------- ------------ -------------- -------------
$ 4,534 $ 2,845 $ 13,625 $ 7,191
============== ============ ============== =============
NET INCOME PER LIMITED PARTNER
UNIT (1,470 Units)....................................$ 2,930 $ 1,839 $ 8,805 $ 4,647
============= ============ ============== =============
See Notes to Condensed Consolidated Financial Statements
</TABLE>
<PAGE>
COURTYARD BY MARRIOTT II LIMITED PARTNERSHIP
CONDENSED CONSOLIDATED BALANCE SHEET
(In thousands)
<TABLE>
September 12, December 31,
1997 1996
(Unaudited)
<S> <C> <C>
ASSETS
Property and equipment, net...........................................................$ 458,154 $ 458,687
Due from Courtyard Management Corporation............................................. 10,308 13,315
Other assets.......................................................................... 45,394 54,052
Restricted cash....................................................................... 14,168 6,848
Cash and cash equivalents............................................................. 11,893 14,197
-------------- ----------------
$ 539,917 $ 547,099
============== ================
LIABILITIES AND PARTNERS' CAPITAL (DEFICIT)
LIABILITIES
Debt..................................................................................$ 517,499 $ 526,253
Management fees due to Courtyard Management Corporation. ............................. 33,782 36,442
Due to Marriott International, Inc. and affiliates.................................... 9,140 9,169
Accounts payable and accrued liabilities.............................................. 9,351 7,176
-------------- ----------------
Total Liabilities.................................................................. 569,772 579,040
-------------- ----------------
PARTNERS' CAPITAL (DEFICIT)
General Partner....................................................................... 6,468 5,787
Limited Partners...................................................................... (36,323) (37,728)
-------------- ----------------
Total Partners' Deficit............................................................ (29,855) (31,941)
-------------- ----------------
$ 539,917 $ 547,099
============== ================
See Notes to Condensed Consolidated Financial Statements
</TABLE>
<PAGE>
COURTYARD BY MARRIOTT II LIMITED PARTNERSHIP
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
<TABLE>
Thirty-Six Weeks Ended
September 12, September 6,
1997 1996
(in thousands)
<S> <C> <C>
OPERATING ACTIVITIES
Net income ........................................................................$ 13,625 $ 7,191
Noncash items...................................................................... 17,329 20,425
Changes in operating accounts...................................................... (15) (6,095)
--------------- --------------
Cash provided by operating activities........................................... 30,939 21,521
--------------- --------------
INVESTING ACTIVITIES
Additions to property and equipment................................................ (18,368) (6,984)
Change in property improvement funds............................................... 7,542 (1,751)
--------------- --------------
Cash used in investing activities............................................... (10,826) (8,735)
--------------- --------------
FINANCING ACTIVITIES
Capital distributions.............................................................. (11,539) (3,308)
Repayments of debt ................................................................ (8,754) (538,192)
Change in reserve accounts......................................................... (2,124) (164)
Proceeds from debt ................................................................ -- 537,600
Payment of financing costs......................................................... -- (15,466)
Repayment of advances from Host Marriott Corporation............................... -- (6,489)
--------------- --------------
Cash used in financing activities............................................... (22,417) (26,019)
--------------- --------------
DECREASE IN CASH AND CASH EQUIVALENTS................................................... (2,304) (13,233)
CASH AND CASH EQUIVALENTS at beginning of period........................................ 14,197 27,708
--------------- --------------
CASH AND CASH EQUIVALENTS at end of period..............................................$ 11,893 $ 14,475
=============== ==============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for mortgage and other interest..........................................$ 34,158 $ 32,203
=============== ==============
See Notes to Condensed Consolidated Financial Statements
</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 September 12, 1997, and the
results of operations for the twelve and thirty-six weeks ended September
12, 1997 and September 6, 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
thirty-six weeks ended (in thousands):
<TABLE>
Twelve Weeks Ended Thirty-Six Weeks Ended
September 12, September 6, September 12, September 6,
1997 1996 1997 1996
-------------- ------------- -------------- ---------
<S> <C> <C> <C> <C>
HOTEL SALES
Rooms..............................$ 59,503 $ 56,164 $ 176,228 $ 163,859
Food and beverage.................. 3,966 4,084 12,325 12,613
Other.............................. 2,147 2,391 6,789 6,893
-------------- ------------- -------------- -------------
65,616 62,639 195,342 183,365
-------------- --------- --------------- -----------
HOTEL EXPENSES
Departmental direct costs
Rooms.......................... 12,777 11,778 36,786 34,782
Food and beverage.............. 3,572 3,755 10,597 11,082
Other.............................. 15,811 15,251 46,531 44,607
-------------- ------------- -------------- -------------
32,160 30,784 93,914 90,471
-------------- ------------- -------------- -------------
REVENUES...............................$ 33,456 $ 31,855 $ 101,428 $ 92,894
============== ============= ============== =============
</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 has transferred
$7.3 million into the reserve account from the Manager's existing tax
and insurance reserve account as of September 12, 1997. Out of this
balance, approximately $2.0 million of real estate taxes have been
paid. 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 condensed consolidated balance
sheet.
<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 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 thirty-six weeks ended September 12, 1997, and September 6, 1996, was
$30.9 million and $21.5 million, respectively. The increase is primarily due to
improved operations.
Cash used in investing activities was $10.8 million and $8.7 million for the
first three quarters of 1997 and 1996, respectively. Cash used in investing
activities for 1997 includes capital expenditures of $18.4 million primarily
related to room renovations and replacements at the Partnership's hotels.
Cash used in financing activities was $22.4 million and $26.0 million for the
thirty-six weeks ended September 12, 1997, and September 6, 1996, respectively.
Cash used in financing activities in the first three quarters of 1997 includes
$11.5 million of cash distributions to limited partners, $8.8 million of
principal repayments on the debt, and $2.1 million transferred to reserve
accounts.
During the three quarters of 1997, the Partnership paid $34.2 million of
interest and $8.8 million of principal on the commercial mortgage backed
securities as compared to $32.2 million of interest and $7.1 million of
principal on the commercial mortgage backed securities during the same period in
1996.
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. In August of 1997, the Partnership made a cash
distribution of $7.5 million or $5,100 per limited partner unit from cash flow
after debt service from the first half of 1997.
Pursuant to the terms of the Certificate/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
has transferred $7.3 million into the reserve account as of September 12, 1997.
Out of this balance, approximately $2.0 million of real estate taxes have been
paid. 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 condensed consolidated balance sheet.
The General Partner believes that cash from hotel operations and the property
improvement fund 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 $1.6 million and $8.5 million, respectively, for the twelve and thirty-six
weeks ended September 12, 1997. This represents a 5.0% and 9.2% 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 thirty-six weeks ended September 12, 1997, hotel sales
increased $3.0 million and $12.0 million, respectively. This represents a 4.8%
increase for the quarter and a 6.5% 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 $5.20 to $82.57 for the quarter and $5.57 to $82.44 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 third quarter 1997 decreased slightly by 0.6
percentage points to 83.0% while the combined average occupancy for the
thirty-six weeks ended September 12, 1997 increased slightly by 0.3 percentage
points to 82.1%. The decrease in occupancy during the quarter is mainly due to
increased competition and aggressive rate increases in some markets. For the
thirty-six weeks ended on September 12, 1997, 50 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 thirty-six
weeks ended September 12, 1997, was $68.53 and $67.68, respectively. REVPAR for
the third quarter 1997 increased 6% as compared to the third quarter 1996 while
year-to-date 1997 REVPAR increased 7.6% as compared to the comparable period in
1996.
Direct hotel operating costs and expenses increased from $90.5 million for the
thirty-six weeks ended September 6, 1996 to $93.9 million for the comparable
period in 1997. For the third quarter 1997, these expenses increased $1.4
million as compared to third quarter 1996. However, as a percentage of total
hotel sales, these costs and expenses decreased to 48.1% in the first three
quarters of 1997 as compared to 49.3% 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 8.0% and 12.9%, respectively, for the
thirty-six weeks ended on September 12, 1997, as compared to the same period in
1996.
Interest Expense. Interest expense increased slightly by 0.6% to $32.3 million
for the thirty-six weeks ended September 12, 1997 from $32.1 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
third quarter 1997, interest expense decreased $0.3 million as compared to the
third quarter 1996. The decrease in interest expense for the quarter is due to
amortization of the Mortgage Loan. The weighted average interest rate for the
thirty-six weeks ended September 12, 1997 was 8.5% as compared to 8.4% for the
comparable period in 1996.
Base and Courtyard Management Fees. The increase in base and Courtyard
management fees of 6.5%, from $11.0 million for the thirty-six weeks ended
September 6, 1996 to $11.7 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 4.1%
during the thirty-six weeks ended September 12, 1997. However, as a percentage
of total hotel sales, ground rent remained stable at 4.5% while property tax
expense decreased slightly from 3.8% to 3.6%.
During the thirty-six weeks ended September 12, 1997, $9.4 million of incentive
management fees were earned and paid as compared to $8.4 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 thirty-six weeks ended September 12, 1997, the Partnership had net
income of $13.6 million, an increase of $6.4 million, from net income of $7.2
million for the comparable period in 1996. This increase was primarily due to
higher revenues as discussed above, offset by increases in management fees.
<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.
<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
October 23, 1997 By: /s/ Earla L. Stowe
------------------
Earla L. Stowe
Vice President and Chief
Accounting Officer
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
THIRD 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> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-12-1997
<EXCHANGE-RATE> 1,000
<CASH> 26,061
<SECURITIES> 45,394 <F1>
<RECEIVABLES> 10,308
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 81,763
<PP&E> 703,903
<DEPRECIATION> (245,749)
<TOTAL-ASSETS> 539,917
<CURRENT-LIABILITIES> 9,351
<BONDS> 560,421
0
0
<COMMON> 0
<OTHER-SE> (29,855) <F2>
<TOTAL-LIABILITY-AND-EQUITY> 539,917
<SALES> 0
<TOTAL-REVENUES> 103,417
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<FN>
<F1> THIS REPRESENTS OTHER ASSETS.
<F2> THIS REPRESENTS PARTNERS DEFICIT.
</FN>
</TABLE>
