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 March 27, 1998
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
- -------------------------------------------------------------------------------
(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 U 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 Weeks Ended March 27, 1998 and March 28, 1997..........2
Condensed Consolidated Balance Sheet
March 27, 1998 and December 31, 1997........................2
Condensed Consolidated Statement of Cash Flows
Twelve Weeks ended March 27, 1998 and March 28, 1997........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..............................................8
Item 6. Exhibits and Reports on Form 8-K...............................9
<PAGE>
11
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)
Twelve Weeks Ended
March 27, March 28,
1998 1997
REVENUES
Hotel revenues (Note 2).................. $ 34,626 $ 32,677
OPERATING COSTS AND EXPENSES
Depreciation............................ 6,266 6,297
Ground rent, taxes and other. ............. 6,000 5,933
Base and Courtyard management fees......... 3,986 3,792
Incentive management fee................... 3,212 3,003
19,464 19,025
OPERATING PROFIT.............................. 15,162 13,652
Interest expense........................... (11,089) (11,399)
Interest income............................ 672 476
NET INCOME....................................$ 4,745 $ 2,729
ALLOCATION OF NET INCOME
General Partner........................... $ 237 $ 136
Limited Partners........................... 4,508 2,593
$ 4,745 $ 2,729
NET INCOME PER LIMITED PARTNER UNIT (1,470 Units)$ 3,067 $ 1,764
See Notes to Condensed Consolidated Financial Statements.
<PAGE>
COURTYARD BY MARRIOTT II LIMITED PARTNERSHIP
CONDENSED CONSOLIDATED BALANCE SHEET
(In thousands)
March 27, December 31,
1998 1997
(Unaudited)
ASSETS
Property and equipment, net........... $ 456,625 $ 455,435
Due from Courtyard Management
Corporation............................ 13,931 11,318
Other assets............................. 38,493 43,060
Restricted cash......................... 16,145 13,212
Cash and cash equivalents................ 8,244 13,690
$ 533,438 $ 536,715
LIABILITIES AND PARTNERS' CAPITAL (DEFICIT)
LIABILITIES
Debt......................................$ 509,472 $ 512,955
Management fees due to Courtyard
Management Corporation. ............... 33,965 34,829
Due to Marriott International, Inc. and
affiliates............................ 9,023 9,050
Accounts payable and accrued liabilities.. 6,930 10,578
Total Liabilities....................... 559,390 567,412
PARTNERS' CAPITAL (DEFICIT)
General Partner............................ 6,809 6,572
Limited Partners............................ (32,761) (37,269)
Total Partners' Deficit.................. (25,952) (30,697)
$ 533,438 $ 536,715
See Notes to Condensed Consolidated Financial Statements.
<PAGE>
COURTYARD BY MARRIOTT II LIMITED PARTNERSHIP
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
(in thousands)
Twelve Weeks Ended
March 27, March 28,
1998 1997
OPERATING ACTIVITIES
Net income .............................. $ 4,745 $ 2,729
Noncash items............................. 6,629 6,147
Changes in operating accounts............. (7,119) (3,670)
Cash provided by operating activities.. 4,255 5,206
INVESTING ACTIVITIES
Additions to property and equipment........ (7,456) (6,345)
Change in property improvement funds....... 4,228 3,122
Cash used in investing activities....... (3,228) (3,223)
FINANCING ACTIVITIES
Repayments of debt ......................... (3,483) (3,225)
Change in reserve accounts.................. (2,990) (2,011)
Cash used in financing activities........ (6,473) (5,236)
DECREASE IN CASH AND CASH EQUIVALENTS......... (5,446) (3,253)
CASH AND CASH EQUIVALENTS at beginning of period 13,690 14,197
CASH AND CASH EQUIVALENTS at end of period.....$ 8,244 $ 10,944
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for mortgage and other interest....$ 14,303 $ 14,574
See Notes to Condensed Consolidated Financial Statements.
<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, 1997.
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 March 27, 1998 and December 31,
1997, and the results of operations and cash flows for the twelve weeks
ended March 27, 1998 and March 28, 1997. 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. Certain reclassifications were made to the prior year financial statements
to conform to the 1998 presentation.
3. 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 weeks ended
(in thousands):
March 27, March 28,
1998 1997
HOTEL SALES
Rooms................................$ 60,280 $ 56,756
Food and beverage.................... 4,029 4,111
Other................................ 2,123 2,337
66,432 63,204
HOTEL EXPENSES
Departmental direct costs
Rooms............ ................. 12,658 11,640
Food and beverage.................. 3,459 3,434
Other................................. 15,689 15,453
31,806 30,527
HOTEL REVENUES...........................$ 34,626 $ 32,677
4. In December 1997, Host Marriott Corporation on behalf of the General
Partner, CBM Two Corporation, filed a preliminary Prospectus/Consent
Solicitation Statement (the "S-4") with the Securities and Exchange
Commission which proposed the consolidation (the "Consolidation") of this
Partnership and five other limited partnerships into a publicly traded real
estate investment trust ("REIT"). The General Partner has been working to
resolve various open issues concerning the proposed Consolidation.
In addition, there are existing REIT's which are active in the moderate
price and extended stay hotel segment that have expressed an interest in
the six limited partnerships. Therefore, the General Partner has had
preliminary discussions with some of these companies. Although no
agreements have yet been reached, the General Partner continues to pursue
the possibility of a potential transaction involving the Partnership's
assets or a merger of the Partnership with an existing publicly traded
company.
The General Partner has retained Merrill Lynch to advise the Partnership
with respect to the Partnership's strategic alternatives, including the
original Consolidation plan and other available alternatives. The General
Partner intends to continue to explore these alternatives and determine
which path to pursue, obviously subject to appropriate partner approval.
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 that 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.
RESULTS OF OPERATIONS
Revenues. Revenues (hotel sales less direct hotel operating costs and expenses)
increased by $1.9 million to $34.6 million for the twelve weeks ended March 27,
1998, a 6.0% increase when compared to the same period in 1997. The increase in
revenues was achieved primarily through an increase in hotel sales offset by an
increase in direct hotel operating costs and expenses.
The first quarter 1998 hotel sales increased $3.2 million to $66.4 million, a
5.1% increase over the first quarter of 1997. The increase in sales was achieved
primarily through an increase of $6.63 in the combined average room rate from
$81.89 for the first quarter 1997 to $88.52 for the first quarter 1998. The
increase in average room rate is primarily due to aggressive weekday pricing
combined with a strong advertising campaign which focused on leisure travelers.
Combined average occupancy for the first quarter 1998 decreased slightly by 1.4
percentage points to 78.4%. The decrease in occupancy during the quarter is
mainly due to increased competition and aggressive rate increases in some
markets. For the twelve weeks ended on March 27, 1998, 28 of the Partnership's
70 Hotels posted occupancy rates exceeding 80%. REVPAR, or revenue per available
room, represents the combination of the average daily room rate charged and the
average daily occupancy achieved and is a commonly used indicator of hotel
performance (although it is not a GAAP, or generally accepted accounting
principles, measure of revenue). REVPAR for the twelve weeks ended March 27,
1998 increased $4.05 to $69.40 representing a 6.2% increase when compared to the
first quarter 1997.
Direct hotel operating costs and expenses increased to $31.8 million for the
twelve weeks ended March 27, 1998 from $30.5 million for the same period in
1997. However, as a percentage of total hotel sales, these costs and expenses
decreased to 47.9% in the first quarter of 1998 as compared to 48.3% for the
first quarter in 1997. Room profit increased by 5.6% for the twelve weeks ended
on March 27, 1998 as compared to the same period in 1997.
Operating Costs and Expenses. The Partnership's operating costs and expenses
increased by 2.3% from $19.0 million in the first quarter 1997 to $19.5 million
in the comparable period in 1998. As a percentage of total hotel sales, these
costs and expenses decreased slightly from 30.1% in the first quarter 1997 to
29.3% in 1998. The components of this category are discussed below:
Base and Courtyard Management Fees. The increase in base and Courtyard
management fees from $3.8 million for the twelve weeks ended March 27, 1997 to
$4.0 million for the comparable period in 1998, a 5.1% increase, is due to the
improved combined hotel sales for the 70 Hotels.
Ground Rent, Taxes and Other. Ground rent, taxes and other increased by 1.1%
during the twelve weeks ended March 27, 1998. However, as a percentage of total
hotel sales, these expenses decreased to 9% for the first quarter of 1998 from
9.4% in 1997.
Incentive Management Fees. During the twelve weeks ended March 27, 1998,
incentive management fees earned increased by 7.0% to $3.2 million from $3.0
million in the comparable period in 1997. The increase in incentive management
fees earned was the result of improved combined hotel operating results.
Operating Profit. Operating profit (hotel revenues less all costs and expenses
other than interest expense) increased by $1.5 million to $15.2 million in the
first quarter of 1998 from $13.7 million in the first quarter of 1997, primarily
due to higher revenues.
Interest expense decreased by 2.7% to $11.1 million for the twelve weeks ended
March 27, 1998 from $11.4 million for the comparable period in 1997. This
decrease was primarily due to principal amortization of $3.5 million in 1998 on
the Certificates/Mortgage Loan. The weighted average interest rate for the
twelve weeks ended March 27, 1998 was 8.9% as compared to 8.8% for the
comparable period in 1997.
For the twelve weeks ended March 27, 1998, the Partnership had net income of
$4.7 million, an increase of $2.0 million, from net income of $2.7 million for
the comparable period in 1997. This increase was primarily due to higher
revenues and a decrease in interest expense as discussed above, offset by
increases in management fees.
CAPITAL RESOURCES AND LIQUIDITY
The Partnership's financing needs have historically been funded through loan
agreements with various lenders and Host Marriott Corporation ("Host Marriott").
The General Partner believes that the Partnership will have sufficient capital
resources and liquidity to continue to conduct its business in the ordinary
course.
Principal Sources and Uses of Cash
The Partnership's principal source 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 twelve weeks ended March 27, 1998, and March
28, 1997, was $4.3 million and $5.2 million, respectively. The decrease in cash
provided by operations in the first quarter of 1998 resulted primarily from a
higher receivable balance due from the Manager at March 27, 1998 when compared
to the receivable balance at March 28, 1997. Additionally, during the first
quarter of 1998, the Partnership repaid $864,000 of deferred incentive
management fees while in the first quarter of 1997, only $513,000 was repaid.
Cash used in investing activities was $3.2 million for the first quarter of 1998
and 1997. Cash used in investing activities for the first quarter of 1998
includes capital expenditures of $7.5 million primarily related to renovations
and replacements at the Partnership's hotels.
Cash used in financing activities was $6.5 million and $5.2 million for the
twelve weeks ended March 27, 1998, and March 28, 1997, respectively. During the
first quarters of 1998 and 1997, the Partnership repaid $3.5 million and $3.2
million, respectively, of principal on the commercial mortgage backed
securities. The Partnership also transferred $3.0 million and $2.0 million into
reserve accounts in the first quarters of 1998 and 1997, respectively.
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.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Certain Limited Partners of the Partnership have filed a lawsuit, styled Whitey
Ford, et al. v. Host Marriott Corporation, et al., Case No. 96-CI-08327, in the
285th Judicial District Court of Bexar County, Texas 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.
In January of 1998, two other Limited Partners filed a petition to expand this
lawsuit to include a class action. The General Partner believes that all of the
claims are without foundation and intends to vigorously defend against them.
On February 11, 1998, four individual limited partners in partnerships sponsored
by Host Marriott Corporation ("Host Marriott"), filed a class action lawsuit,
styled Ruben, et al. v. Host Marriott Corporation, et al., Civil Action No.
16186, in Delaware State Chancery Court against Host Marriott and the general
partners of Courtyard by Marriott Limited Partnership, Courtyard by Marriott II
Limited Partnership, Marriott Residence Inn Limited Partnership, Marriott
Residence Inn II Limited Partnership, and Fairfield Inn by Marriott Limited
Partnership (collectively, the "Five Partnerships"). The plaintiffs allege that
the merger of the Five Partnerships (the "Merger") into an umbrella partnership
real estate investment trust proposed by CRF Lodging Company, L.P. in a
preliminary registration statement filed with the Securities and Exchange
Commission, dated December 22, 1997, constitutes a breach of the fiduciary
duties owed to the limited partners of the Five Partnerships by Host Marriott
and the general partners of the Five Partnerships. In addition, the plaintiffs
allege that the Merger breaches various agreements relating to the Five
Partnerships. The plaintiffs are seeking, among other things, the following:
certification of a class; injunctive relief to block consummation of the Merger
or, in the alternative, recision of the Merger; and damages. Host Marriott and
the general partners of the Five Partnerships believe that these allegations are
totally devoid of merit and they intend to vigorously defend against them. The
defendants also maintain that this lawsuit is premature because the Merger has
not been and may not be consummated as proposed in the SEC filings.
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. CI-04092, in
the 57th Judicial District Court of Bexar County, Texas against Marriott
International, Inc. ("Marriott International"), Host Marriott, various of their
subsidiaries, J.W. Marriott, Jr., Stephen Rushmore, and Hospitality Valuation
Services, Inc. (collectively, the "Defendants"). The lawsuit relates to the
following limited partnerships: Courtyard by Marriott Limited Partnership,
Courtyard by Marriott II Limited Partnership, Marriott Residence Inn Limited
Partnership, Marriott Residence Inn II Limited Partnership, Fairfield Inn by
Marriott Limited Partnership, Desert Springs Marriott Limited Partnership, and
Atlanta Marriott Marquis Limited Partnership (collectively, the "Seven
Partnerships"). The plaintiffs allege that the Defendants conspired to sell
hotels to the Seven Partnerships for inflated prices and that they charged the
Seven Partnerships excessive management fees to operate the Seven Partnerships'
hotels. The plaintiffs further allege that the Defendants committed fraud,
breached fiduciary duties, and violated the provisions of various contracts. The
plaintiffs are seeking unspecified damages. The Defendants, which do not include
the Seven Partnerships, believe that there is no truth to the plaintiffs'
allegations and that the lawsuit is totally devoid of merit. The Defendants
intend to vigorously defend against the claims asserted in the lawsuit. Although
the Seven Partnerships have not been named as Defendants in the lawsuit, the
partnership agreements relating to the Seven Partnerships include an indemnity
provision which requires the Seven Partnerships, under certain circumstances, to
indemnify the general partners against losses, judgments, expenses, and fees.
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
condition or results of operations of the Partnership.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits:
None.
b. Reports on Form 8-K:
May 6, 1998 -- Letter to limited partners regarding
status of proposed consolidation.
<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
May 11, 1998 By:
Earla L. Stowe
Vice President and Chief Accounting
Officer
<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: CMB TWO CORPORATION
General Partner
May 11, 1998 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
FIRST 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> 1000
<CURRENCY> US DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-27-1998
<EXCHANGE-RATE> 1000
<CASH> 24,389
<SECURITIES> 38,493 <F1>
<RECEIVABLES> 13,931
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 76,813
<PP&E> 717,870
<DEPRECIATION> (261,245)
<TOTAL-ASSETS> 533,438
<CURRENT-LIABILITIES> 6,930
<BONDS> 552,460
0
0
<COMMON> 0
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<FN>
<F1> THIS REPRESENTS OTHER ASSETS.
<F2> THIS REPRESENTS PARTNERS DEFICIT.
</FN>
</TABLE>
