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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 September 12, 1997
OR
[_] Transition Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
Commission File Number: 033-24935
MARRIOTT RESIDENCE INN II LIMITED PARTNERSHIP
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(Exact name of registrant as specified in its charter)
Delaware 52-1605434
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(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 ____ No ____ (Not
Applicable. On August 25, 1992, the Registrant filed an application for
relief from the reporting requirements of the Securities Exchange Act of
1934 pursuant to Section 12(h) thereof. Pursuant to a grant of the relief
requested in such application, the Registrant was not required to, and did
not make, any filings pursuant to the Securities Exchange Act of 1934 from
October 23, 1989 until the application was voluntarily withdrawn on January
26, 1998.)
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Marriott Residence Inn II Limited Partnership
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TABLE OF CONTENTS
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PAGE NO.
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
<S> <C>
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...........................................................5
PART II - OTHER INFORMATION
Item 1. Legal Proceedings...............................................................................7
</TABLE>
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MARRIOTT RESIDENCE INN II LIMITED PARTNERSHIP
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
(in thousands, except per unit amounts)
<TABLE>
<CAPTION>
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........................ $ 8,113 $ 8,350 $25,160 $24,255
------- ------- ------- -------
OPERATING COSTS AND EXPENSES
Depreciation................... 1,266 1,757 4,820 5,272
Incentive management fee....... 852 886 2,645 2,541
Residence Inn system fees...... 639 625 1,910 1,833
Property taxes................. 512 513 1,543 1,531
Base management................ 336 330 1,005 968
Equipment rent and other....... 193 227 936 789
------- ------- ------- -------
3,798 4,338 12,859 12,934
------- ------- ------- -------
OPERATING PROFIT................ 4,315 4,012 12,301 11,321
Interest expense............... (2,978) (2,957) (9,052) (9,105)
Interest income................ 171 122 448 295
------- ------- ------- -------
NET INCOME...................... $ 1,508 $ 1,177 $ 3,697 $ 2,511
======= ======= ======= =======
ALLOCATION OF NET INCOME
General Partner................ $ 15 $ 12 $ 37 $ 25
Limited Partners............... 1,493 1,165 3,660 2,486
------- ------- ------- -------
$1,508 $ 1,177 $ 3,697 $ 2,511
======= ======= ======= =======
NET INCOME PER LIMITED
PARTNER UNIT (70,000 Units).... $ 21 $ 17 $ 52 $ 36
======= ======= ======= =======
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
1
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MARRIOTT RESIDENCE INN II LIMITED PARTNERSHIP
CONDENSED CONSOLIDATED BALANCE SHEET
(in thousands)
<TABLE>
<CAPTION>
September 12, December 31,
1997 1996
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(Unaudited)
<S> <C> <C>
ASSETS
Property and equipment, net................. $144,211 $144,792
Due from Residence Inn by Marriott, Inc..... 3,163 2,472
Deferred financing costs, net............... 3,512 3,797
Property improvement fund................... 1,354 2,150
Restricted reserves......................... 6,548 4,291
Cash and cash equivalents................... 7,483 8,008
-------- --------
$166,271 $165,510
======== ========
LIABILITIES AND PARTNERS' CAPITAL
LIABILITIES
Mortgage debt............................... $139,454 $140,000
Incentive management fee due to Residence
Inn by Marriott, Inc..................... 15,649 14,610
Accounts payable and accrued expenses....... 1,802 1,695
-------- --------
Total Liabilities.......................... 156,905 156,305
-------- --------
PARTNERS' CAPITAL
General Partner............................. 172 171
Limited Partners............................ 9,194 9,034
-------- --------
Total Partners' Capital.................... 9,366 9,205
-------- --------
$166,271 $165,510
======== ========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
2
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MARRIOTT RESIDENCE INN II LIMITED PARTNERSHIP
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
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<CAPTION>
Thirty-Six Weeks Ended
September 12, September 6,
1997 1996
------------ ------------
(in thousands)
<S> <C> <C>
OPERATING ACTIVITIES
Net income....................................... $ 3,697 $ 2,511
Noncash items.................................... 6,143 6,993
Change in operating accounts..................... (584) (8,478)
------------ ------------
Cash provided by operating activities....... 9,256 1,026
------------ ------------
INVESTING ACTIVITIES
Additions to property and equipment.............. (4,239) (2,780)
Additions to restricted reserves................. (2,257) (1,908)
Change in property improvement fund.............. 797 (3,143)
------------ ------------
Cash used in investing activities........... (5,699) (7,831)
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FINANCING ACTIVITIES
Capital distributions............................ (3,536) --
Repayment of mortgage debt....................... (546) (137,089)
Proceeds from mortgage loan...................... -- 140,000
Payment of financing costs....................... -- (3,438)
------------ ------------
Cash used in financing activities........... (4,082) (527)
------------ ------------
DECREASE IN CASH AND CASH EQUIVALENTS............... (525) (7,332)
CASH AND CASH EQUIVALENTS at beginning
of period........................................ 8,008 13,892
------------ ------------
CASH AND CASH EQUIVALENTS at end of period.......... $ 7,483 $ 6,560
============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest........................... $ 9,421 $ 14,786
============ ============
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
3
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MARRIOTT RESIDENCE INN II LIMITED PARTNERSHIP
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. The accompanying condensed consolidated financial statements have been
prepared by Marriott Residence Inn 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. Interim results are not necessarily indicative of fiscal year
performance because of seasonal and short-term variations.
2. Pursuant to the terms of the Mortgage Debt, the Partnership is required to
establish with the lender a separate escrow account for payments of insurance
premiums and real estate taxes (the "Tax and Insurance Escrow Reserves") for
each mortgaged property if the credit rating of Marriott International, Inc.
("MII") is downgraded by Standard and Poors Rating Services. The Manager of
the Partnership's Inns, Residence Inn by Marriott, Inc. (the "Manager"), is a
wholly-owned subsidiary of MII. On April 1, 1997, MII's credit rating was
downgraded and the Partnership subsequently transferred $834,000 into the Tax
and Insurance Escrow Reserves from the Manager's existing tax and insurance
reserve account. In addition, the Mortgage Debt required the Partnership to
fund an additional month's debt service into the debt service reserve account
over a six month period as a result of this downgrade. During the thirty-six
weeks ended September 12, 1997, $774,000 was out of Partnership cash from
operations into this reserve. The additional month's debt service will be
fully funded by November 1997. The tax and insurance escrow reserves and the
debt service reserve are shown as restricted reserves and the resulting tax
and insurance liability is included with accounts payable and accrued
expenses in the accompanying balance sheet.
3. Revenues represent house profit of the Partnership Inns since the Partnership
has delegated substantially all of the operating decisions related to the
generation of house profit of the Inns to the Manager. House profit reflects
the net revenues flowing to the Partnership as property owner and represents
Inn operating results less property-level expenses, excluding depreciation,
Residence Inn system, base and incentive management fees, real and personal
property taxes, equipment rent, insurance and certain other costs, which are
classified as operating costs and expenses. Revenues consist of the
following Inn operating results for twelve and thirty-six weeks ended (in
thousands):
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<CAPTION>
Twelve Weeks Ended Thirty-Six Weeks Ended
September 12, September 6, September 12, September 6,
1997 1996 1997 1996
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<S> <C>. <C> <C> <C>
INN SALES
Suites......................................... $15,973 $15,612 $47,755 $45,823
Other operating departments.................... 848 871 2,594 2,564
------- ------- ------- -------
16,821 16,483 50,349 48,387
------- ------- ------- -------
INN EXPENSES
Departmental direct costs
Suites........................................ 3,565 3,300 10,365 9,676
Other operating departments................... 361 320 1,062 973
Other Inn operating expenses................... 4,782 4,513 13,762 13,483
------- ------- ------- -------
8,708 8,133 25,189 24,132
------- ------- ------- -------
REVENUES........................................ $ 8,113 $ 8,350 $25,160 $24,255
======= ======= ======= =======
</TABLE>
4
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4. The General Partner has undertaken, on behalf of the Partnership, to
pursue, subject to further approval of the partners, a potential
transaction (the "Consolidation") in which (i) subsidiaries of CRF Lodging
Company, L.P. (the "Company"), a newly formed Delaware limited partnership,
would merge with and into the Partnership and up to five other limited
partnerships, with the Partnership and the other limited partnerships being
the surviving entities (each, a "Merger" and collectively, the "Mergers"),
subject to the satisfaction or waiver of certain conditions, (ii) CRF
Lodging Trust ("CRFLT"), a Maryland real estate investment trust, the sole
general partner of the Company, would offer its common shares of beneficial
interest, par value $0.01 per share (the "Common Shares") to investors in
an underwritten public offering and would invest the proceeds of such
offering in the Company in exchange for units of limited partnership
interests in the Company ("Units") and (iii) the Partnership would enter
into a Lease for the operation of its Hotels pursuant to which a Lessee
would pay rent to the Partnership based upon the greater of a fixed dollar
amount of base rent or specified percentages of gross sales, as specified
in the Lease. If the partners approve the transaction and other conditions
are satisfied, the partners of the Partnership would receive Units in the
Merger in exchange for their interests in the Partnership.
A preliminary Prospectus/Consent Solicitation was filed as part of a
Registration Statement on Form S-4 with the Securities and Exchange
Commission and which describes the potential transaction in greater detail.
Any offer of Units in connection with the Consolidation will be made solely
by a final Prospectus/Consent Solicitation.
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.
RESULTS OF OPERATIONS
First Three Quarters of 1997 Compared To First Three Quarters of 1996
Revenues. Revenues for the first three quarters of 1997 increased $0.9 million,
or 4%, to $25.2 million. Revenue and operating profit were impacted primarily
by growth in revenue per available room ("REVPAR"). REVPAR is a commonly used
indicator of market performance for hotels which represents the combination of
daily room rate charged and the average daily occupancy achieved. REVPAR does
not include food and beverage or other ancillary revenues generated by the
property. Inn sales increased $2.0 million, or 4%, to $50.3 million in the
first three quarters of 1997 reflecting the improvements in REVPAR for the
period. REVPAR increased 4% for the first three quarters of 1997 due primarily
to an increase in average room rates of 5%, while average occupancy decreased
less than one percentage point. Due to the high occupancy of these properties,
the Partnership expects future increases in REVPAR to be driven by room rate
increases, rather than occupancy increases. However, there can be no assurance
that REVPAR will continue to increase in the future.
Operating Costs and Expenses. Operating costs and expenses remained at $12.9
million for the first three quarters of 1997 and the first three quarters of
1996. As a percentage of Inn revenues, Inn operating costs and expenses were
51% and 53% of revenues for the first three quarters of 1997 and the first three
quarters of 1996, respectively.
Operating Profit. As a result of the changes in revenues and operating costs
and expenses discussed above, operating profit increased by $1.0 million to
$12.3 million, or 49% of revenues, for the first three quarters of 1997 from
$11.3 million, or 47% of revenues, for the first three quarters of 1996.
Interest Expense. Interest expense remained unchanged at $9.1 million for the
first three quarters of 1997.
Net Income. Net income for the first three quarters of 1997 increased $1.2
million to $3.7 million, or 15% of revenues, compared to net income of $2.5
million, or 10% of revenues, for the first three quarters of 1996.
5
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Third Quarter 1997 Compared To Third Quarter 1996
Revenues. Revenues for the Third Quarter 1997 decreased $0.2 million, or 3%, to
$8.1 million. Inn sales increased $0.3 million, or 2%, to $16.8 million in the
Third Quarter 1997 reflecting the improvements in REVPAR for the period. REVPAR
increased 2% for the Third Quarter 1997 due primarily to an increase in average
room rates of 5%, while average occupancy decreased 2 percentage points. Due to
the high occupancy of these properties, the Partnership expects future increases
in REVPAR to be driven by room rate increases, rather than occupancy increases.
However, there can be no assurance that REVPAR will continue to increase in the
future.
Operating Costs and Expenses. Operating costs and expenses decreased to $3.8
million for the Third Quarter 1997 from $4.3 million for the Third Quarter 1996.
As a percentage of Inn revenues, Inn operating costs and expenses were 47% and
52% of revenues for the Third Quarter 1997 and the Third Quarter 1996,
respectively.
Operating Profit. As a result of the changes in revenues and operating costs
and expenses discussed above, operating profit increased by $0.3 million to $4.3
million, or 53% of revenues, for the Third Quarter 1997 from $4.0 million, or
48% or revenues, for the Third Quarter 1996.
Interest Expense. Interest expense remained unchanged at $3.0 million for the
Third Quarter 1997 and 1996.
Net Income. Net income for the Third Quarter 1997 increased $0.3 million to
$1.5 million, or 19% of revenues, compared to net income of $1.2 million, or 14%
of revenues, for the Third Quarter 1996.
LIQUIDITY AND CAPITAL RESOURCES
Cash provided by operations was $9.3 million and $1 million for the first three
quarters of 1997 and the first three quarters of 1996, respectively. The
increase is due primarily to deferred mortgage interest costs that were paid in
1996.
Cash used in investing activities for the first three quarters of 1997 and the
first three quarters of 1996 was $5.7 million and $7.8 million, respectively.
The Partnership's cash investing activities consists primarily of contributions
to the property improvement fund and capital expenditures for improvements to
existing Inns and contributions to restricted cash reserves required under the
new terms of the mortgage debt.
Cash used in financing activities for the first three quarters of 1997 and the
first two quarters of 1996 was $4.1 million and $0.5 million, respectively. The
Partnership's cash financing activities primarily consist of capital
distributions to partners, repayment of debt and payment of financing costs, as
well as the refinancing of certain debts of the Partnership. In March 1996, the
Partnership refinanced mortgage debt of $137 million with proceeds from a $140
million nonrecourse mortgage loan. The excess proceeds from the loan were
primarily used to establish a reserve for certain capital expenditures. The
refinanced debt is nonrecourse to the Partnership, bears interest at a fixed
rate of 8.85% and matures in 2006. Principal amortization is required on the
loan over the ten year term based on a 25-year amortization. In connection with
the refinancing, the Partnership contributed the Bossier City Residence Inn to a
newly formed wholly-owned subsidiary.
6
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Partnership and the Inns are involved in routine litigation and
administrative proceedings arising in the ordinary course of business, some of
which are expected to be covered by liability insurance and which collectively
are not expected to have a material adverse effect on the business, financial
conditions or results of operations of the Partnership.
7
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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.
MARRIOTT RESIDENCE INN II
LIMITED PARTNERSHIP
By: MARRIOTT RIBM TWO CORPORATION
General Partner
January 26 , 1998 By: /s/ Patricia K. Brady
--------------------------------
Patricia K. Brady
Vice President and Chief Accounting
Officer
8
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<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY INFORMATION EXTRACTED FROM THE QUARTERLY REPORT
10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000841283
<NAME> MARRIOT RESIDENCE INN II LIMITED PARTNERSHIP
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-12-1997
<CASH> 7,483
<SECURITIES> 0
<RECEIVABLES> 3,163
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 11,414
<PP&E> 212,415
<DEPRECIATION> (68,204)
<TOTAL-ASSETS> 166,271
<CURRENT-LIABILITIES> 156,905
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 9,366
<TOTAL-LIABILITY-AND-EQUITY> 166,271
<SALES> 0
<TOTAL-REVENUES> 25,160
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 12,411
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 9,052
<INCOME-PRETAX> 3,697
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,697
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
