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 11, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File No. 0-28222
MARRIOTT HOTEL PROPERTIES II LIMITED PARTNERSHIP
(Exact name of registrant as specified in its charter)
Delaware 52-1990352
- --------------------------------------------------------------------------------
(State of Organization) (I.R.S. Employer Identification Number)
10400 Fernwood Road, Bethesda, MD 20817-1109
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (301) 380-2070
Securities registered pursuant to Section 12(b) of the Act:
Not Applicable
Securities registered pursuant to Section 12(g) of
the Act:
Units of Limited Partnership Interest
(Title of Class)
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>
================================================================================
Marriott Hotel Properties II Limited Partnership
================================================================================
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
PAGE NO.
Item 1. Financial Statements
Condensed Statement of Operations
Twelve and Thirty-Six Weeks Ended September 11, 1998 (Unaudited)
and September 12, 1997 (Unaudited)...............................1
Condensed Balance Sheet
September 11, 1998 (Unaudited) and December 31, 1997.............2
Condensed Statement of Cash Flows
Thirty-Six Weeks Ended September 11, 1998 (Unaudited)
and September 12, 1997 (Unaudited)...............................3
Notes to Condensed Financial Statements (Unaudited)................4
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations............................................7
PART II - OTHER INFORMATION
Item 1. Legal Proceedings....................................................13
Item 6. Exhibits and Reports on Form 8-K.....................................14
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Marriott Hotel Properties II Limited Partnership
Condensed Statement of Operations
(Unaudited)
(in thousands, except per Unit amounts)
<TABLE>
Twelve Weeks Ended Thirty-Six Weeks Ended
September 11, September 12, September 11, September 12,
1998 1997 1998 1997
---------------- --------------- ---------------- ---------------
<S> <C> <C> <C> <C>
REVENUES (Note 4)....................................$ 11,567 $ 11,113 $ 49,513 $ 47,697
---------------- --------------- ---------------- ---------------
OPERATING COSTS AND EXPENSES
Depreciation...................................... 2,919 2,919 9,204 8,961
Incentive management fees......................... 1,441 1,427 6,991 6,837
Property taxes.................................... 1,538 1,363 4,716 4,123
Base management fees.............................. 947 888 3,337 3,191
Ground rent ...................................... 450 466 1,540 1,459
Insurance and other............................... 266 243 825 710
---------------- --------------- ---------------- ---------------
7,561 7,306 26,613 25,281
---------------- --------------- ---------------- ---------------
OPERATING PROFIT..................................... 4,006 3,807 22,900 22,416
Interest expense.................................. (4,275) (4,338) (12,983) (13,165)
Interest income................................... 375 625 1,089 1,582
---------------- --------------- ---------------- ---------------
INCOME BEFORE EQUITY IN INCOME OF
SANTA CLARA PARTNERSHIP........................... 106 94 11,006 10,833
EQUITY IN INCOME OF
SANTA CLARA PARTNERSHIP........................... 621 238 2,477 1,350
---------------- --------------- ---------------- ---------------
NET INCOME...........................................$ 727 $ 332 $ 13,483 $ 12,183
================ =============== ================ ===============
ALLOCATION OF NET INCOME
General Partner...................................$ 8 $ 3 $ 135 $ 122
Limited Partners.................................. 719 329 13,348 12,061
---------------- --------------- ---------------- ---------------
$ 727 $ 332 $ 13,483 $ 12,183
================ =============== ================ ===============
NET INCOME PER LIMITED PARTNER UNIT
(745 Units).......................................$ 965 $ 442 $ 17,917 $ 16,189
================ =============== ================ ===============
See Notes to Condensed Financial Statements.
</TABLE>
<PAGE>
Marriott Hotel Properties II Limited Partnership
Condensed Balance Sheet
(in thousands)
<TABLE>
September 11, December 31,
1998 1997
(unaudited)
<S> <C> <C>
ASSETS
Property and equipment, net..........................................................$ 197,594 $ 197,512
Due from Marriott Hotel Services, Inc................................................ 8,433 7,063
Other assets......................................................................... 7,105 8,510
Deferred financing costs, net........................................................ 5,453 5,663
Restricted cash reserves............................................................. 17,934 20,307
Cash and cash equivalents............................................................ 5,314 10,363
---------------- ---------------
$ 241,833 $ 249,418
================ ===============
LIABILITIES AND PARTNERS' CAPITAL
LIABILITIES
Mortgage debt......................................................................$ 218,575 $ 221,814
Investment in Santa Clara Partnership.............................................. 8,740 8,737
Due to Marriott International, Inc. .............................................. 3,233 3,567
Accounts payable and accrued expenses.............................................. 2,892 4,163
---------------- ---------------
Total Liabilities.............................................................. 233,440 238,281
---------------- ---------------
PARTNERS' CAPITAL
General Partner.................................................................... 229 256
Limited Partners................................................................... 8,164 10,881
---------------- ---------------
Total Partners' Capital........................................................ 8,393 11,137
---------------- ---------------
$ 241,833 $ 249,418
================ ===============
See Notes to Condensed Financial Statements.
</TABLE>
<PAGE>
Marriott Hotel Properties II Limited Partnership
Condensed Statement of Cash Flows
(Unaudited)
(in thousands)
<TABLE>
Thirty-Six Weeks Ended
September 11, September 12,
1998 1997
---------------- ---------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income ..........................................................................$ 13,483 $ 12,183
Noncash items........................................................................ 7,658 7,863
Change in operating accounts......................................................... (4,021) (1,660)
---------------- ---------------
Cash provided by operating activities.......................................... 17,120 18,386
---------------- ---------------
INVESTING ACTIVITIES
Additions to property and equipment, net............................................. (9,286) (3,410)
Change in restricted capital expenditure reserves.................................... 2,797 281
Distributions from Santa Clara Partnership........................................... 2,480 1,811
Change in property improvement fund.................................................. 1,212 (2,921)
Working capital returned by Marriott Hotel Services, Inc............................. 94 --
---------------- ---------------
Cash used in investing activities.............................................. (2,703) (4,239)
---------------- ---------------
FINANCING ACTIVITIES
Capital distributions to partners.................................................... (16,227) (18,680)
Repayment of mortgage debt........................................................... (3,239) --
Change in restricted debt service reserves........................................... -- (1,508)
Payment of financing costs........................................................... -- (34)
---------------- ---------------
Cash used in financing activities.............................................. (19,466) (20,222)
---------------- ---------------
DECREASE IN CASH AND CASH EQUIVALENTS................................................... (5,049) (6,075)
CASH AND CASH EQUIVALENTS at beginning of period........................................ 10,363 16,372
---------------- ---------------
CASH AND CASH EQUIVALENTS at end of period..............................................$ 5,314 $ 10,297
================ ===============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for mortgage interest......................................................$ 13,787 $ 13,920
================ ===============
See Notes to Condensed Financial Statements.
</TABLE>
<PAGE>
Marriott Hotel Properties II Limited Partnership
Notes to Condensed Financial Statements
(Unaudited)
1. The accompanying condensed financial statements have been prepared by
Marriott Hotel Properties 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 financial statements should be read in conjunction with the
Partnership's 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 condensed unaudited
financial statements reflect all adjustments (which include only normal
recurring adjustments) necessary to present fairly the financial position
of the Partnership as of September 11, 1998, the results of operations for
the twelve and thirty-six weeks ended September 11, 1998, and September
12, 1997, and cash flows for the thirty-six weeks ended September 11,
1998, and September 12, 1997. Interim results are not necessarily
indicative of fiscal year performance because of seasonal and short-term
variations.
For financial reporting purposes, net income of the Partnership is
allocated 99% to the limited partners and 1% to 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 and shorter depreciable
lives of assets and differences in the timing of recognition of incentive
management fee expense.
2. The Partnership owns the New Orleans, San Antonio Rivercenter and San Ramon
Marriott Hotels (the "Hotels"). In addition, the Partnership owns a 50%
limited partnership interest in the Santa Clara Marriott Hotel Limited
Partnership (the "Santa Clara Partnership") which owns the Santa Clara
Marriott Hotel (the "Santa Clara Hotel"). The sole general partner of the
Partnership and the Santa Clara Partnership, with a 1% interest in each, is
Marriott MHP Two Corporation (the "General Partner"), a wholly owned
subsidiary of Host Marriott Corporation ("Host Marriott"). The remaining
49% interest in the Santa Clara Partnership is owned by HMH Properties,
Inc., a wholly owned subsidiary of Host Marriott. The Partnership's income
from the Santa Clara Partnership is reported as Equity in Income of the
Santa Clara Partnership. In arriving at Equity in Income from the Santa
Clara Partnership, the Partnership is allocated 100% of the interest
expense related to the debt incurred to purchase the Santa Clara
Partnership interest. Summarized financial information for the Santa Clara
Partnership is presented in Note 5.
3. Certain reclassifications were made to the prior year condensed financial
statements to conform to the current year presentation.
4. Revenues represent house profit of the Partnership's Hotels since the
Partnership has delegated substantially all of the operating decisions
related to the generation of house profit of the Hotels to Marriott Hotel
Services, Inc. (the "Manager"). House profit reflects hotel operating
results which flow to the Partnership as property owner and represents
gross hotel sales less property-level expenses, excluding depreciation and
amortization, base and incentive management fees, property taxes, ground
rent, insurance and certain other costs, which are disclosed separately in
the condensed statement of operations. On November 20, 1997, the Emerging
Issues Task Force ("EITF") of the Financial Accounting Standards Board
reached a consensus on EITF 97-2 "Application of FASB Statement No. 94 and
APB Opinion No. 16 to Physician Practice Management Entities and Certain
Other Entities with Contractual Management Arrangements." EITF 97-2
addresses the circumstances in which a management entity may include the
revenues and expenses of a managed entity in its financial statements.
The Partnership has considered the impact of EITF 97-2 and concluded that
it should be applied to its Hotels. Accordingly, upon adoption, Hotel sales
and property-level expenses will be reflected on the statement of
operations. This change in accounting principle will be adopted in the
financial statements during the fourth quarter of 1998 as of and for the
year ended December 31, 1998 with retroactive effect in prior periods to
conform to the new presentation. Application of EITF 97-2 will increase
both revenues and operating expenses by approximately $20.0 million and
$18.5 million for the twelve weeks ended September 11, 1998 and September
12, 1997, respectively, by approximately $61.7 million and $58.7 million
for the thirty-six weeks ended September 11, 1998 and September 12, 1997,
respectively, and will have no impact on operating profit or net income.
Revenues consist of the following Hotel operating results (in thousands):
<TABLE>
Twelve Weeks Ended Thirty-Six Weeks Ended
September 11, September 12, September 11, September 12,
1998 1997 1998 1997
---------------- --------------- ---------------- ----------
<S> <C> <C> <C> <C>
HOTEL SALES
Rooms.........................................$ 21,282 $ 19,634 $ 74,202 $ 70,018
Food and beverage............................. 8,353 8,220 30,576 30,292
Other......................................... 1,954 1,739 6,468 6,059
---------------- --------------- ---------------- ---------------
31,589 29,593 111,246 106,369
---------------- --------------- ---------------- ---------------
HOTEL EXPENSES
Departmental direct costs
Rooms....................................... 4,750 4,367 14,249 13,518
Food and beverage........................... 6,954 6,455 22,269 21,407
Other hotel operating expenses.............. 8,318 7,658 25,215 23,747
---------------- --------------- ---------------- ---------------
20,022 18,480 61,733 58,672
---------------- --------------- ---------------- ---------------
REVENUES........................................$ 11,567 $ 11,113 $ 49,513 $ 47,697
================ =============== ================ ===============
</TABLE>
5. Summarized financial information for the Santa Clara Partnership for 1998
and 1997, is as follows (in thousands):
<TABLE>
Twelve Weeks Ended Thirty-Six Weeks Ended
September 11, September 12, September 11, September 12,
1998 1997 1998 1997
---------------- --------------- ---------------- ---------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Condensed Statement of Operations
REVENUES........................................$ 5,366 $ 4,703 $ 17,856 $ 14,950
---------------- --------------- ---------------- ---------------
OPERATING COSTS AND EXPENSES
Incentive management fee...................... 843 730 2,851 2,340
Depreciation and amortization................. 675 888 2,099 2,022
Base management fee........................... 355 318 1,115 986
Property taxes................................ 127 125 372 369
Ground rent, insurance and other.............. 167 104 424 334
---------------- --------------- ---------------- ---------------
2,167 2,165 6,861 6,051
---------------- --------------- ---------------- ---------------
OPERATING PROFIT................................ 3,199 2,538 10,995 8,899
Interest expense.............................. (832) (834) (2,507) (2,533)
Interest income............................... 128 25 235 127
---------------- --------------- ---------------- ---------------
NET INCOME......................................$ 2,495 $ 1,729 $ 8,723 $ 6,493
================ =============== ================ ===============
</TABLE>
<TABLE>
September 11, December 31,
1998 1997
(Unaudited)
<S> <C> <C>
Condensed Balance Sheet
Property and equipment, net......................................................$ 27,198 $ 28,688
Property improvement fund........................................................ 3,930 2,619
Due from Marriott Hotel Services, Inc............................................ 2,737 2,059
Cash and cash equivalents........................................................ 1,400 3,177
---------------- ---------------
Total Assets.................................................................$ 35,265 $ 36,543
================ ===============
Mortgage debt....................................................................$ 42,732 $ 43,366
Due to Marriott Hotel Services, Inc.............................................. 290 970
Accounts payable and accrued expenses............................................ 80 482
Partners' deficit................................................................ (7,837) (8,275)
---------------- ---------------
Total Liabilities and Partners' Deficit......................................$ 35,265 $ 36,543
================ ===============
</TABLE>
6. Host Marriott Corporation ("Host Marriott"), the parent company of the
General Partner of the Partnership, has adopted a plan to restructure its
business operations so that it will qualify as a real estate investment
trust ("REIT"). As part of this restructuring (the "REIT Conversion"), Host
Marriott and its consolidated subsidiaries will contribute their
full-service hotel properties and certain other businesses and assets to
Host Marriott, L.P., a Delaware limited partnership (the "Operating
Partnership"), in exchange for units of limited partnership interest in the
Operating Partnership ("OP Units") and the assumption of liabilities. As
part of the REIT Conversion, Host Marriott proposes to merge into HMC
Merger Corporation (to be renamed "Host Marriott Corporation"), a Maryland
corporation ("Host REIT"), and thereafter continue to expand its
full-service hotel ownership business. Host REIT expects to qualify as a
REIT beginning with its first full taxable year commencing after the REIT
Conversion is completed, which Host Marriott currently expects to be the
year beginning January 1, 1999 (but which might not be until the year
beginning January 1, 2000). Host REIT will be the sole general partner of
the Operating Partnership. The Operating Partnership is proposing to
acquire by merger (the "Merger") the Partnership. The Limited Partners in
the Partnership have been given an opportunity to receive, on a
tax-deferred basis, OP Units in the Operating Partnership in exchange for
their current limited partnership interests. At any time prior to 5:00 p.m.
on the fifteenth trading day following the effective date of the Merger,
the Limited Partners can elect to exchange the OP Units received in
connection with the Merger for either common stock of Host REIT or a 6.56%
callable note due December 15, 2005 of the Operating Partnership. Exercise
of either the election to receive common stock or a note would be a taxable
transaction. Beginning one year after the Merger, Limited Partners who
retain OP Units may exchange such OP Units for Host REIT common stock on a
one-for-one basis (or their cash equivalent, as determined by Host REIT).
On June 2, 1998, the Operating Partnership filed a Registration Statement
on Form S-4 with the Securities and Exchange Commission. In October 1998,
the Prospectus/Consent Solicitation Statement, which formed a part of such
Registration Statement, was mailed to the Limited Partners who have until
December 12, 1998 to vote on this Merger, unless extended.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS FORWARD-LOOKING STATEMENTS
Certain matters discussed in this Form 10-Q include forward-looking statements
including, without limitation, statements related to the proposed REIT
conversion, the terms, structure and timing thereof, and the expected effects of
the proposed REIT conversion and business and operating strategies in the
future. All forward-looking statements involve known and unknown risks,
uncertainties and other factors which may cause the actual transactions,
results, performance or achievements to be materially different from any future
transactions, results, performance or achievements expressed or implied by such
forward-looking statements. Certain of the transactions described herein are
subject to certain consents of shareholders, lenders, debtholders and partners
of Host Marriott and its affiliates and of other third parties and various other
conditions and contingencies, and future results, performance and achievements
will be affected by general economic, business and financing conditions,
competition and government actions. The cautionary statements set forth in
reports filed under the Securities Act of 1934 contained important factors with
respect to such forward-looking statements, including: (i) national and local
economic and business conditions that will, among other things, affect demand
for hotels and other properties, the level of rates and occupancy that can be
achieved by such properties and the availability and terms of financing; (ii)
the ability to maintain the properties in a first-class manner; (iii) the
ability to compete effectively; (iv) the ability to obtain required consents of
shareholders, lenders, debtholders, partners and ground lessors in connection
with Host Marriott's proposed conversion to a REIT and to consummate all of the
transactions constituting the REIT conversion; (v) changes in travel patterns,
taxes and government regulations; (vi) governmental approvals, actions and
initiatives; (vii) the effects of tax legislative action; and (viii) the timing
of Host Marriott's election to be taxed as a REIT and the ability to satisfy
complex rules in order to qualify for taxation as a REIT for federal income tax
purposes and to operate effectively within the limitations imposed by these
rules. Although the Partnership believes the expectations reflected in such
forward-looking statements are based upon reasonable assumptions, it cannot
provide assurance that its expectations will be attained or that any deviations
will not be material. 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
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). The following
charts summarize REVPAR and the percentage change in REVPAR for each Partnership
Hotel:
<TABLE>
Twelve Weeks Ended Thirty-Six Weeks Ended
September 11, September 12, % September 11, September 12, %
1998 1997 Change 1998 1997 Change
---------------- --------------- --------- --------------- --------------- -------
<S> <C> <C> <C> <C> <C> <C>
San Antonio $ 106 $ 106 -- $ 126 $ 119 6%
San Ramon $ 102 $ 98 4% $ 104 $ 93 12%
New Orleans $ 85 $ 71 20% $ 101 $ 97 4%
Santa Clara $ 134 $ 120 12% $ 136 $ 121 12%
Combined Average $ 100 $ 92 9% $ 114 $ 107 7%
</TABLE>
Revenues. Revenues for the thirty-six weeks ended September 11, 1998, increased
4% to $49.5 million when compared to the same period of 1997. Room revenues
increased 6% primarily due to a 7% increase in REVPAR to $114. The increase in
REVPAR is attributable to an increase in the combined average room rate of 8% to
$141 offset by a one percentage point decrease in combined average occupancy to
81%. Revenues for the twelve weeks ended September 11, 1998, increased 4% to
$11.6 million when compared to the same period of 1997. Third quarter 1998
REVPAR increased 9% to $100 due a 6% increase in the combined average room rate
to $122 and a two percentage point increase in combined average occupancy to
82%.
Operating Costs and Expenses. For the thirty-six weeks ended September 11, 1998,
operating costs and expenses increased 5%, or $1.3 million, over the comparable
period of 1997. For the twelve weeks ended September 11, 1998, operating costs
and expenses increased 3% to $7.6 million over third quarter 1997. Operating
costs and expenses increased primarily due to an increase in property taxes,
incentive management fees, and base management fees.
Operating Profit. For the thirty-six weeks ended September 11, 1998, operating
profit increased 2% to $22.9 million. For the twelve weeks ended September 11,
1998, operating profit increased 5%, or $199,000. The increases in operating
profit are attributable to increases in revenues which were partially offset by
the increases in operating costs and expenses discussed above.
Interest Expense. Interest expense decreased slightly when comparing both
year-to-date and third quarter 1998 results to the same periods in 1997 due to a
lower principal balance on the Partnership's mortgage debt as a result of the
principal payments made in 1997 and 1998.
Equity in Income of Santa Clara Partnership. For year-to-date 1998, equity in
income of the Santa Clara Partnership increased by $1.1 million to $2.5 million
primarily due to improved hotel operating results at the Santa Clara Hotel
combined with a slight decrease in interest expense on the Santa Clara mortgage
debt. For third quarter of 1998, equity in income of the Santa Clara Partnership
increased by $383,000 to $621,000 as compared to the third quarter of 1997.
Net Income. For the thirty-six weeks ended September 11, 1998, net income
increased by $1.3 million to $13.5 million. For the third quarter of 1998, net
income increased by $395,000 to $727,000. These increases resulted from the
increases in operating profit and in equity in income of the Santa Clara
Partnership discussed above.
Individual Hotel operating results are discussed below:
The Marriott Rivercenter in San Antonio reported a 4% increase in revenues to
$23.6 million for the thirty-six weeks ended September 11, 1998, when compared
to the same period of 1997. The increase in revenues is primarily due to a 5%
increase in room revenues to $25.9 million partially offset by a 12% decline in
food and beverage revenues. Year-to-date REVPAR increased 6% to $126 due to a 6%
increase in the average room rate to $145 partially offset by a one percentage
decrease in average occupancy to 87%. During 1998, management at the Hotel has
focused on shifting its customer mix from discounted group business to
higher-rated transient business, which has allowed it to increase average room
rates. For the third quarter of 1998, revenues decreased 15%, or $894,000, to
$5.0 million when compared to the third quarter of 1997. Third quarter 1998
REVPAR remained stable at $106; the Hotel's average room rate increase of 4% to
$125 was offset by a three percentage point decline in average occupancy to 85%.
The decrease in revenues is primarily due to a decline in food and beverage
revenues caused by less group business which has resulted in a decrease in
banquet sales. The Hotel will begin a renovation of its ballroom in the fourth
quarter of 1998, that is expected to position it to compete more effectively for
banquet business in the future.
Third quarter year-to-date revenues at the San Ramon Marriott Hotel increased
13% to $5.3 million when compared to same period of 1997. Room revenues
increased by 14%, or $925,000, due to a 12% increase in REVPAR to $104. The
average room rate increased 16% to $127 while average occupancy declined three
percentage points to 82%. Third quarter 1998 revenues remained stable at $1.7
million when compared to third quarter 1997. REVPAR reflected a 4% increase to
$102, resulting from a 7% increase in the average room rate to $122 partially
offset by a two percentage point decline in average occupancy to 84%. The Hotel
increased its corporate room rates in 1998, leading to the increase in the
average room rate. During the fourth quarter of 1998, the hotel plans to replace
the carpeting in its guest room corridors.
For the thirty-six weeks ended September 11, 1998, revenues at the New Orleans
Marriott Hotel increased slightly to $20.6 million, when compared to the same
period of 1997. REVPAR increased 4% to $101 primarily due to a 5% increase in
the average room rate to $132 while occupancy remained stable at 77%. For the
third quarter of 1998, revenues increased 39% to $4.8 million when compared to
the third quarter of 1997. REVPAR increased 19% to $85. This increase is
attributable to a 7% increase in the average room rate to $107 combined with an
eight percentage point increase in average occupancy to 80%. Average room rates
were increased during 1998 due to aggressive Hotel pricing strategies with the
transient and group room rates. In July 1998, the Hotel completed its rooms
renovation, allowing it to increase its room rate and average occupancy for the
remainder of the third quarter.
Additionally, the Hotel completed a lobby and restaurant renovation in 1998.
For the thirty-six weeks ended September 11, 1998, the Santa Clara Marriott
Hotel reported a 19% increase in revenues to $17.9 million when compared to the
same period of 1997. The increase in revenues is attributable to a 13%, or $2.4
million, increase in rooms revenues as well as a 31%, or $679,000, increase in
food and beverage revenues. For year-to-date 1998, the average room rate
increased 17% to $169 while average occupancy decreased by approximately three
percentage points to 81%. Food and beverage revenues increased significantly due
to increased banquet sales as well as effective menu pricing in the Hotel's
restaurant. For the third quarter of 1998, revenues at the Hotel increased 14%
to $5.4 million when compared to the third quarter of 1997. REVPAR increased 12%
to $134 due to a 14% increase in the average room rate to $164 partially offset
by a slight decrease in average occupancy to 82%. During 1998, the hotel
increased its corporate room rates allowing the average room rate to improve.
The Hotel plans to begin a major rooms renovation in November 1998 and conclude
the work in early 1999.
CAPITAL RESOURCES AND LIQUIDITY
The Partnership's financing needs historically have been funded through loan
agreements with independent financial institutions. The General Partner believes
that the Partnership will have sufficient capital resources and liquidity to
continue to conduct its operations in the ordinary course of business. The
Partnership's principal sources of cash are cash from operations and cash
distributions from the Santa Clara Partnership. Its principal uses of cash are
to pay debt service on the Partnership's Mortgage Debt, to fund the property
improvement funds of the Hotels and to make capital distributions to the
partners. Additionally, in 1997 the Partnership utilized cash to establish
capital reserves required by the lender and to pay financing costs incurred in
connection with the refinancing of the Partnership's Mortgage Debt and the Santa
Clara Partnership's mortgage debt.
Total cash provided by operating activities decreased 7% to $17.1 million for
the thirty-six weeks ended September 11, 1998 when compared to the same period
of 1997. This decrease was primarily due to an increase in amounts due to the
Partnership from the Manager partially offset by an increase in net income.
Cash used in investing activities decreased 36% to $2.7 million for the
thirty-six weeks ended September 11, 1998, from $4.2 million for the thirty-six
weeks ended September 12, 1997. Contributions to the property improvement fund
totaled $5.9 million for 1998 while property and equipment expenditures from it
totaled $7.3 million. The Partnership also funded property and equipment
expenditures of $2.0 million from its restricted capital expenditure reserves in
1998. Additionally, distributions from the Santa Clara Partnership increased
$669,000 in 1998 due to improved Hotel operations.
Cash used in financing activities decreased to $19.5 million from $20.2 million
for the thirty-six weeks ended September 11, 1998 and September 12, 1997,
respectively. Capital distributions to the partners decreased to $16.2 million
in 1998 from $18.7 million in 1997, and net inflows to the restricted debt
service reserves decreased from $1.5 million in 1997 to zero in 1998. These
decreases in cash used for financing activities were partially offset by
mortgage debt repayments of $3.2 million in 1998.
The General Partner believes that cash from hotel operations and the reserves
established in conjunction with the refinancing will continue to meet the short
and long-term operational and capital needs of the Partnership. In November
1998, the Partnership will make a cash distribution of $5,600 per limited
partner unit from third quarter 1998 operating cash flow bringing year-to-date
distributions from 1998 operating cash flow to $17,300 per limited partner unit.
Under each of the Partnership Hotels and the Santa Clara Hotel's management
agreements, the Partnership is required to make annual contributions to the
property improvement funds, which provide funding for replacement of furniture,
fixtures and equipment. The General Partner believes the property improvement
funds, as adjusted in the case of the New Orleans Hotel, and the capital
reserves established in conjunction with the refinancing will be adequate for
the future capital repairs and replacement needs of the Hotels and the Santa
Clara Hotel. As previously reported, the escrow contribution percentage for the
New Orleans Marriott Hotel increased from 5% to 7% in late 1997 and will
continue at 7% through 1998 to allow for adequate funding of the total rooms
refurbishment of its guest rooms. This project was completed in July 1998, and
during the refurbishment, the Hotel replaced the carpeting, bedspreads,
upholstery, drapes and other similar items as well as the dressers, chairs, beds
and other furniture in the guest rooms.
YEAR 2000 ISSUES
The "Year 2000 Issue" has arisen because many existing computer programs and
chip-based embedded technology systems use only the last two digits to refer to
a year, and therefore do not properly recognize a year that begins with "20"
instead of the familiar "19." If not corrected, many computer applications could
fail or create erroneous results. The following disclosure provides information
regarding the current status of the Partnership's Year 2000 compliance program.
The Partnership processes its records on computer hardware and software systems
maintained by Host Marriott Corporation ("Host Marriott"), the parent company of
the General Partner of the Partnership. Host Marriott has adopted a compliance
program because it recognizes the importance of minimizing the number and
seriousness of any disruptions that may occur as a result of the Year 2000
Issue. Host Marriott's compliance program includes an assessment of Host
Marriott's hardware and software computer systems and embedded systems, as well
as an assessment of the Year 2000 issues relating to third parties with which
the Partnership has a material relationship or whose systems are material to the
operations of the Partnership's Hotels. Host Marriott's efforts to ensure that
its computer systems are Year 2000 compliant have been segregated into two
separate phases: in-house systems and third-party systems.
In-House Systems. Host Marriott has invested in the implementation and
maintenance of accounting and reporting systems and equipment that are intended
to enable the Partnership to provide adequately for its information and
reporting needs and which are also Year 2000 compliant. Substantially all of
Host Marriott's in-house systems have already been certified as Year 2000
compliant through testing and other mechanisms and Host Marriott has not delayed
any systems projects due to the Year 2000 Issue. Host Marriott is in the process
of engaging a third party to review its Year 2000 in-house compliance. Host
Marriott believes that future costs associated with Year 2000 Issues for its
in-house systems will be insignificant and will therefore not impact the
Partnership's business, financial condition and results of operations. Host
Marriott has not developed, and does not plan to develop, a separate contingency
plan for its in-house systems due to their current Year 2000 compliance.
However, Host Marriott does have detailed contingency plans for its in-house
systems covering a variety of possible events, including natural disasters,
interruption of utility service and similar events.
Third-Party Systems. The Partnership relies upon operational and accounting
systems provided by third parties, primarily the Manager of its Hotels, to
provide the appropriate property-specific operating systems (including
reservation, phone, elevator, security, HVAC and other systems) and to provide
it with financial information. Based on discussions with the third parties that
are critical to the Partnership's business, including the Manager of its Hotels,
Host Marriott believes that these parties are in the process of studying their
systems and the systems of their respective vendors and service providers and,
in many cases, have begun to implement changes, to ensure that they are Year
2000 compliant. To the extent these changes impact property-level systems, the
Partnership may be required to fund capital expenditures for upgraded equipment
and software. Host Marriott does not expect these charges to be material, but is
committed to making these investments as required. To the extent that these
changes relate to the Manager's centralized systems (including reservations,
accounting, purchasing, inventory, personnel and other systems), the
Partnership's management agreement generally provides for these costs to be
charged to the Partnership's Hotels. Host Marriott expects that the Manager will
incur Year 2000 costs for its centralized systems in lieu of costs related to
system projects that otherwise would have been pursued and therefore, its
overall level of centralized charges allocated to the Hotels will not materially
increase as a result of the Year 2000 compliance effort. Host Marriott believes
that this deferral of certain system projects will not have a material impact on
its future results of operations, although it may delay certain productivity
enhancements at the Partnership's Hotels. Host Marriott will continue to monitor
the efforts of these third parties to become Year 2000 compliant and will take
appropriate steps to address any non-compliance issues. The Partnership believes
that in the event of material Year 2000 non-compliance caused by a breach of the
Manager's duties, the Partnership will have the right to seek recourse against
the Manager under its third party management agreement. The management agreement
generally does not specifically address the Year 2000 compliance issue.
Therefore the amount of any recovery in the event of Year 2000 non-compliance at
a property, if any, is not determinable at this time.
Host Marriott will work with the third parties to ensure that appropriate
contingency plans will be developed to address the most reasonably likely worst
case Year 2000 scenarios, which may not have been identified fully. In
particular, Host Marriott has had extensive discussions regarding the Year 2000
Issue with Marriott International, the Manager of the Hotels. Due to the
significance of Marriott International to the Partnership's business, a detailed
description of Marriott International's state of readiness follows.
Marriott International has adopted an eight-step process toward Year 2000
readiness, consisting of the following: (i) Awareness: fostering understanding
of, and commitment to, the problem and its potential risks; (ii) Inventory:
identifying and locating systems and technology components that may be affected;
(iii) Assessment: reviewing these components for Year 2000 compliance, and
assessing the scope of Year 2000 issues; (iv) Planning: defining the technical
solutions and labor and work plans necessary for each particular system; (v)
Remediation/Replacement: completing the programming to renovate or replace the
problem software or hardware; (vi) Testing and Compliance Validation: conducting
testing, followed by independent validation by a separate internal verification
team; (vii) Implementation: placing the corrected systems and technology back
into the business environment; and (viii) Quality Assurance: utilizing a
dedicated audit team to review and test significant projects for adherence to
quality standards and program methodology.
Marriott International has grouped its systems and technology into three
categories for purposes of Year 2000 compliance: (i) information resource
applications and technology (IT Applications) -- enterprise-wide systems
supported by Marriott International's centralized information technology
organization ("IR"); (ii) Business-initiated Systems ("BIS") - systems that have
been initiated by an individual business unit, and that are not supported by
Marriott International's IR organization; and (iii) Building Systems - non-IT
equipment at properties that use embedded computer chips, such as elevators,
automated room key systems and HVAC equipment. Marriott International is
prioritizing its efforts based on how severe an effect noncompliance would have
on customer service, core business processes or revenues, and whether there are
viable, non-automated fallback procedures (System Criticality).
Marriott International measures the completion of each phase based on documented
and quantified results, weighted for System Criticality. As of the end of the
1998 third quarter, the awareness and inventory phases were complete for IT
Applications and nearly complete for BIS and Building Systems. For IT
Applications, the Assessment, Planning and Remediation/Replacement phases were
each over 80 percent complete, and Testing and Compliance Validation had been
completed for a number of key systems, with most of the remaining work in its
final stage. For BIS and Building Systems, Assessment and Planning were in the
mid- to upper-range of completion, with a substantial amount of work in process,
while the progress level for Remediation/Replacement and Testing and Compliance
Validation had not yet been documented and quantified. Quality Assurance is also
in progress for IT Applications and is scheduled to begin for BIS and Business
Systems in the near future. Marriott International's goal is to substantially
complete the Remediation/Replacement and Testing phases for its System Critical
IT Applications by the end of 1998, with 1999 reserved for unplanned
contingencies and for Compliance Validation and Quality Assurance. For System
Critical BIS and Building Systems, the same level of completion is targeted for
June 1999 and September 1999, respectively.
Marriott International has initiated Year 2000 compliance communications with
its significant third party suppliers, vendors and business partners, including
its franchisees. Marriott International is focusing its efforts on the business
interfaces most critical to its customer service and revenues, including those
third parties that support the most critical enterprise-wide IT Applications,
franchisees generating the most revenues, suppliers of the most widely used
Building Systems and BIS, the top 100 suppliers, by dollar volume, of non-IT
products, and financial institutions providing the most critical payment
processing functions. Responses have been received from a majority of the firms
in this group.
Marriott International is also establishing a common approach for testing and
addressing Year 2000 compliance issues for its managed and franchised
properties. This includes a guidance protocol for operated properties, and a
Year 2000 "Toolkit" for franchisees containing relevant Year 2000 compliance
information. Marriott International is also utilizing a Year 2000 best-practices
sharing system.
Risks. There can be no assurance that Year 2000 remediation by the Partnership
or third parties will be properly and timely completed, and failure to do so
could have a material adverse effect on the Partnership, its business and its
financial condition. The Partnership cannot predict the actual effects to it of
the Year 2000 Issue, which depends on numerous uncertainties such as: (i)
whether significant third parties properly and timely address the Year 2000
Issue; and (ii) whether broad-based or systemic economic failures may occur.
Host Marriott is also unable to predict the severity and duration of any such
failures, which could include disruptions in passenger transportation or
transportation systems generally, loss of utility and/or telecommunications
services, the loss or distortion of hotel reservations made on a centralized
reservation system and errors or failures in financial transactions or payment
processing systems such as credit cards. Due to the general uncertainty inherent
in the Year 2000 Issue and the Partnership's dependence on third parties, the
Partnership is unable to determine at this time whether the consequences of Year
2000 failures will have a material impact on the Partnership. Host Marriott's
Year 2000 compliance program is expected to significantly reduce the level of
uncertainty about the Year 2000 Issue and Host Marriott believes that the
possibility of significant interruptions of normal operations should be reduced.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Partnership and the Partnership Hotels are involved in routine litigation
and administrative proceedings arising in the ordinary course of business, some
of which are expected to be covered by liability insurance and which
collectively are not expected to have a material adverse effect on the business,
financial condition or results of operations of the Partnership.
Two groups of limited partners of the Partnership are each asserting putative
class claims in lawsuits filed against Host Marriott, Marriott International and
certain of their affiliates. The first case, Leonard Rosenblum, as Trustee of
the Sylvia Bernice Rosenblum Trust, et al. v. Marriott MHP Two Corporation, et
al., Case No. 96-4087, was filed on May 10, 1996, in Palm Beach County Circuit
Court. The defendants removed the case to the U.S. District Court for the
Southern District of Florida on June 4, 1996, Case No. 96-8377-CIV-HURLEY.
The second case, MacKenzie Patterson Special Fund 2, L.P. et al. v. Marriott MHP
Two Corporation et al., Case No. 97-8989-CIV-HURLEY, had its genesis in a
lawsuit filed on April 24, 1996 in Maryland Circuit Court, which was dismissed
on May 6, 1997, and was filed on December 18, 1997 in the same federal District
Court. Both cases allege that the defendants violated their fiduciary duties and
engaged in fraud and coercion in connection with a tender offer for Partnership
units by a Host Marriott subsidiary.
The District Court dismissed the MacKenzie Patterson case on August 4, 1998, and
remanded the Rosenblum case back to Palm Beach County Circuit Court on July 25,
1998, Case No. CL-96-4087-AD. The defendants have moved to dismiss Rosenblum's
fifth amended Complaint, or, in the alternative, to deny class certification.
The Partnership is named only as a nominal defendant in this lawsuit.
Accordingly, final resolution of this matter will not have any adverse effect on
the business, financial condition or results of Partnership operations.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits- None
b. Reports on Form 8-K
A Form 8-K was filed with the Securities and Exchange Commission on
September 16, 1998. This filing, Item 5 - Other Events, discloses that
the General Partner sent the limited partners of the Partnership a
letter to inform them that September 18, 1998 will be the record date
for voting in the forthcoming consent solicitation. Those limited
partners whose ownership is reflected on the records of the General
Partner as of September 18, 1998 will be eligible to vote on the merger
and proposed amendments. A copy of the letter was included as an Item 7
- Exhibit in this Form 8-K filing.
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
MARRIOTT HOTEL PROPERTIES II
LIMITED PARTNERSHIP
By: MARRIOTT MHP TWO CORPORATION
General Partner
October 27, 1998 By: /s/Earla L. Stowe
Earla L. Stowe
Vice President and Chief Accounting Officer
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
SCHEDULE
This schedule contains summary financial information extracted from the third
quarter Form 10-Q and is qualified in its entirety by reference to such
financial statements.</LEGEND>
<CIK> 0000845240
<NAME> MARRIOTT HOTEL PROPERTIES II LIMITED PARTNERSHIP
<MULTIPLIER> 1,000
<CURRENCY> U.S. Dollar
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-11-1998
<EXCHANGE-RATE> 1.00
<CASH> 23,248
<SECURITIES> 12,558<F1>
<RECEIVABLES> 8,433
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 44,239
<PP&E> 305,029
<DEPRECIATION> (107,435)
<TOTAL-ASSETS> 241,833
<CURRENT-LIABILITIES> 14,865
<BONDS> 218,575
0
0
<COMMON> 0
<OTHER-SE> 8,393
<TOTAL-LIABILITY-AND-EQUITY> 241,832
<SALES> 0
<TOTAL-REVENUES> 53,079<F2>
<CGS> 0
<TOTAL-COSTS> 26,613
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 12,983
<INCOME-PRETAX> 13,483
<INCOME-TAX> 0
<INCOME-CONTINUING> 13,483
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 13,483
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
<FN>
<F1>This is other assets.
<F2>This includes equity in income of Santa Clara Partnership and interest
income.
</FN>
</TABLE>
