10-Q 1 d10q.txt FORM 10-Q =============================================================================== 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 OR [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarter Ended March 23, 2001 Commission File No. 033-24935 MARRIOTT RESIDENCE INN II LIMITED PARTNERSHIP 10400 Fernwood Road Bethesda, MD 20817-1109 (301) 380-9000 Delaware 52-1605434 ------------------------------- ----------------------------------------- (State of Organization) (I.R.S. Employer Identification Number) 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 ____. ---- ================================================================================ 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 ____. --- =============================================================================== Marriott Residence Inn II Limited Partnership =============================================================================== TABLE OF CONTENTS -----------------

Marriott Residence Inn II Limited Partnership Condensed Consolidated Balance Sheets (in thousands)

See Notes to Condensed Consolidated Financial Statements. 1 Marriott Residence Inn II Limited Partnership Condensed Consolidated Statements of Operations (Unaudited, in thousands, except Unit and per Unit amounts)

See Notes to Condensed Consolidated Financial Statements. 2 Marriott Residence Inn II Limited Partnership Condensed Consolidated Statements of Cash Flows (Unaudited, in thousands)

See Notes to Condensed Consolidated Financial Statements. 3 Marriott Residence Inn II Limited Partnership Notes to Condensed Consolidated Financial Statements (Unaudited) 1. Organization Marriott Residence Inn II Limited Partnership (the "Partnership"), a Delaware limited partnership, was formed on November 23, 1988 to acquire and own 23 Marriott Residence Inn properties (the "Inns") and the land on which the Inns are located. The Inns are located in 16 states and contain a total of 2,487 suites as of March 23, 2001. The Partnership commenced operations on December 28, 1988. The Inns are operated as part of the Residence Inn by Marriott system and are managed by Residence Inn by Marriott, Inc. (the "Manager"), a wholly- owned subsidiary of Marriott International, Inc. 2. Summary of Significant Accounting Policies The accompanying unaudited condensed consolidated financial statements of the Partnership have been prepared without audit. Certain information and footnote disclosures normally included in financial statements presented in accordance with accounting principles generally accepted in the United States have been condensed or omitted. The Partnership believes the disclosures made are adequate to make the information presented not misleading. However, the unaudited condensed consolidated financial statements should be read in conjunction with the Partnership's consolidated financial statements and notes thereto included in the Partnership's annual report on Form 10-K for the year ended December 31, 2000. In the opinion of the Partnership, the accompanying unaudited condensed consolidated financial statements reflect all adjustments necessary to present fairly the financial position of the Partnership as of March 23, 2001, and the results of its operations and cash flows for the twelve weeks ended March 23, 2001 and March 24, 2000. Interim results are not necessarily indicative of full year performance because of the impact 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 RIBM Two LLC (the "General Partner"). Significant differences exist between the net income for financial reporting purposes and the net income for federal income tax purposes. These differences are due primarily to the use, for federal income tax purposes, of accelerated depreciation methods and shorter depreciable lives of the assets, and differences in the timing of the recognition of incentive management fee expense. Certain reclassifications were made to the prior year unaudited condensed consolidated financial statements to conform to the current presentation. 3. Amounts Paid to the General Partner and Marriott International, Inc. The chart below summarizes cash amounts paid to the General Partner and Marriott International, Inc. for the twelve weeks ended March 23, 2001 and March 24, 2000 (in thousands): Marriott International, Inc.:

4 RESIDENCE INN II LIMITED PARTNERSHIP MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FORWARD-LOOKING STATEMENTS Certain matters discussed herein are forward-looking statements. We have based these forward-looking statements on our current expectations and projections about future events. Certain, but not necessarily all, of such forward-looking statements can be identified by the use of forward-looking terminology, such as "believes," "expects," "may," "will," "should," "estimates," or "anticipates," or the negative thereof or other variations thereof or comparable terminology. All forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause our 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. Although we believe the expectations reflected in such forward-looking statements are based upon reasonable assumptions, we can give no assurance that our expectations will be attained or that any deviations will not be material. We disclaim any obligations or undertaking to publicly release any updates or revisions to any forward-looking statement contained in this quarterly report on Form 10-Q to reflect any change in our expectations with regard thereto or any change in events, conditions or circumstances on which any such statement is based. GENERAL Consistent with the terms of the Partnership agreement and the original investment objectives contemplated at the formation of the Partnership, the General Partner is currently attempting to sell the Inns or, in the alternative, find a buyer for the partnership interests. In this regard, the General Partner has recently engaged a financial advisor to solicit bids from interested parties. There can be no assurance, however, that such a transaction will occur or, if it were to occur, of the timing or value of any such transaction. If the General Partner determines that any such bids would be in the best interest of the Limited Partners, then the General Partner will attempt to effectuate such a transaction. No such transaction is pending as of the date of this report. RESULTS OF OPERATIONS Revenues. Inn revenues increased $107,000, or .6%, to $16.6 million for the first quarter of 2001, when compared to the same period in 2000. The slight increase was achieved primarily through increases in room revenue per available room, or REVPAR. REVPAR measures daily room revenues generated on a per room basis and represents the combination of the average daily suite rate charged and the average daily occupancy achieved. For the first quarter of 2001, REVPAR increased 1.6% to $76.40 due to a $3.11, or 3.3%, increase in the combined average suite rate to $97.50 offset by a one percentage point decrease in the combined average occupancy to 78.4%. Operating Costs and Expenses. Operating costs and expenses increased $442,000, or 3.4%, to $13.4 million for the first quarter of 2001, when compared to the same period in 2000, primarily due to increases in Inn property-level costs and expenses, partially offset by a $130,000 reduction in incentive management fees. As a percentage of total Inn revenues, total operating costs and expenses were 81% and 78% for the first quarters of 2001 and 2000, respectively. Inn property-level costs and expenses increased $562,000, or 6.4%, to $9.4 million for the first quarter of 2001, when compared to the same period in 2000 primarily due to an increase in selling, administrative and other expenses, including salaries and benefits, energy costs, repairs and maintenance costs, and marketing and sales expense. As a percentage of Inn revenues, Inn property-level costs and expenses represented 57% and 53% for the first quarter of 2001 and 2000, respectively. Operating Profit. As a result of the changes in revenues and operating costs and expenses discussed above, operating profit decreased $335,000 to $3.2 million, or 19% of revenues, for the first quarter of 2001, versus $3.6 million, or 22% of revenues, for the same period in 2000. Interest Expense. Interest expense decreased $103,000, or 4% for the first quarter of 2001, when compared to the same period in 2000 as a result of principal amortization of the Partnership's mortgage debt. Net Income. As a result of the items discussed above, net income decreased $206,000, or 21%, to $.8 million, or 5% of revenues for the first quarter of 2001 compared to net income of $1 million, or 6% of revenues, for the first quarter of 2000. 5 RESIDENCE INN II LIMITED PARTNERSHIP MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS LIQUIDITY AND CAPITAL RESOURCES Our financing needs have been historically funded through loan agreements with independent financial institutions. Beginning in 1998, the Partnership's property improvement fund was insufficient to meet current needs. The shortfall is primarily due to the need for total suite refurbishments at a majority of the Inns as part of ongoing routine capital maintenance. To reduce the shortfall, the Partnership increased the contribution rate to the fund beginning in 1999 from 6% in 1998 to 7% of gross Inn revenues. The Partnership also provided additional cash of $1.6 million to the property improvement fund in the first quarter 2000 to help address the shortfall. The contribution rate will remain 7% for 2001. In light of the increased competition in the extended-stay market described above, the Manager has also proposed additional improvements that are intended to enhance the overall value and competitiveness of the Inns. These proposed improvements include design, structural and technological improvements to modernize and enhance the functionality and appeal of the Inns. Based upon information provided by the Manager, approximately $59 million may be required over the next five years for the routine renovations and all of the proposed additional improvements. The General Partner is currently in discussions with the Manager regarding alternate funding sources for the capital expenditure needs. The Partnership may be required to fund a portion of these capital needs. Once negotiations are completed, the General Partner will be in a better position to project possible cash distributions to limited partners in the future. The General Partner believes that cash from Inn operations and Partnership reserves will be sufficient to make the required debt service payments and to fund a portion of the capital expenditures at the Inns. The General Partner is reviewing the Manager's proposed Inn renovations and improvements to identify those projects that have the greatest value to the Partnership. Principal Sources and Uses of Cash The Partnership's principal source of cash is from operations. Its principal uses of cash are to make debt service payments and fund the property improvement fund. Cash provided by operating activities was $1.1 million through the first quarter of 2001 compared to $1.7 million for the same period in 2000. The $.6 million decrease was primarily due to a $1.9 million increase in amounts due from the Manager due to timing of receipts from the Manager, partially offset by an increase in deferred incentive management fees. Cash used in investing activities through the first quarters of 2001 and 2000 was $1.3 million and $2.6 million, respectively. The Partnership's cash investing activities consist primarily of contributions to the property improvement fund, capital expenditures for improvements to the Inns and contributions to restricted cash reserves 6 RESIDENCE INN II LIMITED PARTNERSHIP MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS required under the terms of the mortgage debt. Contributions to the property improvement fund were $1.2 million and $2.4 million through the first quarter of 2001 and 2000, respectively, and we provided additional cash of $1.6 million to the fund in the first quarter of 2000. Capital expenditures were $.8 million and $1.5 million through the first quarter of 2001 and 2000, respectively. Cash used in financing activities through the first quarters of 2001 and 2000 were $737,000 and $448,000, respectively, consisting primarily of repayments of mortgage debt of $516,000 and $443,000, respectively, as well as increases in the debt service reserves. There were no distributions to the partners during the first quarters of 2001 or 2000. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Partnership does not have significant market risk with respect to interest rates, foreign currency exchanges or other market rate or price risks, and the Partnership does not hold any financial instruments for trading purposes. As of March 23, 2001, the Partnership's mortgage debt has a fixed interest rate. As of March 23, 2001 and March 24, 2000, the Partnership's mortgage debt totaled $133.7 million and $134.2 million, respectively. 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 condition or results of operations of the Partnership. 7 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: RIBM TWO LLC General Partner May 7, 2001 By: /s/ Mathew Whelan ----------------------------------- Mathew Whelan Vice President

MARRIOTT RESIDENCE INN II LIMITED PARTNERSHIP 10-Q