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 September 7, 2001 Commission File No. 0-16728 COURTYARD BY MARRIOTT II LIMITED PARTNERSHIP 10400 Fernwood Road Bethesda, MD 20817-1109 (301) 380-9000 Delaware 52-1533559 -------------------------------- ------------------------------------------- (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 ____. ----- ================================================================================ ================================================================================ Courtyard by Marriott II Limited Partnership ================================================================================ TABLE OF CONTENTS -----------------

Courtyard by Marriott II Limited Partnership Condensed Consolidated Balance Sheets (in thousands)

See Notes to Condensed Consolidated Financial Statements. 1 Courtyard by Marriott 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 Courtyard by Marriott II Limited Partnership Condensed Consolidated Statements of Cash Flows (Unaudited, in thousands) Thirty-six Weeks Ended September 7, September 8, 2001 2000 ------------ ------------ OPERATING ACTIVITIES Net income........................................ $ 15,995 $ 15,610 Depreciation expense.............................. 19,488 19,756 (Gain) /loss on disposition of fixed assets....... (4) 17 Change in prepaid expenses........................ (6) 5 Amortization of deferred financing fees........... 1,088 1,088 Changes in operating accounts..................... (5,450) (4,310) ------------ ------------ Cash provided by operating activities......... 31,111 32,166 ------------ ------------ INVESTING ACTIVITIES Additions to property and equipment, net.......... (3,538) (8,699) Change in property improvement funds.............. (10,512) (11,394) ------------ ------------ Cash used in investing activities............. (14,050) (20,093) ------------ ------------ FINANCING ACTIVITIES Repayments of debt................................ (11,807) (10,956) Capital distributions............................. (12,874) (7,351) ------------ ------------ Cash used in financing activities............. (24,681) (18,307) ------------ ------------ DECREASE IN CASH AND CASH EQUIVALENTS.............. (7,620) (6,234) CASH AND CASH EQUIVALENTS at beginning of period... 13,511 23,341 ------------ ------------ CASH AND CASH EQUIVALENTS at end of period......... $ 5,891 $ 17,107 ============ ============ SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid for mortgage and other interest......... $ 31,162 $ 31,930 ============ ============ See Notes to Condensed Consolidated Financial Statements. 3 Courtyard by Marriott II Limited Partnership Notes to Condensed Consolidated Financial Statements (Unaudited) 1. Organization Courtyard by Marriott II Limited Partnership (the "Partnership"), a Delaware limited partnership, owns 70 Courtyard by Marriott hotels (the "Hotels") located in 29 states within the contiguous United States. The hotels are operated under a management agreement by a subsidiary of Marriott International (the "Manager"). 2. Summary of Significant Accounting Policies The accompanying unaudited, condensed consolidated financial statements have been prepared by the Partnership. 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 from the accompanying statements. 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 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 September 7, 2001, the results of its operations for the twelve and thirty-six weeks ended September 7, 2001 and September 8, 2000 and cash flows for the thirty-six weeks ended September 7, 2001 and September 8, 2000. Interim results are not necessarily indicative of full year performance because of seasonal and short-term variations. Certain reclassifications were made to the prior year financial statements to conform to the 2001 presentation. For financial reporting purposes, the net income of the Partnership is allocated 95% to the limited partners and 5% to CBM Two LLC (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 Federal income tax purposes of accelerated depreciation methods, shorter depreciable lives for certain assets, differences in the timing of the recognition of certain fees and straight-line rent adjustments. 4 COURTYARD BY MARRIOTT 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. RECENT EVENTS As a result of the September 11, 2001 terrorist attacks, which occurred subsequent to the third quarter, occupancy levels have declined significantly during the first four-weeks of the fourth quarter. However, we do not believe that this four-week period will be representative of the remainder of the quarter. We expect operations to recover somewhat, but remain significantly below third quarter 2001 and fourth quarter 2000 levels. As a result, we have been actively working with the Manager on a number of initiatives to reverse this trend. The Manager has become more focused on marketing and advertising and has targeted specific industry groups that are likely to benefit from the changed economic environment such as the defense industry and government agencies. We have implemented a number of cost saving initiatives to reflect the reduced volume at the properties, including consolidating or reducing hours of operations and reducing labor costs. Many of these initiatives had been in place at varying degrees prior to September 11th due to the slower economy and have subsequently been accelerated. We believe that while the near term outlook for the hotel operations will continue to be difficult, we anticipate a gradual return to normal business levels. RESULTS OF OPERATIONS Hotel Revenues. Total hotel revenues for the twelve weeks ended September 7, 2001 decreased $5.7 million, or 8% to $66.3 million compared to the same period in 2000. For the thirty-six weeks ended September 7, 2001, total hotel revenues decreased $6.5 million, or 3%, to $206.6 million compared to the thirty-six weeks ended September 8, 2000. The decrease in total hotel revenues was driven by a decrease in occupancy. Occupancy at the hotels decreased 6.7 percentage points for the quarter and 4.7 percentage points year-to-date. Year-to-date, the decrease in occupancy has been offset by a $3.59 increase in average room rate. Room rates for the quarter decreased $0.50 when compared to 2000, as the Manager has begun to lower rates to improve occupancy. The results reflect a continued weakness in the economy through the end of the 3rd quarter. We expect a significant decrease in results during the 4th quarter of 2001 as a result of the September 11, 2001 terrorist attacks on the World Trade Center in New York and the Pentagon and their subsequent negative impact on the hospitality industry. Rooms' revenues decreased $5.2 million, or 8%, to $60.5 million for the third quarter of 2001 when compared to 2000. Year-to-date room revenues decreased $4.5 million, or 2%, to $189.0 million. The decrease year-to-date is 5 due to a decrease in Revenue per available room ("REVPAR") of $1.74. The decrease in REVPAR is due to a decrease in occupancy of 6.7 percentage points, which was offset by the $3.59 increase in the average room rate year-to-date discussed above. For the quarter, REVPAR decreased $5.94 due to the decreases in both the average room rate and occupancy discussed above. Operating costs and expenses. Operating costs and expenses decreased $6.1 million, or 4%, to $163.1 million through the third quarter of 2001, and $4.4 million, or 8%, to $52.6 million for the third quarter of 2001 when compared to the same periods in 2000, primarily due to a decrease in property-level expenses. Also, incentive management fees have decreased by $899,000 year-to- date as a result of decreased hotel revenues, and ground rent, taxes and other have decreased $1.1 million primarily as a result of decreased litigation costs due to a lawsuit that was resolved in 2000. Operating costs and expenses represented 79% of revenues for the thirty-six weeks ended September 7, 2001 and September 8, 2000. For the quarters ended September 7, 2001 and September 8, 2000, operating costs and expenses represented 79% and 77% of hotel revenues, respectively. The Partnership's hotel property-level costs and expenses decreased $3.4 million, or 3%, to $102.7 million year-to-date as of September 7, 2001, and decreased $3.4 million, or 9%, to $33.1 million for the third quarter of 2001 when compared to the same periods in 2000. The decrease is due to a $2.2 million decrease in controllable expenses as a result of decreased occupancy and a decrease of general and administrative expenses due to cost-cutting measures implemented at the Hotels. This was partially offset by a $1.0 million increase in utility costs due to the inflation of energy costs. As a percentage of hotel revenues, property-level costs and expenses represented approximately 50% as of September 7, 2001 and September 8, 2000, year-to-date. For the third quarters of 2001 and 2000, property-level costs represented 50% and 51% of hotel revenues, respectively. Operating Profit. Operating profit decreased $393,000 year-to-date to $43.4 million when compared to the same period in 2000. For the third quarter of 2001, operating profit decreased $1.2 million, or 8%, to $13.6 million compared to third quarter 2000. Operating profit represented 21% of revenues for both the third quarter 2001 and 2000. Year-to-date, operating profit represented 21% of hotel revenues for both 2001 and 2000. Interest Expense. Interest expense decreased $276,000, or 3% and $965,000, or 3% for the quarters ending September 7, 2001 and year-to-date through September 7, 2001, respectively, when compared to the same periods in 2000 as a result of principal amortization on the debt. Net Income. Net income increased by $385,000 year-to-date to $16.0 million over prior year, and third quarter 2001 net income decreased by $1.1 million when compared to third quarter 2000 as a result of the items discussed above. LIQUIDITY AND CAPITAL RESOURCES The Partnership's financing needs have historically been funded through loan agreements with independent financial institutions. The General Partner believes that cash from hotel operations will be sufficient to make the required debt service payments, to fund the current capital expenditures needs of the hotels as well as to make cash distributions to the limited partners. Principal Sources and Uses of Cash The Partnership's principal source of cash is from operations. Its principal uses of cash are to make debt service payments, fund the property improvement fund and to make distributions to limited partners. 6 Cash provided by operations for year-to-date 2001 was $31.1 million compared to $32.2 million for year-to-date 2000. The decrease in cash provided by operations is primarily due to increased cash deposited into the restricted cash accounts to fund management fees and debt service due during 2001, which was partially offset by decreased payments required for deferred incentive management fees. Cash used in investing activities was $14.1 million and $20.1 million for the thirty-six weeks ended September 7, 2001 and September 8, 2000, respectively. Cash used in investing activities for 2001 includes capital expenditures of $3.5 million, primarily related to renovations and replacements of furniture, fixtures and equipment at the Partnership's hotels as compared to $8.7 million in 2000. The property improvement fund increased $10.5 million for the thirty- six weeks ended September 7, 2001 as compared to an increase of $11.4 million for the comparable period in 2000. Contributions to the property improvement fund were $13.4 million and $10.7 million for the thirty-six weeks ended September 7, 2001 and 2000, respectively. During the first three quarters of 2000, the Partnership funded an additional $10.7 million to the property improvement fund for capital expenditures at the properties. Cash used in financing activities was $24.7 million and $18.3 million through September 7, 2001 and September 8, 2000, respectively. The Partnership repaid $11.8 million and $11.0 million, respectively, of principal on the commercial mortgage-backed securities. Cash used in financing activities included $12.9 million of cash distributions to limited partners through September 7, 2001 as compared to $7.4 million of distributions as of September 8, 2000. Distributions for 2001 are made on a monthly basis, instead of a quarterly basis as in prior years; therefore, partners have received distributions for the first through the eighth period of 2001 as of September 7, 2001. As of September 8, 2000, the partners had only been distributed cash from first and second quarter operations. 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 September 7, 2001, all of the Partnership's debt is fixed rate. PART II. OTHER INFORMATION LEGAL PROCEEDINGS The Partnership is 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. COURTYARD BY MARRIOTT II LIMITED PARTNERSHIP By: CBM TWO LLC General Partner October 22, 2001 By: /s/ Mathew J. Whelan ---------------------------------- Mathew J. Whelan Vice President 8

COURTYARD BY MARRIOTT II LIMITED PARTNERSHIP /DE/ 10-Q