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. 033-20022 MARRIOTT RESIDENCE INN LIMITED PARTNERSHIP 10400 Fernwood Road Bethesda, MD 20817-1109 (301) 380-9000 Delaware 52-1558094 ---------------------------------------- -------------------------------------------------------- (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 ____. --- ================================================================================ Marriott Residence Inn Limited Partnership ================================================================================ TABLE OF CONTENTS -----------------

PAGE NO. -------- PART I - FINANCIAL INFORMATION (Unaudited): Condensed Balance Sheets ~~June~~September 157, 2001 and December 31, 2000............................................... 1 Condensed Statements of Operations Twelve and ~~Twenty~~Thirty-~~Four~~Six Weeks Ended ~~June~~September 157, 2001 and ~~June~~September 168, 2000.............. 2 Condensed Statements of Cash Flows ~~Twenty~~Thirty-~~Four~~Six Weeks Ended ~~June~~September 157, 2001 and ~~June~~September 168, 2000......................... 3 Notes to Condensed Financial Statements................................................ 4 Management's Discussion and Analysis of Financial Condition and Results of Operations................................................... 5 Quantitative and Qualitative Disclosures about Market Risk............................. 78 PART II - OTHER INFORMATION AND SIGNATURE................................................... 78

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

~~June~~September 157, December 31, 2001 2000 ------------- ------------ (unaudited) ASSETS Property and equipment, net......................................~~...~~ $~~135~~134,~~286~~676 $137,497 Due from Residence Inn by Marriott, Inc..........................~~...~~ 2,~~562~~593 2,160 Deferred financing costs, net of accumulated amortization........~~...~~ ~~617~~508 835 Property improvement fund........................................~~...~~ 3,~~689~~836 2,889 Cash and cash equivalents........................................~~...~~ 1416,~~613~~429 10,755 -------- -------- $~~156~~158,~~767~~042 $154,136 ======== ======== LIABILITIES AND PARTNERS' CAPITAL LIABILITIES Mortgage debt....................................................~~...~~ $ 9594,~~943~~534 $ 98,213 Incentive management fees due to Residence Inn by Marriott, Inc..~~...~~ 56,~~475~~121 3,626 Accounts payable and accrued expenses............................~~...~~ ~~710~~498 277 -------- -------- Total Liabilities............................................~~...~~ ~~102~~101,~~128~~153 102,116 -------- -------- PARTNERS' CAPITAL General Partner..................................................~~...~~ ~~623~~644 597 Limited Partners.................................................~~...~~ 5456,~~016~~245 51,423 -------- -------- Total Partners' Capital......................................~~...~~ 5456,~~639~~889 52,020 -------- -------- $~~156~~158,~~767~~042 $154,136 ======== ========

See Notes to Condensed Financial Statements. 1 Marriott Residence Inn Limited Partnership Condensed Statements of Operations (Unaudited, in Thousands, Except Unit and Per Unit Amounts)

Twelve Weeks Ended ~~Twenty~~Thirty-~~Four~~Six Weeks Ended ~~June~~September 157, ~~June~~September 168, ~~June~~September 157, ~~June~~September 168, 2001 2000 2001 2000 ------------ ------------ ------------ ------------ REVENUES Inn revenues Suites........................................ $15,~~040~~661 $1517,~~500~~022 $2945,~~779~~440 $2946,~~764~~786 Other......................................... ~~634~~759 ~~742~~813 12,~~246~~005 12,~~461~~274 ------- ------- ------- ------- Total Inn revenues........................... 1516,~~674~~420 1617,~~242~~835 3147,~~025~~445 3149,~~225~~060 ------- ------- ------- ------- OPERATING COSTS AND EXPENSES Inn property-level costs and expenses Suites........................................ 3,~~227~~267 3,~~347~~530 69,~~461~~728 610,~~605~~135 Other department costs and expenses........... ~~410~~349 ~~423~~249 ~~762~~1,111 ~~856~~1,105 Selling, administrative and other............. 3,~~669~~681 34,~~521~~246 711,~~609~~290 711,~~070~~862 ------- ------- ------- ------- Total Inn property-level costs and expenses.. 7,~~306~~297 78,~~291~~025 1422,~~832~~129 1423,~~531~~102 Depreciation................................... 1,~~564~~478 1,~~469~~457 34,~~034~~512 24,~~951~~408 Incentive management fee....................... 1,~~116~~256 1,~~416~~397 23,~~140~~396 23,~~186~~583 Property taxes................................. ~~574~~571 ~~611~~516 1,~~124~~695 1,~~194~~710 Residence Inn system fee....................... ~~601~~626 ~~620~~680 1,~~191~~817 1,~~191~~871 Equipment rent and other....................... ~~578~~481 ~~743~~358 1,~~075~~556 1,~~211~~023 Base management fee............................ ~~314~~328 ~~325~~356 ~~621~~949 ~~625~~981 ------- ------- ------- ------- Total operating costs and expenses........... 12,~~053~~037 12,~~475~~789 2436,~~017~~054 2336,~~889~~678 ------- ------- ------- ------- OPERATING PROFIT................................ 34,~~621~~383 35,~~767~~046 711,~~008~~391 712,~~336~~382 Interest expense............................... (2,~~355~~305) (2,~~479~~430) (47,~~726~~031) (47,~~998~~428) Interest income................................ ~~196~~172 ~~137~~183 ~~337~~509 ~~222~~405 ------- ------- ------- ------- NET INCOME...................................... $ 12,~~462~~250 $ 12,~~425~~799 $ 24,~~619~~869 $ 25,~~560~~359 ======= ======= ======= ======= ALLOCATION OF NET INCOME General Partner................................ $ 1423 $ 1428 2649 2654 Limited Partners............................... 12,~~448~~227 12,~~411~~771 24,~~593~~820 25,~~534~~305 ------- ------- ------- ------- $ 12,~~462~~250 $ 12,~~425~~799 $ 24,~~619~~869 $ 25,~~560~~359 ======= ======= ======= ======= NET INCOME PER LIMITED PARTNER UNIT (65,600 Units)................................. $ 2234 $ 2242 $ 4073 $ 3981 ======= ======= ======= =======

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

~~Twenty~~Thirty-~~Four~~Six Weeks Ended ~~June~~September 157, ~~June~~September 168, 2001 2000 ----------- ------------ OPERATING ACTIVITIES Net income....................................... $ 24,~~619~~869 $ 25,~~560~~359 Depreciation..................................... 34,~~034~~512 24,~~951~~408 Amortization of deferred financing costs......... ~~218~~327 ~~218~~327 Deferred incentive management fees............... 12,~~849~~495 12,~~781~~215 Loss on dispositions of fixed assets............. 31 167 Changes in operating accounts.................... 31(212) (~~254~~536) ------- ------- Cash provided by operating activities........ 711,~~754~~992 711,~~272~~780 ------- ------- INVESTING ACTIVITIES Additions to property and equipment.............. (~~826~~1,692) (23,~~476~~535) Change in property improvement fund.............. (~~800~~947) (~~907~~484) ------- ------- Cash used in investing activities............ (12,~~626~~639) (34,~~383~~019) ------- ------- FINANCING ACTIVITIES Repayment of mortgage debt....................... (23,~~270~~679) (23,~~049~~321) ------- ------- INCREASE IN CASH AND CASH EQUIVALENTS............. 35,~~858~~674 14,~~840~~440 CASH AND CASH EQUIVALENTS at beginning of period.. 10,755 6,025 ------- ------- CASH AND CASH EQUIVALENTS at end of period........ $1416,~~613~~429 $ 710,~~865~~465 ======= ======= SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Cash paid for mortgage interest.................. $ 46,~~104~~518 $ 46,~~324~~877 ======= =======

See Notes to Condensed Financial Statements. 3 Marriott Residence Inn Limited Partnership Notes to Condensed Financial Statements (Unaudited) 1. Organization Marriott Residence Inn Limited Partnership (the "Partnership"), a Delaware limited partnership, owns 15 Residence Inn by Marriott hotels (the "Inns") and the land on which the Inns are located. The Inns are located in seven states in the United States and have a total of 2,129 suites. The Inns 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 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 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 year ended December 31, 2000. In the opinion of the Partnership, the accompanying unaudited, condensed 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 its 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. For financial reporting purposes, net income of the Partnership is allocated 99% to the limited partners and 1% to RIBM One 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 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 thirty-six weeks ended September 7, 2001 and September 8, 2000 (unaudited, in thousands): 2001 2000 ------ ------ Marriott International, Inc.: Residence Inn system fee..................... $1,817 $1,871 Incentive management fee..................... 900 1,369 Marketing fund contribution.................. 1,136 1,170 Base management fee.......................... 949 981 Chain services and Marriott Rewards Program.. 972 1,022 ------ ------ $5,774 $6,413 ====== ====== General Partner: Administrative expenses reimbursed........... $ 55 $ 188 ====== ====== 4 RESIDENCE INN 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. As stated in the Partnership's letter to limited partners dated September 14, 2001, the General Partner engaged Merrill Lynch & Co. ("Merrill Lynch") as its financial advisor in April 2001 to solicit bids from interested parties. As part of that process, Merrill Lynch prepared a list of over 20 parties who they believed might have an interest in acquiring either the Partnership's Inns or the limited partner units and contacted those parties. Several of the parties contacted requested additional information, conducted preliminary due diligence of the Partnership and submitted acquisition proposals to the Partnership. As previously disclosed to the limited partners, the Partnership has begun exclusive discussions with one potential acquirer. As part of these discussions, we are working with the potential acquirer to determine, among other things, the effect of the terrorist attacks of September 11, 2001 on the Partnership's Inns and the transaction in general. Since the sale process is still ongoing, there can be no assurance that a transaction will occur or, if it were to occur, of the timing or ultimate value of any such transaction. In addition, if a transaction were to occur, it would require approval of the limited partners as well as consent of the Partnership's lenders. 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 5 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 11/th/ due to the slower economy and have subsequently been accelerated. We believe that while the near term outlook for the Inns' operations will continue to be difficult, we anticipate a gradual return to normal business levels. RESULTS OF OPERATIONS Revenues. Inn revenues decreased $1,415,000, or 8%, to $16.4 million and decreased $1,615,000, or 3%, to $47.4 million, respectively, for the twelve week and thirty-six week periods ended September 7, 2001 and are the result of the continued overall weakness in the economy compared to the prior year. For the third quarter of 2001, revenue per available room (RevPAR) decreased 3% to $84.95 due to a less than 1% increase in the combined average suite rate to $102.99 offset by a 2.9 percentage point decrease in the combined average occupancy to 82.5%. Through the third quarter of 2001, RevPAR decreased 3% to $84.66 due to a $1, or 1%, increase in the combined average suite rate to $102.77, offset by a 2.9 percentage point decrease in the combined average occupancy to 82.4%. Operating Costs and Expenses. Operating costs and expenses decreased $752,000, or 6%, to $12.0 million and decreased $624,000, or 2%, to $36.1 million for the twelve weeks and thirty-six weeks ended September 7, 2001, respectively, when compared to the same periods in 2000, primarily due to decreases in Inn property-level costs and expenses. As a percentage of total Inn revenues, total operating costs and expenses were 73% and 72% for the third quarter of 2001 and 2000, respectively, and 76% and 75% of revenues through the third quarters of 2001 and 2000, respectively. Inn property-level costs and expenses decreased $728,000, or 9%, to $7.3 million and decreased $973,000, or 4%, to $22.1 million for the twelve and thirty-six weeks ended September 7, 2001, respectively, when compared to the same periods in 2000. The decrease is due to a decrease in rooms controllable expenses corresponding to the decreasing occupancy in general and administrative expenses as a result of the Manager's cost-cutting efforts at the Inns. As a percentage of Inn revenues, Inn property-level costs and expenses represented 44% and 45% for the third quarters of 2001 and 2000, respectively, and 47% year-to-date 2001 and 2000. The incentive management fee ("IMF") earned by Residence Inn by Marriott, Inc. (the "Manager") is calculated as 15% of Operating Profit, as defined in the Management Agreement, in any year in which Operating Profit is less than $23.5 million and as 20% of Operating Profit whenever Operating Profit equals or exceeds $23.5 million. The IMF was calculated as 20% of Operating Profit for the thirty-six weeks ended September 7, 2001 and September 8, 2000, based upon the expectations for full year Operating Profit. However, the estimated full year IMF calculation was increased from 15% of operating profit for the first quarter of 2000 to 20% of Operating Profit in the second quarter 2000, the result was an adjustment of $257,000 to IMF during the second quarter of 2000. Operating Profit. As a result of the changes in revenues and operating costs and expenses discussed above, operating profit decreased $663,000 to $4.4 million, or 27% of revenues, for the third quarter of 2001, versus $5.0 million, or 28% of revenues, for the same period in 2000, and decreased $991,000 to $11.4 million, or 24% of revenues, for the first three quarters of 2001, versus $12.4 million, or 25% of revenues, for the same period in 2000. Interest Expense. Interest expense decreased $125,000, or 5%, and $397,000, or 5%, for the third quarter and year-to-date 2001, respectively, primarily due to principal amortization of the senior and second 6 mortgages. Net Income. As a result of the items discussed above, net income decreased $549,000, or 20%, to $2.3 million, and decreased $490,000 or 9%, to $4.9 million for the twelve and thirty-six weeks ended September 7, 2001, respectively. Net income comprised approximately 14% and 16% of revenues for the third quarter of 2001 and 2000, and 10% and 11% of revenues for the first three quarters of 2001 and 2000, respectively. LIQUIDITY AND CAPITAL RESOURCES The Partnership's financing needs have been historically funded through loan agreements with independent financial institutions. Our mortgage matures in 2002, and it is expected that the debt will be refinanced prior to maturity. Beginning in 1998, the Partnership's property improvement fund was insufficient to meet current needs. The shortfall is primarily due to the need for suite refurbishments at a majority of the Inns as part of ongoing, routine capital replacement. To reduce the shortfall, the contribution rate to the fund has been set at 5.5% of gross Inn revenues since 1999. The contribution rate will remain at 5.5% for 2001. Currently we are negotiating with the Manager a long- term plan, discussed below, and until such time as this is completed we do not anticipate any material routine capital maintenance expenses. 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 $47 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, if any, 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 cash 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 $12 million for the first three quarters of 2001 and 2000. The Partnership's cash used in investing activities primarily consists of contributions to the property improvement fund and capital expenditures for improvements to the Inns. Cash used in investing activities was $2.6 million and $4.0 million for the first three quarters of 2001 and 2000, respectively. Contributions to the property improvement fund were $2.6 and $1.2 million for the first three quarters in 2001 and 2000, respectively, and we provided additional cash of $1.2 million to the fund in the first quarter of 2000. Capital expenditures during these same time periods were $1.7 million and $3.8 million, respectively. The Partnership's cash used in financing activities consist of repayments of mortgage debt of $3.7 million 7 and $3.3 million for the first three quarters of 2001 and 2000, respectively. 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 has a fixed interest rate. 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. 8 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 LIMITED PARTNERSHIP By: RIBM ONE LLC General Partner October 22, 2001 By: /s/ Mathew Whelan ----------------------------- Mathew Whelan Vice President 9

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