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Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended June 14, 2002
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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 ___.
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Courtyard by Marriott II Limited Partnership
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TABLE OF CONTENTS
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Page No.
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PART I - FINANCIAL INFORMATION (Unaudited)
Condensed Consolidated Balance Sheets
June 14, 2002 and December 31, 2001 .................................... 1
Condensed Consolidated Statements of Operations
Twelve and Twenty-four Weeks Ended June 14, 2002 and June 15, 2001 ..... 2
Condensed Consolidated Statements of Cash Flows
Twenty-four Weeks Ended June 14, 2002 and June 15, 2001 ................ 3
Notes to Condensed Consolidated Financial Statements ...................... 4
Management's Discussion and Analysis of Financial
Condition and Results of Operations .................................... 5
Quantitative and Qualitative Disclosures about Market Risk ................ 7
PART II - OTHER INFORMATION
Legal Proceedings ......................................................... 7
Courtyard by Marriott II Limited Partnership
Condensed Consolidated Balance Sheets
(in thousands)
June 14, December 31,
2002 2001
--------- ---------
(Unaudited)
ASSETS
Property and equipment, net ..................................... $ 408,916 $ 418,885
Deferred financing costs, net of accumulated amortization ....... 8,822 9,547
Due from Courtyard Management Corporation ....................... 8,174 9,117
Prepaid insurance ............................................... 3 --
Property improvement fund ....................................... 36,645 30,513
Restricted cash ................................................. 26,557 22,535
Cash and cash equivalents ....................................... 5,363 10,489
--------- ---------
$ 494,480 $ 501,086
========= =========
LIABILITIES AND PARTNERS' CAPITAL (DEFICIT)
LIABILITIES
Debt ............................................................ $ 440,727 $ 448,605
Management fees due to Courtyard Management Corporation ......... 48,115 43,288
Due to Marriott International, Inc. and affiliates .............. 8,519 8,574
Accounts payable and accrued liabilities ........................ 12,799 12,389
--------- ---------
Total Liabilities ......................................... 510,160 512,856
--------- ---------
PARTNERS' CAPITAL (DEFICIT)
General Partner ................................................. 9,111 9,307
Limited Partners ................................................ (24,791) (21,077)
--------- ---------
Total Partners' Deficit ................................... (15,680) (11,770)
--------- ---------
$ 494,480 $ 501,086
========= =========
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)
Twelve Weeks Ended Twenty-four Weeks Ended
June 14, June 15, June 14, June 15,
2002 2001 2002 2001
--------- --------- --------- ---------
REVENUES
Rooms ............................... $ 57,527 $ 65,040 $ 109,736 $ 128,490
Food and beverage ................... 3,656 3,958 6,991 7,918
Other ............................... 1,264 1,949 2,595 3,915
--------- --------- --------- ---------
Total revenues .................. 62,447 70,947 119,322 140,323
--------- --------- --------- ---------
OPERATING COSTS AND EXPENSES
Rooms ............................... 12,726 14,064 24,493 28,063
Food and beverage ................... 2,953 3,578 5,770 7,156
Department costs and expenses ....... 599 664 1,048 1,114
Selling, administrative and other 15,051 16,450 29,402 33,242
Depreciation ........................ 6,003 6,530 12,140 13,045
Ground rent, taxes and other ........ 6,464 6,703 12,822 13,289
Base and Courtyard management fee ... 3,746 4,256 7,159 8,419
Incentive management fee ............ 2,628 3,235 4,827 6,189
--------- --------- --------- ---------
OPERATING PROFIT ....................... 12,277 15,467 21,661 29,806
Interest expense .................... (9,284) (9,582) (18,422) (19,108)
Interest income ..................... 127 370 233 701
--------- --------- --------- ---------
NET INCOME ............................. $ 3,120 $ 6,255 $ 3,472 $ 11,399
========= ========= ========= =========
ALLOCATION OF NET INCOME
General Partner ..................... $ 156 $ 313 $ 174 $ 570
Limited Partners .................... 2,964 5,942 3,298 10,829
--------- --------- --------- ---------
$ 3,120 $ 6,255 $ 3,472 $ 11,399
========= ========= ========= =========
NET INCOME PER LIMITED PARTNER
UNIT (1,470 Units) .................. $ 2,016 $ 4,042 $ 2,244 $ 7,367
========= ========= ========= =========
See Notes to Condensed Consolidated Financial Statements.
2
Courtyard by Marriott II Limited Partnership
Condensed Consolidated Statements of Cash Flows
(Unaudited, in thousands)
Twenty-four Weeks Ended
June 14, June 15,
2002 2001
-------- --------
OPERATING ACTIVITIES
Net income ...................................... $ 3,472 $ 11,399
Depreciation expense ............................ 12,140 13,045
Gain on disposition of fixed assets ............. -- (4)
Amortization of deferred financing fees ......... 725 728
Changes in operating accounts ................... 2,090 (4,684)
-------- --------
Cash provided by operating activities ..... 18,427 20,484
-------- --------
INVESTING ACTIVITIES
Additions to property and equipment, net ........ (2,171) (1,798)
Change in property improvement funds ............ (6,132) (7,929)
-------- --------
Cash used in investing activities ......... (8,303) (9,727)
-------- --------
FINANCING ACTIVITIES
Repayments of debt .............................. (7,878) (7,310)
Change in debt service reserve .................. 10 --
Capital distributions ........................... (7,382) (9,936)
-------- --------
Cash used in financing activities ......... (15,250) (17,246)
-------- --------
DECREASE IN CASH AND CASH EQUIVALENTS .............. (5,126) (6,489)
CASH AND CASH EQUIVALENTS at beginning of period ... 10,489 13,511
-------- --------
CASH AND CASH EQUIVALENTS at end of period ......... $ 5,363 $ 7,022
======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for mortgage and other interest ....... $ 17,305 $ 18,933
======== ========
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, a Delaware limited partnership,
owns 70 Courtyard by Marriott 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, 2001.
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 June 14, 2002, and the
results of its operations for the twelve and twenty-four weeks ended June 14,
2002 and June 15, 2001 and cash flows for the twenty-four weeks ended June 14,
2002 and June 15, 2001. 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 2002 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.
3. Amounts Paid to the General Partner and Marriott International, Inc.
The chart below summarizes amounts paid to the general partner and Marriott
International, Inc. for the twenty-four weeks ended June 14, 2002 and June 15,
2001 (in thousands):
2002 2001
------- -------
Marriott International, Inc.:
Incentive management fee ..................... $ -- $ 2,040
Base management fee .......................... 4,176 4,911
Chain services and Marriott Rewards Program .. 3,743 4,238
Courtyard by Marriott system fee ............. 2,983 3,508
Marketing fund contribution .................. 2,488 2,981
------- -------
$13,390 $17,678
======= =======
General Partner:
Administrative expenses reimbursed ........... $ 349 $ 7
======= =======
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.
RESULTS OF OPERATIONS
Revenues. Total hotel revenues for the twelve weeks ended June 14, 2002
decreased $8.5 million, or 12%, to $62.4 million compared to the same period in
2001. For the twenty-four weeks ended June 14, 2002, total hotel revenues
decreased $21 million, or 15%, to $119.3 million compared to the twenty-four
weeks ended June 15, 2001. The decrease in hotel revenues for both the second
quarter of 2002 and year-to-date 2002 is due to a decrease in rooms' revenues.
The decrease in year-to-date rooms' revenue was driven by a decline in revenue
per available room ("RevPAR") of $10.80 or, 14.6%, which reflects a decrease in
occupancy of 6.1 percentage points and a decrease in average room rates of
$6.98, or 7.1%. The results reflect the continued demand weakness in the lodging
industry. Additionally, lower room rates at full service hotels have caused
increased competition for the limited service segment.
Property level costs and expenses. Property-level costs and expenses which
includes rooms, food and beverage, department costs and expenses and selling,
administration, and other expenses, declined $3.4 million, or 10%, to $31.3
million for the second quarter of 2002 compared to the second quarter of 2001.
For the twenty-four weeks ended June 14, 2002, property-level costs and expenses
decreased $8.9 million to $60.7 million from the same period in 2001. The
decrease is due to a decline in controllable expenses as a result of
cost-cutting efforts implemented at the hotels in response to the decrease in
occupancy. These efforts include a reduction in wages at the properties of $3.1
million. However, our ability to achieve significant additional reductions in
variable costs is limited and as a result, we believe we will continue to see a
decline in margins over the prior year. As a percentage of hotel revenues,
property-level costs and expenses represented approximately 50% and 49% of hotel
revenues for the second quarter of 2002 and 2001 respectively. Year-to-date,
property-level costs and expenses represented 51% and 50% of hotel revenues for
2002 and 2001 respectively.
Base and Courtyard management fees. Base and Courtyard management fees declined
$510,000, or 12%, for the second quarter of 2002 versus the second quarter of
2001, and decreased $1.3 million, or 15%, year-to-date. The decrease in
management fees, which are calculated as a percentage of total hotel revenues,
is consistent with the decline in hotel revenues.
Incentive Management Fees. Incentive management fees decreased by $607,000, or
19%, for the second quarter of 2002 versus the second quarter of 2001, and
decreased $1.4 million, or 22%, year-to-date. This is a result of decreased
hotel revenues.
5
COURTYARD BY MARRIOTT II LIMITED PARTNERSHIP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Operating Profit. Operating profit for second quarter 2002 decreased by $3.2
million compared to second quarter 2001. Year-to-date, operating profit
decreased $8.1 million to $21.7 million when compared to the same period in
2001. Operating profit represented 20% of total revenues for the second quarter
of 2002 and 22% for the second quarter of 2001. Year-to-date, operating profit
represented 18% and 21% of hotel revenues for 2002 and 2001, respectively.
Interest Expense. Interest expense decreased $298,000, or 3.1%, for the second
quarter of 2002 versus the second quarter of 2001, and decreased $686,000, or
3.6%, year-to-date. The decreases for both periods are the result of principal
amortization on the debt.
Net Income. Net income for the second quarter 2002 decreased by $3.1 million to
$3.1 million when compared to the same period in 2001. Year-to-date, net income
decreased $7.9 million to $3.5 million, as a result of the items discussed
above.
LIQUIDITY AND CAPITAL RESOURCES
The partnership's liquidity has been historically funded through loan agreements
with independent financial institutions and by cash from our operations. As a
result of the events of September 11 and the slowly recovering economy the
results of operations from the properties have decreased significantly over
prior year levels. Based on the current forecast of full year results, it
appears that there will be sufficient cash from operations to make the required
debt service, however we may not have sufficient cash from operations to
complete all the planned owner funded capital expenditures for the remainder of
2002. The partnership does have $5.4 million of cash as of June 14, 2002, which
could be used either to fund capital expenditures or to make distributions to
the partners. If the economy experiences further declines, we expect that
operations may continue to be adversely affected. Also, we believe that delays
in completing the planned capital expenditures could result in greater future
costs for the partnership. Although the General Partner believes that the
expectations reflected in these forward looking statements are based upon
reasonable assumptions, we can give no assurance that actual results will
reflect these statements or that the results will not deviate materially.
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, make payments to the property
improvement fund and to make distributions to the limited partners.
Cash provided by operations for the first two quarters of 2002 was $18.4 million
compared to $20.5 million for the first two quarters of 2001. The decrease in
cash provided by operations is due to a decrease in net income, partially offset
by an increase in deferred incentive management fees.
Cash used in investing activities was $8.3 million and $9.7 million for the
first two quarters of 2002 and 2001, respectively. Cash used in investing
activities for the first two quarters of 2002 includes capital expenditures of
$2.2 million, primarily related to renovations and replacements of furniture,
fixtures and equipment at the partnership's hotels as compared to $1.8 million
in the first two quarters of 2001. The property improvement fund increased by
$6.1 million for the twenty-four weeks ended June 14, 2002 compared to $7.9
million for the twenty-four weeks ended June 15, 2001.
Cash used in financing activities was $15.3 million and $17.2 million for the
first two quarters of 2002 and 2001, respectively. The partnership repaid $7.9
million and $7.3 million, respectively, of principal on the commercial
mortgage-backed securities during the first two quarters of 2002 and 2001. Cash
used in financing activities
6
COURTYARD BY MARRIOTT II LIMITED PARTNERSHIP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
included $7.4 million of cash distributions to the limited partners during the
first two quarters of 2002 compared to $10 million during the first two quarters
of 2001.
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
June 14, 2002, 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
July 29, 2002 By: /s/ Mathew J. Whelan
----------------------------------------
Mathew J. Whelan
Vice President
8