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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to ___________
COMMISSION FILE NO. 33-98136
CHELSEA GCA REALTY PARTNERSHIP, L.P.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 22-3258100
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
103 EISENHOWER PARKWAY, ROSELAND, NEW JERSEY 07068
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES - ZIP CODE)
(973) 228-6111
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE
Securities registered pursuant to Section 12 (g) of the Act: None
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 (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
Indicate by check mark if the disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [x]
There are no outstanding shares of Common Stock or voting securities.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the definitive Proxy Statement of Chelsea GCA Realty, Inc. relating
to its 1998 Annual Meeting of Shareholders are incorporated by reference into
Part III as set forth herein.
PART I
ITEM 1. BUSINESS
THE OPERATING PARTNERSHIP
Chelsea GCA Realty Partnership, L.P., a Delaware limited partnership (the
"Operating Partnership"), is 81.7% owned and managed by its sole general
partner, Chelsea GCA Realty, Inc. ("Chelsea GCA" or the "Company"), a
self-administered and self-managed real estate investment trust ("REIT"). The
Operating Partnership owns, develops, redevelops, leases, markets and manages
upscale and fashion-oriented manufacturers' outlet centers. At the end of 1997,
the Operating Partnership owned and operated 20 centers (the "Properties") with
approximately 4.3 million square feet of gross leasable area ("GLA") in 12
states. The Operating Partnership also has properties under development
including one new center in Leesburg, Virginia, an expansion of Woodbury Common
(Central Valley, NY), its largest center, and expansions of other existing
centers. The Operating Partnership's existing portfolio includes properties in
or near New York City, Los Angeles, San Francisco, Sacramento, Boston, Portland
(Oregon), Kansas City, Atlanta, Cleveland, Honolulu, the Napa Valley, Palms
Springs and the Monterey Peninsula.
The Operating Partnership's executive offices are located at 103 Eisenhower
Parkway, Roseland, New Jersey 07068 (telephone 973-228-6111).
RECENT DEVELOPMENTS
Between January 1, 1997 and December 31, 1997, the Operating Partnership added
698,000 square feet of GLA to its portfolio as a result of a 227,000 square foot
new center opening, a 214,000 square foot acquisition and five expansions
totaling 257,000 square feet.
A summary of development, acquisition and expansion activity from January 1,
1997 through December 31, 1997 is contained below:
Acquisition
or GLA Number
Development (Sq. of
Property Date (s) Ft.) Stores Certain Tenants
- -------- ----------------- -------------- ------------ -----------------
As of January 1, 1997............ 3,610,000 995
New center:
Wrentham Village............ 10/97 227,000 57 Bose, Brooks Brothers,
Donna Karan, GAP,
Off 5th-Saks Fifth Avenue, Versace
Acquisition:
Waikele Premium Outlets...... 3/97 214,000 51 Bose, Donna Karan, Guess, Levi's,
Nine West, Off 5th-Saks Fifth Avenue
Expansions:
North Georgia................. 5/97 111,000 32 Joan & David, Liz Claiborne, Williams
Sonoma
Camarillo Premium Outlets...... 9/97 85,000 18 Calvin Klein, GAP, J. Peterman
Desert Hills.................... 11/97 36,000 8 Emanuel/Emanuel Ungaro, Lacoste
Other (net)..................... 25,000 1 Emanuel/Emanuel Ungaro
-------------- -----------
Total expansions............. 257,000 59
-------------- ------------
As of December 31, 1997............... 4,308,000 1,162
============== ============
The most recent newly developed, expanded or acquired centers are discussed
below:
WRENTHAM VILLAGE, WRENTHAM, MASSACHUSETTS. Wrentham Village Premium Outlets, a
227,000 square foot center containing 57 stores, opened in October 1997 and is
located near the junction of interstates 95 and 495 between Boston and
Providence. The populations within a 30-mile, 60-mile and 100-mile radius are
approximately 3.9 million, 6.9 million and 10.3 million, respectively. Average
household income within a 30-mile radius is approximately $52,000.
WAIKELE, WAIPAHU, HAWAII. Waikele Premium Outlets, a 214,000 square foot center
containing 51 stores, was acquired on March 31, 1997 and is located on Oahu
Highway H-1, 15 miles northwest of Honolulu. The populations within a 15-mile
and 30-mile radius are approximately 700,000 and 900,000, respectively. Average
household income within a 30-mile radius is approximately $63,000. Approximately
6.5 million tourists visited Hawaii in 1996.
NORTH GEORGIA, DAWSONVILLE, GEORGIA. North Georgia Premium Outlets, a 403,000
square foot center containing 108 stores, opened in two phases, in May 1996 and
May 1997. The center is located 40 miles north of Atlanta on Georgia State
Highway 400 bordering Lake Lanier, at the gateway to the North Georgia
mountains. The populations within a 30-mile, 60-mile and 100-mile radius are
approximately 700,000, 3.6 million and 5.8 million, respectively. Average
household income within a 30-mile radius is approximately $55,000.
CAMARILLO, CAMARILLO, CALIFORNIA. Camarillo Premium Outlets, a 365,000 square
foot center containing 103 stores, opened in five phases, from March 1995
through September 1997. The center is located 48 miles north of Los Angeles,
about 55 miles south of Santa Barbara on Highway 101. The populations within a
30-mile, 60-mile and 100-mile radius are approximately 1.1 million, 8.3 million
and 14.6 million, respectively. Average household income within a 30-mile radius
is approximately $66,000.
DESERT HILLS, CABAZON, CALIFORNIA. Desert Hills Premium Outlets, a 468,000
square foot center containing 117 stores, opened in three phases, in December
1990, June 1995 and November 1997. The center is located on Interstate 10, 18
miles west of Palm Springs and 75 miles east of Los Angeles. The populations
within a 30-mile, 60-mile and 100-mile radius are approximately 1.1 million, 4.7
million and 17.0 million, respectively. Average household income within a
30-mile radius is approximately $42,000.
The Operating Partnership has started construction of approximately 760,000
square feet of new GLA scheduled for completion in 1998, including the 270,000
square foot first phase of Leesburg Corner Premium Outlets (Leesburg, VA), a new
center serving the greater Washington, DC market; and expansions of 270,000
square feet at Woodbury Common Premium Outlets (Central Valley, NY), 125,000
square feet at Wrentham Village Premium Outlets, 45,000 square feet at Camarillo
Premium Outlets, 30,000 square feet at North Georgia Premium Outlets, and 20,000
square feet at Folsom Premium Outlets (Folsom, CA). These projects are in
various stages of development and there can be no assurance that any of these
projects will be completed or opened, or that there will not be delays in the
opening or completion of any of these projects.
STRATEGIC ALLIANCE
In May 1997, the Operating Partnership announced the formation of a strategic
alliance with Simon DeBartolo Group, Inc. ("Simon") to develop and acquire
high-end outlet centers with GLA of 500,000 square feet or more in the United
States. The Operating Partnership and Simon will be co-managing general
partners, each with 50% ownership of the joint venture and any entities formed
with respect to specific projects; the Operating Partnership will have primary
responsibility for the day-to-day activities of each project. In conjunction
with the alliance, on June 16, 1997, the Operating Partnership completed the
sale of 1.4 million shares of the Company's common stock to Simon, for an
aggregate price of $50 million. Proceeds from the sale were used to repay
borrowings under the Credit Facilities. Simon is one of the largest publicly
traded real estate companies in North America as measured by market
capitalization, and at March 1998 owns, has an interest in and or manages
approximately 145 million square feet of retail and mixed-use properties in 34
states.
ORGANIZATION OF THE OPERATING PARTNERSHIP
The Operating Partnership was formed through the merger in 1993 of The Chelsea
Group ("Chelsea") and Ginsburg Craig Associates ("GCA"), two leading outlet
center development companies, providing for greater access to the public and
private capital markets. All of the Properties are held by and all of its
business activities conducted through the Operating Partnership. The Company
(which owned 81.7% in the Operating Partnership as of December 31, 1997) is the
sole general partner of the Operating Partnership and has full and complete
control over the management of the Operating Partnership and each of the
Properties.
THE MANUFACTURERS' OUTLET BUSINESS
Manufacturers' outlets are manufacturer-operated retail stores that sell
primarily first-quality, branded goods at significant discounts from regular
department and specialty store prices. Manufacturers' outlet centers offer
numerous advantages to both consumer and manufacturer: by eliminating the third
party retailer, manufacturers are often able to charge customers lower prices
for brand name and designer merchandise; manufacturers benefit by being able to
sell first quality in-season, as well as out-of-season, overstocked or
discontinued merchandise without compromising their relationships with
department stores or hampering the manufacturers' brand name. In addition,
outlet stores enable manufacturers to optimize the size of production runs while
maintaining control of their distribution channels.
BUSINESS OF THE OPERATING PARTNERSHIP
The Operating Partnership believes its strong tenant relationships, high-quality
property portfolio and managerial expertise give it significant advantages in
the manufacturers' outlet business.
STRONG TENANT RELATIONSHIPS. The Operating Partnership maintains strong tenant
relationships with high fashion, upscale manufacturers that have a selective
presence in the outlet industry, such as Ann Taylor, Brooks Brothers, Cole Haan,
Donna Karan, Joan & David, Jones New York, Nautica, Polo Ralph Lauren and Tommy
Hilfiger, as well as with national brand-name manufacturers such as Nine West,
Phillips-Van Heusen (Bass, Geoffrey Beene, Van Heusen) and Sara Lee (Champion,
Hanes, Coach Leather). The Operating Partnership believes that its ability to
draw from both groups is an important factor in providing broad customer appeal
and higher tenant sales.
HIGH QUALITY PROPERTY PORTFOLIO. The Properties generated weighted average
reported tenant sales during 1997 of $360 per square foot. A significant number
of the Operating Partnership's tenants, including Ann Taylor, Brooks Brothers,
Burberrys, Cole-Haan, Donna Karan, Emanuel/Emanuel Ungaro, Joan & David, Jones
New York, Nike, Nine West, Nautica, Polo Ralph Lauren Factory Store, Royal
Doulton, Timberland, Tommy Hilfiger and Waterford/Wedgwood, reported that the
top store in their outlet chain during 1996 (as measured by sales per square
foot or gross sales) was in one of the Operating Partnership's centers. The
Operating Partnership believes that the quality of its centers gives it
significant advantages in attracting customers and negotiating multi-lease
transactions with tenants.
MANAGEMENT EXPERTISE. The Operating Partnership believes it has a competitive
advantage in the manufacturers' outlet business as a result of its experience in
the business, long-standing relationships with tenants and expertise in the
development and operation of manufacturers' outlet centers. The Operating
Partnership's senior management has been recognized as leaders in the outlet
industry over the last two decades. The Operating Partnership was the first
recipient of the VALUE RETAIL NEWS Award of Excellence. In addition, management
developed a number of the earliest and most successful outlet centers in the
industry, including Liberty Village (one of the first manufacturers' outlet
centers in the U.S.) in 1981, Woodbury Common in 1985, and Desert Hills and
Aurora Farms in 1990. Since the IPO, the Operating Partnership has added
significantly to its senior management in the areas of development, leasing and
property management without increasing general and administrative expenses as a
percentage of total revenues; additionally, the Operating Partnership intends to
continue to invest in systems and controls to support the planning, coordination
and monitoring of its activities.
GROWTH STRATEGY
The Operating Partnership seeks growth through increasing rents in its existing
centers; developing new centers and expanding existing centers; and acquiring
and redeveloping centers.
INCREASING RENTS AT EXISTING CENTERS. The Operating Partnership's leasing
strategy includes aggressively marketing available space and maintaining a high
level of occupancy; providing for inflation-based contractual rent increases or
periodic fixed contractual rent increases in substantially all leases; renewing
leases at higher base rents per square foot; re-tenanting space occupied by
underperforming tenants; and continuing to sign leases that provide for
percentage rents.
DEVELOPING NEW CENTERS AND EXPANDING EXISTING CENTERS. The Operating Partnership
believes there will continue to be significant opportunities to develop
manufacturers' outlet centers across the United States. The Operating
Partnership intends to undertake such development on a selective basis, and
believes that it will have a competitive advantage in doing so as a result of
its development expertise, tenant relationships and access to capital. The
Operating Partnership expects that the development of new centers and the
expansion of existing centers will continue to be a substantial part of its
growth strategy. The Operating Partnership believes that its development
experience and strong tenant relationships enable it to determine site viability
on a timely and cost-effective basis. There can be no assurance that any
development or expansion projects will be commenced or completed as scheduled.
ACQUIRING AND REDEVELOPING CENTERS. The Operating Partnership intends to
selectively acquire individual properties and portfolios of properties that meet
its strategic investment criteria as suitable opportunities arise. The Operating
Partnership believes that its extensive experience in the outlet center
business, access to capital markets, familiarity with real estate markets and
advanced management systems will allow it to evaluate and execute acquisitions
competitively. Furthermore, management believes that the Operating Partnership
will be able to enhance the operation of acquired properties as a result of its
(i) strong tenant relationships with both national and upscale fashion
retailers; and (ii) development, marketing and management expertise as a
full-service real estate organization. Additionally, the Operating Partnership
may be able to acquire properties on a tax-advantaged basis through the issuance
of Operating Partnership units. There can be no assurance that any acquisitions
will be consummated or, if consummated, will result in an advantageous return on
investment for the Operating Partnership.
OPERATING STRATEGY
The Operating Partnership's primary business objectives are to enhance the value
of its properties and operations by increasing cash flow. The Operating
Partnership plans to achieve these objectives through continuing efforts to
improve tenant sales and profitability, and to enhance the opportunity for
higher base and percentage rents.
LEASING. The Operating Partnership pursues an active leasing strategy through
long-standing relationships with a broad range of tenants including
manufacturers of men's, women's and children's ready-to-wear, lifestyle apparel,
footwear, accessories, tableware, housewares, linens and domestic goods. Key
tenants are placed in strategic locations to draw customers into each center and
to encourage shopping at more than one store. The Operating Partnership
continually monitors tenant mix, store size, store location and sales
performance, and works with tenants to improve each center through re-sizing,
re-location and joint promotion.
MARKET AND SITE SELECTION. To ensure a sound long-term customer base, the
Operating Partnership generally seeks to develop sites near densely-populated,
high-income metropolitan areas, and/or at or near major tourist destinations.
While these areas typically impose numerous restrictions on development and
require compliance with complex entitlement and regulatory processes, the
Operating Partnership believes that these areas provide the most attractive
long-term demographic characteristics.
The Operating Partnership generally seeks to develop sites that can support at
least 400,000 square feet of GLA and that offer the long-term opportunity to
dominate their respective markets through a critical mass of tenants.
MARKETING. The Operating Partnership pursues an active, property-specific
marketing strategy using a variety of media including newspapers, television,
radio, billboards, regional magazines, guide books and direct mailings. The
centers are marketed to tour groups, conventions and corporations; additionally,
each property participates in joint destination marketing efforts with other
area attractions and accommodations. Virtually all consumer marketing expenses
incurred by the Operating Partnership are reimbursable by tenants.
PROPERTY DESIGN AND MANAGEMENT. The Operating Partnership believes that
effective property design and management are significant factors in the success
of its properties and works continually to maintain or enhance each center's
physical plant, original architectural theme and high level of on-site services.
Each property is designed to be compatible with its environment and is
maintained to high standards of aesthetics, ambiance and cleanliness in order to
promote longer visits and repeat visits by shoppers. Of the Operating
Partnership's 326 full-time and 72 part-time employees, 228 full-time and 72
part-time employees are involved in on-site maintenance, security,
administration and marketing. Centers are generally managed by an on-site
property manager with oversight from a regional operations manager.
FINANCING
The Operating Partnership's financing strategy is to maintain a strong, flexible
financial position by: (i) maintaining a conservative level of leverage, (ii)
extending and sequencing debt maturity dates, (iii) managing floating interest
rate exposure and (iv) maintaining liquidity. Management believes these
strategies will enable the Operating Partnership to access a broad array of
capital sources, including bank or institutional borrowings, secured and
unsecured debt and equity offerings.
It is the Operating Partnership's policy to limit its borrowings to less than
40% of total market capitalization (defined as the value of outstanding shares
of the Company's common stock including conversion of partnership units to
common stock, plus the liquidation preference value of the Company's preferred
stock, plus total debt). Applying a December 31, 1997 closing price of $38.1875
per common share, plus a liquidation preference of $50.00 per preferred share,
the Operating Partnership's ratio of debt to total market capitalization was
approximately 27% at December 31, 1997.
The Operating Partnership currently has in place two unsecured bank revolving
lines of credit with an aggregate maximum borrowing amount of $150 million
(each, a "Credit Facility" and collectively, the "Credit Facilities"). Each
Credit Facility expires on March 30, 1998 and bears interest on the outstanding
balance, payable monthly, at a rate equal to the London Interbank Offered Rate
("LIBOR") plus 1.15% or the prime rate, at the Operating Partnership's option. A
fee on the unused portion of the Credit Facilities is payable quarterly at a
rate of 0.25% per annum. The Credit Facilities' are provided by five banks. The
Operating Partnership has agreed to a term sheet with its agent bank for a new
three year credit facility that generally includes more favorable terms than the
Credit Facilities and is expected to close on or prior to March 30, 1998.
The Operating Partnership completed the sale to Simon of 1.4 million shares of
the Company's common stock, for an aggregate price of $50 million, on June 16,
1997, in conjunction with a strategic alliance. Proceeds from the sale were used
to repay borrowings under the Credit Facilities.
In October 1997, the Company issued 1.0 million shares of 8.375% Series A
Cumulative Redeemable Preferred Stock (the "Preferred Stock"), par value $0.01
per share, having a liquidation preference of $50.00 per share. The Preferred
Stock has no stated maturity and is not convertible into any other securities of
the Company. The Preferred Stock is redeemable on or after October
15, 2027 at the Company's option. Net proceeds from the offering
were used to repay borrowings under the Operating Partnership's Credit
Facilities.
Also in October 1997, the Operating Partnership completed a $125 million public
debt offering of 7.25% unsecured term notes due October 2007 (the "7.25%
Notes"). The 7.25% Notes were priced to yield 7.29% to investors, 120 basis
points over the 10-year U.S. Treasury rate. Net proceeds from the offering were
used to repay substantially all borrowings under the Operating Partnership's
Credit Facilities, redeem $40 million of Remarketed Floating Rate Reset Notes
and for general corporate purposes.
COMPETITION
The Properties compete for retail consumer spending on the basis of the diverse
mix of retail merchandising and value oriented pricing. Manufacturers' outlet
centers have established a niche capitalizing on consumer demand for
value-priced goods. The Properties compete for customer spending with other
outlet locations, traditional shopping malls, off-price retailers, and other
sales channels in the retail industry. The Operating Partnership believes that
the Properties are generally the leading manufacturers' outlet centers in each
market. The Operating Partnership carefully considers the degree of existing and
planned competition in each proposed area before deciding to build a new center.
ENVIRONMENTAL MATTERS
The Operating Partnership is not aware of any environmental liabilities relating
to the Properties that would have a material impact on the Operating
Partnership's financial position and results of operations.
PERSONNEL
As of December 31, 1997, the Operating Partnership had 326 full-time and 72
part-time employees. None of the employees are subject to any collective
bargaining agreements, and the Operating Partnership believes it has good
relations with its employees.
ITEM 2. PROPERTIES
The Properties are upscale, fashion-oriented manufacturers' outlet centers
located near large metropolitan areas, including New York, Los Angeles, San
Francisco, Boston, Atlanta, Sacramento, Portland (Oregon), Kansas City and
Cleveland, or at or near tourists destinations, including Honolulu, the Napa
Valley, Palm Springs and the Monterey Peninsula. The Properties were 99% leased
as of December 31, 1997 and contained approximately 1,200 stores with
approximately 360 different tenants. During 1997 and 1996, the Properties
generated weighted average tenant sales of $360 and $345 per square foot,
respectively. As of December 31, 1997, the Operating Partnership had 20
operating outlet centers. Of the 20 operating centers, 18 are owned 100% in fee;
and two, American Tin Cannery Premium Outlets and Lawrence Riverfront Plaza
Factory Outlets, are held under long-term leases. The Operating Partnership
manages all of its Properties.
Approximately 34% and 38% of the Operating Partnership's revenues for the years
ended December 31, 1997 and 1996, respectively, were derived from the Operating
Partnership's two centers with the highest revenues, Woodbury Common Premium
Outlets and Desert Hills Premium Outlets. The loss of either center or a
material decrease in revenues from either center for any reason may have a
material adverse effect on the Operating Partnership. In addition, approximately
38% and 44% of the Operating Partnership's revenues for the years ended December
31, 1997 and 1996, respectively, were derived from the Operating Partnership's
centers in California.
The Operating Partnership, combining all of its store concepts, does not
consider any one store lease to be material and no individual tenant accounts
for more than 7% of the Operating Partnership's gross revenues or total GLA.
Only one tenant occupies more than 4.3% of the Operating Partnership's total
GLA. In view of these statistics and the Operating Partnership's past success in
re-leasing available space, the Operating Partnership believes the loss of any
individual tenant would not have a significant effect on future operations.
Set forth in the table below is certain property information as of December
31,1997:
GLA NO.
YEAR (SQ. OF
NAME/LOCATION OPENED FT.) STORES CERTAIN TENANTS
------------------------------------------- ----------- ------------- ------------ ----------------------------------------
Woodbury Common............................. 1985 573,000 151 Brooks Brothers, Calvin Klein, Coach
Central Valley, NY (New York City Metro area) Leather, Donna Karan, GAP, Polo
Ralph Lauren
Desert Hills................................ 1990 468,000 117 Bose, Coach Leather, Donna Karan,
Cabazon, CA (Palm Springs-Los Angeles area) Eddie Bauer, Nautica, Polo Ralph
Lauren, Tommy Hilfiger
North Georgia............................... 1996 403,000 108 Bose, Brooks Brothers, Donna Karan, GAP,
Dawsonville, GA (Atlanta metro area) Off 5th-Saks Fifth Avenue, Van
Heusen, Williams Sonoma
Camarillo Premium Outlets................... 1995 365,000 103 Barneys New York, Donna Karan, J.
Camarillo, CA (Los Angeles metro area) Peterman, Levi's, Nine West, Off
5th-Saks Fifth Avenue
Aurora Premium Outlets...................... 1987 294,000 66 Ann Taylor, Brooks Brothers, Carters, Liz
Aurora, OH (Cleveland metro area) Claiborne, Off 5th-Saks Fifth Avenue,
Reebok
Clinton Crossing............................ 1996 272,000 67 Bose, Coach Leather, Donna Karan, GAP,
Clinton, CT (I-95/NY-New England corridor) Off 5th-Saks Fifth Avenue, Polo Ralph
Lauren
Wrentham Village............................ 1997 227,000 57 Brooks Brothers, Calvin Klein, Donna
Wrentham, MA (Boston/Providence metro area) Karan, GAP, Versace
Folsom Premium Outlets...................... 1990 226,000 67 Bass, Donna Karan, Levi's, Nike, Nine
Folsom, CA (Sacramento metro area) West, Off 5th-Saks Fifth Avenue
Waikele Premium Outlets..................... 1997(1) 214,000 51 Bose, Donna Karan, Guess, Levi's, Nine
Waipahu, HI (Honolulu area) West, Off 5th-Saks Fifth Avenue
Petaluma Village............................ 1994 196,000 51 Ann Taylor, Brooks Brothers, Levi's,
Petaluma, CA (San Francisco metro area) Off 5th-Saks Fifth Avenue, Reebok
Napa Premium Outlets........................ 1994 171,000 49 Cole-Haan, Dansk, Ellen Tracy, Esprit,
Napa, CA (Napa Valley) J.Crew, Nautica, Timberland
Liberty Village............................. 1981 157,000 58 Calvin Klein, Donna Karan, Ellen Tracy,
Flemington, NJ (New York-Phila. metro area) Polo Ralph Lauren, Tommy Hilfiger
Columbia Gorge.............................. 1991 148,000 42 Carters, Harry & David, Levi's,
Troutdale, OR (Portland metro area) Mikasa, Norm Thompson
Lawrence Riverfront Plaza................... 1990 146,000 39 Bass, J.Crew, Jones New York Country,
Lawrence, KS (Kansas City metro area) London Fog
American Tin Cannery........................ 1987 137,000 49 Anne Klein, Carole Little, Joan & David,
Pacific Grove, CA (Monterey Peninsula) London Fog, Reebok, Rockport
Santa Fe Premium Outlets.................... 1993 125,000 41 Brooks Brothers, Cole-Haan, Dansk,
Santa Fe, NM Donna Karan, Joan & David, Mondi
Patriot Plaza............................... 1986 76,000 11 Lenox, Polo Ralph Lauren, Westpoint
Williamsburg, VA (Norfolk-Richmond area) Stevens
Solvang Designer Outlets.................... 1994 52,000 15 Bass, Donna Karan, Ellen Tracy, Nautica
Solvang, CA (Southern California area)
Mammoth Premium Outlets..................... 1990 35,000 11 Bass, Polo Ralph Lauren
Mammoth Lakes, CA. (Yosemite National Park)
St. Helena Premium Outlets.................. 1992 23,000 9 Brooks Brothers, Coach Leather, Donna
St. Helena, CA (Napa Valley) Karan, Joan & David
------------- ------------
Total.................................... 4,308,000 1,162
============= ============
(1) Acquired in March 1997
The Operating Partnership rents approximately 23,000 square feet of office space
in its headquarters facility in Roseland, New Jersey and approximately 4,000
square feet of office space for its west coast regional office in Newport Beach,
California.
ITEM 3. LEGAL PROCEEDINGS
The Operating Partnership is not presently involved in any material litigation
other than routine litigation arising in the ordinary course of business and
which is either expected to be covered by liability insurance or have no
material impact on the Operating Partnership's financial position and results of
operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY MATTERS
None.
ITEM 6: SELECTED FINANCIAL DATA
CHELSEA GCA REALTY PARTNERSHIP, L.P. AND PREDECESSOR BUSINESS (1)
(IN THOUSANDS EXCEPT PER SHARE, AND NUMBER OF CENTERS)
Period Period
Nov.2 Jan. 1,
1993 1993
Year Ended to to
December 31, Dec. 31, Nov. 1,
--------------------------------------------- ---------- ---------
Operating Data: 1997 1996 1995 1994 1993 1993
---- ---- ---- ---- ---- -----
Rental revenue.................................... $81,531 $63,792 $51,361 $38,010 $6,401 $21,398
Total revenues.................................... 113,417 91,356 72,515 53,145 8,908 29,844
Total expenses.................................... 78,262 59,996 41,814 28,179 4,618 28,372
Net income before minority interest
and extraordinary item........................ 35,155 31,360 29,650 24,966 4,290 1,472
Minority interest................................. (127) (257) (285) (49) - (1,128)
Net income before extraordinary item.............. 35,028 31,103 29,365 24,917 4,290 344
Extraordinary item - loss on retirement of debt... (252) (902) - - (9,410) -
Net income (loss)................................. 34,776 30,201 29,365 24,917 (5,120) 344
Preferred distribution............................ (907) - - - - -
Net income (loss) to common unitholders........... 33,869 30,201 29,365 24,917 (5,120) 344
Net income (loss) per common unit:
General partner (including $0.01, $0.05 and
$0.51 net loss per unit from extraordinary item
in 1997, 1996 and 1993, respectively) .......... $1.88 $1.77 $1.75 $1.50 $(0.31) -
Limited partner (including $0.01, $0.05 and
$0.51 net loss per unit from extraordinary item
in 1997, 1996 and 1993, respectively)............ $1.87 $1.76 $1.75 $1.50 $(0.31) -
OWNERSHIP INTEREST:
General partner................................... 14,605 11,802 11,188 10,956 10,937 -
Limited partners.................................. 3,435 5,316 5,601 5,690 5,703 -
-------- ------- ------- ------- ------- --------
Weighted average units outstanding................ 18,040 17,118 16,789 16,646 16,640 -
BALANCE SHEET DATA:
Rental properties before accumulated
depreciation.................................. $708,933 $512,354 $415,983 $332,834 $243,218 $192,565
Total assets...................................... 688,029 502,212 408,053 330,775 288,732 188,895
Total liabilities................................. 342,106 240,878 141,577 68,084 24,496 173,012
Minority interest................................. - 5,698 5,441 5,156 - 5,587
Partners' capital................................. $345,923 $255,636 $261,035 $257,535 $264,236 $2,297
Distributions declared per common unit............ $2.58 $2.355 $2.135 $1.90 $0.30 -
OTHER DATA:
Funds from operations to common unitholders(2)... $57,417 $48,616 $41,870 $33,631 $5,648 $7,727
Cash flows from:
Operating activities........................... $56,594 $53,510 $36,797 $32,522 $4,746 $9,893
Investing activities........................... (199,250) (99,568) (82,393) (79,595) (63,607) (29,032)
Financing activities........................... $143,308 $55,957 $40,474 $(1,707) $116,570 $22,692
GLA at end of period.............................. 4,308 3,610 2,934 2,342 1,879 1,620
Weighted average GLA (3).......................... 3,935 3,255 2,680 2,001 1,743 1,550
Centers at end of the period...................... 20 18 16 16 13 12
New centers opened................................ 1 2 1 3 1 -
Centers expanded.................................. 5 5 7 4 3 2
Center sold....................................... - - 1 - - -
Center acquired................................... 1 - - - - -
NOTES TO SELECTED FINANCIAL DATA:
(1) The selected financial data includes the combined statement of Chelsea GCA
Properties ("Predecessor Business") for the period prior to November 2,
1993, and the consolidated statements of Chelsea GCA Realty Partnership,
L.P. for the periods after November 1, 1993.
(2) Management considers funds from operations ("FFO") an appropriate measure
of performance for an equity real estate investment trust. FFO does not
represent net income or cash flow from operations as defined by generally
accepted accounting principles and should not be considered an alternative
to net income as an indicator of operating performance or to cash from
operations, and is not necessarily indicative of cash flow available to
fund cash needs. See Management's Discussion and Analysis for definition of
FFO.
(3) GLA weighted by months in operation.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion should be read in connection with the financial
statements included and notes thereto appearing elsewhere in this annual report.
Certain comparisons between periods have been made on a percentage or weighted
average per square foot basis. The latter technique adjusts for square footage
changes at different times during the year.
GENERAL OVERVIEW
At December 31, 1997, the Operating Partnership operated 20 manufacturers'
outlet centers, compared to 18 at the end of 1996 and 16 at the end of 1995. The
Operating Partnership's operating gross leasable area ("GLA") at December 31,
1997 was 4.3 million square feet compared to 3.6 million square feet and 2.9
million square feet at December 31, 1996 and 1995, respectively.
From January 1, 1995 to December 31, 1997, the Operating Partnership grew by
increasing rents at its operating centers, opening four new centers, acquiring
one center, and expanding ten centers. The 2.0 million square feet ("sf") of GLA
added is detailed in the schedule that follows:
SINCE
JANUARY 1,
1995 1997 1996 1995
Changes in GLA (sf in 000's): ---------------- ------------- ---------------- ----------------
NEW CENTERS DEVELOPED:
Wrentham Village....................... 227 227 - -
North Georgia.......................... 292 - 292 -
Clinton Crossing....................... 272 - 272 -
Camarillo Premium Outlets 149 - - 149
---------------- -------------- ---------------- ----------------
TOTAL NEW CENTERS........................ 940 227 564 149
CENTERS EXPANDED:
North Georgia........................... 111 111 - -
Camarillo Premium Outlets............... 216 85 54 77
Desert Hills............................ 227 36 - 191
Folsom Premium Outlets.................. 37 15 22 -
Liberty Village......................... 16 12 4 -
Petaluma Village........................ 46 - 30 16
Woodbury Common......................... 21 - 2 19
Napa Premium Outlets.................... 99 - - 99
Patriot Plaza........................... 35 - - 35
Aurora Premium Outlets.................. 27 - - 27
Other................................... (9) (2) - (7)
---------------- ---------------- --------------- ----------------
TOTAL CENTERS EXPANDED..................... 826 257 112 457
CENTER SOLD:
Page Factory Stores.................. (14) - - (14)
CENTER ACQUIRED:
Waikele Premium Outlets.............. 214 214 - -
---------------- ---------------- ---------------- ----------------
GLA added during the period 1,966 698 676 592
OTHER DATA:
GLA at end of period................... 4,308 3,610 2,934
Weighted average GLA (1)............... 3,935 3,255 2,680
Centers at end of period............... 20 18 16
New centers opened..................... 1 2 1
Centers expanded....................... 5 5 7
Center sold............................ - - 1
Center acquired........................ 1 - -
NOTE: (1) Average GLA weighted by months in operation
The Operating Partnership's centers produced weighted average reported tenant
sales of approximately $360 per square foot in 1997 compared to $345 and $313
per square foot in 1996 and 1995, respectively.
Two of the Operating Partnership's centers, Woodbury Common and Desert Hills,
provided approximately 34%, 38% and 40% of the Operating Partnership's total
revenue for the years 1997, 1996, and 1995, respectively. In addition,
approximately 38%, 44%, and 45% of the Operating Partnership's revenues for the
years ended December 31, 1997, 1996 and 1995, respectively, were derived from
the Operating Partnership's centers in California.
The Operating Partnership does not consider any one store lease to be material
and no individual tenant, combining all of its store concepts, accounts for more
than 7% of the Operating Partnership's gross revenues or total GLA. Only one
tenant occupies in excess of 4.3% of the Operating Partnership's total GLA. In
view of these statistics and the Operating Partnership's past success in
re-leasing available space, the Operating Partnership believes the loss of any
individual tenant would not have a significant effect on future operations.
The discussion below is based upon operating income before minority interest and
extraordinary item. The minority interest in net income varies from period to
period as a result of changes in the Operating Partnership's 50% investment in
Solvang.
COMPARISON OF YEAR ENDED DECEMBER 31, 1997 TO YEAR ENDED DECEMBER 31, 1996
Operating income before interest, depreciation and amortization increased $16.7
million, or 28.4%, to $75.4 million in 1997 from $58.7 million in 1996. This
increase was primarily the result of the Operating Partnership's expansions, new
center openings and a center acquired.
Base rentals increased $14.3 million, or 25.4%, to $70.7 million in 1997 from
$56.4 million in 1996 due to expansions, new center openings, one acquired
center and higher average rents. Base rental revenue per weighted average square
foot increased to $17.97 in 1997 from $17.32 in 1996 as a result of higher
rental rates on new leases and renewals.
Percentage rents increased $3.4 million, or 46.4%, to $10.8 million in 1997 from
$7.4 million in 1996. The increase was primarily due to increases in tenant
sales, new center openings, expansions at the Operating Partnership's larger
centers, a center acquired and increases in tenants contributing percentage
rents.
Expense reimbursements, representing contractual recoveries from tenants of
certain common area maintenance, operating, real estate tax, promotional and
management expenses, increased $4.2 million, or 17.1%, to $29.0 million in 1997
from $24.8 million in 1996, due to the recovery of operating and maintenance
costs at new and expanded centers. On a weighted average square foot basis,
expense reimbursements decreased 3.3% to $7.36 in 1997 from $7.61 in 1996. The
average recovery of reimbursable expenses was 92.2% in 1997 compared to 91.8% in
1996.
Other income increased $0.1 million to $2.9 million in 1997 from $2.8 million in
1996.
Interest, in excess of amounts capitalized, increased $6.6 million to $15.4
million in 1997 from $8.8 million in 1996, due to higher debt balances from new
centers, expansion openings and one center acquisition financed with borrowings.
Operating and maintenance expenses increased $4.4 million, or 16.5%, to $31.4
million in 1997 from $27.0 million in 1996. The increase was primarily due to
costs related to increased GLA. On a weighted average square foot basis,
operating and maintenance expenses decreased 3.6% to $7.99 in 1997 from $8.29 in
1996 as a result of decreased maintenance and snow removal costs.
Depreciation and amortization expense increased $6.0 million to $25.0 million in
1997 from $19.0 million in 1996. The increase was due to costs related to
increased GLA.
General and administrative expenses increased $0.5 million to $3.8 million in
1997 from $3.3 million in 1996. On a weighted average square foot basis, general
and administrative expenses decreased 5.8% to $0.97 in 1997 from $1.03 in 1996.
Increased personnel and overhead costs were more than offset by additions to
operating GLA.
Other expenses increased $0.7 million to $2.6 million in 1997 from $1.9 million
in 1996. The increase was primarily from legal expenses and additional reserves
for bad debt due to higher revenue.
COMPARISON OF YEAR ENDED DECEMBER 31, 1996 TO YEAR ENDED DECEMBER 31, 1995
Operating income before interest, depreciation and amortization increased $12.4
million, or 26.8%, to $59.1 million in 1996 from $46.7 million in 1995. This
increase was primarily the result of the Operating Partnership's expansions and
new center openings.
Base rentals increased $10.4 million, or 22.5%, to $56.4 million in 1996 from
$46.0 million in 1995 due to expansions, new center openings and higher average
rents. Base rental revenue per weighted average square foot increased to $17.32
in 1996 from $17.17 in 1995 as a result of higher rental rates on new leases and
renewals.
Percentage rents increased $2.1 million, or 38.7%, to $7.4 million in 1996 from
$5.3 million in 1995. The increase was primarily due to increases in tenant
sales, new center openings and expansions at the Operating Partnership's larger
centers.
Expense reimbursements, representing contractual recoveries from tenants of
certain common area maintenance, operating, real estate tax, promotional and
management expenses, increased $5.1 million, or 25.6%, to $24.8 million in 1996
from $19.7 million in 1995, due to the recovery of operating and maintenance
costs at new and expanded centers. On a weighted average square foot basis,
expense reimbursements increased 3.5% to $7.61 in 1996 from $7.35 in 1995. The
average recovery of reimbursable expenses was 91.8% in 1996 compared to 93.9% in
1995.
Other income increased $1.3 million to $2.8 million in 1996 from $1.5 million in
1995 primarily as a result of an outparcel sale at one of the operating centers,
increased interest income and lease termination settlements.
Interest, in excess of amounts capitalized, increased $5.7 million to $8.8
million in 1996 from $3.1 million in 1995, due to higher debt balances from the
issuance of $200 million of public debt during 1996 and lower construction in
progress.
Operating and maintenance expenses increased $6.0 million, or 28.6%, to $27.0
million in 1996 from $21.0 million in 1995. The increase was primarily due to
costs related to expansions and new centers. On a weighted average square foot
basis, operating and maintenance expenses increased 5.9% to $8.29 in 1996 from
$7.83 in 1995 as a result of increased insurance expense and additional
maintenance and security services provided at the centers.
General and administrative expenses increased $0.3 million to $3.3 million in
1996 from $3.0 million in 1995. On a weighted average square foot basis, general
and administrative expenses decreased 7.2% to $1.03 in 1996 from $1.11 in 1995.
Increased personnel and overhead costs were offset by additions to operating
GLA.
Other expenses remained stable at $1.9 million in 1996 and 1995.
LIQUIDITY AND CAPITAL RESOURCES
The Operating Partnership believes it has adequate financial resources to fund
operating expenses, distributions, and planned development and construction
activities. Operating cash flow in 1997 of $54.6 million is expected to increase
with a full year of operations of the 698,000 square feet of GLA added during
1997 and scheduled openings of approximately 760,000 square feet in 1998,
subject to market demand. In addition, at December 31, 1997 the Operating
Partnership had $145 million available under its Credit Facilities, access to
the public markets through shelf registrations covering $200 million of equity
and $175 million of debt, and cash and equivalents of $14.5 million.
Operating cash flow is expected to provide sufficient funds for distributions.
In addition, the Operating Partnership anticipates retaining sufficient
operating cash to fund re-tenanting and lease renewal tenant improvement costs,
as well as capital expenditures to maintain the quality of its centers.
In the fourth quarter of 1997, the Operating Partnership raised its quarterly
distribution to $0.69 per unit from $0.63 per unit, a 9.5% increase. Common
distributions declared and recorded in 1997 were $47.3 million or $2.58 per
unit. The Operating Partnership's 1997 distribution payout ratio as a percentage
of net income before depreciation and amortization, loss on extraordinary item
and minority interest was 82.4%. Distributions are limited by covenants of the
Credit Facilities to 95% of net income before depreciation and amortization and
minority interest.
The Operating Partnership currently has in place two unsecured bank revolving
lines of credit with an aggregate maximum borrowing amount of $150 million
(each, a "Credit Facility" and collectively, the "Credit Facilities"). Each
Credit Facility expires on March 30, 1998 and bears interest on the outstanding
balance, payable monthly, at a rate equal to the London Interbank Offered Rate
("LIBOR") plus 1.15% or the prime rate, at the Operating Partnership's option. A
fee on the unused portion of the Credit Facilities is payable quarterly at a
rate of 0.25% per annum. The Credit Facilities'are provided by five banks. The
Operating Partnership has agreed to a term sheet with its agent bank for a new
three year credit facility that generally includes more favorable terms than the
Credit Facilities and is expected to close on or prior to March 30, 1998.
In June 1997, the Operating Partnership completed the sale to Simon of 1.4
million shares of the Company's common stock, for an aggregate price of $50
million, in conjunction with a strategic alliance. Proceeds from the sale were
used to repay borrowings under the Credit Facilities.
In October 1997, the Company issued 1.0 million shares of 8.375% Series A
Cumulative Redeemable Preferred Stock (the "Preferred Stock"), par value $0.01
per share, having a liquidation preference of $50.00 per share. The Preferred
Stock has no stated maturity and is not convertible into any other securities of
the Company. The Preferred Stock is redeemable on or after October 15, 2027 at
the Company's option. Net proceeds from the offering were used to repay
borrowings under the Operating Partnership's Credit Facilities.
In October 1997, the Operating Partnership completed a $125 million public debt
offering of 7.25% unsecured term notes due October 2007 (the "7.25% Notes"). The
7.25% Notes were priced to yield 7.29% to investors, 120 basis points over the
10-year U.S. Treasury rate. Net proceeds from the offering were used to repay
substantially all borrowings under the Operating Partnership's Credit
Facilities, redeem $40 million of Remarketed Floating Rate Reset Notes and for
general corporate purposes.
The Operating Partnership is in the process of planning development for 1998 and
beyond. Approximately 760,000 square feet of the Operating Partnership's planned
1998 development is under construction. The Operating Partnership anticipates
1998 development and construction costs of $100 million to $120 million. Funding
is currently expected from borrowings under the Credit Facilities, additional
debt offerings, and/or equity offerings.
The Operating Partnership's planned development also includes Houston Premium
Outlets (Houston, TX) which is expected to be the first project undertaken as
part of the Operating Partnership's strategic alliance with Simon, announced in
May 1997. Construction is scheduled to begin on the 430,000 square foot first
phase during the third quarter of 1998, with completion scheduled for mid-year
1999. The Operating Partnership will be a co-managing general partner of a sole
purpose joint venture and will have a 50% ownership interest in the project. The
joint venture expects to finance this project with partners' equity
contributions and debt secured by the project.
Planned development projects are in various stages of completion and there can
be no assurance that any of these projects will be completed or opened or that
there will not be delays in the opening or completion of any of these projects.
To achieve planned growth and favorable returns in both the short and long-term,
the Operating Partnership's financing strategy is to maintain a strong, flexible
financial position by: (i) maintaining a conservative level of leverage; (ii)
extending and sequencing debt maturity dates; (iii) managing exposure to
floating interest rates; and (iv) maintaining liquidity. Management believes
these strategies will enable the Operating Partnership to access a broad array
of capital sources, including bank or institutional borrowings and secured and
unsecured debt and equity offerings. It is the Operating Partnership's policy to
limit its borrowings to less than 40% of total market capitalization (defined as
the value of outstanding shares of the Company's common stock including
conversion of partnership units to common stock, plus the liquidation preference
value of the Company's preferred stock plus total debt). Applying a December 31,
1997 closing price of $38.1875 per common share, plus a liquidation preference
of $50.00 per preferred share, the Operating Partnership's ratio of debt to
total market capitalization was approximately 27% at December 31, 1997.
Net cash provided by operating activities was $56.6 million and $53.5 million
for the years ended December 31, 1997 and 1996, respectively. The increase was
primarily due to the growth of the Operating Partnership's GLA to 4.3 million
square feet in 1997 from 3.6 million square feet in 1996 and increases in
accrued interest on the borrowings offset by additions to deferred lease costs.
Net cash used in investing activities increased $99.7 million for the year ended
December 31, 1997 compared to 1996, primarily as a result of the acquisition of
Waikele Factory Outlets and increased construction activity. Net cash provided
by financing activities increased $87.4 million primarily due to the sale of the
Company's common stock to Simon and the sale of the Company's Preferred Stock.
Net cash provided by operating activities was $53.5 million and $36.8 million
for the years ended December 31, 1996 and 1995, respectively. The increase was
primarily due to the growth of the Operating Partnership's GLA to 3.6 million
square feet in 1996 from 2.9 million square feet in 1995 and increases in
accrued interest on the borrowings. Net cash used in investing activities
increased $17.2 million for the year ended December 31, 1996 compared to 1995,
primarily as a result of increased construction activity. Net cash provided by
financing activities increased $15.5 million primarily due to debt offerings
offset by repayments of the Operating Partnership's lines of credit.
YEAR 2000 COMPLIANCE
The Operating Partnership has determined that is will need to modify or replace
significant portions of its software so that its computer systems will function
properly with respect to dates in the year 2000 and beyond. The Operating
Partnership's comprehensive Year 2000 initiative is being managed by a team of
internal staff and outside consultants. The team's activities are designed to
ensure that there are no adverse effects on the Operating Partnership's core
business operations and that transactions with customers, suppliers, and
financial institutions are fully supported. The Operating Partnership is well
under way with these efforts, which are scheduled to be completed by the end of
1998. While the Operating Partnership believes its planning efforts are adequate
to address its Year 2000 concerns, there can be no guarantee that the systems of
other companies on which the Operating Partnership's systems and operations rely
will be converted on a timely basis and will not have a material effect on the
Operating Partnership. The cost of the Year 2000 initiatives is not expected to
be material to the Operating Partnership's results of operations or financial
position.
FUNDS FROM OPERATIONS
Management believes that funds from operations ("FFO") should be considered in
conjunction with net income, as presented in the statements of operations
included elsewhere herein, to facilitate a clear understanding of the operating
results of the Operating Partnership. Management considers FFO an appropriate
measure of performance for an equity real estate investment trust. FFO, as
defined by the National Association of Real Estate Investment Trusts ("NAREIT"),
is net income applicable to common shareholders (computed in accordance with
generally accepted accounting principles), excluding gains (or losses) from debt
restructuring and sales of property, exclusive of outparcel sales, plus
depreciation and amortization (as defined by NAREIT), and after adjustments for
unconsolidated partnerships and joint ventures. Adjustments for unconsolidated
partnerships and joint ventures are calculated to reflect FFO on the same basis.
FFO does not represent net income or cash flow from operations as defined by
generally accepted accounting principles and should not be considered an
alternative to net income as an indicator of operating performance or to cash
from operations, and is not necessarily indicative of cash flow available to
fund cash needs.
Year Ended December 31,
1997 1996
-------------- --------------
Common income before extraordinary item.... $34,121 $31,103
Add:
Depreciation and amortization (1)........ 24,883 18,747
Amortization of deferred financing costs
and depreciation of non-rental real
estate assets......................... (1,587) (1,234)
------------- --------------
FFO........................................ $57,417 $48,616
============== ==============
Average units outstanding.................. 18,039 17,118
Distributions declared per unit............ $2.58 $2.355
NOTE: (1) Excludes depreciation and minority interest attributed
to a third-party limited partner's interest in a partnership
for the years ended December 31, 1997 and 1996, respectively.
ECONOMIC CONDITIONS
Substantially all leases contain provisions, including escalations of base rents
and percentage rentals calculated on gross sales, to mitigate the impact of
inflation. Inflationary increases in common area maintenance and real estate tax
expenses are substantially all reimbursed by tenants.
Virtually all tenants have met their lease obligations and the Operating
Partnership continues to attract and retain quality tenants. The Operating
Partnership intends to reduce operating and leasing risks by continually
improving its tenant mix, rental rates and lease terms, and by pursuing
contracts with creditworthy upscale and national brand-name tenants.
ITEM 7-A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
None.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and financial information of the Operating Partnership
for the years ended December 31, 1997, 1996 and 1995 and the Reports of the
Independent Auditors thereon are included elsewhere herein. Reference is made to
the financial statements and schedules in Item 14.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEMS 10, 11, 12 AND 13.
The Operating Partnership does not have any directors, executive officers or
stock authorized, issued or outstanding. If the information was required it
would be identical to the information contained in Items 10, 11, 12 and 13 of
the Company's Form 10-K, that will appear in the Company's Proxy Statement
furnished to shareholders in connection with the Company's 1998 Annual Meeting.
Such information is incorporated by reference in this Form 10-K.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1 and 2. The response to this portion of Item 14 is submitted as a separate
section of this report.
3. Exhibits
3.1 Articles of Incorporation of the Company, as amended,
including Articles Supplementary relating to 8 3/8% Series
A Cumulative Redeemable Preferred Stock.
3.2 By-laws of the Company. Incorporated by reference to Exhibit
3.2 to Registration Statement filed by the Company on Form
S-11 under the Securities Act of 1933 (file No. 33-67870)
(S-11).
3.3 Agreement of Limited Partnership for the Operating
Partnership. Incorporated by reference to Exhibit 3.3
to S-11.
3.4 Amendments No. 1 and No. 2 to Partnership Agreement
dated March 31, 1997 and October 7, 1997
4.1 Form of Indenture among the Company, Chelsea GCA Realty
Partnership, L.P., and State Street Bank and Trust Company, as
Trustee. Incorporated by reference to Exhibit 4.4 to
Registration Statement filed by the Company on Form S-3 under
the Securities Act of 1933 (File No. 33-98136).
10.1 Registration Rights Agreement among the Company and recipients
of Units. Incorporated by reference to Exhibit 4.1 to S-11.
10.2 Consulting Agreement effective August 1, 1997, between the
Operating Partnership and Robert Frommer.
10.3 Limited Liability Company Agreement of Simon/Chelsea
Development Co., L.L.C. dated May 16, 1997 between
Simon DeBartolo Group, L.P. and Chelsea GCA Realty
Partnership, L.P.
10.4 Subscription Agreement dated as of March 31, 1997 by and among
Chelsea GCA Realty Partnership, L.P., WCC Associates and K M
Halawa Partners. Incorporated by reference to Exhibit 1 to
current report on Form 8-K reporting on an event which
occurred March 31, 1997.
10.5 Stock Subscription Agreement dated May 16, 1997
between Chelsea GCA Realty, Inc. and Simon DeBartolo
Group, L.P.
23.1 Consent of Ernst & Young LLP.
(b) Reports on Form 8-K.
None
(c) Exhibits
None
(d) Financial Statement Schedules - The response to this portion of Item 14
is submitted as a separate schedule of this report.
ITEM 8, ITEM 14(a)(1) AND (2) AND ITEM 14(d)
(a)1. FINANCIAL STATEMENTS
FORM 10-K
REPORT PAGE
CONSOLIDATED FINANCIAL STATEMENTS-CHELSEA GCA REALTY PARTNERSHIP, L.P.
Report of Independent Auditors........................................... F-1
Consolidated Balance Sheets as of December 31, 1997 and 1996 ............ F-2
Consolidated Statements of Operations for the years ended
December 31, 1997, 1996 and 1995..................................... F-3
Consolidated Statements of Partners' Capital for the years ended
December 31, 1997, 1996 and 1995.................................... F-4
Consolidated Statements of Cash Flows for the years ended
December 31, 1997, 1996 and 1995.................................... F-5
Notes to Consolidated Financial Statements............................... F-6
(a)2 AND (d) FINANCIAL STATEMENT SCHEDULE
Schedule III-Consolidated Real Estate and Accumulated
Depreciation........................................................ F-14
and F-15
All other schedules are omitted since the required information is not present or
is not present in amounts sufficient to require submission of the schedule, or
because the information required is included in the consolidated financial
statements and notes thereto.
REPORT OF INDEPENDENT AUDITORS
TO THE OWNERS
CHELSEA GCA REALTY PARTNERSHIP, L.P.
We have audited the accompanying consolidated balance sheets of Chelsea GCA
Realty Partnership, L.P. as of December 31, 1997 and 1996, and the related
consolidated statements of operations, partners' capital and cash flows for each
of the three years in the period ended December 31, 1997. Our audits also
included the financial statement schedule listed in the Index as Item 14(a).
These financial statements and schedule are the responsibility of the management
of Chelsea GCA Realty Partnership, L.P. Our responsibility is to express an
opinion on the financial statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Chelsea GCA Realty
Partnership, L.P. as of December 31, 1997 and 1996, and the consolidated results
of their operations and their cash flows for each of the three years in the
period ended December 31, 1997 in conformity with generally accepted accounting
principles. Also, in our opinion, the related financial statement schedule, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
ERNST & YOUNG LLP
NEW YORK, NEW YORK
FEBRUARY 13, 1998
CHELSEA GCA REALTY PARTNERSHIP, L.P.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
DECEMBER 31,
1997 1996
--------- -----------
Assets
Rental properties:
Land.................................................................. $112,470 $ 80,312
Depreciable property.................................................. 596,463 432,042
-----------
-----------
Total rental property...................................................... 708,933 512,354
Accumulated depreciation................................................... (80,244) (58,054)
-----------
-----------
Rental properties, net..................................................... 628,689 454,300
Cash and equivalents....................................................... 14,538 13,886
Notes receivable-related parties........................................... 4,781 8,023
Deferred costs, net........................................................ 17,276 10,321
Other assets............................................................... 22,745 15,682
-------- -----------
TOTAL ASSETS............................................................... $688,029 502,212
=========== ===========
LIABILITIES AND PARTNERS' CAPITAL
Liabilities:
Unsecured bank debt................................................... $ 5,035 $ -
7.75% Unsecured Notes due 2001........................................ 99,743 99,668
Remarketed Floating Rate Reset Notes due 2001......................... 60,000 100,000
7.25% Unsecured Notes due 2007........................................ 124,681 -
Construction payables................................................. 17,810 14,473
Accounts payable and accrued expenses................................. 14,442 10,904
Obligation under capital lease........................................ 9,729 9,805
Accrued distribution payable.......................................... 3,276 3,038
Other liabilities..................................................... 7,390 2,990
----------- -----------
TOTAL LIABILITIES.......................................................... 342,106 240,878
Commitments and contingencies
Minority interest.......................................................... - 5,698
Partners' capital:
General partner units outstanding, 15,353 in 1997 and 12,402 in 1996....... 297,670 185,340
Limited partners units outstanding, 3,432 in 1997 and 4,808 in 1996........ 48,253 70,296
----------- -----------
Total partners' capital.................................................... 345,923 255,636
----------- -----------
TOTAL LIABILITIES AND PARTNERS' CAPITAL.................................... $688,029 $502,212
=========== ===========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
CHELSEA GCA REALTY PARTNERSHIP, L.P.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER UNIT DATA)
YEAR ENDED DECEMBER 31,
1997 1996 1995
----------------- ---------------- -----------------
Revenues:
Base rental................................... $70,693 $56,390 $46,025
Percentage rentals............................ 10,838 7,402 5,336
Expense reimbursements........................ 28,981 24,758 19,704
Other income.................................. 2,905 2,806 1,450
----------------- ---------------- -----------------
TOTAL REVENUES..................................... 113,417 91,356 72,515
EXPENSES:
Interest....................................... 15,447 8,818 3,129
Operating and maintenance...................... 31,423 26,979 20,984
Depreciation and amortization.................. 24,995 18,965 12,823
General and administrative..................... 3,815 3,342 2,967
Other.......................................... 2,582 1,892 1,911
----------------- --------------- -----------------
TOTAL EXPENSES...................................... 78,262 59,996 41,814
Operating income.................................... 35,155 31,360 30,701
Loss on sale of center.............................. - - (1,051)
----------------- ---------------- -----------------
Net income before minority interest and
extraordinary item............................. 35,155 31,360 29,650
Minority interest................................... (127) (257) (285)
----------------- ---------------- -----------------
Net income before extraordinary item................ 35,028 31,103 29,365
Extraordinary item-loss on early
extinguishment of debt......................... (252) (902) -
----------------- ----------------- --------------
Net income.......................................... 34,776 30,201 29,365
Preferred unit requirement (907) - -
----------------- ---------------- -----------------
NET INCOME TO COMMON UNITHOLDERS.................... $33,869 $30,201 $29,365
================= ================ =================
NET INCOME TO COMMON UNITHOLDERS:
General partner................................ $27,449 $20,854 $19,572
Limited partners............................... 6,420 9,347 9,793
----------------- ---------------- -----------------
TOTAL............................................... $33,869 $30,201 $29,365
================= ================ =================
NET INCOME PER COMMON UNIT:
General partner (including $0.01 and $0.05
net loss per unit from extraordinary item in
1997 and 1996, respectively)................... $1.88 $1.77 $1.75
Limited partners (including $0.01 and $0.05
net loss per unit from extraordinary item in
1997 and 1996, respectively)................... $1.87 $1.76 $1.75
WEIGHTED AVERAGE UNITS OUTSTANDING:
General partner................................ 14,605 11,802 11,188
Limited partners............................... 3,435 5,316 5,601
----------------- ---------------- -----------------
TOTAL............................................... 18,040 17,118 16,789
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
CHELSEA GCA REALTY PARTNERSHIP, L.P.
CONSOLIDATED STATEMENTS OF PARTNERS' CAPITAL
(IN THOUSANDS)
General Limited Total
Partner's Partners' Partners'
Capital Capital Capital
--------------- --------------- ---------------
Balance December 31, 1994................................... $171,051 $86,484 $257,535
Contributions............................................... 8,446 1,932 10,378
Net income.................................................. 19,572 9,793 29,365
Distributions............................................... (23,940) (11,945) (35,885)
Transfer of a limited partner's interest.................... 1,629 (1,629) -
Purchase of a limited partner's interest.................... - (358) (358)
-------------- --------------- ---------------
Balance December 31, 1995................................... 176,758 84,277 261,035
Contributions............................................... 3,216 1,556 4,772
Net income.................................................. 20,854 9,347 30,201
Distributions............................................... (28,122) (12,250) (40,372)
Transfer of a limited partners' interest.................... 12,634 (12,634) -
--------------- --------------- ---------------
BALANCE DECEMBER 31, 1996................................... 185,340 70,296 255,636
Contributions............................................... 103,357 389 103,746
Net income.................................................. 28,356 6,420 34,776
Common distributions........................................ (38,475) (8,853) (47,328)
Preferred distribution...................................... (907) - (907)
Transfer of a limited partners' interest.................... 19,999 (19,999) -
--------------- --------------- ---------------
Balance December 31, 1997................................... $297,670 $48,253 $345,923
=============== =============== ===============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
CHELSEA GCA REALTY PARTNERSHIP, L.P.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
Year ended December 31,
1997 1996 1995
----------------- ----------------- -----------------
Cash flows from operating activities
Net income........................................ $34,776 $30,201 $29,365
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization................ 24,995 18,965 12,823
Minority interest in net income.............. 127 257 285
Loss on sale of center....................... - - 1,051
Loss on early extinguishment of debt......... 252 902 -
Additions to deferred lease costs............ (6,629) (2,537) (1,245)
Other operating activities................... 319 191 146
Changes in assets and liabilities:
Straight-line rent receivable.............. (1,523) (1,595) (1,357)
Other assets............................... 287 597 (2,426)
Accounts payable and accrued expenses...... 3,990 6,529 (1,845)
----------------- ----------------- -----------------
Net cash provided by operating activities......... 56,594 53,510 36,797
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to rental properties.................... (195,058) (97,585) (80,249)
Additions to deferred development costs........... (2,237) (1,477) (2,068)
Advances to related parties....................... - (67) (189)
Payments from related parties..................... - 173 115
Proceeds from sale of center...................... - - 465
Other investing activities........................ (1,955) (612) (467)
----------------- ----------------- ----------------
Net cash used in investing activities............. (199,250) (99,568) (82,393)
CASH FLOWS FROM FINANCING ACTIVITIES
Net proceeds from sale of preferred units......... 48,406 - -
Net proceeds from sale of common units............ 54,951 2,583 8,446
Distributions..................................... (48,791) (47,124) (34,748)
Debt proceeds .................................... 261,710 292,592 68,000
Repayments of debt................................ (172,000) (189,000) -
Additions to deferred financing costs............. (855) (3,660) (866)
Other financing activities........................ (113) 566 (358)
----------------- ----------------- ----------------
Net cash provided by financing activities 143,308 55,957 40,474
Net increase (decrease) in cash and equivalents.... 652 9,899 (5,122)
Cash and equivalents, beginning of period.......... 13,886 3,987 9,109
----------------- ----------------- -----------------
Cash and equivalents, end of period................ $14,538 $13,886 $3,987
================= ================= =================
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION AND BASIS OF PRESENTATION
ORGANIZATION
Chelsea GCA Realty Partnership, L.P. (the "Operating Partnership"), which
commenced operations on November 2, 1993, is engaged in the development,
ownership, acquisition and operation of manufacturers' outlet centers. As of
December 31, 1997, the Operating Partnership operated 20 manufacturers' outlet
centers in 12 states. The sole general partner in the Operating Partnership,
Chelsea GCA Realty, Inc. (the "Company") is a self-administered and self-managed
Real Estate Investment Trust.
BASIS OF PRESENTATION
Through June 30, 1997, the Operating Partnership was the sole general partner
and had a 50% interest in Solvang Designer Outlets ("Solvang"), a limited
partnership. Accordingly, the accounts of Solvang were included in the
consolidated financial statements of the Operating Partnership. On June 30,
1997, the Operating Partnership acquired the remaining 50% interest in Solvang.
Solvang is not material to the operations or financial position.
Disclosure about fair value of financial instruments is based on pertinent
information available to management as of December 31, 1997 using available
market information and appropriate valuation methodologies. Although management
is not aware of any factors that would significantly affect the reasonable fair
value amounts, such amounts have not been comprehensively revalued for purposes
of these financial statements since that date and current estimates of fair
value may differ significantly from the amounts presented herein.
Certain balances in the accompanying prior year financial statements have been
reclassified to conform to the current year presentation.
2. SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES
RENTAL PROPERTIES
Rental properties are presented at cost net of accumulated depreciation.
Depreciation is computed on the straight-line basis over the estimated useful
lives of the assets. The Operating Partnership uses 25-40 year estimated lives
for buildings, and 15 and 5-7 year estimated lives for land improvements and
equipment, respectively. Expenditures for ordinary maintenance and repairs are
charged to operations as incurred, while significant renovations and
enhancements that improve and/or extend the useful life of an asset are
capitalized and depreciated over the estimated useful life. During 1996, the
Operating Partnership adopted Statement of Financial Accounting Standards No.
121 ("SFAS No. 121"), Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of. SFAS No. 121 requires that the Operating
Partnership review real estate assets for impairment wherever events or changes
in circumstances indicate that the carrying value of assets to be held and used
may not be recoverable. Impaired assets are reported at the lower of cost or
fair value. Assets to be disposed of are reported at the lower of cost or fair
value less cost to sell. Prior to the adoption of SFAS No. 121, real estate
assets were stated at the lower of cost or net realizable value. No impairment
losses have been recorded in any of the periods presented.
CASH AND EQUIVALENTS
All demand and money market accounts and certificates of deposit with original
terms of three months or less from the date of purchase are considered cash
equivalents. At December 31, 1997 and 1996 cash equivalents consisted of
repurchase agreements which were held by one financial institution, commercial
paper and US Government agency securities which matured in January of the
following year. The carrying amount of such investments approximated fair value.
DEVELOPMENT COSTS
Development costs, including interest, taxes, insurance and other costs incurred
in developing new properties, are capitalized. Upon completion of construction,
development costs are amortized on a straight-line basis over the useful lives
of the respective assets.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES (CONTINUED)
CAPITALIZED INTEREST
Interest, including the amortization of deferred financing costs for borrowings
used to fund development and construction, is capitalized as construction in
progress and allocated to individual property costs.
RENTAL EXPENSE
Rental expense is recognized on a straight-line basis over the initial term of
the lease.
DEFERRED LEASE COSTS
Deferred lease costs consist of fees and direct costs incurred to initiate and
renew operating leases, and are amortized on a straight-line basis over the
initial lease term or renewal period as appropriate.
DEFERRED FINANCING COSTS
Deferred financing costs are amortized as interest costs on a straight-line
basis over the terms of the respective agreements. Unamortized deferred
financing costs are expensed when the associated debt is retired before
maturity.
REVENUE RECOGNITION
Leases with tenants are accounted for as operating leases. Minimum rental income
is recognized on a straight-line basis over the lease term. Due and unpaid rents
are included in other assets in the accompanying balance sheet. Certain lease
agreements contain provisions for rents which are calculated on a percentage of
sales and recorded on the accrual basis. Virtually all lease agreements contain
provisions for reimbursement of real estate taxes, insurance, advertising and
common area maintenance costs.
BAD DEBT EXPENSE
Bad debt expense included in other expense totaled $0.8 million, $0.3 million
and $0.4 million for the years ended December 31, 1997, 1996 and 1995,
respectively. The allowance for doubtful accounts included in other assets
totaled $0.8 million and $0.5 million at December 31, 1997 and 1996,
respectively.
INCOME TAXES
No provision has been made for income taxes in the accompanying consolidated
financial statements since such taxes, if any, are the responsibility of the
individual partners.
NET INCOME PER PARTNERSHIP UNIT
Net income per partnership unit is determined by allocating net income to the
general partner ( including the general partner's preferred unit allocation) and
the limited partners based on their weighted average partnership units
outstanding during the respective periods presented.
CONCENTRATION OF OPERATING PARTNERSHIP'S REVENUE AND CREDIT RISK
Approximately 34%, 38% and 40% of the Operating Partnership's revenues for the
years ended December 31, 1997, 1996 and 1995, respectively, were derived from
the Operating Partnership's two centers with the highest revenues, Woodbury
Common and Desert Hills. The loss of either center or a material decrease in
revenues from either center for any reason may have a material adverse effect on
the Operating Partnership. In addition, approximately 38%, 44% and 45% of the
Operating Partnership's revenues for the years ended December 31, 1997, 1996 and
1995, respectively, were derived from the Operating Partnership's centers in
California.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES (CONTINUED)
Management of the Operating Partnership performs ongoing credit evaluations of
its tenants and requires certain tenants to provide security deposits. Although
the Operating Partnership's tenants operate principally in the retail industry,
there is no dependence upon any single tenant.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
MINORITY INTEREST
Through June 30, 1997, the Operating Partnership was the sole general partner
and had a 50% interest in Solvang Designer Outlets ("Solvang"), a limited
partnership. Accordingly, the accounts of Solvang were included in the
consolidated financial statements of the Operating Partnership. On June 30,
1997, the Operating Partnership acquired the remaining 50% interest in Solvang.
Solvang is not material to the operations or financial position.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
Financial Accounting Standards Board Statement No. 131 ("FAS No. 131")
"Disclosure about Segments of an Enterprise and Related Information" is
effective for financial statements issued for periods beginning after December
15, 1997. FAS No. 131 requires disclosures about segments of an enterprise and
related information regarding the different types of business activities in
which an enterprise engages and the different economic environments in which it
operates. The Operating Partnership does not believe that the implementation of
FAS No. 131 will have an impact on its financial statements.
3. RENTAL PROPERTIES
The following summarizes the carrying values of rental properties as of December
31 (in thousands):
1997 1996
-------------- -------------
Land and improvements......................... $207,186 $153,096
Buildings and improvements.................... 434,565 335,242
Construction-in-process....................... 60,615 18,888
Equipment and furniture....................... 6,567 5,128
------------- -------------
Total rental property......................... 708,933 512,354
Accumulated depreciation and amortization..... (80,244) (58,054)
-------------- -------------
Total rental property, net.................... $628,689 $454,300
============== =============
Interest costs capitalized as part of buildings and improvements were $4.8
million, $3.9 million and $3.7 million for the years ended December 31, 1997,
1996 and 1995, respectively.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. RENTAL PROPERTIES (CONTINUED)
Commitments for land, new construction, development, and acquisitions totaled
approximately $51.5 million at December 31, 1997.
Depreciation expense (including amortization of the capital lease) amounted to
$22.3 million, $16.9 million and $11.2 million for the years ended December 31,
1997, 1996 and 1995, respectively.
4. WAIKELE ACQUISITION
Pursuant to a Subscription Agreement dated as of March 31, 1997, the Operating
Partnership acquired Waikele Factory Outlets, a manufacturers' outlet shopping
center located in Hawaii. The consideration paid by the Operating Partnership
consisted of the assumption of $70.7 million of indebtedness outstanding with
respect to the property (which indebtedness was repaid in full by the Operating
Partnership immediately after the closing) and the issuance of special
partnership units in the Operating Partnership, having a fair market value of
$0.5 million. Immediately after the closing, the Operating Partnership paid a
special cash distribution of $5.0 million on the special units. The cash used by
the Operating Partnership in the transaction was obtained through borrowings
under the Operating Partnership's Credit Facilities.
The following condensed pro forma (unaudited) information assumes the
acquisition had occurred on January 1, 1996:
1997 1996
-------------- ---------------
Total revenue.............................. $115,802 $99,589
Common income before extraordinary items... 34,718 32,725
Net income to common unitholders:
General partner.......................... 27,933 21,973
Limited partners......................... 6,533 9,850
-------------- ---------------
Total....................................... 34,466 31,823
Net income per unit:
General partner (including $0.01 and $0.05
net loss per unit from extraordinary item
in 1997 and 1996, respectively).......... $1.91 $1.86
Limited partners (including $0.01
and $0.05 net loss per unit
from extraordinary item in 1997 and 1996,
respectively).............................. $1.89 $1.85
5. DEFERRED COSTS
The following summarizes the carrying amounts for deferred costs as of December
31 (in thousands):
1997 1996
---------- -----------
Lease costs........................................... $14,712 $8,095
Financing costs....................................... 9,184 8,329
Development costs..................................... 4,348 2,111
Other................................................. 991 491
---------- -----------
Total deferred costs.................................. 28,235 19,026
Accumulated amortization.............................. (11,959) (8,705)
----------- ----------
Total deferred costs, net............................ $17,276 $10,321
========== ===========
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
6. DEBT
The Operating Partnership currently has in place two unsecured bank revolving
lines of credit with an aggregate maximum borrowing amount of $150 million
(each, a "Credit Facility" and collectively, the "Credit Facilities"). Each
Credit Facility expires on March 30, 1998 and bears interest on the outstanding
balance, payable monthly, at a rate equal to the London Interbank Offered Rate
("LIBOR") plus 1.15% (7.09% at December 31, 1997) or the prime rate, at the
Operating Partnership's option. A fee on the unused portion of the Credit
Facilities is payable quarterly at a rate of 0.25% per annum. The Credit
Facilities' are provided by five banks.
In January 1996, the Operating Partnership completed a $100 million public debt
offering of 7.75% unsecured term notes due January 2001 (the "7.75% Notes"),
which are guaranteed by the Company. The five-year non-callable 7.75% Notes were
priced at a discount of 99.592 to yield 7.85% to investors. Net proceeds from
the offering were used to pay down substantially all of the borrowings under the
Operating Partnership's secured line of credit. The carrying amount of the 7.75%
Notes approximates their fair value.
In October 1996, the Operating Partnership completed a $100 million offering of
Remarketed Floating Rate Reset Notes (the "Reset Notes"), which are guaranteed
by the Company. The interest rate will reset quarterly and was equal to LIBOR
plus 75 basis points during the first year. In October 1997, the interest rate
spread was reduced to LIBOR plus 48 basis points (6.39% at December 31, 1997).
The spread and the spread period for subsequent periods will be adjusted in
whole or part at the end of each year, pursuant to an agreement with the
underwriters. Unless previously redeemed, the Reset Notes will have a final
maturity of October 23, 2001. Net proceeds from the offering were used to repay
all of the then borrowings under the Credit Facilities and for working capital.
In October 1997, the Operating Partnership redeemed $40 million of Reset Notes.
The carrying amount of the Reset Notes approximates their fair value.
Also, in October 1997, the Operating Partnership completed a $125 million public
debt offering of 7.25% unsecured term notes due October 2007 (the "7.25%
Notes"). The 7.25% Notes were priced to yield 7.29% to investors, 120 basis
points over the 10-year U.S. Treasury rate. Net proceeds from the offering were
used to repay substantially all borrowings under the Operating Partnership's
Credit Facilities, redeem $40 million of Reset Notes and for general corporate
purposes. The carrying amount of the 7.25% Notes approximates their fair value.
Interest paid, excluding amounts capitalized, was $14.1 million, $4.8 million
and $2.7 million for the years ended December 31, 1997, 1996 and 1995,
respectively.
7. PREFERRED STOCK
In October 1997, the Company issued 1.0 million shares of 8.375% Series A
Cumulative Redeemable Preferred Stock (the "Preferred Stock"), par value $0.01
per share, having a liquidation preference of $50.00 per share. The Preferred
Stock has no stated maturity and is not convertible into any other securities of
the Company. The Preferred Stock is redeemable on or after October
15, 2027 at the Company's option. Net proceeds from the offering
were used to repay borrowings under the Operating Partnership's Credit
Facilities.
8. LEASE AGREEMENTS
The Operating Partnership is the lessor and sub-lessor of retail stores under
operating leases with term expiration dates ranging from 1998 to 2012. Most
leases are renewable for five years after expiration of the initial term at the
lessee's option. Future minimum lease receipts under non-cancelable operating
leases as of December 31, 1997, exclusive of renewal option periods, were as
follows (in thousands):
1998............ $75,356
1999............ 69,296
2000............ 58,241
2001............ 45,797
2002............ 32,405
Thereafter...... 120,188
-------------
$401,283
=============
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
8. LEASE AGREEMENTS (CONTINUED)
In 1987, a Predecessor partnership entered into a lease agreement for property
in California. Land was estimated to be approximately 37% of the fair market
value of the property. The portion of the lease attributed to land is classified
as an operating lease and the remainder as a capital lease. The initial lease
term is 25 years with two options of 5 and 4 1/2 years, respectively. The lease
provides for additional rent based on specific levels of income generated by the
property. No additional rental payments were incurred during 1997, 1996 or 1995.
The Operating Partnership has the option to cancel the lease upon six months
written notice and six months advance payment of the then fixed monthly rent. If
the lease is canceled, the building and leasehold improvements revert to the
lessor.
OPERATING LEASES
Future minimum rental payments under operating leases for land and
administrative offices as of December 31, 1997 were as follows (in thousands):
1998........... $1,188
1999........... 1,208
2000........... 1,203
2001........... 786
2002........... 755
Thereafter..... 8,787
-------------
$13,927
=============
Rental expense amounted to $1.0 million, $1.1 million and $0.9 million for the
years ended December 31, 1997, 1996 and 1995, respectively.
CAPITAL LEASE
A leased property included in rental properties at December 31 consists of the
following (in thousands):
1997 1996
----------- ------------
Building................................... $8,621 $8,621
Less accumulated amortization.............. (3,592) (3,247)
------------- ------------
Leased property, net....................... $5,029 $5,374
============= ============
Future minimum payments under the capitalized building lease, including the
present value of net minimum lease payments as of December 31, 1997 are as
follows (in thousands):
1998............................... $1,085
1999............................... 1,117
2000............................... 1,151
2001............................... 1,185
2002............................... 1,221
Thereafter......................... 13,732
----------------
Total minimum lease payments....... 19,491
Amount representing interest....... (9,762)
----------------
Present value of net minimum capital
lease payments...................... $9,729
================
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
9. COMMITMENTS AND CONTINGENCIES
In August 1995, the Company's President (and Chief Operating Officer) resigned
and entered into a separation agreement with the Operating Partnership that
included consulting services to be provided through 1999, certain non-compete
provisions, and the acquisition of certain undeveloped real estate assets. Upon
completion of development, such real estate assets may be re-acquired by the
Operating Partnership, at its option, in accordance with a pre-determined
formula based on cash flow. Transactions related to the separation agreement are
not material to the financial statements of the Operating Partnership.
The Operating Partnership is not presently involved in any material litigation
nor, to its knowledge, is any material litigation threatened against the
Operating Partnership or its properties, other than routine litigation arising
in the ordinary course of business. Management believes the costs, if any,
incurred by the Operating Partnership related to any of this litigation will not
materially affect the financial position, operating results or liquidity of the
Operating Partnership.
10. RELATED PARTY INFORMATION
In September 1995, the Operating Partnership transferred property with a book
value of $4.8 million to its former President (a current unitholder) in exchange
for a $4.0 million note secured by units in the Operating Partnership (the
"Secured Note") and an $0.8 million unsecured note receivable (the "Unsecured
Note"). The secured note bears interest at a rate of LIBOR plus 250 basis points
per annum, payable monthly, and is due upon the earlier of the maker obtaining
permanent financing on the property, the Operating Partnership repurchasing the
property under an option agreement, the maker selling the property to an
unaffiliated third party, or January 1999. The Unsecured Note bears interest at
a rate of 8.0% per annum and is due upon the earlier of the Operating
Partnership repurchasing the property under an option agreement, the maker
selling the property to an unaffiliated third party, or September 2000.
On June 30, 1997 the Operating Partnership forgave a $3.3 million related party
note and paid $2.4 million in cash to acquire the remaining 50% interest in
Solvang. The Operating Partnership also collected $0.8 million in accrued
interest on the note.
The Operating Partnership had space leased to related parties of approximately
61,000, 61,000 and 56,000 square feet during the years ended December 31, 1997,
1996 and 1995, respectively. Rental income from those tenants, including
reimbursement for taxes, common area maintenance and advertising, totaled $1.5
million, $1.3 million and $1.5 million during the years ended December 31, 1997,
1996 and 1995, respectively.
The Operating Partnership has a consulting agreement with one of the Company's
directors through December 31, 1999. The agreement calls for monthly payments of
$10,000.
Certain unitholders guarantee Operating Partnership obligations under leases for
one of the properties. The Operating Partnership has indemnified these parties
from and against any liability which they may incur pursuant to these
guarantees.
11. EXTRAORDINARY ITEM
Deferred financing costs of $0.3 million and $0.9 million were expensed in 1997
and 1996, respectively, and are reflected in the accompanying financial
statements as an extraordinary item.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
12. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
The following summary represents the results of operations, expressed in
thousands except per share amounts, for each quarter during 1997 and 1996.
March 31 June 30 September 30 December 31
--------------- -------------- --------------- ---------------
1997
Base rental revenue.......................... $15,563 $17,286 $18,096 $19,748
Total revenues............................... 22,649 26,637 28,822 35,309
Common income before extraordinary item...... 6,437 6,985 9,380 11,319
Net income to common unitholders............. 6,437 6,985 9,380 11,067
Income before extraordinary item per
weighted average partnership unit......... $0.37 $0.40 $0.50 $0.60
Net income per weighted average
partnership unit.......................... $0.37 $0.40 $0.50 $0.59
1996
Base rental revenue.......................... $12,677 $13,746 $14,737 $15,230
Total revenues............................... 19,055 20,929 23,323 28,049
Common income before extraordinary item...... 7,071 8,040 8,085 7,907
Net income to common unitholders............. 6,169 8,040 8,085 7,907
Income before extraordinary item per
weighted average partnership unit......... $0.41 $0.47 $0.47 $0.45
Net income per weighted average
partnership unit.......................... $0.36 $0.47 $0.47 $0.45
13. NON-CASH FINANCING AND INVESTING ACTIVITIES
In December 1997 and 1996, the Operating Partnership declared distributions per
unit of $0.69 and $0.63, respectively. The limited partners' distributions were
paid in January of each subsequent year. In December 1995, the Operating
Partnership declared distributions per share or unit of $0.575, that were paid
in January of the subsequent year.
In June 1997, the Operating Partnership forgave a $3.3 million related party
note receivable as partial consideration to acquire the remaining 50% interest
in Solvang.
Other assets and other liabilities include $3.9 million related to a deferred
unit incentive program with certain key officers to be paid in 2002.
During 1997, 1996 and 1995, the Operating Partnership issued units with an
aggregate fair market value of $0.5 million, $1.6 million and $1.9 million,
respectively, to acquire properties.
During 1997, 1996 and 1995, respectively, 1.4 million, 0.8 million and 0.1
million Operating Partnership units were converted to common shares.
In September 1995, the Operating Partnership transferred property with a book
value of $4.8 million to a unitholder in exchange for a $4.0 million note
collateralized by units in the Operating Partnership and an $0.8 million
unsecured note.
CHELSEA GCA REALTYPARTNERSHIP, L.P.
SCHEDULE III-CONSOLIDATED REAL ESTATE AND ACCUMULATED DEPRECIATION
FOR THE YEAR ENDED DECEMBER 31, 1997
Cost Gross
Capitalized Step-Up Amount
Initial (Disposed of) Related Carried Life
Cost Subsequent to Acquisition at Close Used
to to Acquisition of Partnership of Period to
Company (Improvements) Interest (1) December 31, 1997 Compute
---------------- ----------------- ---------------- ---------------------- Depreciation
Description Buildings, Buildings, Buildings, Buildings, in
Outlet Fixtures Fixtures Fixtures Fixtures Date Latest
Center Encum- and and and and Accumulated of Income
Name brances Land Equipment Land Equipment Land Equipment Land Equipment Total Depreciation Construction Statement
- -----------------------------------------------------------------------------------------------------------------------------------
American Tin $9,729 $ - $8,621 $ - $6,451 $ - $ - $ - $15,072 $15,072 $6,074 '87 25
Cannery, CA
Lawrence - - 14,300 15 2,830 - - 15 17,130 17,145 4,418 '90 40
Riverfront, KS
Liberty - 345 405 1,206 17,543 11,015 2,195 12,566 20,143 32,709 2,952 '81,'97 30
Village, NJ
Folsom, CA - 4,169 10,465 1,868 17,348 - - 6,037 27,813 33,850 4,857 '90,'92, 40
'93,'96, '97
Aurora, OH - 637 6,884 879 16,973 - - 1,516 23,857 25,373 3,632 '90,'93, 40
'94,'95
Woodbury - 4,448 16,073 5,042 85,943 - - 9,490 102,016 111,506 18,152 '85,'93, 30
Common, NY '95
Petaluma - 3,735 - 2,934 29,261 - - 6,669 29,261 35,930 3,599 '93,'95, 40
Village, CA '96
Desert Hills, - 975 - 2,417 58,655 830 4,936 4,222 63,591 67,813 12,163 '90,'94, 40
CA '95,'97
Columbia - 934 - 428 11,357 497 2,647 1,859 14,004 15,863 3,069 '91,'94 40
Gorge, OR
Mammoth - 1,180 530 - 2,221 994 1,430 2,174 4,181 6,355 1,252 '78 40
Lakes, CA
St. Helena, CA - 1,029 1,522 (25) 513 38 78 1,042 2,113 3,155 381 '83 40
Patriot - 789 1,854 976 4,053 - - 1,765 5,907 7,672 1,447 '86,'93, 40
Plaza, VA '95
Santa Fe, NM - 74 - 1,317 11,392 491 1,772 1,882 13,164 15,046 1,652 '93 40
Corporate - - 60 - 3,925 - - - 3,985 3,985 1,295 - 5
Offices, NJ, CA
Napa, CA - 3,456 2,113 7,908 18,345 - - 11,364 20,458 31,822 2,593 '62,'93, 40
'95
Solvang, CA - - - 2,380 9,632 - - 2,380 9,632 12,012 1,226 '94 40
Camarillo, CA - 4,000 - 4,915 40,976 - - 8,915 40,976 49,891 3,122 '94,'95, 40
'96,'97
Clinton, CT - 4,124 43,656 - 4 - - 4,124 43,660 47,784 3,472 '95,'96 40
North - 2,960 34,726 66 7,784 - - 3,026 42,510 45,536 3,222 '95,'96, 40
Georgia, GA '97
Wrentham, MA - 157 2,817 2,909 39,327 - - 3,066 42,144 45,210 338 '95,'96, 40
'97
Waikele, HI - 22,800 54,357 - - - - 22,800 54,357 77,157 1,328 - -
Leesburg, VA - 6,296 - - - - - 6,296 - 6,296 - '96,'97 -
Houston, TX - 500 466 - - - - 500 466 966 - - -
Orlando, FL - 100 23 - - - - 100 23 123 - - -
Wall - 662 - - - - - 662 - 662 - '96,'97 -
Township, NJ
----------------------------------------------------------------------------------------------------------------------
$9,729 $63,370 $198,872 $35,235 $384,533 $13,865 $13,058 $112,470 $596,463 $708,933 $80,244
=====================================================================================================================
The aggregate cost of the land, building, fixtures and equipment for federal tax
purposes was approximately $709 million at December 31, 1997.
(1) As part of the formation transaction assets acquired for cash have been
accounted for as a purchase.
The step-up represents the amount of the purchase price that exceeds the
net book value of the assets acquired (see Note 1).
CHELSEA GCA REALTY PARTNERSHIP, L.P.
SCHEDULE III-CONSOLIDATED REAL ESTATE
AND ACCUMULATED DEPRECIATION (CONTINUED)
THE CHANGES IN TOTAL REAL ESTATE:
YEAR ENDED DECEMBER 31,
1997 1996 1995
--------------- ---------------- ----------------
Balance, beginning of period............ $512,354 $415,983 $332,834
Additions............................... 196,941 96,621 89,871
Dispositions and other.................. (362) (250) (6,722)
--------------- ---------------- ----------------
Balance, end of period.................. $708,933 $512,354 $415,983
=============== ================ ================
THE CHANGES IN ACCUMULATED DEPRECIATION:
YEAR ENDED DECEMBER 31,
1997 1996 1995
--------------- ---------------- ----------------
Balance, beginning of period $58,054 $41,373 $30,439
Additions............................... 22,314 16,931 11,277
Dispositions and other.................. (124) (250) (343)
-------------- ---------------- ----------------
Balance, end of period.................. $80,244 $58,054 $41,373
=============== ================ ================
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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 on the 12th of March 1998.
CHELSEA GCA REALTY PARTNERSHIP, L.P.
By: /S/ DAVID C. BLOOM
David C. Bloom, Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated:
SIGNATURE Title Date
/s/ DAVID C. BLOOM Chairman of the MARCH 12, 1998
- ------------------- Board and Chief
David C. Bloom Executive Officer
/s/ BARRY M. GINSBURG Vice Chairman MARCH 12, 1998
- --------------------
Barry M. Ginsburg
/s/ WILLIAM D. BLOOM Executive Vice MARCH 12, 1998
- -------------------- President-Strategic
William D. Bloom Relationships
/s/ LESLIE T. CHAO President MARCH 12, 1998
- -------------------- and Chief
Leslie T. Chao Financial Officer
/s/ MICHAEL J. CLARKE Senior Vice MARCH 12, 1998
- ---------------------- President-
Michael J. Clarke Finance
/s/ BRENDAN T. BYRNE Director MARCH 12, 1998
- -----------------------
Brendan T. Byrne
/s/ ROBERT FROMMER Director MARCH 12, 1998
- ------------------------
Robert Frommer
/s/ PHILIP D. KALTENBACHER Director MARCH 12, 1998
- ---------------------------
Philip D. Kaltenbacher
/s/ REUBEN S. LEIBOWITZ Director MARCH 12, 1998
- ---------------------------
Reuben S. Leibowitz
Exhibit Index
Exhibits Description Page No.
- --------- ------------ --------
3.1 Articles of Incorporation of the Company, as amended,
including Articles Supplementary relating to 8 3/8% Series
A Cumulative Redeemable Preferred Stock.
3.2 By-laws of the Company. Incorporated by reference to Exhibit
3.2 to Registration Statement filed by the Company on Form
S-11 under the Securities Act of 1933 (file No. 33-67870)
(S-11).
3.3 Agreement of Limited Partnership for the Operating
Partnership. Incorporated by reference to Exhibit
3.3 to S-11.
3.4 Amendments No. 1 and No. 2 to Partnership Agreement
dated March 31, 1997 and October 7, 1997
4.1 Form of Indenture among the Company, Chelsea GCA Realty
Partnership, L.P., and State Street Bank and Trust Company, as
Trustee. Incorporated by reference to Exhibit 4.4 to
Registration Statement filed by the Company on Form S-3 under
the Securities Act of 1933 (File No. 33-98136).
10.1 Registration Rights Agreement among the Company and recipients
of Units. Incorporated by reference to Exhibit 4.1 to S-11.
10.2 Consulting Agreement effective August 1, 1997, between the Company
and Robert Frommer.
10.3 Limited Liability Company Agreement of
Simon/Chelsea Development Co., L.L.C. dated May 16,
1997 between Simon DeBartolo Group, L.P. and Chelsea
GCA Realty Partnership, L.P.
10.4 Subscription Agreement dated as of March 31, 1997 by and among
Chelsea GCA Realty Partnership, L.P., WCC Associates and K M
Halawa Partners. Incorporated by reference to Exhibit 1 to
current report on Form 8-K reporting on an event which
occurred March 31, 1997.
10.5 Stock Subscription Agreement dated May 16, 1997
between Chelsea GCA Realty, Inc. and Simon DeBartolo
Group, L.P.
23.1 Consent of Ernst & Young LLP.