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, 2002
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. 1-12328
CHELSEA PROPERTY GROUP, INC.
(Exact name of registrant as specified in its charter)
|
Maryland (State or other jurisdiction of incorporation or organization) |
22-3251332 (I.R.S. Employer 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:
Title of each class Common stock, $0.01 par value |
Name of each exchange on which registered New York Stock Exchange |
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]
Indicate by check mark whether the registrant is an accelerated filer. Yes X No
Based on the closing sales price on February 14, 2003 of $34.23 per share the aggregate market value of the voting stock held by non-affiliates of the registrant was $1,403,548,778.
The number of shares outstanding of the registrant’s common stock, $0.01 par value was 41,516,896 at February 14, 2003.
Documents incorporated by reference:
Portions of the registrant’s definitive Proxy Statement relating to its 2003 Annual Meeting of Shareholders are incorporated by reference into Part III as set forth herein.
PART I
Item 1. Business
The Company
Chelsea Property Group, Inc. (the “Company") is a self-administered and self-managed real estate investment trust ("REIT"). The Company made its initial public offering of common stock on November 2, 1993 (the "IPO") and simultaneously became the managing general partner of CPG Partners, L.P. (the "Operating Partnership" or “OP”), a partnership that specializes in owning, developing, redeveloping, leasing, marketing and managing upscale and fashion-oriented manufacturers’ outlet centers. As of December 31, 2002, the Company wholly or partially-owned 58 centers in 30 states and Japan containing approximately 14.4 million square feet of gross leasable area (“GLA”) represented by more than 750 tenants in approximately 3,400 stores. The Company’s portfolio is comprised of 26 premium outlet centers containing 8.4 million square feet of GLA (“Premium Properties”) and 32 other retail centers containing 6.0 million square feet of GLA (“Other Properties”) (collectively the “Properties”). The Premium Properties generated approximately 86% of the Company’s retail real estate net operating income for the year ended December 31, 2002. The Premium Properties generally are located near metropolitan areas including New York City, Los Angeles, Boston, Washington, D.C., San Francisco, Sacramento, Cleveland, Atlanta, Dallas, Portland (Oregon), Tokyo and Osaka, Japan, which have a population of at least one million people within a 30-mile radius, with average annual household income of greater than $50,000. Some Premium Properties centers are also located within 20 miles of major tourist destinations including Palm Springs, the Napa Valley, Orlando, and Honolulu. During 2002, the Company’s domestic Premium Properties generated weighted average tenant sales of $383 per square-foot, defined as total sales reported by tenants divided by their gross leasable area weighted by months in operation.
The Company's executive offices are located at 103 Eisenhower Parkway, Roseland, New Jersey 07068 (telephone 973-228-6111). The Company’s website can be accessed at www.CPGI.com. A copy of the Company’s 10-K’s, 10-Q’s, and 8-K’s can be obtained, free of charge, on the Company’s website. The Company was incorporated in Maryland on August 24, 1993.
The Company is taxed as a REIT under the provisions of the Internal Revenue Code. The Company generally will not be taxed at the corporate level on income it currently distributes to its shareholders, provided it distributes at least 90% of its taxable income (95% prior to 2001).
Recent Developments
In April 2002, the Company became the sole owner of Orlando Premium Outlets by acquiring Simon Property Group, Inc.’s (“Simon”) 50% undivided ownership interest for $46.6 million in cash and the assumption of $29.7 million of existing mortgage debt and a related guarantee. In June 2002, the Company repaid the outstanding debt of $59.4 million and extinguished the mortgage.
Also in April 2002, the Company acquired a 305,000 square-foot outlet center, included in Other Properties, located in Edinburgh, Indiana, for $27.0 million in cash.
In June 2002, the Company and Simon entered into a new 50/50 joint venture to develop and operate Las Vegas Premium Outlets (“Simon-Las Vegas”), a 435,000 square-foot single-phase premium outlet center located in Las Vegas, Nevada. The center is scheduled to open in the summer of 2003. In June 2002, Simon-Las Vegas purchased a 40-acre site and commenced construction. The Company is responsible for financing its 50% share of development costs, which are expected to be approximately $48.0 million. As of December 31, 2002, the Company had contributed $22.8 million.
In July 2002, the Company sold approximately 40% of its holdings in Value Retail PLC to a third party for $11.4 million, resulting in a gain of $10.9 million.
In August 2002, the Company became the sole owner of four Premium Properties by acquiring the remaining 51% undivided ownership interest in the joint venture F/C Acquisition Holdings, LLC. The Company paid $58.9 million in cash and assumed $86.5 million, the remaining 51%, of existing mortgage debt.
In August 2002, the Company and Simon entered into a new 50/50 joint venture to develop and operate Chicago Premium Outlets (“Simon-Chicago”), a 438,000 square-foot single-phase premium outlet center located in Aurora, Illinois, near Chicago. The center is scheduled to open in mid-2004. In September 2002, Simon-Chicago purchased a 140-acre site, including 80 acres of conservation area, and commenced construction. The Company is responsible for financing its 50% share of the development costs, which are expected to be approximately $46.0 million. As of December 31, 2002, the Company had contributed $8.4 million.
In November 2002, the Company acquired two outlet centers included in Other Properties: a 305,000 square-foot outlet center located in Albertville, Minnesota, and a 278,000 square-foot outlet center located in Johnson Creek, Wisconsin, for a total price of $89.5 million. The transaction was financed by issuing limited partnership units in the OP valued at $44.6 million and the balance from the senior credit facility.
In December 2002, the Company purchased four outlet centers included in Other Properties for an all-cash price of $193.0 million. The four properties total 1.3 million square feet of gross leaseable area and consist of a 292,000 square-foot center located in Jackson, New Jersey; a 391,000 square-foot center located in Osage Beach, Missouri; a 329,000 square-foot center located in St. Augustine, Florida; and a 300,000 square-foot center located in Branson, Missouri.
During 2002, the Company sold five non-core Other Properties and recognized a gain of approximately $0.3 million.
The Company has been developing and operates an e-commerce technology platform through its affiliate, Chelsea Interactive, Inc. (“Chelsea Interactive”) with an aggregate funding commitment of up to $60.0 million; as of December 31, 2002, $52.4 million had been funded. The Company anticipates that the balance of the funding will be used to further develop the platform and to finance operating cash shortfalls and potential costs related to the disposal or discontinuance of the business. The Company currently believes that it will not be able to recover the net book value of its investment in Chelsea Interactive through future cash flows unless Chelsea Interactive is able to achieve positive cash flow before reaching the $60.0 million funding limit. Due to current market conditions and costs related to securing additional brand users for the platform, the Company has decided to recognize an impairment loss of $34.4 million, equal to the net book value of its investment in Chelsea Interactive at December 31, 2002. However, the Company is in active discussions with potential investors to provide capital to and/or acquire Chelsea Interactive. There can be no assurance that any of these discussions will be successful or that Chelsea Interactive will be able to continue as a going concern. Future funding by the Company will be reported as a loss in the period funding occurs.
The following table sets forth a summary of the additional GLA from expansions, acquisitions and dispositions from January 1 through December 31, 2002:
Number
GLA of
Property % Owned Date (1) (Sq. Ft.) Stores Tenants (2)
- -------- --------- --------- ------------- ---------- ------------------------------
As of January 1, 2002............... 12,574,000 2,903
EXPANSIONS:
Rinku Premium Outlets............... 40 03/02 70,000 40 Benetton, Cole Haan, La Perla,
Izumisano, Japan The North Face, Tommy Hilfiger
Desert Hills Premium Outlets........ 100 12/02 23,000 8 Hugo Boss
Cabazon, CA
Liberty Village Premium Outlets..... 100 11/02 23,000 2 LL Bean, Liz Claiborne
Flemington, NJ
Napa Premium Outlets................ 100 04/02 9,000 2 Kenneth Cole
Napa, CA
Other (net)......................... (17,000) 1
--------- -------
Total expansions ................... 108,000 53
Acquisitions:
Factory Outlet Village Osage Beach.. 100 12/02 391,000 104 Eddie Bauer, Gap, Liz Clairborne,
Osage Beach, MO Polo Ralph Lauren, Tommy Hilfiger
St. Augustine Outlet Center......... 100 12/02 329,000 93 Brooks Brothers, Casual Corner,
St. Augustine, FL Coach, Gap, Reebok, Tommy
Bahama
Outlets at Albertville ............. 100 11/02 305,000 67 Banana Republic, Gap, Old Navy, Polo
Albertville, MN Ralph Lauren, Tommy Hilfiger
Edinburgh Outlet Center............. 100 04/02 305,000 72 Factory Brand Shoes, Gap, Nautica,
Edinburgh, IN Nike, OshKosh B'Gosh, Tommy Hilfiger
Factory Merchants Branson........... 100 12/02 300,000 86 Carter's Childrenswear, L'eggs/
Branson, MO Hanes/Bali/ Playtex, Lenox
Jackson Outlet Village.............. 100 12/02 292,000 71 Casual Corner, Gap, Nike,
Jackson, NJ Reebok, Tommy Hilfiger,
Johnson Creek Outlet Center......... 100 11/02 278,000 62 Gap, Nike, Old Navy Clothing
Johnson Creek, WI Company, Tommy Hilfiger
---------- -----
Total Acquisitions:................. 2,200,000 555
Dispositions:
Factory Stores of America........... 100 06/02 (176,000) (43) Bass, Levi's, Van Heusen,
LaMarque, TX West Point Stevens
Factory Stores of America........... 100 07/02 (128,000) (20) Banister Shoe, Book Warehouse,
Tucson, AZ Samsonite, VF Factory
Outlet
Factory Stores of America........... 100 06/02 (64,000) (4) VF Factory Outlet
Corsicana, TX
Factory Stores of America........... 100 07/02 (64,000) (4) VF Factory Outlet
Livingston, TX
Factory Stores of America........... 100 11/02 (64,000) (4) VF Factory Outlet
Mineral Wells, TX
---------- -----
Total Dispositions.................. (496,000) (75)
Net Additions for 2002.............. 1,812,000 533
---------- -----
Totals as of December 31, 2002...... 14,386,000 3,436
========== =====
| 1) | Expansion, acquisition or disposition date. |
| 2) | Consists of tenants who lease at least 5,000 square feet of GLA or have estimated sales of more than $300 per square-foot. Most tenants pay a fixed base rent based on square feet leased and also pay a percentage rent based on sales. |
Some of the most recent newly acquired or expanded centers are discussed below:
Rinku Premium Outlets, Izumisano, Japan. Rinku Premium Outlets, a 250,000 square-foot center containing 120 stores, opened its initial phase in November 2000. The Phase II expansion that opened in March 2002 consisted of 70,000 square feet of GLA and 40 stores. The center is located 45 miles south of Osaka near Kansai International Airport. The populations within a 35-mile and 65-mile radius are approximately 12.0 million and 19.1 million, respectively.
Factory Outlet Village Osage Beach, Osage Beach, MO - Factory Outlet Village Osage Beach, a 391,000 square-foot center containing 104 stores was acquired in December 2002. The center is located in a tourist destination off Interstate 70 on Highway 54 at the Lake of Ozarks. The populations within a 15-mile, 30-mile and 45-mile radius are 0.1 million, 0.1 million and 0.3 million, respectively. Average household income within a 30-mile radius is approximately $44,000.
St. Augustine Outlet Center, St. Augustine, FL - St. Augustine Outlet Center, a 329,000 square-foot center containing 93 stores was acquired in December 2002. The center is located in a tourist destination off Interstate 95 in St. Augustine, Florida. The populations within a 15-mile, 30-mile and 45-mile radius are 0.1 million, 0.7 million and 1.2 million, respectively. Average household income within a 30-mile radius is approximately $60,000.
Outlets at Albertville, Albertville, MN – Outlets at Albertville, a 305,000 square-foot center containing 67 stores was acquired in November 2002. The center is located approximately 20 miles northwest of Minneapolis-St. Paul on Interstate 94. The populations within a 15-mile, 30-mile and 45-mile radius are 0.3 million, 1.9 million and 3.1 million, respectively. Average household income within a 30-mile radius is approximately $68,000.
Edinburgh Outlet Center, Edinburgh, IN – Edinburgh Outlet Center, a 305,000 square-foot center containing 72 stores was acquired in April 2002. The center is located 40 miles south of downtown Indianapolis at the junction of Interstate 65 and U.S. Route 31. The populations within a 15-mile, 30-mile and 45-mile radius are 0.1 million, 0.7 million and 1.8 million, respectively. Average household income within a 30-mile radius is approximately $53,000.
Factory Merchants Branson, Branson, MO – Factory Merchants Branson, a 300,000 square-foot center containing 86 stores was acquired in December 2002. The center is located in a tourist destination off Highway 76 west on Pat Nash Drive, 40 miles south of Springfield, Missouri. The populations within a 15-mile, 30-mile and 45-mile radius are 0.1 million, 0.2 million and 0.5 million, respectively. Average household income within a 30-mile radius is approximately $47,000.
Jackson Outlet Village, Jackson, NJ - Jackson Outlet Village, a 292,000 square-foot center containing 71 stores was acquired in December 2002. The center is located 50 miles northeast of Philadelphia and 65 miles southwest of New York City. The populations within a 15-mile, 30-mile and 45-mile radius are 0.5 million, 3.0 million and 10.2 million, respectively. Average household income within a 30-mile radius is approximately $70,000.
Johnson Creek Outlet Center, Johnson Creek, WI – Johnson Creek Outlet Center, a 278,000 square-foot center containing 62 stores was acquired in November 2002. The center is located on Interstate 94 at Highway 26, midway between Madison and Milwaukee, Wisconsin. The populations within a 15-mile, 30-mile and 45-mile radius are 0.1 million, 0.6 million and 2.4 million, respectively. Average household income within a 30-mile radius is approximately $62,000.
The Company had been developing and operates an e-commerce technology platform through its affiliate, Chelsea Interactive, Inc. with an aggregate funding commitment of up to $60.0 million; as of December 31, 2002, $52.4 million has been funded. The Company anticipates that the balance of the funding will be used to further develop the platform and to finance operating cash shortfalls and potential costs related to the disposal or discontinuance of the business. The Company currently believes that it will not be able to recover the net book value of its investment in Chelsea Interactive through future cash flows unless Chelsea Interactive is able to achieve positive cash flow before reaching the $60.0 million funding limit. Due to current market conditions and costs related to securing additional brand users for the platform, the Company has decided to recognize an impairment loss of $34.4 million, equal to the net book value of its investment in Chelsea Interactive as of December 31, 2002. However, the Company is in active discussions with potential investors to provide capital to and/or acquire Chelsea Interactive. There can be no assurance that any of these discussions will be successful or that Chelsea Interactive will be able to continue as a going concern. Future funding by the Company will be reported as a loss in the period funding occurs.
Strategic Alliances and Joint Ventures
In June 1999, the Company entered into an agreement with Mitsubishi Estate Co., Ltd. and Nissho Iwai Corporation to jointly develop, own and operate premium outlet centers in Japan. The joint venture, known as Chelsea Japan Co., Ltd. (“Chelsea Japan”), developed its two initial projects, Gotemba Premium Outlets a 220,000 square-foot center, outside of Tokyo and the second, Rinku Premium Outlets a 180,000 square-foot center outside Osaka. In March 2002, the 70,000 square-foot second phase of Rinku Premium Outlets opened 100% leased. The joint venture’s third project, the 180,000 square-foot first phase of Sano Premium Outlets located north of Tokyo in Sano, Japan is scheduled to open in March 2003. A 170,000 square-foot second phase of Gotemba Premium Outlets is scheduled to open in July 2003.
During 2002, the Company and Simon agreed to develop two premium outlet centers under separate 50/50 joint ventures, the 435,000 square-foot Las Vegas Premium Outlets scheduled to open in summer 2003 and the 438,000 square-foot Chicago Premium Outlets scheduled to open in mid-2004 (“Simon-Ventures”). Simon is the largest publicly traded retail real estate company as measured by market capitalization. At February 2003, Simon was engaged in ownership and management of income-producing properties primarily regional malls and community centers and had an interest in and/or managed approximately 183 million square feet of retail and mixed-use properties in 36 states, Canada and Europe. The original 5-year strategic alliance with Simon to develop and acquire high-end outlet centers with 500,000 square feet or more in the United States expired on December 31, 2002. In April 2002, the Company bought out Simon’s undivided 50% interest in Orlando Premium Outlets that opened in May 2000.
In October 1998, the Company sold its interest in and terminated the development of Houston Premium Outlets, a joint venture project with Simon. Under the terms of the agreement, the Company received non-compete payments totaling $21.4 million from The Mills Corporation; $3.0 million was received at closing and all four annual installments of $4.6 each million were received, including the final January 2002 payment, which was reduced by a $0.3 million legal escrow reserve.
In May 2002, the Company entered into a 50/50 strategic alliance with Sordo Madaleno y Asociados and Mr. Carlos Peralta of Mexico City to jointly develop premium outlet centers in Mexico. Subject to leasing and entitlements, construction on a 200,000 square-foot first phase of an outlet project north of Mexico City is expected to commence later in 2003 and open in late 2004. The site can support a second phase containing approximately 165,000 square feet of GLA.
The Company has made several investments through joint ventures with others. Joint venture investments may involve risks not otherwise present for investments made solely by the Company, including the possibility its co-venturers might become bankrupt, its co-venturers might at any time have different interests or goals than the Company, and that the co-venturers may take action contrary to the Company’s instructions, requests, policies or objectives, including its policy with respect to maintaining the qualification of the Company as a REIT. Other risks of joint venture investments include impasse on decisions, such as a sale, because neither its co-venturer nor the Company would have full control over the joint venture. There is no limitation under the Company’s organizational documents as to the amount of funds that may be invested in partnerships or joint ventures.
Organization of the Company
Virtually all of the Company’s assets are held by, and all of its business activities conducted through, the Operating Partnership. The Company is the sole general partner of the Operating Partnership (which owned 84.6% in the Operating Partnership as of December 31, 2002) and has full and complete control over the management of the Operating Partnership and each of the Properties, excluding joint ventures.
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 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 Strategy
The Company 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 Company maintains strong tenant relationships with high-fashion, upscale manufacturers and retailers that have a selective presence in the outlet industry, such as Armani, Brooks Brothers, Chanel, Coach Leather, Cole-Haan, Donna Karan, Gap/Banana Republic, Gucci, Nautica, Polo Ralph Lauren, Tommy Hilfiger and Versace, as well as with national brand-name manufacturers such as Adidas, Carter’s, Nike, Phillips-Van Heusen (Bass, Izod, Geoffrey Beene, Van Heusen) and Timberland. The Company 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 Company’s 24 domestic Premium Properties generated weighted average reported tenant sales during 2002 of $383 per square-foot, the highest among the three publicly traded outlet companies. As a result, the Company has been successful in attracting some of the world’s most sought-after brand-name designers, manufacturers and retailers and each year has added new names to the outlet business and its centers. The Company believes that the quality of its centers gives it significant advantages in attracting customers and negotiating multi-lease transactions with tenants.
Management Expertise. The Company 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. Management developed a number of the earliest and most successful outlet centers in the industry, including Liberty Village Premium Outlets (one of the first manufacturers’ outlet centers in the U.S.) in 1981, Woodbury Common Premium Outlets in 1985 and Desert Hills Premium Outlets in 1990. Since its IPO, the Company 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 Company intends to continue to invest in systems and controls to support the planning, coordination and monitoring of its activities.
Growth Strategy
The Company seeks growth through increasing rents in its existing centers; developing new centers and expanding existing centers; and acquiring and re-developing centers.
Increasing Rents at Existing Centers. The Company’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 under performing tenants; and continuing to sign leases that provide for percentage rents.
Developing New Centers and Expanding Existing Centers. The Company believes that there continue to be significant opportunities to develop manufacturers’ outlet centers across the United States and internationally. The Company intends to undertake such development selectively, 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 Company 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 Company believes that its development experience and strong tenant relationships enable it to determine site viability on a timely and cost-effective basis. However, there can be no assurance that any development or expansion projects will be commenced or completed as scheduled.
International Development. The Company continues to develop, own and operate premium outlet centers in Japan through its joint venture company, Chelsea Japan. In 2000, Chelsea Japan developed its first two outlet centers, one in Gotemba, located outside Tokyo, and the other in Izumisano, outside Osaka, Japan. A third outlet center in Sano, Japan is expected to open in March 2003.
The Company believes that there are significant opportunities to develop additional manufacturers’ outlet centers in Japan and other countries. The Company intends to pursue these opportunities as viable sites and local partners are identified. During 2002, the Company entered into an agreement to jointly develop premium outlets centers in Mexico.
The Company has minority interests ranging from 3% to 8% in several outlet centers and outlet development projects in Europe.
Acquiring and Redeveloping Centers. The Company intends to selectively acquire individual properties and portfolios of properties that meet its strategic investment criteria as suitable opportunities arise. The Company 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 its acquisition strategy successfully. Furthermore, management believes that the Company will be able to enhance the operation of acquired properties as a result of its strong tenant relationships with both national and upscale fashion retailers and development, marketing and management expertise as a full-service real estate organization. Additionally, the Company may be able to acquire properties on a tax-advantaged basis through the issuance of Operating Partnership units. However, there can be no assurance that any acquisitions will be consummated or, if consummated, will result in an advantageous return on investment for the Company.
Operating Strategy
The Company’s primary business objective is to enhance the value of its properties and operations by increasing cash flow. The Company 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 Company 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 Company 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 Company 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 Company believes that these areas provide the most attractive long-term demographic characteristics. The Company 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 Company 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 Company are reimbursable by tenants.
Property Design and Management. The Company 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. The Company has 634 full-time and 180 part-time employees. Of these employees, 491 full-time and 178 part-time 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 director.
Financing
The Company seeks to maintain a strong, flexible financial position by: (i) maintaining a moderate 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 continue to enable the Company to access a broad array of capital sources, including bank or institutional borrowings, secured and unsecured debt and equity financings. See “Management's Discussion and Analysis of Financial Condition and Results of Operations.”
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 consumers’ desire for value-priced goods. The Properties compete for customer spending with other outlet locations, traditional shopping malls, off-price retailers, and other retail distribution channels. The Company believes that the Premium Properties generally are the leading manufacturers' outlet centers in each market. The Company carefully considers the degree of existing and planned competition in each proposed market before deciding to build a new center.
Environmental Matters
The Company is not aware of any environmental liabilities relating to the Properties that would have a material impact on the Company's financial position and results of operations.
Personnel
As of December 31, 2002, the Company had 634 full-time and 180 part-time employees. None of the employees are subject to any collective bargaining agreements, and the Company believes it has good relations with its employees.
Item 2. Properties
As of December 31, 2002, the Company had 58 centers in 30 states and Japan containing approximately 14.4 million square feet of gross leasable area. Of the 58 centers, 56 are owned 100% (49 in fee and seven under a long-term lease). The Company owned and operated all 56 of its domestic centers and Chelsea Japan manages the two centers in Japan.
The Company’s Premium Properties consists of 26 upscale, fashion-oriented manufacturers’ outlet centers located in or near New York City, Los Angeles, Boston, Washington, D.C., San Francisco, Sacramento, Cleveland, Atlanta, Dallas, Portland (Oregon), Tokyo and Osaka, Japan, or within 20 miles of major tourist destinations including Palm Springs, the Napa Valley, Orlando, and Honolulu. The domestic Premium Properties were 99% leased as of December 31, 2002, and contained approximately 2,000 stores with more than 535 different tenants. The Company’s Premium Properties in Japan were 100% leased as of December 31, 2002, and contained approximately 210 stores. The Company's Other Properties were 95% leased as of December 31, 2002, and contained approximately 1,200 stores with more than 225 different tenants.
The Company believes the Properties are adequately covered by insurance.
The Company does not consider any single store lease to be material; no individual tenant, combining all of its store concepts, accounts for more than 5% of the Company’s gross revenues; and only one tenant occupies more than 5% of the Company’s total domestic GLA at 8%. As a result, and considering the Company’s past success in re-leasing available space, the Company believes the loss of any individual tenant would not have a significant effect on future operations.
For the years ended December 31, 2002, 2001, and 2000, respectively, 16%, 21% and 23% of the Company’s total revenues were derived from Woodbury Common Premium Outlets. The loss of this center or a material decrease in revenues from the center for any reason might have a material adverse effect on the Company. In addition, for the years ended December 31, 2002, 2001, and 2000, respectively, 25%, 28% and 28% of the Company’s total revenues were derived from the Company’s centers in California.
Woodbury Common Premium Outlets contributed more than 10% of the Company’s aggregate gross revenues during 2002 and had a book value of more than 5% of the total assets at year-end 2002. No tenant leases more than 10% of the center’s GLA. The following chart shows certain information for Woodbury Common.
Avg. Annual
Fiscal Occupancy Rent
YEAR Rate per sq ft
--------------- --------------
1998................................. 100.0% $33.16
1999................................. 99.5 35.61
2000................................. 100.0 38.55
2001................................. 98.8 38.63
2002................................. 100.0 41.23
Woodbury Common Premium Outlets opened in four phases in 1985, 1993, 1995 and 1998 and contains 845,000 square feet of GLA. As of December 31, 2002, the center was leased to 212 tenants. Woodbury Common is located approximately 50 miles north of New York City at the Harriman exit of the New York State Thruway. The populations within a 30-mile, 60-mile and 100-mile radius are approximately 2.6 million, 17.4 million and 25.3 million, respectively. Average household income within the 30-mile radius is approximately $92,000.
The following table shows lease expiration data as of December 31, 2002 for Woodbury Common Premium Outlets for the next ten years (assuming that none of the tenants exercise renewal options).
% of Annual
Contractual No. of "CBR"
Base Rents ("CBR") Leases Represented by
EXPIRATION YEAR GLA per sq ft Total Expiring Expiring Leases
-------------- ------------- ---------------- ---------- ----------------------
2003...................... 126,496 $30.04 $3,785,000 27 12.5%
2004...................... 35,051 32.23 1,128,000 10 3.7
2005...................... 113,629 35.43 4,027,000 28 13.3
2006...................... 33,544 39.38 1,339,000 14 4.4
2007...................... 63,336 36.24 2,283,000 18 7.6
2008...................... 185,379 35.23 6,517,000 43 21.6
2009...................... 44,786 43.16 1,942,000 16 6.4
2010...................... 37,875 35.76 1,359,000 11 4.5
2011...................... 72,881 42.41 3,096,000 15 10.3
2012...................... 77,193 51.75 3,985,000 26 13.2
Depreciation on Woodbury Common Premium Outlets is calculated using the straight line method over the estimated useful life of the real property and land improvements which ranges from 10 to 40 years. At December 31, 2002, the Federal income tax basis in this center was $120.0 million.
The realty tax rate on Woodbury Common Premium Outlets is approximately $4.68 per $100 of assessed value. Estimated 2003 taxes are $3.9 million.
VF Corporation (Vanity Fair) leases approximately 8% of the Company’s total domestic GLA as of December 31, 2002 and 2001, which constitutes approximately 2% of the Company’s total revenues.
Set forth in the table below is certain property information as of December 31, 2002:
Year
Opened
or GLA No. of
Name/location Acquired (Sq. Ft.) Stores Selected Tenants
- -------------------------------------------- ----------- ---------- --------- -------------------------------------------------------
Premium Properties:
Woodbury Common Premium Outlets........ 1985 845,000 212 Banana Republic, Brooks Brothers,
Central Valley, NY (New York City area) Coach, Giorgio Armani, Gucci,
Neiman Marcus Last Call, Polo Ralph
Lauren, Salvatore Ferragamo
Wrentham Village Premium Outlets....... 1997 601,000 157 Barneys New York, Burberry, Hugo Boss,
Wrentham, MA (Boston/Providence area) Kenneth Cole, Nike, Polo Ralph Lauren,
Sony, Versace
Gilroy Premium Outlets................. 1990 577,000 141 Brooks Brothers, Coach, J. Crew, Hugo
Gilroy, CA (San Jose area) Boss, Nike, Polo Ralph Lauren, Timberland,
Tommy Hilfiger, Versace
North Georgia Premium Outlets.......... 1996 537,000 132 Coach, Crate & Barrel, Escada, Liz
Dawsonville, GA (Atlanta metro area) Claiborne, Polo Ralph Lauren, Tommy
Hilfiger, Williams-Sonoma
Desert Hills Premium Outlets........... 1990 499,000 133 Burberry, Coach, Giorgio Armani, Gucci,
Cabazon, CA (Palm Springs-Los Angeles) Max Mara, Polo Ralph Lauren, Salvatore
Ferragano, Versace, Zegna
Lighthouse Place Premium Outlets....... 1987 484,000 121 Burberry, Coach, Crate & Barrel, Gap,
Michigan City, IN (Chicago area) Liz Claiborne, Polo Ralph Lauren,
Tommy Hilfiger
Leesburg Corner Premium Outlets........ 1998 463,000 103 Barneys New York, Kenneth Cole, Liz
Leesburg, VA (Washington DC area) Claiborne, Nike, Polo Ralph Lauren,
Williams-Sonoma
Camarillo Premium Outlets.............. 1995 454,000 122 Banana Republic, Barneys New York,
Camarillo, CA (Los Angeles metro area) Coach, Donna Karan, Polo Ralph Lauren,
St. John Knits, Versace
Orlando Premium Outlets................ 2000 428,000 114 Barneys New York, Coach, Escada,
Orlando, FL (between Sea World & Epcot) Giorgio Armani, Hugo Boss, Max Mara,
Nike, Polo Ralph Lauren
Waterloo Premium Outlets............... 1995 392,000 99 Brooks Brothers, Coach, Eddie Bauer,
Waterloo, NY (Finger Lakes Region) Gap, J. Crew, Jones New York, Liz
Claiborne, Mikasa, Polo Ralph Lauren
Allen Premium Outlets.................. 2000 349,000 84 Barneys New York, Brooks Brothers,
Allen, TX (Dallas metro area) Cole-Haan, Crate & Barrel, Liz
Claiborne, Polo Ralph Lauren, Tommy
Hilfiger
Folsom Premium Outlets................. 1990 299,000 80 Bass, Eddie Bauer, Gap, Kenneth
Folsom, CA (Sacramento metro area) Cole, Liz Claiborne, Nike, Off
5th-Saks Fifth Avenue
Aurora Premium Outlets................. 1987 286,000 65 Brooks Brothers, Gap, Liz Claiborne,
Aurora, OH (Cleveland metro area) Nautica, Off 5th-Saks Fifth Avenue,
Polo Ralph Lauren, Tommy Hilfiger
Clinton Crossing Premium Outlets....... 1996 272,000 66 Barneys New York, Coach, Dooney &
Clinton CT (I-95/NY-NewEngland Bourke, Gap, Kenneth Cole, Liz
corridor) Claiborne, Nike, Polo Ralph Lauren
Rinku Premium Outlets.................. 2000 (1) 250,000 120 Brooks Brothers, Coach, Dolce &
Rinku, Japan (Osaka metro area) (2) Gabbana, Eddie Bauer, Gap, Nautica,
Nike, Timberland
Gotemba Premium Outlets................ 2000 (1) 220,000 90 Brooks Brothers, Coach, Eddie Bauer,
Gotemba, Japan (Tokyo metro area) (2) Gap, J. Crew, L.L.Bean, Nautica,
Nike, Timberland
Waikele Premium Outlets................ 1997 213,000 51 Banana Republic, Barneys New York,
Waipahu, HI (Honolulu area) Brooks Brothers, Guess, Kenneth Cole,
Max Mara
Petaluma Village Premium Outlets....... 1994 196,000 51 Brooks Brothers, Coach, Gap, Jones
Petaluma, CA (San Francisco metro area) New York, Liz Claiborne, Off 5th-Saks
Fifth Avenue, Puma
Napa Premium Outlets................... 1994 179,000 51 Barneys New York, J. Crew, Jones
Napa, CA (Napa Valley) New York, Kenneth Cole, Nautica,
Tommy Hilfiger, TSE
Liberty Village Premium Outlets........ 1981 177,000 57 Ellen Tracy, Jones New York, L.L.
Flemington, NJ (New York-Phila. metro Bean, Polo Ralph Lauren, Tommy
area) Hilfiger, Timberland, Waterford
Wedgwood
Columbia Gorge Premium Outlets......... 1991 164,000 45 Adidas, Bass, Carter's, Gap, Mikasa,
Troutdale, OR (Portland metro area) Samsonite
Kittery Premium Outlets ............... 1984 150,000 31 Banana Republic, Coach, Crate &
Kittery, ME (Boston area) (2) Barrel, J. Crew, Polo Ralph
Lauren, Reebok
American Tin Cannery Premium Outlets... 1987 135,000 45 Bass, Geoffrey Beene, Nine West,
Pacific Grove, CA (Monterey Peninsula)(2) Reebok, Samsonite, WestPoint
Stevens
Santa Fe Premium Outlets............... 1993 125,000 38 Bose, Brooks Brothers, Coach,
Santa Fe, NM Jones New York, Liz Claiborne,
Nautica, Van Heusen
Patriot Plaza Premium Outlets.......... 1986 77,000 11 Lenox, Polo Ralph Lauren,
Williamsburg, VA (Norfolk-Richmond WestPoint Stevens
area)
St. Helena Premium Outlets............. 1992 23,000 9 Brooks Brothers, Coach, Donna
St. Helena, CA (Napa Valley) Karan, Escada
-------- -----
Total Premium Properties............... 8,395,000 2,228
-------- -----
Other Properties:
Factory Stores at Vacaville............ 2001 447,000 105 Adidas, Carter's Childrenswear,
Vacaville, CA Coach, Eddie Bauer, Gap, Liz
Claiborne, Mikasa, Nike, OshKosh
B'Gosh, Reebok
Carolina Outlet Center (2)............. 2001 440,000 82 Brooks Brothers, Gap, Liz Claiborne,
Smithfield, NC Nike, Polo Ralph Lauren, Timberland,
Tommy Hilfiger
Factory Outlet Village Osage Beach..... 2002 391,000 104 Eddie Bauer, Factory Brand Shoes,
Osage Beach, MO Gap, Liz Claiborne, Polo Ralph
Lauren, Tommy Hilfiger
St. Augustine Outlet Center............ 2002 329,000 93 Brooks Brothers, Casual Corner,
St. Augustine, FL Coach, Gap, Reebok, Tommy Bahama
Outlets at Albertville................. 2002 305,000 67 Banana Republic, Gap, Old Navy,
Albertville, MN Polo Ralph Lauren, Tommy Hilfiger
Edinburgh Outlet Center................ 2002 305,000 72 Factory Brand Shoes, Gap, Nautica,
Edinburgh, IN Nike, OshKosh B'Gosh, Tommy Hilfiger
Factory Merchants Branson(2)........... 2002 300,000 86 Carter's Childrenswear, L'eggs/Hanes,
Branson, MO Bali/Playtex, Lenox
Jackson Outlet Village................. 2002 292,000 71 Casual Corner, Gap, Nike, Reebok,
Jackson, NJ Tommy Hilfiger
Factory Shoppes at Branson Meadows.... 2001 287,000 44 Dress Barn, Easy Spirit, Speigel,
Branson, MO VF Factory Outlet
Johnson Creek Outlet Center............ 2002 278,000 62 Gap, Nike, Old Navy, Tommy Hilfiger
Johnson Creek, WI
Factory Stores at North Bend .......... 2001 223,000 50 Adidas, Bass, Carters Childrenswear,
North Bend, WA Eddie Bauer, Nike, OshKosh B'Gosh,
Samsonite
Factory Stores of America.............. 2001 184,000 31 Adidas, Dress Barn, Samsonite, VF
Draper, UT Factory Outlet
Factory Stores of America.............. 2001 177,000 27 Bass, Carolina Pottery, Dress Barn,
Georgetown, KY Levi's, Van Heusen
Factory Stores of America ............. 2001 167,000 30 Bass, Dress Barn, Fieldcrest Cannon,
Mesa, AZ Samsonite, VF Factory Outlet
North Ridge Shopping Center............ 2001 166,000 33 Ace Hardware, Kerr Drugs, Winn Dixie
Raleigh, NC
Factory Stores of America ............. 2001 151,000 30 Bass, Liz Claiborne, OshKosh B'Gosh,
Crossville, TN Van Heusen, VF Factory Outlet,
Mac Gregor Village..................... 2001 144,000 45 Spa Health Club, Tuesday Morning
Cary, NC
Factory Stores of America -Tri-Cities.. 2001 133,000 16 Carolina Pottery, L'eggs/Hanes/ Bali/
Blountville, TN Playtex, Tri-Cities Cinemas
Factory Stores of America (2).......... 2001 131,000 18 Bass, Easy Spirit, VF Factory Outlet,
Iowa, LA Van Heusen
Factory Stores of America.............. 2001 129,000 12 Banister Shoes, VF Factory Outlet,
Tupelo, MS Van Heusen
Dare Center (2)........................ 2001 115,000 15 Fashion Bug, Food Lion
Kill Devil Hills, NC
Factory Stores of America.............. 2001 112,000 17 Dress Barn, Factory Brand Shoes,
Story City, IA VF Factory Outlet, Van Heusen
Factory Stores of America (2).......... 2001 112,000 18 Banister Shoes, Paper Factory,
Boaz, AL VF Factory Outlet
Factory Stores of America.............. 2001 91,000 10 VF Factory Outlet
West Frankfort, IL
Factory Stores of America.............. 2001 90,000 11 Bass, Dress Barn, VF Factory
Arcadia, LA Outlet, Van Heusen
Factory Stores of America.............. 2001 90,000 10 Bass, Dress Barn, VF Factory
Nebraska City, NE Outlet
Factory Stores of America.............. 2001 86,000 13 Dress Barn, VF Factory Outlet
Lebanon, MO
Factory Stores of America.............. 2001 84,000 13 Factory Brand Shoes, VF Factory
Graceville, FL Outlet, Van Heusen
Factory Stores of America.............. 2001 64,000 4 Banister Shoes, VF Factory Outlet
Hanson, KY
Factory Stores of America.............. 2001 64,000 4 VF Factory Outlet
Hempstead, TX
Factory Stores of America.............. 2001 60,000 4 Bass, VF Factory Outlet
Union City, TN
Factory Stores of America.............. 2001 44,000 11 Levi's, L'eggs/ Hanes/ Bali/ Playtex
Lake George, NY
-------- -----
Total Other Properties................. 5,991,000 1,208
-------- -----
Grand Total......................... 14,386,000 3,436
======== =====
Notes to Property Data:
| 1) | 40%-owned through a joint venture with Mitsubishi Estate Co., Ltd. (30% ownership) and Nissho Iwai Corporation (30% ownership). |
| 2) | Property held under long term land lease expiring as follows: American Tin Cannery Premium Outlets, December 2004; Factory Stores of America at Boaz, January 2007; Kittery Premium Outlets (129,000 sq ft), October 2009; Gotemba Premium Outlets, October 2019; Rinku Premium Outlets, March 2020; Factory Merchants Branson, November 2021; Factory Stores of America at Smithfield (87,000 sq ft), January 2029; Dare Center, September 2058; Factory Stores of America at Iowa, September 2087. |
The Company rents approximately 36,000 square feet of office space in its headquarters facility in Roseland, New Jersey; approximately 2,000 square feet at its office in Mission Viejo, California; 5,600 square feet at Chelsea Interactive’s office in Reston, Virginia and 3,500 square feet at its office in New York.
Item 3. Legal Proceedings
The Company is not presently involved in any material litigation other than routine litigation arising in the ordinary course of business and that is either expected to be covered by liability insurance or to have no material impact on the Company's financial position and results of operations.
Item 4. Submission of Matters to a Vote of Security Holders
None
Directors and Executive Officers of the Company
The following table sets forth the directors and executive officers of the Company:
Name Age Position
- ---- --- -------------
David C. Bloom 46 Chairman of the Board (term expires in 2005)
and Chief Executive Officer
William D. Bloom 40 Vice Chairman
and Director (term expires in 2003)
Brendan T. Byrne 78 Director (term expires in 2004)
Robert Frommer 67 Director (term expires in 2003)
Barry M. Ginsburg 65 Director (term expires in 2005)
Philip D. Kaltenbacher 65 Director (term expires in 2005)
Reuben S. Leibowitz 55 Director (term expires in 2003)
Leslie T. Chao 46 President
Thomas J. Davis 47 Chief Operating Officer
Michael J. Clarke 49 Senior Vice President and Chief Financial
Officer
Bruce Zalaznick 46 Executive Vice President-International
Anthony J. Galvin 43 Senior Vice President-Leasing
John R. Klein 44 Senior Vice President-Real Estate
Christina M. Casey 47 Vice President-Human Resources
Denise M. Elmer 46 Vice President, General Counsel and Secretary
Philip E. Ende 32 Vice President - Leasing
Eric K. Helstrom 44 Vice President-Architecture and Construction
Daniel L. Kelly 37 Vice President- International Leasing
Gregory C. Link 53 Vice President-Operations
Michele Rothstein 44 Vice President-Marketing
Catherine A. Lassi 43 Treasurer
Sharon M. Vuskalns 39 Controller
David C. Bloom, Chairman of the Board and Chief Executive Officer since 1993. Mr. Bloom was a founder and principal of Chelsea, and was President of Chelsea from 1985 to 1993. As Chairman of the Board and Chief Executive Officer of the Company, he sets policy and coordinates and directs all the Company’s primary functions. Prior to founding Chelsea, he was an equity analyst with The First Boston Corporation (now Credit Suisse First Boston Corporation) in New York. Mr. Bloom graduated from Dartmouth College and received an MBA from Harvard Business School.
William D. Bloom, Vice Chairman since 2000 and Director since 1995. Mr. Bloom joined The Chelsea Group in 1986 with responsibility for leasing of Company's projects and was appointed Executive Vice President-Leasing in 1993 and Executive Vice President-Strategic Relationships in 1996. Mr. Bloom's current responsibilities include day to day operations of Chelsea Interactive, Inc. Prior to joining Chelsea, he was an institutional bond broker with Mabon Nugent in New York. Mr. Bloom graduated from Boston University School of Management.
Brendan T. Byrne, Director since 1993. Since 1982, Mr. Byrne has been a senior partner in the law firm of Carella, Byrne, Bain, Gilfillan, Cecchi, Stewart & Olstein. He previously served as Governor of New Jersey from 1974 to 1982, Prosecutor of Essex County (New Jersey), President of the Public Utility Commission and Assignment Judge of the New Jersey Superior Court. He has also served as Vice President of the National District Attorneys Association; Trustee of Princeton University; Chairman of the Princeton University Council on New Jersey Affairs; Chairman of the United States Marshals Foundation; and Chairman of the National Commission on Criminal Justice Standards and Goals (1977). He serves on a Board of the National Judicial College, is a former Commissioner of the New Jersey Sports and Exposition Authority, and was a member of the board of directors of New Jersey Bell Telephone Company, Elizabethtown Water Company, Ingersoll-Rand Company and a former director of The Prudential Insurance Company of America. He is a member of the Board of Mack-Cali, Inc. Mr. Byrne graduated from Princeton University and received an LL.B. from Harvard Law School.
Robert Frommer, Director since 1993. Mr. Frommer is currently a Managing Member of Chatham Development Partners, LLC in San Francisco. From 1991 to 2000, he was a principal of Robert Frommer Associates, a real estate consulting firm. He has been responsible for developing major commercial, residential and mixed-use real estate projects in New York, Philadelphia, Washington, DC, Chicago and Seattle. He has served as President of the Pebble Beach Co., the Ritz-Carlton Hotel of Chicago and PG&E Properties in California. Mr. Frommer is a graduate of the Wharton School of the University of Pennsylvania, and received an LL.B. Degree from Yale Law School.
Barry M. Ginsburg, Director since 1993. Mr. Ginsburg was a founder and principal of Ginsburg Craig Associates and its predecessor companies from 1986 to 1993 and Vice Chairman of the Company from 1993 to 1999 at which time he retired. From 1966 through 1985, he was employed by Dansk International Designs, Ltd. and was corporate Chief Operating Officer and Director from 1980 to 1985. Dansk operated a chain of 31 manufacturers’ outlet stores. He is currently a Director of Liz Lange Maternity, New Milford (Connecticut) Hospital and AGS Realty Advisors. Mr. Ginsburg graduated from Colby College and received an MBA from Cornell University.
Philip D. Kaltenbacher, Director since 1993. Since 1974, Mr. Kaltenbacher has been Chairman of the Board of Directors and Chief Executive Officer of Seton Company, a manufacturer of leather and chemicals. Mr. Kaltenbacher was a Commissioner of The Port Authority of New York and New Jersey from September 1985 through February 1993, and served as Chairman from September 1985 through April 1990. Mr. Kaltenbacher graduated from Yale University and received an LL.B. from Yale Law School.
Reuben S. Leibowitz, Director since 1993. Mr. Leibowitz is a Managing Director of Warburg Pincus, a private equity investment firm. He has been associated with Warburg Pincus since 1984. Mr. Leibowitz currently serves as Director of Grubb & Ellis Company, Price Legacy Corporation and a number of private companies. Mr. Leibowitz graduated from Brooklyn College, received an MBA from New York University, a JD from Brooklyn Law School, and an LL.M. from New York University School of Law.
Leslie T. Chao, President since April 1997. As President of the Company, Mr. Chao oversees the corporate finance, international development, legal, administrative, investor relations and human resource functions of the Company. He is also Chairman of the Board of Chelsea Japan Co., Ltd, the Company’s Japanese joint venture. Mr. Chao joined Chelsea in 1987 as Chief Financial Officer. Prior to joining Chelsea, he was a Vice President in the corporate finance/treasury area of Manufacturers Hanover Corporation (now J.P. Morgan Chase & Co.), a New York bank holding company. He graduated from Dartmouth College and received an MBA from Columbia Business School.
Thomas J. Davis, Chief Operating Officer since April 1997. As Chief Operating Officer, Mr. Davis oversees the asset management activities of the domestic outlet portfolio including leasing, operations and marketing as well as development and construction. Mr. Davis joined Chelsea in 1996 as Executive Vice President-Asset Management. From 1988 to 1995, he held various senior positions at Phillips-Van Heusen Corporation, most recently as Vice President-Real Estate. Mr. Davis has over twenty years of factory outlet industry experience and has served the industry in various trade association positions including Chairman of Manufacturers Idea Exchange as well as a board member of the Steering Committee for FOMA (Factory Outlet Marketing Association). Mr. Davis received the 1995 Value Retail News Award of Excellence for individual achievement in the outlet industry.
Michael J. Clarke, Senior Vice President and Chief Financial Officer since 1999. Since joining the Company in 1994, Mr. Clarke has held various senior level financial positions. As Chief Financial Officer, he is responsible for Chelsea’s financial functions including reporting, treasury, accounting, budgeting, as well as banking, investor and rating agency relationships. From 1985 to 1993, he held various senior positions at a NYSE-listed operator of hotels, most recently as Executive Vice President & Chief Financial Officer. Mr. Clarke graduated from Seton Hall University and is a certified public accountant.
Bruce Zalaznick, Executive Vice President-International since 1999. Mr. Zalaznick is responsible for the Company’s development activities outside the United States as Executive Vice President-International. He joined the Company in 1994 as Vice President-Acquisitions responsible for the Company’s domestic site acquisition activities. From 1996 to 1999 he served as Executive Vice President-Real Estate, responsible for the domestic site selection, development, design and construction activities of the Company. From 1990 to 1994, he was Senior Vice President-Site Acquisition at Prime Retail, Inc., a publicly traded REIT, and in that capacity was responsible for the acquisition and entitlement of approximately three million square feet of outlet space in ten states. Mr. Zalaznick graduated from Cornell University and received an MBA from the Wharton School at the University of Pennsylvania.
Anthony J. Galvin, Senior Vice President-Leasing since 2001. Mr. Galvin joined the Company in 1997 as Vice President-Leasing and was named Senior Vice President-Leasing in January 2001. Mr. Galvin is responsible for the management of all aspects of the Company’s domestic leasing activities which includes leasing, lease administration, legal leasing support and tenant improvement/construction. From 1995 to 1997, he was Director of Real Estate for Coach Leather, a division of Sara Lee Corporation. From 1987 to 1995 he held positions in both real estate and construction at Phillips-Van Heusen Corporation. Mr. Galvin has served the industry in various trade association positions including Chairperson of the Northeast Merchants Association and the Board of Directors of ORMA (Outlet Retail Merchants Association). Mr. Galvin is a graduate of Glassboro State College (now Rowan University), where he serves on the Executive Committee of the Alumni Advisory Council for the School of Business.
John R. Klein, Senior Vice President-Real Estate, since 2001. Mr. Klein joined the Company in 1995 as Director-Acquisitions, was named Vice President-Acquisitions and Development in 1996, and named Senior Vice President-Real Estate in January 2001. He oversees the Company’s domestic acquisitions, development and construction activities. From 1991 to 1995, he held various positions at Prime Retail, Inc., most recently as Vice President-Site Acquisition. At Prime, Mr. Klein was involved in the acquisition and entitlement of over two million square feet of manufacturers’ outlet space in nine states. Mr. Klein graduated from Columbia University and received an MBA from George Washington University School of Business.
Christina M. Casey, Vice President-Human Resources since 1998. Ms. Casey joined the Company in 1996 as Director of Human Resources. As Vice President-Human Resources, she oversees all aspects of the Company’s human resource activities, including recruitment, benefits, compensation, policy development, training and employee relations. From 1987 to 1996 she held various positions in Human Resources with Boise Cascade Corporation, Specialty Paperboard and Rock-Tenn Company. Ms. Casey graduated from Villanova University and received a Masters in Social Service from Bryn Mawr Graduate School.
Denise M. Elmer, Vice President, General Counsel and Secretary since 1993. Ms. Elmer joined Chelsea as General Counsel in 1993. As Vice President, General Counsel and Secretary, she oversees the legal activities of the Company, including those related to property acquisition and development, leasing, finance and operations. From 1990 to 1993, she was a partner in the New York law firm of Stadtmauer Bailkin Levine & Masur, where she specialized in commercial real estate law. Ms. Elmer graduated from St. Lawrence University and received a JD from Duke University School of Law.
Philip Ende, Vice President-Leasing since 2001. Mr. Ende joined the Company in 1993 and has held various positions with increasing responsibility in leasing and construction prior to being named Vice President-Leasing in March 2001. Mr. Ende is responsible for the management of all aspects of the day-to-day leasing activities of the Company’s domestic portfolio. Mr. Ende graduated from the University of Florida.
Eric K. Helstrom, Vice President-Architecture and Construction, since 1996. Mr. Helstrom joined the Company in 1995 as Director-Development and was named Vice President-Architecture and Construction in 1996. He oversees the design, engineering and construction activities of the Company. From 1987 to 1995, he held various positions including Director-Architecture/Construction with Alexander Haagen Properties, an AMEX-listed REIT. Mr. Helstrom graduated from California Polytechnic San Luis Obispo and received a Masters in Real Estate Development from the University of Southern California. Mr. Helstrom is a licensed architect and general contractor.
Daniel L. Kelly, Vice President - International Leasing since 2001. Since joining the Company in 1993, Mr. Kelly has held various positions in the leasing area. From July 1999 to August 2001, Mr. Kelly served as Senior Managing Director of Chelsea Japan in Tokyo before being named Vice President-International Leasing. Mr. Kelly received his MBA in International Business from Rutgers University and a BA in mathematics from Providence College.
Gregory C. Link, Vice President-Operations since 1996. Mr. Link joined the Company in 1994 as Vice President-Leasing responsible for the management of the Company’s leasing activities. In January 1996, Mr. Link was appointed Vice President-Operations and is responsible for supervising property management activities at the Company’s operating properties. From 1987 to 1994, he was Chairman, President and Chief Executive Officer of The Ribbon Outlet, Inc., an affiliate of the world’s largest ribbon manufacturer, and in that capacity opened over 100 factory outlet stores across the United States. From 1971 to 1987 he held various senior merchandising positions with Phillips-Van Heusen Corporation, Westpoint Pepperell Corporation, May Department Stores and Associated Dry Goods Corporation. Mr. Link graduated from the College of Business and Public Administration of the University of Arizona at Tucson.
Michele Rothstein, Vice President-Marketing since 1993. Ms. Rothstein joined Chelsea in 1989 as Vice President-Marketing. As Vice President-Marketing of the Company, she oversees all aspects of the Company’s marketing and promotion activities. From 1987 to 1989, she was a product manager at Regina Company and, prior to 1987, was with Waring & LaRosa Advertising in New York. Ms. Rothstein graduated from the School of Business at the State University of New York at Albany.
Catherine A. Lassi, Treasurer since 1997. Ms. Lassi joined Chelsea in 1987, became Controller in 1990 and Treasurer in January 1997. As Treasurer, she oversees budgeting, forecasting, contract administration, cash management, banking, information systems and lease accounting activities for the Company. Ms. Lassi is a certified public accountant and graduated from the University of South Florida.
Sharon M. Vuskalns, Controller since 1997. Ms. Vuskalns joined the Company in 1995 as Director of Accounting Services. As Controller, she oversees the accounting, tax and financial reporting activities for the Company. Prior to joining Chelsea, she was a Senior Audit Manager with Ernst & Young, LLP. Ms. Vuskalns graduated from Indiana University and is a certified public accountant.
David C. Bloom and William D. Bloom are brothers.
PART II
Item 5. Market for the Registrant's Common Stock and Related Security Matters
The common stock of the Company is traded on the New York Stock Exchange under the ticker symbol CPG. As of February 14, 2003, the closing market price of the Company’s stock was $34.23 and there were 493 shareholders of record. The Company believes it has more than 14,500 beneficial holders of common stock. The following table sets forth the quarterly high and low closing sales price per share (as derived from the Wall Street Journal) and the cash distributions declared in 2002 and 2001. All share and per share data has been adjusted to reflect a 2-for-1 stock split that was paid as a stock dividend on May 28, 2002 to shareholders of record on May 14, 2002:
Sales Price ($) Distributions
Quarter Ended High Low ($)
------------- ---- --- -------------
December 31, 2002 $35.40 $31.13 $ 0.485
September 30, 2002 34.59 26.40 0.485
June 30, 2002 35.03 26.80 0.485
March 31, 2002 27.40 23.93 0.405
December 31, 2001 25.44 22.13 0.390
September 30, 2001 26.38 21.50 0.390
June 30, 2001 23.47 20.78 0.390
March 31, 2001 21.13 18.47 0.390
While the Company intends to continue paying regular quarterly dividends, future dividend declarations will be at the discretion of the Board of Directors and will depend on the cash flow and financial condition of the Company; capital requirements; annual distribution requirements under the REIT provisions of the Internal Revenue Code; covenant limitations under the Senior Credit Facility and the Term Notes; and such other factors as the Board of Directors deems relevant.
Item 6: Selected Financial Data
Chelsea Property Group, Inc.
(In thousands except per share, and number of centers)
Year Ended December 31,
-------------------------------------------------------------------
Operating Data: 2002 2001 2000 1999 1998
- -------------- ---- ---- ---- ---- ----
Rental revenue.................................. $205,689 $145,278 $125,824 $114,485 $ 99,976
Total revenues.................................. 283,214 206,855 179,903 162,618 139,315
Total expenses.................................. 198,317 150,640 123,876 114,676 98,449
Income from unconsolidated investments ......... 9,802 15,025 6,723 308 -
Loss from and impairment of Chelsea
Interactive .................................... (47,756) (5,337) (2,364) - -
Gain (loss) on sale or write-down of assets..... 10,911 617 - (694) (15,713)
Income before minority interest................. 57,854 66,520 60,386 47,556 25,436
Minority interest............................... (12,718) (14,706) (14,606) (9,275) (3,803)
Net income...................................... 45,136 51,814 45,780 38,281 21,350
Preferred dividend.............................. (3,422) (4,188) (4,188) (4,188) (4,188)
Net income available to common shareholders..... $41,714 $47,626 $41,592 $34,093 $17,162
Net income per common share (diluted) (1) (2)... $1.05 $1.37 $1.29 $1.07 $0.55
Ownership Interest: (2)
REIT common shares.............................. 39,798 34,710 32,252 31,816 31,344
Operating Partnership units..................... 6,426 6,358 6,712 6,778 6,862
-------- -------- ------- ------- -------
Weighted average shares/units outstanding....... 46,224 41,068 38,964 38,594 38,206
Balance Sheet Data:
Rental properties before accumulated
depreciation.................................. $1,837,174 $1,127,906 $908,344 $848,813 $792,726
Total assets.................................... 1,703,030 1,099,308 901,314 806,055 773,352
Unsecured and mortgage debt..................... 1,030,820 548,538 450,353 355,684 375,571
Total liabilities ............................. 1,107,756 624,246 528,752 426,198 450,410
Minority interest............................... 139,443 115,639 101,203 102,561 42,551
Redeemable preferred stock...................... 38,731 48,385 48,385 48,385 48,385
Stockholders' equity............................ 455,831 359,423 271,359 277,296 280,391
Distributions declared per common share (2)..... $1.86 $1.56 $1.50 $1.44 $1.38
Other Data:
Funds from operations available to common
shareholders (1) ............................... $131,771 $108,862 $93,556 $79,980 $67,994
Cash flows from:
Operating activities......................... $128,222 $121,723 $106,658 $87,502 $78,731
Investing activities......................... (404,178) (112,551) (121,479) (77,490) (119,807)
Financing activities......................... 273,903 (2,604) 23,995 (10,781) 36,169
GLA at end of period (3)........................ 14,386 12,574 8,159 5,216 4,876
Weighted average GLA (4)........................ 12,758 9,349 5,703 4,995 4,614
Centers in operation at end of the period....... 58 57 27 19 19
New centers opened.............................. - - 4 - 1
Centers expanded ............................... 4 1 3 4 7
Centers sold ................................... 5 1 1 1 -
Centers held for sale........................... - - - 1 2
Centers acquired ............................... 7 31 4 - -
Notes to Selected Financial Data:
| 1) | The Company believes that FFO is helpful to investors as a measure of the performance of an equity REIT because, along with cash flow from operating activities, financing activities and investing activities, it provides investors with an indication of the ability of the Company to incur and service debt, to make capital expenditures and to fund other cash needs. The Company computes FFO in accordance with the current standards established by NAREIT which may not be comparable to FFO reported by other REITs that do not define the term in accordance with the current NAREIT definition or that interpret the current NAREIT definition differently than the Company. FFO does not represent cash generated from operating activities in accordance with GAAP and should not be considered as an alternative to net income (determined in accordance with GAAP) as an indication of the Company's financial performance or to cash flow from operating activities (determined in accordance with GAAP) as a measure of the Company's liquidity, nor is it indicative of funds available to fund the Company's cash needs, including its ability to make cash distributions. See Management's Discussion and Analysis for definition of FFO. |
| 2) | Assumes that the 2-for-1 stock split on May 28, 2002 had occurred on January 1, 1998. |
| 3) | At year-end 2002, includes two 40% owned centers containing 470,000 square feet of GLA; at year-end 2001 and 2000 includes seven centers containing 2.4 million square feet of GLA in which the Company had joint venture interests ranging from 40 to 50%. |
| 4) | 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 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, 2002, the Company wholly or partially-owned 58 Premium Outlet and other shopping centers, compared to 57 and 27 at the end of 2001 and 2000, respectively. During 2002, the Company added a net 1.8 million square feet of GLA to its portfolio by acquiring seven Other Properties comprising 2.2 million square feet, expanding three existing wholly-owned centers by 55,000 square feet and one joint venture center by 70,000 square feet and selling five non-core wholly-owned Other Properties containing 496,000 square feet. Two previously acquired premium outlet centers in Kittery, Maine were combined and are now considered a single center.
During the three-year period ending December 31, 2002, the Company has grown rental revenue by $90.2 million to $205.7 million. This was achieved by increasing rents, opening four new centers, expanding eight centers and acquiring 42 centers that was partially offset by rent decreases from selling six non-core centers. Income from unconsolidated investments aggregated $31.6 million during the same three-year period ended December 31, 2002, increasing from $0.3 million in 1999 to $9.8 million in 2002, primarily as a result of opening three new centers developed by joint ventures during 2000 and by acquiring a 49% interest in four centers through a joint venture in December 2000. During 2002, the Company became the sole owner of five of these outlet centers resulting from the buyouts of joint venture partners. The operating results of these five centers have been fully consolidated since their buyouts.
At December 31, 2002, 2001 and 2000, the Company wholly or partially-owned 14.4 million, 12.6 million and 8.2 million square feet of GLA, respectively. Since January 1, 2000, the Company has added 9.2 million square feet (“sf”) of net GLA and details are as follows:
Since January 1,
2000 2002 2001 2000
------------------- -------------- ------------- --------------
Changes in GLA (Sf in 000'S):
New Centers Developed:
Orlando Premium Outlets ...................... 428 - - 428
Gotemba Premium Outlets (40%-owned) ........... 220 - - 220
Allen Premium Outlets.......................... 206 - - 206
Rinku Premium Outlets (40%-owned) ............. 180 - - 180
------------------- -------------- ------------- --------------
Total New Centers.............................. 1,034 - - 1,034
Centers Expanded:
Rinku Premium Outlets (40% owned) ............. 70 70 - -
Desert Hills Premium Outlets................... 23 23 - -
Liberty Village Premium Outlets................ 23 23 - -
Napa Premium Outlets.......................... 9 9 - -
Allen Premium Outlets.......................... 146 - 146 -
Leesburg Corner Premium Outlets................ 138 - - 138
Wrentham Village Premium Outlets............... 127 - - 127
Folsom Premium Outlets......................... 54 - - 54
Other.......................................... (14) (17) 4 (1)
------------------- -------------- ------------- --------------
Total Centers Expanded......................... 576 108 150 318
Centers Acquired:
Factory Outlet Village Osage Beach............. 391 391 - -
St. Augustine Outlet Center.................... 329 329 - -
Edinburgh Outlet Center........................ 305 305 - -
Outlets at Albertville......................... 305 305 - -
Factory Merchants Branson...................... 300 300 - -
Jackson Outlet Village......................... 292 292 - -
Johnson Creek Outlet Center.................... 278 278 - -
Kittery Premium Outlets II (1)(3).............. 21 - 21 -
30 Other Properties (2)........................ 4,279 - 4,279 -
Gilroy Premium Outlets......................... 577 - - 577
Lighthouse Place Premium Outlets............... 491 - - 491
Waterloo Premium Outlets....................... 392 - - 392
Kittery Premium Outlets (I) (3) ............... 131 - - 131
------------------- -------------- ------------- --------------
Total Centers Acquired......................... 8,091 2,200 4,300 1,591
Centers Sold:
Five Other Properties.......................... (496) (496) - -
Mammoth Premium Outlets........................ (35) - (35) -
------------------- -------------- ------------- --------------
Total Centers Sold............................. (531) (496) (35) -
Net GLA Added During the Period................ 9,170 1,812 4,415 2,943
Other Data:
GLA at end of period.............................. 14,386 12,574 8,159
Weighted average GLA.............................. 12,758 9,349 5,703
Centers in operation at end of period............. 58 57 27
New centers opened................................ - - 4
Centers expanded.................................. 4 1 3
Centers sold...................................... 5 1 1
Centers acquired.................................. 7 31 4
| 1) | Acquired in the September 25, 2001 Konover Property Trust acquisition transaction and formerly Factory Stores of America at Kittery. |
| 2) | Acquired in the September 25, 2001 Konover transaction and excludes Vegas Pointe Plaza which was repurchased by Konover on December 3, 2001. |
| 3) | Kittery Premium Outlets (I) and Kittery Premium Outlets (II) were combined in 2002 and are now considered a single center. |
The Company’s domestic Premium Properties produced weighted average reported tenant sales of approximately $383 per square-foot in 2002, $379 per square-foot in 2001 and $400 per square-foot in 2000. Weighted average sales is a measure of tenant performance that has a direct effect on base and percentage rents that can be charged to tenants over time.
One of the Company’s centers, Woodbury Common Premium Outlets, generated approximately 16%, 21% and 23% of the Company’s total revenue for the years 2002, 2001 and 2000, respectively. In addition, approximately 25%, 28% and 28% of the Company's revenues for the years ended December 31, 2002, 2001 and 2000, respectively, were derived from the Company’s centers in California.
The Company does not consider any single store lease to be material; no individual tenant, combining all of its store concepts, accounts for more than 5% of the Company’s gross revenues. VF Corporation occupied 8% of the Company’s total domestic GLA at December 31, 2002, and was the only tenant that occupied more than 5% of GLA at year end. In view of these statistics and the Company’s past success in re-leasing available space, the Company believes that 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. The minority interest in net income varies from period to period as a result of changes in Operating Partnership interests.
Comparison of year ended December 31, 2002 to year ended December 31, 2001.
Income before interest, depreciation and amortization and minority interest increased $40.3 million, or 24.9%, to $202.3 million in 2002 from $162.0 million in 2001. This increase was primarily the result of the acquisition of 31 centers in September 2001, the buyout and consolidation of five centers previously held as unconsolidated investments, the acquisition of seven centers and higher rents on releasing and renewals partially offset by higher operating maintenance, general and administrative, interest and other costs and increased losses from Chelsea Interactive during 2002. Income before interest expense and minority interest increased $3.1 million to $106.5 million in 2002 from $103.4 million in 2001 due to the addition of GLA while maintaining overhead costs, a gain resulting from the partial sale of an unconsolidated investment, substantially offset by the impairment loss on Chelsea Interactive.
Base rents increased $54.5 million, or 42.8%, to $181.7 million in 2002 from $127.2 million in 2001 due to the acquisition of 38 centers; the buyouts of ownership interests in five centers in 2002; and higher average rents as a result of higher rental rates on new leases and renewals. Base rental revenue per weighted average square-foot in the Premium Properties increased to $21.30 in 2002 from $20.39 in 2001.
Percentage rents increased $6.0 million, or 33.1%, to $24.0 million in 2002 from $18.0 million in 2001 primarily due to higher tenant sales, the acquisition of the 38 centers and the buyouts of ownership interests in five centers during 2002.
Expense reimbursements, representing contractual recoveries from tenants of certain common area maintenance, operating, real estate tax, promotional and management expenses, increased $15.2 million, or 30.1%, to $65.8 million in 2002 from $50.6 million in 2001 due to the recovery of operating and maintenance costs from increased GLA. The average recovery of reimbursable expenses for the Premium Properties was 90.6% for 2002 and 2001. The average recovery of reimbursable expenses for the Other Properties improved to 52.6% in 2002 compared to 51.1% in 2001.
Other income increased $0.7 million, or 6.7%, to $11.7 million in 2002 from $11.0 million in 2001 primarily due to increased ancillary operating income from the acquisition of the 38 centers; the buyouts of ownership interests in five centers in 2002; and the gains from sale of five Other Properties and an out parcel during 2002, partially offset by decreased interest income from lower interest rates.
Operating and maintenance expenses increased $22.1 million, or 38.3%, to $79.9 million in 2002 from $57.8 million in 2001 primarily due to costs related to increased GLA and the buyouts of ownership interests in five centers during 2002. On a weighted average square-foot basis, Premium Properties operating and maintenance expenses increased to $9.21 in 2002 from $9.16 in 2001.
Depreciation and amortization expense increased $9.7 million, or 20.0%, to $58.3 million in 2002 from $48.6 million in 2001 due to additional depreciation from the acquisition of the 38 retail centers, the buyouts of ownership interests in five centers in 2002 and expansions.
General and administrative expense increased $2.5 million, or 53.2%, to $7.1 million in 2002 from $4.6 million in 2001 primarily due to increased professional fees, head count and deferred compensation accrual.
Other expenses increased $1.5 million, or 54.1%, to $4.3 million in 2002 from $2.8 million in 2001 due to ground lease expenses assumed with the acquisition of new centers, legal expenses and increased bad debts.
Income from unconsolidated investments decreased $5.2 million, or 34.8%, to $9.8 million in 2002 from $15.0 million in 2001 due to buyouts of ownership interests in five centers that required that operations of these centers be fully consolidated from the buyout date, partially offset by higher earnings from Chelsea Japan.
The loss from Chelsea Interactive operations increased $8.1 million, or 150.8%, to $13.4 million in 2002 from $5.3 million in 2001. The increase was due to increased operating payroll, general and administrative, depreciation and amortization expense and lack of third party participation in the losses. The Company also recorded an impairment loss of $34.4 million as of December 31, 2002.
Gain on sale of unconsolidated investments of $10.9 million in 2002 resulted from the sale of approximately 40% of the Company’s partial interest in Value Retail. The 2001 gain on sale of $0.6 million was also from the sale of a partial interest in Value Retail offset by the write-off of the Company’s investment in Guam.
Interest in excess of amounts capitalized increased $11.8 million, or 32.1%, to $48.7 million in 2002 from $36.9 million in 2001, primarily due to higher debt from acquisitions, and joint venture buyouts, partially offset by lower interest rates.
Comparison of year ended December 31, 2001 to year ended December 31, 2000.
Income before interest, depreciation and amortization and minority interest increased $30.0 million, or 22.7%, to $162.0 million in 2001 from $132.0 million in 2000. This increase was primarily the result of expansions and new center openings during the latter part of 2000, higher rents on releasing and renewals during 2001, income from unconsolidated investments that commenced operations in the latter part of 2000 and the September 25, 2001, acquisition of 31 centers. These increases were partially offset by the loss from Chelsea Interactive and increases in interest and operating and maintenance expenses.
Base rents increased $19.1 million, or 17.7%, to $127.2 million in 2001 from $108.1 million in 2000 due to expansions of wholly-owned centers and a new center opening in 2000, higher average rents and the acquisition of the 31 centers in September 2001. Base rental revenue per weighted average square-foot in the Premium Properties increased to $20.39 in 2001 from $20.23 in 2000 as a result of higher rental rates on new leases and renewals.
Percentage rents increased $0.3 million, or 2.0%, to $18.0 million in 2001 from $17.7 million in 2000 primarily due to the acquisition of the 31 centers in 2001. Percentage rents per weighted average square-foot on the Company’s wholly-owned centers decreased to $2.60 in 2001 from $3.31 in 2000. The decrease is due to much lower sales per square-foot from the Other Properties acquired in September 2001. The Company’s wholly-owned Premium Properties percentage rents per weighted average square-foot decreased to $3.08 in 2001 from $3.31 in 2000 due to changes of some tenants from overage to base rents and lower sales.
Expense reimbursements, representing contractual recoveries from tenants of certain common area maintenance, operating, real estate tax, promotional and management expenses, increased $6.5 million, or 14.6%, to $50.6 million in 2001 from $44.1 million in 2000, due to the recovery of operating and maintenance costs from increased GLA. Excluding the 31 retail centers acquired in 2001, on a weighted average square-foot basis, expense reimbursements increased 0.7% to $8.32 in 2001 from $8.26 in 2000. The average recovery of reimbursable expenses for the wholly-owned Premium Properties was 90.8% in 2001 compared to 90.0% in 2000. The average recovery of reimbursable expense for the Other Properties was 51.1% in 2001.
Other income increased $1.0 million, or 10.6%, to $11.0 million in 2001 from $10.0 million in 2000. The increase was due to increased interest and ancillary income, partially offset by lower pad sale gains in 2001 versus 2000.
Operating and maintenance expenses increased $8.8 million, or 18.0%, to $57.8 million in 2001 from $49.0 million in 2000. The increase was primarily due to costs related to increased GLA and the acquisition of the 31 centers. Excluding the 31 centers acquired in 2001, on a weighted average square-foot basis, operating and maintenance expenses decreased to $9.16 in 2001 from $9.17 in 2000.
Depreciation and amortization expense increased $5.6 million, or 12.9%, to $48.6 million in 2001 from $43.0 million in 2000 due to depreciation of expansions of wholly-owned and new centers opened in 2000 and the acquisition of the 31 centers in September 2001.
General and administrative expenses were $4.6 and $4.8 million in 2001 and 2000, respectively.
Other expenses increased $0.1 million, or 5.8%, to $2.8 million in 2001 from $2.7 million in 2000. Increased 2001 bad debt and legal expenses were greater than the non-recurring write-off of development costs related to inactive projects in 2000.
Income from unconsolidated investments increased $8.3 million, or 123.5%, to $15.0 million in 2001 from $6.7 million in 2000 as a result of a full year’s results of equity-in-earnings and fees earned from joint venture investments that were opened or acquired in the latter part of 2000.
The loss from Chelsea Interactive increased $2.9 million, or 125.8%, to $5.3 million in 2001 from $2.4 million in 2000. The increase was due to a full year of operations in 2001 versus a partial year in 2000.
Gain on sale of unconsolidated investments (net of write-downs) of $0.6 million in 2001 resulted from the gain generated from a partial sale of the Company’s interest in Value Retail offset by the write-off of the Company’s investment in Guam.
Interest, in excess of amounts capitalized, increased $12.4 million, or 50.7%, to $36.9 million in 2001 from $24.5 million in 2000, due to higher debt balances from acquisitions and lower construction activity in 2001.
Liquidity and Capital Resources
The Company believes it has adequate financial resources to fund operating expenses, distributions, and planned development, construction and acquisition activities over the short term, which is less than 12 months and the long term, which is 12 months or more. Operating cash flow for the year ended December 31, 2002 of $128.2 million is expected to increase with a full year of operations from the five joint venture buyout centers and the 1.8 million square feet of GLA added during 2002 as well as scheduled openings of approximately 800,000 square feet of new joint venture GLA in 2003. The Company has adequate funding sources to complete and open all current development projects from available cash, credit facilities and secured construction financing. The Company also has access to the public markets through its $1.6 billion debt and equity shelf registration.
Operating cash flow is expected to provide sufficient funds for dividends and distributions in accordance with REIT federal income tax requirements. In addition, the Company 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, meet funding requirements of Chelsea Interactive and partially fund development projects.
Common distributions declared and recorded in 2002 were $84.5 million, or $1.86 per share or unit. The Company’s dividend payout ratio as a percentage of net income before minority interest, gain or loss on sale or writedown of assets and depreciation and amortization (reduced by amortization of deferred financing costs, depreciation of non-real estate assets and preferred dividends (“FFO”)) was 64.1%. The Company’s senior unsecured bank line of credit (“Senior Credit Facility”) limits aggregate dividends and distributions to the lesser of (i) 90% of FFO on an annual basis or (ii) 100% of FFO for any two consecutive quarters.
The Company’s ratio of earnings-to-fixed charges for each of the three years ended December 31, 2002, 2001 and 2000 was 2.4, 2.6 and 2.6, respectively. For purposes of computing the ratio, earnings consist of income from continuing operations after depreciation and before minority interest and fixed charges, exclusive of interest capitalized and amortization of loan costs capitalized and impairment losses. Fixed charges consist of interest expense, including interest costs capitalized, the portion of rent expense representative of interest and total amortization of debt issuance costs expensed and capitalized.
In July 2002, the Company increased its Senior Credit Facility to $200 million from $160 million to support its growth. The Senior Credit Facility expires in March 2005 (unless extended until March 2006), bears interest on the outstanding balance at an annual rate equal to the London Interbank Offered Rate (“LIBOR”) plus 1.05% (2.46% at December 31, 2002) or the prime rate, at the Company’s option and has an annual facility fee of 0.125%. The LIBOR rate spread ranges from 0.85% to 1.50% depending on the Company’s Senior Debt rating. At December 31, 2002, $98.0 million was outstanding under the Senior Credit Facility.
During 2002, the Company completed five acquisitions valued at $531.2 million, including: (i) $76.3 million buyout of Simon Property Group’s 50% undivided ownership interest of Orlando Premium Outlets on April 1, 2002; (ii) $27.0 million acquisition of a 305,000 square-foot center in Edinburgh, Indiana completed on April 1, 2002; (iii) $145.4 million buyout of Fortress Registered Investment Trust’s 51% ownership interest in four premium outlet centers on August 20, 2002; (iv) $89.5 million acquisition of two outlet centers located in Albertville, Minnesota and Johnson Creek, Wisconsin, completed on November 22, 2002; and (v) $193.0 million acquisition of four outlet centers located in Jackson, New Jersey, Osage Beach, Missouri, St. Augustine, Florida and Branson, Missouri, completed on December 19, 2002.
Also during 2002, the Company completed several long-term capital transactions to fund acquisition and development activity and to support future growth. These transactions included: (i) the issuance of $100 million of 6.875% ten-year senior unsecured notes due June 15, 2012; (ii) the assumption of $86.5 million of mortgage debt due 2008, bearing interest at 6.99% that was part of the consideration for the 51% ownership interest buyout of four premium outlet centers; (iii) the issuance of 3.5 million common shares in a public offering that yielded net proceeds before expenses of $119.3 million; (iv) the issuance of 1.3 million limited partnership units (convertible on a one-for-one basis to common shares of the Company) valued at $44.6 million as partial consideration in the acquisition of the Albertville, Minnesota and Johnson Creek, Wisconsin outlet centers; (v) the issuance of $150 million of 6.0% ten-year senior unsecured notes due January 15, 2013; and (vi) the repayment of two secured construction loans aggregating $88.9 million, and the extinguishment of mortgages on Orlando Premium Outlets and Allen Premium Outlets.
A summary of the maturity of the Company’s contractual debt obligations (at par) as of December 31, 2002 is as follows (in thousands):
Less than 1 to 3 4 to 5 After 5
Total One Year Years Years Years
------------- -------------- -------------- ----------- ------------
Unsecured bank debt $103,035 $ - $103, 035 $ - $ -
Unsecured notes 625,000 - 50,000 125,000 450,000
Mortgage debt 301,025 4,686 10,934 166,068 119,337
------------- -------------- -------------- ----------- ------------
Total $1,029,060 $4,686 $163,969 $291,068 $569,337
============= ============== ============== =========== ============
Construction projects underway and expected to open during 2003 include a 180,000 square-foot first phase of Sano Premium Outlets, located north of Tokyo, Japan, scheduled to open in March 2003; a 170,000 square-foot second phase at Gotemba Premium Outlets, scheduled to open in July 2003; and the 435,000 square-foot Las Vegas Premium Outlets, scheduled to open mid-2003. The Company is also under construction on the single phase 438,000 square-foot Chicago Premium Outlets located in Aurora, Illinois that is scheduled to open in mid-2004. The Gotemba and Sano projects are developments of Chelsea Japan Co., Ltd., the Company’s 40% owned Japanese joint venture. The Las Vegas and Chicago projects are 50/50 joint ventures with Simon. Other projects in various stages of development are expected to open in 2004 and beyond. There can be no assurance that these projects will be completed or opened, or that there will not be delays in opening or completion. All current development activity is fully financed either through project specific secured construction financing, the yen denominated line of credit, available cash or through the Senior Credit Facility. The Company will seek to obtain permanent financing once the projects are completed and income has been stabilized.
In connection with the Simon joint ventures, the Company has committed to provide 50% of the development costs, which are expected to be approximately $48.0 million for Las Vegas Premium Outlets and $46.0 million for Chicago Premium Outlets. As of December 31, 2002, the Company had contributed $22.8 million and $8.4 million to the Las Vegas and Chicago projects, respectively.
In June 1999, the Company entered into an agreement with Mitsubishi Estate Co., Ltd. and Nissho Iwai Corporation to jointly develop, own and operate premium outlet centers in Japan under the joint venture Chelsea Japan. Borrowings related to Chelsea Japan for which the Company and the OP have provided guarantees as of December 31, 2002, are as follows (in thousands):
Total Facility | Outstanding
-------------- | -----------
US $ | US $ US $ Due Interest
Yen Equivalent | Yen Equivalent Guarantee Date Rate
--- ---------- | --- ---------- --------- ---- --------
4.0 billion (1) $33.7 million | 1.0 billion $8.3 million $8.3 million 2003 1.45%
0.6 billion (2) 5.0 million | 0.6 billion 4.8 million 1.9 million 2012 1.50%
3.8 billion (2) 32.0 million | 3.5 billion 29.5 million 11.8 million 2015 2.20%
| 1) | Facility entered into by an equity investee of the Company has a one-year extension option; amended in November 2002 to allow for one additional year extension. |
| 2) | Facilities entered into by Chelsea Japan, secured by Gotemba and Rinku and 40% severally guaranteed by the Company. |
In May 2002, the Company, through an affiliated entity, entered into a 50/50 strategic alliance with Sordo Madaleno y Asociados and Mr. Carlos Peralta of Mexico City to jointly develop premium outlet centers in Mexico. Subject to leasing and entitlement, construction on a 200,000 square-foot first phase of an outlet project north of Mexico City is expected to commence later in 2003 and to open in 2004. The site can support a second phase containing approximately 165,000 square feet of GLA. Once phase one of the project has been approved, the Company will be committed to fund approximately $12 million which is 50% of the development costs.
The Company has minority interests ranging from 3% to 8% in several outlet centers and outlet development projects in Europe operated by Value Retail. The Company’s total investment in Europe as of December 31, 2002, was $3.6 million. The Company has also agreed to provide up to $22.0 million in limited debt service guarantees under a standby facility for loans arranged by Value Retail to construct outlet centers in Europe. The term of the standby facility for new guarantees expired in November 2001 and these guarantees shall not be outstanding for longer than five years after project completion. In July 2002, the Company sold approximately 40% of its holdings in Value Retail to a third party for $11.4 million, resulting in a gain of approximately $10.9 million.
The Company has been developing and operates an e-commerce technology platform through its affiliate, Chelsea Interactive, Inc. with an aggregate funding commitment of up to $60.0 million; as of December 31, 2002, $52.4 million had been funded. The Company anticipates that the balance of the funding will be used to further develop the platform and to finance operating cash shortfalls and potential costs related to the disposal or discontinuance of the business. The Company currently believes that it will not be able to recover the net book value of its investment in Chelsea Interactive through future cash flows unless Chelsea Interactive is able to achieve positive cash flow before reaching the $60.0 million funding limit. Due to current market conditions and costs related to securing additional brand users for the platform, the Company has decided to recognize an impairment loss of $34.4 million, equal to the net book value of its investment in Chelsea Interactive as of December 31, 2002. However, the Company is in active discussions with potential investors to provide capital to and/or acquire Chelsea Interactive. There can be no assurance that any of these discussions will be successful or that Chelsea Interactive will be able to continue as a going concern. Future funding by the Company will be reported as a loss in the period funding occurs.
To achieve planned growth and favorable returns in both the short and long-term, the Company’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 continue to enable the Company to access a broad array of capital sources, including bank or institutional borrowings and secured and unsecured debt and equity offerings, subject to market conditions.
Net cash provided by operating activities was $128.2 million and $121.7 million for the years ended December 31, 2002, and 2001, respectively. The increase was primarily due to the growth of the Company’s GLA to 14.4 million square feet in 2002 from 12.6 million square feet in 2001 offset by the payout of the deferred incentive compensation in March 2002. Net cash used in investing activities increased $291.6 million for the year ended December 31, 2002, compared to the corresponding 2001 period, as a result of increased joint venture and wholly owned property investing activity, offset by proceeds from the partial sale of a joint venture investment. For the year ended December 31, 2002, net cash provided by financing activities increased by $276.5 million compared to the corresponding period in 2001 as a result of increased borrowing and increased issuance of common stock as a result of acquisition and development activities of the Company.
Net cash provided by operating activities was $121.7 million and $106.7 million for the years ended December 31, 2001, and 2000, respectively. The increase was primarily due to the growth of the Company’s GLA to 12.6 million square feet in 2001 from 8.2 million square feet in 2000. Net cash used in investing activities decreased $8.9 million for the year ended December 31, 2001, compared to the corresponding 2000 period, as a result of decreased joint venture investing activity, proceeds from sale of a center and partial sale of a joint venture investment offset by the acquisition of the 31 centers. For the year ended December 31, 2001, net cash provided by financing activities decreased by $26.6 million compared to the corresponding period in 2000 as a result of reduced borrowing and increased debt repayments offset by issuance of common stock.
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 clearer understanding of the operating results of the Company. The White Paper on Funds from Operations approved by the Board of Governors of NAREIT in October 1999 defines FFO as net income (loss) (computed in accordance with GAAP), excluding gains (or losses) from debt restructuring and sales of properties, plus real estate related depreciation and amortization and after adjustments for unconsolidated partnerships and joint ventures. The Company believes that FFO is helpful to investors as a measure of the performance of an equity