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. 33-98136
CPG PARTNERS, L.P.
(Exact name of registrant as specified in its charter)
|
Delaware (State or other jurisdiction of incorporation or organization) |
22-3258100 (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: None
Securities registered pursuant to Section 12 (g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
Indicate by check mark if the disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [x]
Indicate by check mark whether the registrant is an accelerated filer.
Yes No X
There are no outstanding shares of Common Stock or voting securities.
Documents incorporated by reference:
Portions of the definitive Proxy Statement of Chelsea Property Group, Inc. 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 OP
CPG Partners, L.P., a Delaware limited partnership, (the "Operating Partnership" or "OP") is 84.6% owned and managed by its sole general partner Chelsea Property Group, Inc. (the "Company"), a self-administered and self-managed real estate investment trust ("REIT"). The OP specializes in owning, developing, redeveloping, leasing, marketing and managing upscale and fashion-oriented manufacturers' outlet centers. As of December 31, 2002, the OP 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 OP'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 OP'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 OP'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 OP'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 OP's 10-K's, 10-Q's, and 8-K's can be obtained, free of charge, on the OP's website.
Recent Developments
In April 2002, the OP 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 OP repaid the outstanding debt of $59.4 million and extinguished the mortgage.
Also in April 2002, the OP 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 OP 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 OP 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 OP had contributed $22.8 million.
In July 2002, the OP 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 OP 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 OP paid $58.9 million in cash and assumed $86.5 million, the remaining 51%, of existing mortgage debt.
In August 2002, the OP 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 OP 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 OP had contributed $8.4 million.
In November 2002, the OP 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 OP 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 OP sold five non-core Other Properties and recognized a gain of approximately $0.3 million.
The OP 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 OP 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 OP 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 OP 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 OP 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 OP 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
Izumisano, Japan Perla, 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, Polo, Tommy
Osage Beach, MO Hilfiger, Liz Claiborne,
St. Augustine Outlet Center......... 100 12/02 329,000 93 Brooks Brothers, Coach, Gap,
St. Augustine, FL Tommy Bahama, Casual Corner,
Reebok
Outlets at Albertville ............. 100 11/02 305,000 67 Polo, Old Navy Gap, Tommy
Albertville, MN Hilfiger, Banana Republic
Edinburgh Outlet Center............. 100 04/02 305,000 72 Gap, Nautica, Nike, OshKosh
Edinburgh, IN B'Gosh, Factory Brand Shoes,
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, Reebok,
Jackson, NJ Tommy Hilfiger,
Johnson Creek Outlet Center......... 100 11/02 278,000 62 Gap, Old Navy Clothing Company,
Johnson Creek, WI Nike, Tommy Hilfiger
------------- ----------
Total acquisitions:................. 2,200,000 555
------------- ----------
Dispositions:
Factory Stores of America........... 100 06/02 (176,000) (43) Bass, Levi's, Van Heusen, West Point
LaMarque, TX Stevens
Factory Stores of America........... 100 07/02 (128,000) (20) Book Warehouse, Banister Shoe,
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 OP 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 OP 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 OP 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 OP 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 OP 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 OP will be reported as a loss in the period funding occurs.
Strategic Alliances and Joint Ventures
In June 1999, the OP 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 OP 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 OP bought out Simon's undivided 50% interest in Orlando Premium Outlets that opened in May 2000.
In October 1998, the OP 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 OP 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 OP 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 OP has made several investments through joint ventures with others. Joint venture investments may involve risks not otherwise present for investments made solely by the OP, including the possibility its co-venturers might become bankrupt, its co-venturers might at any time have different interests or goals than the OP, and that the co-venturers may take action contrary to the OP's instructions, requests, policies or objectives, including its policy with respect to maintaining the qualification of the OP as a REIT. Other risks of joint venture investments include impasse on decisions, such as a sale, because neither its co-venturer nor the OP would have full control over the joint venture. There is no limitation under the OP's organizational documents as to the amount of funds that may be invested in partnerships or joint ventures.
Organization of the OP
Virtually all of the Properties assets are held by, and all of its business activities conducted through, the Operating Partnership. The Company is the sole general partner of the OP (which owned 84.6% in the Operating Partnership as of December 31, 2002) and has full and complete control over the management of the OP 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 OP 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 OP 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 OP 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 OP'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 OP 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 OP believes that the quality of its centers gives it significant advantages in attracting customers and negotiating multi-lease transactions with tenants.
Management Expertise. The OP 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 the Company's initial public offering of its common stock, the OP 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 OP intends to continue to invest in systems and controls to support the planning, coordination and monitoring of its activities.
Growth Strategy
The OP 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 OP'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 OP believes that there continue to be significant opportunities to develop manufacturers' outlet centers across the United States and internationally. The OP 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 OP 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 OP 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 OP 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 OP believes that there are significant opportunities to develop additional manufacturers' outlet centers in Japan and other countries. The OP intends to pursue these opportunities as viable sites and local partners are identified. During 2002, the OP entered into an agreement to jointly develop premium outlets centers in Mexico.
The OP has minority interests ranging from 3% to 8% in several outlet centers and outlet development projects in Europe.
Acquiring and Redeveloping Centers. The OP intends to selectively acquire individual properties and portfolios of properties that meet its strategic investment criteria as suitable opportunities arise. The OP 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 OP 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 OP 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 OP.
Operating Strategy
The OP's primary business objective is to enhance the value of its properties and operations by increasing cash flow. The OP 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 OP 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 OP 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 OP 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 OP believes that these areas provide the most attractive long-term demographic characteristics. The OP 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 OP 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 OP are reimbursable by tenants.
Property Design and Management. The OP 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 OP 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 OP 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 OP 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 OP believes that the Premium Properties generally are the leading manufacturers' outlet centers in each market. The OP carefully considers the degree of existing and planned competition in each proposed market before deciding to build a new center.
Environmental Matters
The OP is not aware of any environmental liabilities relating to the Properties that would have a material impact on the OP's financial position and results of operations.
Personnel
As of December 31, 2002, the OP had 634 full-time and 180 part-time employees. None of the employees are subject to any collective bargaining agreements, and the OP believes it has good relations with its employees.
Item 2. Properties
As of December 31, 2002, the OP 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 OP owned and operated all 56 of its domestic centers and Chelsea Japan manages the two centers in Japan.
The OP'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 OP's Premium Properties in Japan were 100% leased as of December 31, 2002, and contained approximately 210 stores. The OP's Other Properties were 95% leased as of December 31, 2002, and contained approximately 1,200 stores with more than 225 different tenants.
The OP believes the Properties are adequately covered by insurance.
The OP 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 OP's gross revenues; and only one tenant occupies more than 5% of the OP's total domestic GLA at 8%. As a result, and considering the OP's past success in re-leasing available space, the OP 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 OP'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 OP. In addition, for the years ended December 31, 2002, 2001, and 2000, respectively, 25%, 28% and 28% of the OP's total revenues were derived from the OP's centers in California.
Woodbury Common Premium Outlets contributed more than 10% of the OP'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 OP's total domestic GLA as of December 31, 2002 and 2001, which constitutes approximately 2% of the OP'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 Boss,
Gilroy, CA (San Jose area) Nike, Polo Ralph Lauren, Timberland, Tommy
Hilfiger, Versace,
North Georgia Premium Outlets.......... 1996 537,000 132 Coach, Crate & Barrel, Escada, Liz Claiborne,
Dawsonville, GA (Atlanta metro area) 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, Coach,
Camarillo, CA (Los Angeles metro area) Donna Karan, Polo Ralph Lauren, St. John
Knits,Versace
Orlando Premium Outlets................ 2000 428,000 114 Barneys New York, Coach, Escada, Giorgio
Orlando, FL (between Sea World & Epcot) Armani, Hugo Boss, Max Mara, Nike, Polo
Ralph Lauren
Waterloo Premium Outlets............... 1995 392,000 99 Brooks Brothers, Coach, Eddie Bauer, Gap,
Waterloo, NY (Finger Lakes Region) 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 Cole,
Folsom, CA (Sacramento metro area) 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 New
Napa, CA (Napa Valley) York, Kenneth Cole, Nautica, Tommy
Hilfiger, TSE
Liberty Village Premium Outlets........ 1981 177,000 57 Ellen Tracy, Jones New York, L.L. Bean,
Flemington, NJ (New York-Phila. metro area) Polo Ralph Lauren, Tommy 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, Jones
Santa Fe, NM New York, Nautica, Liz Claiborne,
Van Heusen
Patriot Plaza Premium Outlets.......... 1986 77,000 11 Lenox, Polo Ralph Lauren, WestPoint
Williamsburg, VA (Norfolk-Richmond area) Stevens
St. Helena Premium Outlets............. 1992 23,000 9 Brooks Brothers, Donna Karan, Coach,
St. Helena, CA (Napa Valley) 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, Coach, Casual
St. Augustine, FL Corner, Gap, Reebok, Tommy Bahama
Outlets at Albertville,................ 2002 305,000 67 Banana Republic, Gap, Old Navy,
Albertville, MN. Polo, Tommy Hilfiger
Edinburgh Outlet....................... 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, Old Navy, Nike, Tommy Hilfiger
Johnson Creek, WI
Factory Stores at North Bend........... 2001 223,000 50 Adidas, Eddie Bauer, Bass, Carters,
North Bend, WA Childrenswear, 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
North Ridge, 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, VF
Story City, IA Factory Outlet, Van Heusen
Factory Stores of America (2).......... 2001 112,000 18 Banister Shoes, Paper Factory, VF
Boaz, AL 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 Outlet,
Arcadia, LA Van Heusen
Factory Stores of America.............. 2001 90,000 10 Bass, Dress Barn, VF Factory Outlet
Nebraska City, NE
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 Outlet,
Graceville, FL 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 OP 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 OP 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 OP's financial position and results of operations.
Item 4. Submission of Matters to a Vote of Security Holders
None.
PART II
Item 5. Market for Registrant's Common Stock and related Security Matters
None.
Item 6: Selected Financial Data
CPG Partners, L.P.
(In thousands except per unit, 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)
Net income...................................... 57,854 66,520 60,386 47,556 25,436
Preferred distributions......................... (9,270) (10,036) (10,036) (6,137) (4,188)
Net income available to common unitholders...... $48,584 $56,484 $50,350 $41,419 $20,903
Net income per common unit(1) (2):..............
General Partner ................................ $1.09 $1.41 $1.30 $1.09 $0.56
Limited Partner ................................ $1.07 $1.39 $1.30 $1.08 $0.55
Ownership Interest: (2)
General Partner................................. 38,245 33,678 31,880 31,484 30,880
Limited Partners................................ 6,426 6,358 6,712 6,778 6,862
Weighted average units outstanding.............. 44,671 40,036 38,592 38,262 37,742
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
Partner's capital .............................. 595,274 475,062 372,562 379,857 322,942
Distributions declared per common unit (2)...... $1.86 $1.56 $1.50 $1.44 $1.38
Other Data:
Funds from operations available to common
unitholders (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 OP 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 OP to incur and service debt, to make capital expenditures and to fund other cash needs. The OP 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 OP. 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 OP's financial performance or to cash flow from operating activities (determined in accordance with GAAP) as a measure of the OP's liquidity, nor is it indicative of funds available to fund the OP'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/unit 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 OP had a joint venture interest 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 OP 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 OP 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 OP 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 OP 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 OP wholly or partially-owned 14.4 million, 12.6 million and 8.2 million square feet of GLA, respectively. Since January 1, 2000, the OP 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 OP'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 OP's centers, Woodbury Common Premium Outlets, generated approximately 16%, 21% and 23% of the OP's total revenue for the years 2002, 2001 and 2000, respectively. In addition, approximately 25%, 28% and 28% of the OP's revenues for the years ended December 31, 2002, 2001 and 2000, respectively, were derived from the OP's centers in California.
The OP 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 OP's gross revenues. VF Corporation occupied 8% of the OP'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 OP's past success in re-leasing available space, the OP believes that the loss of any individual tenant would not have a significant effect on future operations.
Comparison of year ended December 31, 2002 to year ended December 31, 2001.
Income before interest, depreciation and amortization 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 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 OP 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 OP'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 OP'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 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 OP'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 OP'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 OP's interest in Value Retail offset by the write-off of the OP'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 OP 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 OP has adequate funding sources to complete and open all current development projects from available cash, credit facilities and secured construction financing. The OP also has access to the public markets through its $800 million debt and the Company's $800 million equity shelf registrations.
Operating cash flow is expected to provide sufficient funds for dividends and distributions in accordance with the Company's REIT federal income tax requirements. In addition, the OP 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 OP's dividend payout ratio as a percentage of net income before 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 OP'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 OP'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 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 OP 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 OP'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 OP's Senior Debt rating. At December 31, 2002, $98.0 million was outstanding under the Senior Credit Facility.
During 2002, the OP 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 OP 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 OP's contractual debt obligations (at par) as of December 31, 2002 is as follows (in thousands):
Less than 1 to 3 Years 4 to 5 After 5
Total One Year 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 OP 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 OP'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 OP will seek to obtain permanent financing once the projects are completed and income has been stabilized.
In connection with the Simon joint ventures, the OP 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 OP had contributed $22.8 million and $8.4 million to the Las Vegas and Chicago projects, respectively.
In June 1999, the OP 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 OP 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 OP. |
In May 2002, the OP, 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 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 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 OP will be committed to fund approximately $12 million which is 50% of the development costs.
The OP has minority interests ranging from 3% to 8% in several outlet centers and outlet development projects in Europe operated by Value Retail. The OP's total investment in Europe as of December 31, 2002, was $3.6 million. The OP 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 OP 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 OP 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 OP 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 OP 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 OP 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 OP 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 OP 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 OP'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 OP 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 OP'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 the Company's common stock as a result of acquisition and development activities of the OP.
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 OP'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 the Company's 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 OP. 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 OP 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 OP to incur and service debt, to make capital expenditures and to fund other cash needs. FFO for the year ended December 31, 2002, excludes the Chelsea Interactive impairment loss of $34.4 million. Since all companies do not calculate FFO in a similar fashion, the OP's calculation of FFO presented herein may not be comparable to similarly titled measure as reported by other companies. 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 OP's financial performance or to cash flow from operating activities (determined in accordance with GAAP) as a measure of the OP's liquidity, nor is it indicative of funds available to fund the OP's cash needs, including its ability to make cash distributions.
Year Ended December 31,
2002 2001 2000
------------ ------------ -------------
Income available to common unitholders ................. $48,584 $56,484 $50,350
Depreciation and amortization-wholly-owned............ 58,275 48,554 42,978
Depreciation and amortization-joint ventures.......... 4,166 5,964 2,024
Amortization of deferred financing costs and depreciation
of non-rental real estate assets..................... (2,401) (1,807) (1,796)
Net gain on sale or write-down of assets................ (11,223) (333) -
Chelsea Interactive impairment loss..................... 34,370 - -
------------ ------------ -------------
FFO..................................................... $131,771 $108,862 $93,556
============ ============ =============
Average units outstanding (1)........................... 44,671 40,036 38,592
Distributions declared per unit......................... $1.86 $1.56 $1.50
| 1) | Assumes 2-for-1 stock/unit split in May 2002 had occurred on January 1, 2000. |
Recent Accounting Pronouncements
In June 2001, the FASB issued Statements of Financial Accounting Standards No. 141 "Business Combinations" ("SFAS 141"), which was effective for all business combinations initiated after June 30, 2001, and No. 142 "Goodwill and Other Intangible Assets" ("SFAS 142") which was effective January 1, 2002. SFAS 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001. Under SFAS 142, amortization of goodwill, including goodwill recorded in past business combinations, will discontinue upon adoption of this standard. All goodwill and intangible assets will be tested for impairment in accordance with the provisions of the Statement. The OP adopted SFAS 141 and 142 on July 1, 2001 and January 1, 2002, respectively. The adoption of these statements did not have an impact on the OP's results of operations or its financial position.
In August 2001, FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations" ("SFAS 143") which is effective January 1, 2003. SFAS 143 requires the recording of the fair value of a liability for an asset retirement obligation in the period in which it is incurred. See note 6 to financial statements for discussion related to the estimated future costs to be incurred in connection with the future operations of Chelsea Interactive.
In October 2001, the FASB issued Statement of Financial Accounting Standard No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS 144") which was effective and adopted by the OP on January 1, 2002. SFAS 144 provides accounting guidance for financial accounting and reporting for impairment or disposal of long-lived assets. SFAS 144 supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of." SFAS 144 retains fundamental provisions of SFAS 121 related to the recognition and measurement of the impairment of long-lived assets to be held and used. In addition, SFAS 144 superseded APB Opinion 30, "Reporting the Results of Operations-Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions." SFAS 144 extended the reporting of a discontinued operation to a "component of an entity." Thus, the operations of assets held for sale or assets sold are required to be presented as discontinued operations in the OP's statement of income. The initial adoption of FAS 144 did not have a material effect on the financial position or results of operations of the OP.
In May 2002, the FASB issued SFAS No. 145, "Reporting Gains and Losses from Extinguishment of Debt", which rescinded SFAS No. 4, No. 44 and No. 64 and amended SFAS No. 13. The new standard addresses the income statement classification of gains or losses from the extinguishment of debt and criteria for classification as extraordinary items. The new standard became effective for fiscal years beginning after May 15, 2002. The OP adopted this pronouncement on April 1, 2002. The adoption of this pronouncement did not have a material impact on the OP's results of operations or financial position.
In November 2002, the FASB issued Interpretation No. 45, Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others ("FIN 45"). FIN 45 requires certain guarantees to be recorded at fair value, instead of recording a liability only when a loss is probable and reasonably estimable, as those terms are defined in FASB Statement No. 5, Accounting for Contingencies. FIN 45 also requires a guarantor to make significant new disclosures, even when the likelihood of making any payments under the guarantee is remote. The disclosure requirements of FIN 45 are effective for financial statements of interim or annual periods ending after December 15, 2002. The OP adopted the disclosure provisions of FIN 45 effective December 31, 2002. FIN 45's initial recognition and initial measurement provisions are applicable on a prospective basis to guarantees issued or modified after December 31, 2002. The OP is in the process of determining the impact, if any, on its results of operations or financial position from the adoption of FIN 45.
In January of 2003, the FASB issued Interpretation No. 46, Consolidation of Variable Interest Entities ("FIN 46"). FIN 46 clarifies the application of existing accounting pronouncements to certain entities in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. The provisions of FIN 46 will be immediately effective for all variable interests in variable interest entities created after January 31, 2003, and the OP will need to apply its provisions to any existing variable interests in variable interest entities by no later than December 31, 2004. The OP does not believe that FIN 46 will have a significant impact on the OP's financial statements.
Critical Accounting Policies and Estimates
The OP's discussion and analysis of its financial condition and results of operations are based upon the OP's consolidated financial statements which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires the OP to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. The OP bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
The OP believes the following critical accounting policies affect its more significant judgments and estimates used in the preparation of its consolidated financial statements.
Bad Debt
The OP maintains an allowance for doubtful accounts for estimated losses resulting from the inability of its tenants to make required rent payments. If the financial condition of the OP's tenants were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required. The OP's allowance for doubtful accounts included in tenant accounts receivable totaled $2.6 million and $1.7 million at December 31, 2002 and 2001, respectively.
Valuation of Investments
On a periodic basis, the OP's management team assesses whether there are any indicators that the value of real estate properties, including joint venture properties may be impaired. If the carrying amount of the property is greater than the estimated expected future cash flow (undiscounted and without interest charges) of the asset, impairment has occurred. The OP will then record an impairment loss equal to the difference between the carrying amount and the fair value of the asset. The OP does not believe that the value of any of its rental properties were impaired at December 31, 2002 and 2001. The OP recorded a $34.4 million impairment loss in 2002 on its investment in Chelsea Interactive and a $1.2 million loss in 2001 for an impairment write-down of its investment in an outlet center in Guam.
Economic Conditions
Substantially all leases contain provisions, including escalations of base rents and percentage rentals calculated on gross sales, to mitigate the impact of inflation. Inflationary increases in common area maintenance and real estate tax expenses are substantially reimbursed by tenants.
Virtually all tenants have met their lease obligations and the OP continues to attract and retain quality tenants. The OP intends to reduce operating and leasing risks by continually improving its tenant mix, rental rates and lease terms and by pursuing contracts with creditworthy upscale and national brand-name tenants.
Item 7-A. Quantitative and Qualitative Disclosures about Market Risk
The OP is exposed to changes in interest rates primarily from its floating rate debt arrangements. In December 2000, the OP implemented a policy to protect against interest rate and foreign exchange risk. The OP's primary strategy is to protect against this risk by using derivative transactions as appropriate to minimize the variability that floating rate interest and foreign currency fluctuations could have on cash flow. In December 2000, a wholly-owned subsidiary of the OP entered into an interest rate swap agreement effective January 2, 2001 with a financial institution for a notional amount of $69.3 million amortizing to $64.1 million to hedge against unfavorable fluctuations in the LIBOR rates of its secured mortgage loan facility. The hedge effectively produces a fixed rate of 7.2625% on the notional amount until January 1, 2006.
At December 31, 2002 a hypothetical 100 basis point adverse move (increase) in US Treasury and LIBOR rates applied to unhedged debt would adversely affect the OP's annual interest cost by approximately $1.0 million annually.
Following is a summary of the OP's debt obligations at December 31, 2002 (in thousands):
Expected Maturity Date
----------------------------------------------------------
2003 2004 2005 2006 2007 Thereafter Total Fair
Value
---- ---- ---- ---- ---- ---------- ------ -----
Fixed Rate Debt: - - $49,922 - $124,841 $685,772 $860,535 $966,224
Average Interest Rate: - - 8.38% - 7.25% 7.22% 7.29%
Variable Rate Debt: - - $103,035 - - $67,250 $170,285 $170,285
Average Interest Rate: - - 2.46% - - 2.88% 2.63%
Item 8. Financial Statements and Supplementary Data
The financial statements and financial information of the OP for the years ended December 31, 2002, 2001 and 2000 and the Report of the Independent Auditors thereon are included elsewhere herein. Reference is made to the financial statements and schedules in Item 15.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
PART III
Items 10, 11, 12 and 13.
The Operating Partnership does not have any Directors, executive officers or stock authorized, issued or outstanding. If the information were required it would be indentical to the information contained in Items 10, 11, 12 and 13 of the Company's Form 10-K that will appear in the Company's Proxy Statement furnished to shareholders in connection with the Company's 2003 Annual Meeting. Such information is incorporated by reference in the Form 10-K.
Item 14. Controls and Procedure
The Company's chief executive officer and chief financial officer evaluated the effectiveness of our disclosure controls and procedures (as defined in rule 13A-14 c under the Securities Exchange Act of 1934, as amended) within 90 days of the filing date of this report (the "Evaluation Date") and, based on that evaluation, concluded that, as of the Evaluation Date, we had sufficient controls and procedures for recording, processing, summarizing and reporting information that is required to be disclosed in our reports under the Securities Exchange Act of 1934, as amended, within the time periods specified in the SEC's rules and forms.
Since the Evaluation Date, there have not been any significant changes to our internal controls including any corrective actions with regard to significant deficiencies and material weaknesses or other factors that could significantly affect these controls.
PART IV
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) 1 and 2. The response to this portion of Item 14 is submitted as a separate section of this report.
3. Exhibits
| 3.1 | Articles of Incorporation of the Company, as amended, including Articles Supplementary relating to 8 3/8% Series A Cumulative Redeemable Preferred Stock and Articles Supplementary relating to 9% Series B Cumulative Redeemable Preferred Stock. Incorporated by reference to Exhibit 3.1 to Form 10-K of Chelsea Property Group, Inc. for the year ended December 31, 2002. |
| 3.2 | By-laws of the Company. Incorporated by reference to Exhibit 3.2 to Registration Statement filed by the Company on Form S-11 under the Securities Act of 1933 (file No. 33-67870) ("S-11"). |
| 3.3 | Agreement of Limited Partnership for the Operating Partnership. Incorporated by reference to Exhibit 3.3 to S-11. |
| 3.4 | Amendments No. 1 and No. 2 to Partnership Agreement dated March 31, 1997 and October 7, 1997. Incorporated by reference to Exhibit 3.4 to Form 10-K for the year ended December 31, 1997. ("1997 10-K") |
| 3.5 | Amendment No. 3 to Partnership Agreement dated September 3, 1999. Incorporated by reference to Exhibit 3.5 to 1999 10-K. |
| 4.1 | Form of Indenture among the Company, Chelsea GCA Realty Partnership, L.P., and State Street Bank and Trust Company, as Trustee. Incorporated by reference to Exhibit 4.4 to Registration Statement filed by the Company on Form S-3 under the Securities Act of 1933 (File No. 33-98136). |
| 10.1 | Registration Rights Agreement among the Company and recipients of Units. Incorporated by reference to Exhibit 4.1 to S-11. |
| 10.2 | Amended and Restated Credit Agreement dated July 31, 2002 among CPG Partners, L.P. and Fleet National Bank, individually and as an agent, and other Lending Institutions listed therein. Incorporated by reference to Exhibit 10.1 to Form 10-Q for the period ending September 30, 2002. |
| 10.3 | Joint Venture Agreement among Chelsea GCA Realty Partnership, L.P., Mitsubishi Estate Co., Ltd. and Nissho Iwai Corporation dated June 16, 1999. Incorporated by reference to Exhibit 10.9 to 1999 10-K. |
| 10.4 | Agreement for Purchase and Sale of Assets dated December 22, 2000. Incorporated by reference to Exhibit 2.1 to current report on Form 8-K reporting on an event which occurred December 22, 2000. |
| 10.5 | Limited Liability Company Agreement of F/C Acquisition Holdings LLC. Incorporated by reference to Exhibit 2.2 to current report on Form 8-K reporting on an event which occurred December 22, 2000. |
| 10.6 | Agreement for Purchase and Sale of Assets dated July 12, 2001. Incorporated by reference to Exhibit 2 to current report on Form 8-K reporting on an event which occurred on September 25, 2001. |
| 10.7 | Purchase Agreement dated November 11, 2002. Incorporated by reference to Exhibit 2 to current report on Form 8-K reporting on an event which occurred December 19, 2002. |
| 21 | List of Subsidiaries |
| 23.1 | Consent of Ernst & Young LLP. |
| (b) | Reports on Form 8-K. None |
| (c) | Exhibits See (a) 3 |
| (d) | Financial Statement Schedules - The response to this portion of Item 15 is submitted as a separate schedule of this report. |
Item 8, Item 15(a)(1) and (2) and Item 15(d)
(a)1. Financial Statements
Form 10-K
Report Page
Consolidated Financial Statements–CPG Partners, L.P.
| Report of Independent Auditors | F-1 | </