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, 2003
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 2004 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 85.6% 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, 2003, the OP wholly or partially-owned 60 centers in 31 states and Japan containing approximately 16.1 million square feet of gross leasable area (“GLA”) represented by more than 1,030 tenants in 3,953 stores. The OP’s portfolio is comprised of 30 Premium Outlet centers containing 10.6 million square feet of GLA (“Premium Properties”) and 30 other retail centers containing 5.5 million square feet of GLA (“Other Properties”) (collectively the “Properties”). The Premium Properties, excluding properties converted to Premium during 2003, generated approximately 75% and 86% of the OP’s real estate net operating income for the years ended December 31, 2003 and 2002, respectively. The Premium Properties generally are located near metropolitan areas including New York City, Los Angeles, Chicago, Boston, Washington, D.C., San Francisco, Sacramento, Atlanta, Dallas, 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, Napa Valley, Orlando, Las Vegas and Honolulu. During 2003, the OP’s domestic Premium Properties generated weighted average tenant sales of $399 per square-foot, defined as total sales reported by tenants divided by their gross leasable area, weighted by number of 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 Forms 10-K, 10-Q, 8-K and other filings can be obtained free of charge, on the website. These SEC filings are added to the website as soon as reasonably practicable. The Company’s Code of Ethics and other committee charters are also listed on the website and the corporate governance principles will follow shortly.
Recent Developments
Acquisitions
In June 2003, the OP purchased The Crossings Factory Stores, a 390,000 square-foot outlet center located in Tannersville, Pennsylvania, for $111.3 million including closing costs and the assumption of a $60.7 million 5.85% mortgage loan due 2013. In conjunction with the acquisition, the Company completed an offering of 1.2 million shares of common stock at a price of $42.10 per share. Net proceeds after expenses of $49.4 million were used to fund substantially the entire cash portion of the acquisition.
In August 2003, the OP acquired Las Vegas Outlet Center, a 477,000 square-foot outlet center in Las Vegas, Nevada, for $104.0 million including the assumption of a $24.4 million 8.12% mortgage loan due 2012. As part of the transaction, the OP also acquired Lakeland Factory Outlet Mall, a 319,000 square-foot outlet center near Memphis, Tennessee for an additional $3.5 million. The Lakeland property is being marketed for sale. The approximately $84.0 million cash portion of the overall transaction was financed with a $100.0 million one-year term loan at an annual interest rate of LIBOR plus 0.80% that is due on July 31, 2004 and extendible for six months until January 31, 2005, at the OP’s option. The LIBOR rate spread ranges from 0.70% to 1.35% depending on the OP’s Senior Debt rating. Surplus proceeds from the financing of approximately $16.0 million were used for general corporate purposes.
Recent Developments (continued)
Chelsea Interactive
At December 31, 2002, the OP recognized an impairment loss equal to the net book value of its investment in Chelsea Interactive. The OP believes that it will not be able to recover the net book value of its investment in Chelsea Interactive through future cash flows. A $2.5 million funding loss was reported for the year ended December 31, 2003. Future funding by the OP will be reported as a loss in the period funding is required. Through December 31, 2003, the OP had funded $54.9 million and anticipates that Chelsea Interactive will not reach the OP’s funding limit of $60.0 million. On February 17, 2004, the OP announced a joint venture between Chelsea Interactive and a publicly traded third party, GSI Commerce, Inc. (“GSI-Chelsea Solutions”). Under the terms of the agreement, Chelsea Interactive will no longer operate its e-commerce technology, but will retain a minority interest in GSI-Chelsea Solutions. Chelsea Interactive’s largest clients have entered into service agreements with GSI-Chelsea Solutions and will transition e-commerce activities to the GSI-Chelsea platform by the second quarter of 2004.
The following table sets forth a summary of the GLA changes from developments, expansions, acquisitions and dispositions from January 1 through December 31, 2003:
GLA Number
Property Owned Date (1) (Sq. Ft.) of Stores Tenants (2)
- ----------------------------------- ----------- --------- ------------- ----------- ---------------------------------------
As of January 1, 2003.............. 14,386,000 3,436
New centers developed:
Las Vegas Premium Outlets.......... 50% 08/03 435,000 123 A|X Armani Exchange, Coach, Dolce &
Las Vegas, NV Gabana, Kenneth Cole, Polo Ralph
Lauren
Sano Premium Outlets .............. 40% 03/03 180,000 97 Bally, Brooks Brothers, Coach,
Sano, Japan Escada, Nautica, Theory, Timberland
------------- -----------
Total Development ................. 615,000 220
Expansions:
Gotemba Premium Outlets........... 40% 07/03 170,000 73 Bally, Coach, Diesel, Gap, Gucci,
Gotemba City, Japan L.L. Bean, Nike
Albertville Premium Outlets........ 100% 12/03 125,000 37 Calvin Klein, Liz Claiborne,
Albertville, MN Timberland, Tommy Kids
Other (net) ....................... (30,000) (12)
------------- -----------
Total expansions................... 265,000 98
Acquisitions:
Las Vegas Outlet Center............ 100% 08/03 477,000 130 Liz Claiborne, Nike, Reebok, Tommy
Las Vegas, NV Hilfiger, VF Factory Outlet
The Crossings Factory Stores....... 100% 06/03 390,000 108 Ann Taylor, Coach, Liz Claiborne,
Tannersville, PA Reebok, Tommy Hilfiger,
Lakeland Factory Outlet Mall....... 100% 08/03 319,000 45 Bass, L'eggs Hanes Bali Playtex,
Lakeland, TN Nike, VF Factory Outlet,
------------- -----------
Total acquisitions:................ 1,186,000 283
Dispositions:
Factory Stores of America.......... 100% 09/03 (167,000) (30)
Mesa, AZ
American Tin Cannery
Premium Outlets(3) ............. 100% 01/04 (135,000) (45)
Pacific Grove, CA
St. Helena Premium Outlets......... 100% 06/03 (23,000) (9)
St. Helena, CA (Napa Valley)
------------- -----------
Total dispositions................. (325,000) (84)
Net additions for 2003............. 1,741,000 517
------------- -----------
Totals as of December 31, 2003..... 16,127,000 3,953
============= ===========
| 1) | Development, expansion, acquisition, disposition or termination 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 pay percentage rent based on sales. |
| 3) | The OP terminated its long-term lease agreement, expiring December 2004, effective January 2, 2004. |
Recent Developments (continued)
Some of the most recent newly developed, acquired or expanded centers are discussed below:
Las Vegas Premium Outlets, Las Vegas, Nevada – Las Vegas Premium Outlets, a 435,000 square-foot center containing 123 stores opened in August 2003. The center is located between Grand Central Parkway and I-15 near the intersection of U.S. Route 95, easily accessible from downtown Las Vegas and the “Strip”. This tourist destination attracts over 35 million people annually. The population within a 15-mile radius is 1.1 million. Average household income within a 30-mile radius is approximately $60,000.
Sano Premium Outlets, Sano, Japan - Sano Premium Outlets, a 180,000 square-foot center containing 97 stores, opened in March 2003. The center is located 40 miles north of Tokyo on Route 50 off the Tohoku Expressway. Sano is near some of Japan’s most famous tourist spots, including Nikko and the Nasu-Kogen resort area. The population within a 20-mile and 30-mile radius is 2.5 million and 8.3 million, respectively.
Gotemba Premium Outlets, Gotemba City, Japan - Gotemba Premium Outlets is a 390,000 square-foot center containing 158 stores. Gotemba opened its initial phase in July 2000 and expanded by 170,000 square feet in July 2003. The center is located on the Tomei Expressway, approximately 60 miles west of Tokyo and midway between Mt. Fuji and the Hakone resort area. These two tourist destinations attract 37 million people annually. The population within a 20-mile, 30-mile and 60-mile radius is approximately 1.5 million, 5.0 million and 31.2 million, respectively.
Albertville Premium Outlets, Albertville, Minnesota - Albertville Premium Outlets, a 430,000 square-foot center containing 104 stores was acquired in November 2002 and expanded in December 2003. The center is located approximately 20 miles northwest of Minneapolis-St. Paul on Interstate 94. The population within a 15-mile, 30-mile and 60-mile radius is 0.3 million, 1.9 million and 3.3 million, respectively. Average household income within a 30-mile radius is approximately $68,000.
Las Vegas Outlet Center, Las Vegas, Nevada - Las Vegas Outlet Center, a 477,000 square-foot center containing 130 stores was acquired in August 2003. The center is located at the intersection of Las Vegas Boulevard and Warm Springs Road, easily accessible from the Las Vegas airport and the “Strip”. This tourist destination attracts over 35 million people annually. The population within a 15-mile radius is 1.1 million. Average household income within a 30-mile radius is approximately $60,000.
The Crossings Factory Stores, Tannersville, Pennsylvania - The Crossings Factory Stores, a 390,000 square-foot center containing 108 stores was acquired in June 2003. The center is located in Tannersville approximately 13 miles from the Delaware Water Gap, directly off Interstate 80. The population within a 15-mile, 30-mile and 60-mile radius is 0.2 million, 1.0 million and 2.7 million, respectively. Average household income within a 30-mile radius is approximately $60,000.
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"), has three operating centers: Sano Premium Outlets, Gotemba Premium Outlets, and Rinku Premium Outlets. Chelsea Japan is scheduled to open its fourth center, Tosu Premium Outlets, located near Fukuoka, Japan, in March 2004.
During 2002, the OP and Simon Property Group, Inc. (“Simon”) agreed to develop two Premium Outlet centers under separate 50/50 joint ventures, the 435,000 square-foot Las Vegas Premium Outlets which opened in August 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 in the United States as measured by market capitalization. At February 2004, 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 190 million square feet of retail and mixed-use properties in 37 states, Canada and Europe.
Strategic Alliances and Joint Ventures (continued)
The OP has a 50/50 joint venture agreement with Sordo Madaleno y Asociados and affiliates to jointly develop, own and operate Premium Outlet centers in Mexico. In July 2003, the first development project broke ground, a 230,000 square-foot first phase of Punta Norte Premium Outlets located near Mexico City and is scheduled to open in late 2004. The OP is responsible for financing its 50% share of project costs of approximately $15.0 million. As of December 31, 2003, the OP had contributed $2.5 million.
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, however, the OP’s loan covenants do contain certain limitations.
Organization of the OP
Virtually all of the OP's assets are held by, and all of its business activities conducted through, the Operating Partnership. The Company (which owned 85.6% of the Operating Partnership as of December 31, 2003) is the sole general partner of the Operating Partnership and has full and complete control over the management of the Operating Partnership and each of the Properties, 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 sell to customers at lower prices for brand name and designer merchandise; manufacturers benefit from selling 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 Giorgio Armani, Banana Republic, Brooks Brothers, Chanel, Coach, ColeHaan, Gucci, Nautica, Polo Ralph Lauren, Tommy Hilfiger and Versace, as well as with national brand-name manufacturers such as Adidas, Carter’s, Gap, Nike, Phillips-Van Heusen (Bass, Calvin Klein, 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 domestic Premium Properties generated weighted average reported tenant sales during 2003 of $399 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.
Business Strategy (continued)
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 its IPO, 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; international development 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 2003, Chelsea Japan opened the 180,000 square-foot first phase of Sano Premium Outlets, located 40 miles north of Tokyo, Japan and expanded Gotemba Premium Outlets, by 170,000 square-feet. Gotemba Premium Outlets at 390,000 square feet is the OP’s largest and most productive outlet center in Japan. The 185,000 square-foot first phase of Tosu Premium Outlets, located near Fukuoka, Japan is scheduled to open in March 2004. During 2003, the OP commenced construction on the 230,000 square-foot first phase of Punta Norte Premium Outlets, located north of Mexico City. The center is scheduled to open in late 2004 and can support an additional phase containing approximately 165,000 square feet. The OP believes that there are significant opportunities to develop additional manufacturers’ outlet centers in Japan, Mexico and other countries. The OP intends to pursue these opportunities as viable sites and local partners are identified.
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 this objective through continuing efforts to improve tenant sales and profitability, and to enhance the opportunity for higher base and percentage rents.
Operating Strategy (continued)
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 645 full-time and 208 part-time employees. Of these employees, 502 full-time and 208 part-time are involved in on-site maintenance, security, administration and marketing. An on-site property manager generally manages centers 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, 2003, the OP had 645 full-time and 208 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, 2003, the OP had 60 centers in 31 states and Japan containing approximately 16.1 million square feet of gross leasable area. Of the 60 centers, 56 are owned 100% (50 in fee and 6 under long-term leases). The OP operated all 57 of its domestic centers and Chelsea Japan managed the three centers in Japan.
The OP’s Premium Properties consist of 30 upscale, fashion-oriented manufacturers’ outlet centers located in or near New York City, Los Angeles, Chicago, Boston, Washington, D.C., San Francisco, Sacramento, Atlanta, Dallas, Tokyo and Osaka, Japan, or within 20 miles of major tourist destinations including Palm Springs, Napa Valley, Orlando, Las Vegas and Honolulu. The domestic Premium Properties were 99% leased as of December 31, 2003, and contained approximately 2,468 stores with more than 550 different tenants. The OP’s Premium Properties in Japan were 100% leased as of December 31, 2003 and contained 375 stores with approximately 190 different tenants. The OP's Other Properties were 93% leased as of December 31, 2003, and contained approximately 1,110 stores with more than 290 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, 2003, 2002 and 2001, respectively, 13%, 16% and 21% 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, 2003, 2002 and 2001, respectively, 23%, 25% and 28% of the OP’s total revenues were derived from the OP’s centers in California.
VF Corporation (Vanity Fair) leases approximately 8% of the OP’s total domestic GLA as of December 31, 2003, which constitutes approximately 3% of the OP’s base rents.
Woodbury Common Premium Outlets contributed more than 10% of the OP’s aggregate gross revenues during 2003 and had a book value of more than 5% of the total assets at year-end 2003. No tenant leases more than 5% of the center’s GLA. The following chart shows certain information for Woodbury Common.
Fiscal Occupancy Avg. Annual
Year Rate Rent Per Sq Ft
-------- ------------ -----------------
1999 99.5% $35.61
2000 100.0% 38.55
2001 98.8% 38.63
2002 100.0% 41.23
2003 100.0% 44.62
Woodbury Common Premium Outlets opened in four phases in 1985, 1993, 1995 and 1998 and contains 844,000 square feet of GLA. As of December 31, 2003, the center’s 212 units were fully leased. Woodbury Common is located approximately 50 miles north of New York City at the Harriman exit off the New York State Thruway. The population within a 30-mile, 60-mile and 100-mile radius is approximately 2.5 million, 17.3 million and 25.2 million, respectively. Average household income within the 30-mile radius is approximately $83,000.
Item 2. Properties (continued)
The following table shows lease expiration data as of December 31, 2003 for Woodbury Common Premium Outlets for the next ten years (assuming that none of the tenants exercise renewal options).
Annual
Contractual No. of "CBR"
Base Rents Leases Represented by
Expiration Year GLA ("CBR") per sq ft Total Expiring Expiring Leases
--------------- ---------- -------------------- ------------- ----------- -------------------
2004 42,086 $30.12 $1,268,000 11 3.8%
2005 109,652 36.13 3,962,000 26 11.9%
2006 33,768 43.76 1,478,000 14 4.4%
2007 55,722 37.94 2,114,000 14 6.3%
2008 229,842 36.41 8,369,000 52 25.1%
2009 52,739 47.84 2,523,000 19 7.6%
2010 44,661 40.62 1,814,000 12 5.4%
2011 79,142 41.58 3,291,000 15 9.9%
2012 70,068 51.46 3,606,000 22 10.8%
2013 109,636 38.67 4,240,000 23 12.7%
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, 2003, the Federal income tax basis in this center was $116.0 million.
The real estate tax on Woodbury Common Premium Outlets was $4.2 million in 2003 and it is estimated to be $4.7 million in 2004.
Set forth in the table below is certain property information as of December 31, 2003.
Opened
or GLA No. of
Name/Location Acquired (Sq. Ft.) Stores Selected Tenants
- ---------------------------------------- ---------- ---------- --------- ---------------------------------------
Premium Properties:
Woodbury Common Premium Outlets......... 1985 844,000 212 Banana Republic, Brooks Brothers, Coach,
Central Valley, NY (New York City area) Giorgio Armani, Gucci, Neiman Marcus Last
Call, Polo Ralph Lauren, Salvatore
Ferragamo
Wrentham Village Premium Outlets........ 1997 601,000 158 Barneys New York, Burberry, Hugo Boss,
Wrentham, MA (Boston/Providence area) Kenneth Cole, Nike, Polo Ralph Lauren,
Sony, Versace
Gilroy Premium Outlets.................. 1990 577,000 142 Brooks Brothers, Calvin Klein, Coach, J.
Gilroy, CA (San Jose area) Crew, Hugo Boss, 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
Ferragamo, Versace, Yves Saint Laurent
Rive Gauche, Zegna
Lighthouse Place Premium Outlets........ 1987 478,000 115 Burberry, Coach, Crate & Barrel, Gap,
Michigan City, IN (Chicago area) Liz Claiborne, Polo Ralph Lauren,
Tommy Hilfiger
Leesburg Corner Premium Outlets......... 1998 463,000 103 Barneys New York, Kenneth Cole, Liz
Leesburg, VA (Washington DC area) Claiborne, Nike, Polo Ralph Lauren,
Williams-Sonoma
Camarillo Premium Outlets............... 1995 454,000 122 Banana Republic, Barneys New York,
Camarillo, CA (Los Angeles metro area) Coach, Donna Karan, Polo Ralph Lauren,
St. John, Versace
Carolina Premium Outlets (2)............ 2001 440,000 82 Brooks Brothers, Gap, Liz Claiborne,
Smithfield, NC (Raleigh area) Nike, Polo Ralph Lauren, Timberland,
Tommy Hilfiger
Las Vegas Premium Outlets............... 2003 435,000 123 A|X Armani Exchange, Calvin Klein,
Las Vegas, NV Coach, Dolce & Gabbana, Elie Tahari,
Polo Ralph Lauren
Albertville Premium Outlets............. 2002 430,000 104 Banana Republic, Calvin Klein, Gap,
Albertville, MN (Minneapolis area) Old Navy, Polo Ralph Lauren, Tommy
Hilfiger
Orlando Premium Outlets................. 2000 428,000 115 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,
Polo Ralph Lauren
Osage Beach Premium Outlets............. 2002 391,000 104 Brooks Brothers, Coach, Gap, Liz
Osage Beach, MO Claiborne, Polo Ralph Lauren, Tommy
Hilfiger
Gotemba Premium Outlets................. 2000 (1) 390,000 158 Bally, Coach, Diesel, Gap, Gucci, Jill
Gotemba City, Japan (Tokyo metro area)(2) Stuart, L.L. Bean, Nike, Tod's
Allen Premium Outlets................... 2000 349,000 84 Brooks Brothers, Cole-Haan, Crate &
Allen, TX (Dallas metro area) Barrel, Kenneth Cole, Liz Claiborne,
Polo Ralph Lauren, Tommy Hilfiger.
St. Augustine Premium Outlets........... 2002 329,000 93 Brooks Brothers, Casual Corner, Coach,
St. Augustine, FL Gap, Movado, Reebok, Tommy Bahama
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 287,000 65 Ann Taylor, Brooks Brothers, Gap, Liz
Aurora, OH (Cleveland metro area) Claiborne, Nautica, Off 5th-Saks Fifth
Avenue, Polo Ralph Lauren, Tommy Hilfiger
Clinton Crossing Premium Outlets........ 1996 272,000 66 Barneys New York, Calvin Klein, Coach,
Clinton, CT (I-95/NY-New England Dooney & Bourke, Gap, Kenneth Cole,
Corridor) Liz Claiborne, Nike, Polo Ralph Lauren
Rinku Premium Outlets................... 2000(1) 250,000 120 Bally, Brooks Brothers, Coach, Eddie
Izumisano, Japan (Osaka metro area)(2) Bauer, Gap, Nautica, Nike, Timberland,
Versace
Waikele Premium Outlets................. 1997 210,000 51 Banana Republic, Barneys New York,
Waipahu, HI (Honolulu area) Coach, Guess, Kenneth Cole, Max Mara,
Polo Ralph Lauren
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
Sano Premium Outlets.................... 2003(1) 180,000 97 Bally, Brooks Brothers, Coach, Nautica,
Sano, Japan (Tokyo metro area)(2) New Yorker, Nine West, Timberland
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 Calvin Klein, Ellen Tracy, Jones
Flemington, NJ (New York-Phila. New York, L.L. Bean, Polo Ralph
metro area) Lauren, Tommy Hilfiger, Timberland,
Waterford Wedgwood
Columbia Gorge Premium Outlets.......... 1991 164,000 45 Adidas, Carter's, Gap, Samsonite,
Troutdale, OR (Portland metro area) Van Heusen
Kittery Premium Outlets ................ 1984 150,000 32 Banana Republic, Coach, Crate &
Kittery, ME (Boston area) (2) Barrel, J. Crew, Polo Ralph Lauren,
Reebok, Tumi
Santa Fe Premium Outlets................ 1993 125,000 38 Brooks Brothers, Coach, Johnston &
Santa Fe, NM Murphy, Jones New York, Liz Claiborne,
Nautica, Van Heusen
Patriot Plaza Premium Outlets........... 1986 77,000 11 Lenox, Polo Ralph Lauren, WestPoint
Williamsburg, VA (Norfolk-Richmond Stevens
area)
----------- --------
Total Premium Properties (3)............ 10,603,000 2,843
----------- --------
Other Properties:
Las Vegas Outlet Center................. 2003 477,000 130 Liz Claiborne, Nike, Reebok, Tommy
Las Vegas, NV Hilfiger, VF Factory Outlet, Waterford
Wedgwood
Factory Stores at Vacaville............. 2001 447,000 104 Adidas, Burberry, Coach, Eddie Bauer,
Vacaville, CA Gap, Liz Claiborne, Nike, Polo Ralph
Lauren, Reebok
The Crossings Factory Stores............ 2003 390,000 108 Ann Taylor, Coach, Liz Claiborne, Polo
Tannersville, PA Ralph Lauren, Reebok, Tommy Hilfiger
Lakeland Factory Outlet Mall............ 2003 319,000 45 Bass, L'eggs Hanes Bali Playtex, Nike,
Lakeland, TN VF Factory Outlet, Van Heusen
Edinburgh Outlet Center................. 2002 305,000 72 Coach, Gap, Nautica, Nike, OshKosh
Edinburgh, IN B'Gosh, Polo Ralph Lauren, Tommy
Hilfiger
Factory Merchants Branson............... 2002 300,000 86 Carter's, Coach, Izod, Nautica,
Branson, MO Pfaltzgraff, Reebok, Van Heusen
Jackson Outlet Village.................. 2002 292,000 71 Brooks Brothers, Calvin Klein, Gap,
Jackson, NJ Nike, Reebok, Timberland, Tommy Hilfiger
The Factory Shoppes at Branson
Meadows(2).............................. 2001 287,000 43 Dress Barn, Easy Spirit, VF Factory Outlet
Branson, MO
Johnson Creek Outlet Center............. 2002 278,000 62 Gap, Lands' End, Nike, Old Navy, Tommy
Johnson Creek, WI Hilfiger
Factory Stores at North Bend ........... 2001 223,000 50 Adidas, Bass, Carter's, Eddie Bauer, Nike,
North Bend, WA OshKosh B'Gosh, Samsonite
Factory Stores of America............... 2001 184,000 31 Adidas, Dress Barn, Samsonite, VF Factory
Draper, UT Outlet
Factory Stores of America............... 2001 177,000 27 Bass, Carolina Pottery, Dress Barn, Levi's,
Georgetown, KY Van Heusen
North Ridge Shopping Center............. 2001 166,000 33 Ace Hardware, Kerr Drugs, Winn Dixie
Raleigh, NC
Factory Stores of America .............. 2001 151,000 30 Bass, Liz Claiborne, OshKosh B'Gosh,
Crossville, TN Reebok, Van Heusen, VF Factory Outlet
MacGregor Village....................... 2001 145,000 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............... 2001 129,000 12 Banister Shoes, VF Factory Outlet,
Tupelo, MS Van Heusen
Dare Centre (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 (2)........... 2001 109,000 15 Easy Spirit, VF Factory Outlet,
Iowa, LA Van Heusen
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 VF Factory Outlet
Union City, TN
Factory Stores of America............... 2001 44,000 11 Levi's, Sportshoe Center, Carter's
Lake George, NY
------------ -----
Total Other Properties.................. 5,524,000 1,110
Grand Total.......................... 16,127,000 3,953
============ =====
Notes to Property Data:
| 1) | Chelsea Japan properties are 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: 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; Sano Premium Outlets, June 2022; The Shoppes at Branson Meadows, November 2021; Carolina Premium Outlets (87,000 sq ft), January 2029; Dare Centre, September 2058; Factory Stores of America at Iowa, September 2087. |
| 3) | The OP terminated its American Tin Cannery Premium Outlets long-term lease agreement. |
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 the 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: 2003 2002 2001 2000 1999
-------------- -------------- -------------- ------------ -------------
Rental revenue.................................... $ 277,028 $202,021 $142,498 $123,525 $ 111,828
Total revenues.................................... 372,265 278,489 202,882 176,488 158,636
Total expenses.................................... 260,940 194,958 147,450 121,878 111,371
Income from unconsolidated investments............ 11,006 9,802 15,025 6,723 308
Loss from and impairment of Chelsea Interactive... (2,518) (47,756) (5,337) (2,364) -
Gain (loss) on sale or write-down of assets....... - 10,911 617 - (694)
Income from continuing operations................. 119,813 56,488 65,737 58,969 46,879
(Loss) income from discontinued operations........ (980) 1,366 783 1,417 677
Gain on sale of discontinued operations........... 5,625 - - - -
Net income........................................ 124,458 57,854 66,520 60,386 47,556
Preferred distribution............................ (9,184) (9,270) (10,036) (10,036) (6,137)
Net income available to common unitholders $ 115,274 $ 48,584 $ 56,484 $50,350 $41,419
Net income per common unit (1)(2):
General Partner................................. $2.30 $1.09 $1.41 $1.30 $1.09
Limited Partners................................ $2.30 $1.07 $1.39 $1.30 $1.08
Ownership Interest: (2)
General Partner................................... 42,613 38,245 33,678 31,880 31,484
Limited Partners.................................. 7,442 6,426 6,358 6,712 6,778
-------------- -------------- -------------- ------------ -------------
Weighted average units outstanding................ 50,055 44,671 40,036 38,592 38,262
Balance Sheet Data:
Rental properties before accumulated depreciation $2,072,783 $ 1,837,174 1,127,906 $ 908,344 $ 848,813
Total assets...................................... 1,970,414 1,703,030 1,099,308 901,314 806,055
Unsecured and mortgage debt....................... 1,211,472 1,030,820 548,538 450,353 355,684
Total liabilities ............................... 1,304,880 1,107,756 624,246 528,752 426,198
Partners capital.................................. 665,534 595,274 475,062 372,562 379,857
Distributions declared per common unit (2) ....... $2.14 $ 1.86 $1.56 $1.50 $1.44
Other Data:
Funds from operations (1) ........................ $ 185,095 $ 131,771 $ 108,862 $ 93,556 $ 79,980
Cash flows from:
Operating activities........................... $ 181,634 $ 128,222 $ 121,723 $ 106,658 $ 87,502
Investing activities........................... (213,603) (404,178) (112,551) (121,479) (77,490)
Financing activities........................... 27,894 273,903 (2,604) 23,995 (10,781)
GLA at end of period (3).......................... 16,127 14,386 12,574 8,159 5,216
Weighted average GLA (4).......................... 15,249 12,758 9,349 5,703 4,995
Centers in operation at end of the period......... 60 58 57 27 19
New centers developed............................. 2 - - 4 -
Centers expanded ................................. 2 4 1 3 4
Centers sold and lease terminated................. 3 5 1 1 1
Centers held for sale............................. 1 - - - 1
Centers acquired ................................. 2 7 31 4 -
Notes to Selected Financial Data:
| 1) | 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, or is it indicative of funds available to fund the OP's cash needs, including its ability to make cash distributions. |
| 2) | Assumes that the 2-for-1 unit split on May 28, 2002 had occurred on January 1, 1999. |
| 3) | At December 31, 2003, includes four joint venture centers, ownership share ranging between 40% and 50%, containing a total of 1,255,000 square feet of GLA. 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 joint venture interests ranging from 40% to 50%. |
| 4) | GLA weighted by months in operation. |
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
The following discussion should be read in connection with the Financial Statements and notes thereto appearing elsewhere in this annual report.
Certain comparisons between periods have been made on a percentage or weighted average per square foot basis. The latter technique adjusts for square-footage changes at different times during the year.
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 that the 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 $1.6 million and $2.6 million at December 31, 2003 and 2002, 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, 2003, 2002 and 2001. The OP recorded $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.
Purchase Price Allocation
The OP allocates the purchase price of real estate to land, building, tenant improvements and if determined to be material, intangibles, such as the value of above, below and at market leases and origination cost associated with in-place leases. The OP depreciates the amount allocated to building and other intangible assets over their estimated useful lives, which generally range from five to forty years. The values of the above and below market leases are amortized and recorded as either an increase (in the case of below market leases) or a decrease (in the case of above market leases) to rental income over the remaining term of the associated lease. The values associated with in-place leases are amortized over the term of the lease. If a tenant vacates its space prior to the contractual termination of the lease and no rental payments are being made on the lease, any unamortized balance of the related intangible will be written off. The tenant improvements and origination costs are amortized as an expense over the remaining life of the lease (or charged against earnings if the lease is terminated prior to contractual expiration date). The OP assesses fair value based on estimated cash flow projections that utilize appropriate discount and capitalization rate and available market information. Estimates of future cash flows are based on a number of factors including the historical operating results, known trends and market/economic conditions that may affect the property.
General Overview
During the three-year period ended December 31, 2003, rental revenues grew from $123.5 million to $277.0 million, representing an increase of $153.5 million, or 124%. The incremental growth was driven by expanding seven centers, acquiring 41 centers, buying out partners’ interests in five centers and increasing rents. Growth was further enhanced through joint venture development of two new Premium Outlet centers and the expansion of two other Premium Outlet centers. From January 1, 2001 to December 31, 2003, the number of centers more than doubled from 27 to 60 centers, while GLA increased by 8.0 million square feet or 97.8%.
Base rent on average increased 35.2%, or $48.0 million per year, during the same three-year period, primarily from the acquisitions of domestic properties that contributed aggregate incremental revenue of $77.8 million and the buyout of partners’ interests that added $42.9 million. Expansions contributed $11.3 million during the three-year period.
Income from unconsolidated investments during the three-year period ended December 31, 2003, contributed $46.7 million, including a $10.9 million gain on sale of minority interests in 2002. As previously mentioned, since January 1, 2001, the OP with its joint venture partners, developed two new premium centers and expanded two premium centers. During 2002, the OP purchased the remaining interest from two joint venture partners and became the sole owner of five centers whose operating results were fully consolidated since their buyout.
At December 31, 2003, the OP’s portfolio consisted of 60 wholly or partially owned properties containing 16.1 million square feet of GLA. Premium Properties include 30 centers containing 10.6 million square feet of GLA and 30 Other Properties containing 5.5 million square feet of GLA.
Details of the 8.0 million square feet of net GLA added are as follows:
Since Jan 1,
2001 2003 2002 2001
---------------- ---- ---- ----
Changes in GLA (sf in 000's):
New centers developed:
Las Vegas Premium Outlets (50% owned) ............. 435 435 - -
Sano Premium Outlets (40% owned)................... 180 180 - -
-------- ------- ------- ------
Total new centers. ................................ 615 615 - -
Centers expanded:
Gotemba Premium Outlets (40% owned) ............... 170 170 - -
Albertville Premium Outlets........................ 125 125 - -
Rinku Premium Outlets (40% owned) ................. 70 - 70 -
Desert Hills Premium Outlet........................ 23 - 23 -
Liberty Village Premium Outlets.................... 23 - 23 -
Napa Premium Outlets............................... 9 - 9 -
Allen Premium Outlets.............................. 146 - - 146
Other (net) ....................................... (43) (30) (17) 4
------------------------------------------------------
Total centers expanded. ............................. 523 265 108 150
Centers acquired:
Las Vegas Outlet Center............................ 477 477 - -
The Crossings Factory Stores....................... 390 390 - -
Lakeland Factory Outlet Mall (1) .................. 319 319 - -
Osage Beach Premium Outlets........................ 391 - 391 -
St. Augustine Premium Outlets...................... 329 - 329 -
Edinburgh Outlet Center............................ 305 - 305 -
Albertville Premium Outlets........................ 305 - 305 -
Factory Merchants Branson. ........................ 300 - 300 -
Jackson Outlet Village............................. 292 - 292 -
Johnson Creek Outlet Center........................ 278 - 278 -
Kittery Premium Outlets II (2)..................... 21 - - 21
30 Other Properties (3)............................ 4,279 - - 4,279
-------- ------- ------- ------
Total centers acquired .............................. 7,686 1,186 2,200 4,300
Centers disposed:
American Tin Cannery Premium Outlets (4)........... (135) (135) - -
St. Helena Premium Outlets......................... (23) (23) - -
Mammoth Premium Outlets............................ (35) - - (35)
Other Properties (5) .............................. (663) (167) (496) -
-------- ------- ------- ------
Total centers disposed:.............................. (856) (325) (496) (35)
Net GLA added during the period...................... 7,968 1,741 1,812 4,415
Other Data:
GLA at end of period .............................. 16,127 14,386 12,574
Weighted average GLA .............................. 15,249 12,758 9,349
Centers in operation at end of period.............. 60 58 57
New centers opened. ............................... 2 - -
Centers expanded. ................................. 2 4 1
Centers acquired .................................. 3 7 31
Centers disposed................................... 3 5 1
| 1) | Acquired Lakeland Factory Outlet Mall in August 2003 in conjunction with the Las Vegas Outlet Center. The Lakeland property is being marketed for sale. |
| 2) | Acquired in the September 25, 2001 Konover Property Trust acquisition transaction and formerly Factory Stores of America at Kittery. |
| 3) | Acquired in the September 25, 2001 Konover transaction and excludes Vegas Pointe Plaza which was repurchased by Konover on December 3, 2001. |
| 4) | In January 2004, the OP terminated its long-term lease agreement, expiring December 2004. |
| 5) | Consists of properties acquired in the September 25, 2001 Konover transaction. |
The OP’s domestic Premium Properties produced weighted average reported tenant sales of approximately $399 per square-foot in 2003, $383 per square-foot in 2002 and $379 per square-foot in 2001. Weighted average sales are a measure of tenant performance that has a direct effect on base and percentage rents that can be charged to tenants over time.
Woodbury Common Premium Outlets, the OP’s largest premium center located in Central Valley, New York, generated approximately 13%, 16%, and 21% of the OP’s total revenue for the years ended 2003, 2002 and 2001, respectively. In addition, approximately 23%, 25% and 28% of the OP’s revenues for fiscal years 2003, 2002 and 2001, resulted from the OP’s centers located 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, 2003, and was the only tenant that occupied more than 5% of GLA at year-end. In view of these results 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, 2003 to year ended December 31, 2002.
Income from continuing operations was $119.8 million, an increase of $63.3 million, or 112.1%, from $56.5 million in 2002. The increase resulted primarily from the acquisitions of seven centers in 2002 and three centers in 2003, the buyout of ownership interests in five centers in 2002 previously reported as unconsolidated investments, higher rents from releasing and renewals, and a decrease in the loss from Chelsea Interactive. These increases to income were largely offset by the 2002 gain of $10.9 million, which reflects the sale of a portion of the OP’s interest in Value Retail in 2002 and higher operating and maintenance, general and administrative, interest and other expenses due to the expansion of the portfolio.
Base rentals increased $69.6 million, or 39.0%, to $247.9 million in 2003 from $178.3 million in 2002 due to the acquisitions of ten centers, the buyout of partnership interests in five centers, higher average rents on releasing and renewals, and the expansion of two wholly-owned centers in late 2002. Base rental revenue per weighted average square-foot in the Premium Properties increased to $22.57 from $21.30 a year earlier.
Percentage rents rose $5.4 million, or 22.8%, to $29.1 million in 2003 from $23.7 million in 2002, primarily due to improved tenant sales, the acquisition of ten centers and the buyout of ownership interests in five centers in 2002.
Expense reimbursements, representing contractual recoveries from tenants of certain common area maintenance, operating, real estate tax and promotional and management expenses, increased $21.6 million, or 33.3% to $86.5 million in 2003 from $64.9 million in 2002, due to the recovery of operating and maintenance costs from increased GLA. In 2003, the average recovery of reimbursable expenses for the Premium Properties was 88.4% compared with 90.6% in 2002. The average recovery of reimbursable expenses for the Other Retail centers improved to 72.0% in 2003, compared with 52.6% in the previous year. The increase from Other Retail centers was a result of better recovery of expenses at centers acquired in 2002.
Other income decreased $2.9 million or 24.6% to $8.7 million in 2003, from $11.6 million in 2002. The decrease was primarily due to the expiration of the non-compete agreement which included income recognition of $5.1 million in 2002, and decreased interest income from lower interest rates, partially offset by increased ancillary operating income and the sale of two outparcels in 2003.
Operating and maintenance expenses increased $25.1 million, or 32.2%, to $103.0 million in 2003 from $77.9 million in 2002 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 $9.26 in 2003 from $9.21 in 2002 primarily due to increased snow removal costs.
Depreciation and amortization expense was up $13.9 million, or 24.5%, to $70.8 million in 2003 from $56.9 million in 2002 due to increased depreciation from the acquisition of the ten centers and the buyouts of ownership interests during 2002.
General and administrative expense grew $5.3 million, or 75.2%, to $12.4 million in 2003 from $7.1 million in 2002. Approximately $1.5 million of the increase is a one-time charge due to timing of recognition of deferred compensation expense required under FIN 28. The balance was due to increased cost for corporate governance, compensation, including deferred compensation accrual, benefits and professional fees.
Other expenses increased $1.0 million, or 25.8%, to $5.0 million in 2003 from $4.0 million in 2002 due to ground leases assumed with the acquisition of new centers, legal expenses and increased bad debt expense.
Income from unconsolidated investments was up $1.2 million, or 12.3%, to $11.0 million in 2003 from $9.8 million in 2002 due to higher earnings from Chelsea Japan and Las Vegas Premium Outlets, which opened in August 2003 partially offset by the buyouts of ownership interests in five centers in 2002 that required full consolidation of the operating results from the buyout date.
The operating loss from Chelsea Interactive decreased $45.3 million, or 94.7%, to $2.5 million in 2003 from $47.8 million in 2002 due to the write-off of the OP’s investment at December 31, 2002. The OP recorded an impairment loss of $34.4 million at fiscal year-end 2002.
Interest expense increased $20.6 million, or 41.9%, to $69.8 million in 2003, from $49.2 million in 2002 due to higher debt that financed acquisitions and buyouts of partners’ interests.
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 PLC.
Gain on sale of discontinued operations of $5.6 million, primarily reflects the sale of two centers in 2003.
Comparison of year ended December 31, 2002 to year ended December 31, 2001.
Income from continuing operations was $56.5 million in 2002, representing a decrease of $9.2 million, or 14.1%, from $65.7 million in 2001. This decrease was primarily the result of an operating loss and impairment loss from Chelsea Interactive of $47.8 million in 2002 compared with an operating loss of $5.3 million in 2001. These losses were substantially offset by 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. Income before interest expense increased $2.7 million to $105.7 million in 2002 from $103.0 million in 2001 due to additional GLA, a gain resulting from the partial sale of an unconsolidated investment, substantially offset by the impairment loss from Chelsea Interactive.
Base rents increased $53.7 million, or 43.0%, to $178.3 million in 2002 from $124.6 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 $5.8 million, or 32.9%, to $23.7 million in 2002 from $17.9 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 $15.4 million, or 31.1%, to $64.9 million in 2002 from $49.5 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 with 51.1% in 2001.
Other income increased $0.7 million, or 6.5%, to $11.6 million in 2002 from $10.9 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 gains from sale of five Other Properties and an outparcel during 2002, partially offset by decreased interest income from lower interest rates.
Operating and maintenance expenses increased $21.6 million, or 38.4%, to $77.9 million in 2002 from $56.3 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 $10.1 million, or 21.6%, to $56.9 million in 2002 from $46.8 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 53.1%, 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 56.3%, to $4.0 million in 2002 from $2.5 million in 2001 due to ground leases 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 $11.9 million, or 32.0%, to $49.2 million in 2002 from $37.3 million in 2001, primarily due to higher debt from acquisitions and joint venture buyouts, partially offset by lower interest rates.
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, 2003 of $181.6 million is expected to increase from 1.7 million square feet of GLA added during 2003, including a full year of operations from the two joint venture openings and the acquisition of three centers as well as scheduled openings and expansions of approximately 0.9 million square feet of new GLA in 2004. As of December 31, 2003, the OP has a commitment of $30.0 million for active domestic development projects. The OP has adequate funding sources to complete these 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 $750 million equity shelf registrations for funding or refinancing requirements.
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 2003 were $107.8 million, or $2.14 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 58.2%. 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, 2003, 2002, and 2001 was 2.5, 2.4 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.
The OP’s $200.0 million 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 0.95% (2.09% at December 31, 2003) 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. The OP received a debt rating upgrade in July 2003, resulting in a reduction of the LIBOR rate spread to 0.95% from 1.05%. At December 31, 2003, $99.0 million was outstanding under the Senior Credit Facility.
During 2003, the OP completed two acquisition transactions valued at approximately $219.0 million. On June 12, 2003, the OP purchased The Crossings Factory Stores, a 390,000 square-foot outlet center located in Tannersville, Pennsylvania, for $111.3 million, including closing costs and the assumption of a $60.7 million 5.85% mortgage loan due 2013. In conjunction with The Crossings Factory Stores acquisition, the OP completed an offering of 1.2 million shares of common stock at a price of $42.10 per share. Net proceeds after expenses of $49.4 million were used to fund substantially the entire cash portion of the acquisition.
On August 1, 2003, the OP acquired Las Vegas Outlet Center, a 477,000 square-foot outlet center in Las Vegas, Nevada, for $104.0 million including the assumption of a $24.4 million 8.12% mortgage loan due 2012. As part of the transaction, the OP also acquired Lakeland Factory Outlet Mall, a 319,000 square-foot outlet center near Memphis, Tennessee for an additional $3.5 million. The Lakeland property is being marketed for sale. The approximately $84.0 million cash portion of the overall transaction was financed with a $100.0 million one-year term loan facility at an annual interest rate of LIBOR plus 0.80% (1.96% at December 31, 2003) that is due on July 31, 2004 and extendible for six months until January 31, 2005 at the OP’s option. The LIBOR rate spread ranges from 0.70% to 1.35% depending on the OP’s Senior Debt rating. Surplus proceeds from the financing of approximately $16.0 million were used for general corporate purposes.
A summary of the OP’s contractual obligations (at par) as of December 31, 2003, is as follows (in thousands):
Less than 1 to 3 3 to 5 More than
Total 1 Year Years Years 5 Years
-------------- -------------- -------------- ------------ -------------
Unsecured bank debt $ 204,035 $100,000 $104,035 $ - $ -
Unsecured notes 625,000 - 50,000 125,000 450,000
Mortgage debt 375,433 7,873 18,889 167,587 181,084
------------ ------------ ------------ ------------ ------------
Total debt 1,204,468 107,873 172,924 292,587 631,084
Ground and operating leases 24,634 2,299 2,609 2,358 17,368
Real estate commitments 49,670 49,670 - - -
Deferred compensation 17,600 - - 17,600 -
============ ============ ============ ============ ============
Total Obligations $1,296,372 $159,842 $175,533 $312,545 $648,452
============ ============ ============ ============ ============
At December 31, 2003, construction for international and domestic development includes projects totaling 0.9 million square-feet of GLA. Internationally, projects in the pipeline include the 187,000 square-foot first phase of Tosu Premium Outlets near Fukuoka, Japan, scheduled to open in March 2004; and the 230,000 square-foot first phase of Punta Norte Premium Outlets in Mexico City scheduled to open in late 2004. Domestically, projects underway include the single-phase 438,000 square-foot Chicago Premium Outlets, scheduled to open in mid 2004. The Tosu project is a development of Chelsea Japan Co., Ltd., the OP’s 40%-owned Japanese joint venture. The Punta Norte project is a development of the OP’s 50% owned Mexican joint venture. The Chicago project is a 50/50 joint venture with Simon. Other projects in various stages of development are expected to open in 2004 and beyond including the 350,000 square-foot Seattle Premium Outlets, located near Seattle, Washington, scheduled to commence construction in spring 2004 and open in spring 2005. 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, the peso 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 venture, the OP has committed to provide 50% of the development costs, or approximately $46.0 million for Chicago Premium Outlets. As of December 31, 2003, the OP had contributed $26.7 million to the Chicago project.
The OP has 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, 2003, are as follows:
Total Facility | Outstanding
| Due
Yen US $ Equivalent | Yen US $ Equivalent US $ Guarantee Date Interest Rate
--- --------------- | --- --------------- --------------- ---- -------------
4.0 billion (1) $37.3 million | 0.9 billion $ 8.4 million $ 8.4 million 2004 1.31%
3.8 billion (2) 35.4 million | 3.2 billion 30.0 million 12.0 million 2015 2.20%
0.6 billion (2) 5.6 million | 0.5 billion 4.7 million 1.9 million 2012 1.50%
| (1) | Facility entered into by an equity investee of the OP that has a one-year extension option until April 1, 2005. |
| (2) | Facilities entered into by Chelsea Japan, secured by Gotemba and Rinku and 40% severally guaranteed by the OP. |
The OP has a 50/50 joint venture agreement with Sordo Madaleno y Asociados and affiliates to jointly develop, own and operate Premium Outlet centers in Mexico. In July 2003, the first development project broke ground, the 230,000 square-foot first phase of Punta Norte Premium Outlets, located near Mexico City and is scheduled to open in late 2004. The OP is responsible for financing its 50% share of project costs up to approximately $15.0 million. As of December 31, 2003, the OP had contributed $2.5 million.
In January 2004, a subsidiary of the OP entered into a 180.0 million peso revolving facility (USD $16.5 million as of February 17, 2004) to provide funding for Mexican development projects. The peso facility has a three-year term and the drawn funds bear interest at The Interbank Interest Equilibrium Rate (“TIIE”) plus 0. 825% plus the bank’s cost of funds spread limited to 20% of the TIIE and has an annual facility fee of 0.15% on the unused balance. The TIIE rate spread ranges from 0.725% to 1.37% depending on the OP’s Senior Debt rating.
At December 31, 2002, the OP recognized an impairment loss equal to the net book value of its investment in Chelsea Interactive. The OP believes that it will not be able to recover the net book value of its investment in Chelsea Interactive through future cash flows. For 2003, a $2.5 million funding loss was reported. Future funding by the OP will be reported, as a loss in the period funding is required. As of December 31, 2003, the OP had funded $54.9 million and anticipates that Chelsea Interactive will not reach the OP’s funding limit of $60.0 million. On February 17, 2004, the OP announced a joint venture between Chelsea Interactive and a publicly traded third party, GSI Commerce, Inc. (“GSI-Chelsea Solutions”). Under the terms of the agreement, Chelsea Interactive will no longer operate its e-commerce technology, but will retain a minority interest in GSI-Chelsea Solutions. Chelsea Interactive’s largest clients have entered into service agreements with GSI-Chelsea Solutions and will transition e-commerce activities to the GSI-Chelsea platform by the second quarter of 2004.
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, 2003, was $3.6 million. The OP has also provided $17.1 million in limited debt service guarantees under a standby facility for loans arranged by Value Retail to construct outlet centers in Europe. The standby facility for new guarantees, which has a maximum of $22.0 million, expired in November 2001 and outstanding guarantees shall not survive more than five years after project completion.
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 that 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 $181.6 million and $128.2 million for the years ended December 31, 2003, and 2002, respectively. The increase was primarily due to increased operating cash flow generated on the growth of the OP’s GLA offset by the decreased losses from Chelsea Interactive and the payout of the deferred incentive compensation in March 2002. Net cash used in investing activities decreased to $213.6 million in 2003 from $404.2 million in 2002 due to reduced acquisition activity. Net cash provided by financing activities decreased to $27.9 million from $273.9 million for the years ended December 31, 2003, and 2002, respectively. The decrease was primarily the result of reduced borrowings, debt repayments and higher distributions in 2003.
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.
Funds from Operations (continued)
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, or is it indicative of funds available to fund the OP’s cash needs, including its ability to make cash distributions.
Year Ended December 31,
2003 2002 2001
------------ ----------- ------------
Net income available to common unitholders ............................ $115,274 $48,584 $ 56,484
Depreciation and amortization-wholly-owned........................... 73,651 58,275 48,554
Depreciation and amortization-joint ventures......................... 4,069 4,166 5,964
Amortization of deferred financing costs and depreciation
of non-rental real estate assets.................................... (2,274) (2,401) (1,807)
Net gain on sale or write-down of assets............................... (5,625) (11,223) (333)
Chelsea Interactive impairment loss.................................... - 34,370 -
------------ ----------- ------------
FFO.................................................................... $185,095 $131,771 $108,862
============ =========== ============
Average units outstanding (1).......................................... 50,055 44,671 40,036
FFO per unit........................................................... $3.56 $2.85 $2.65
Distributions declared per unit........................................ $2.14 $1.86 $1.56
(1) Assumes 2-for-1 unit split in May 2002 had occurred on January 1, 2001.
Recent Accounting Pronouncements
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 sold or held for sale are presented as discontinued operations in the OP's statement of income.
In June 2002, FASB issued Statement of Financial Accounting Standards No. 146, "Accounting for Costs Associated with Exit or Disposal Activities" ("SFAS 146") which was effective for exit or disposal activities initiated after December 31, 2002. SFAS 146 requires that a liability for a cost associated with an exit or disposal activity be recognized and measured initially at fair value, only when the liability 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.
Recent Accounting Pronouncements (continued)
In November 2002, the FASB issued 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 adoption of FIN 45 did not have a material impact on the OP's financial position or the results of operations.
In January 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. The OP has not created any variable interest entities subsequent to January 31, 2003. In December 2003, FASB issued a revision to Interpretation 46 ("FIN 46-R") to clarify the provisions of FIN 46. The application of FIN 46-R is effective for public companies, other than small business issuers, after March 15, 2004. The OP does not believe that FIN 46-R will have a significant impact on the OP's financial statements.
On April 30, 2003, FASB issued SFAS No.149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities" ("SFAS 149"). SFAS 149 amends and clarifies the accounting guidance on (1) derivative instruments (including certain derivative instruments embedded in other contracts) and (2) hedging activities that fall within the scope of SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities "("SFAS 133"). SFAS 149 also amends certain other existing pronouncements, which will result in more consistent reporting of contracts that are derivatives in the entirety or that contain embedded derivatives that warrant separate accounting. SFAS 149 is effective (1) for contracts entered into or modified after June 30, 2003, with certain exceptions, and (2) for hedging relationships designed after June 30, 2003. The guidance is to be applied prospectively. The adoption of SFAS 149 did not have a material impact on the OP's financial condition, results of operations or cash flows.
In May 2003, FASB issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity" ("SFAS 150"). This statement establishes standards for the classification and measurement of certain financial instruments with characteristics of both liabilities and equity. SFAS 150 is effective for financial instruments entered into or modified after May 31, 2003 and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. It is to be implemented by reporting the cumulative effect of a change in accounting principle for financial instruments created before the issuance date of the statement and still existing at the beginning of the interim period of adoption. The implementation of SFAS 150 did not have a material impact on the OP's financial condition, results of operations or cash flows.
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 these risks 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 one of its mortgage loans. The hedge effectively produces a fixed rate of 7.2625% on the notional amount until January 1, 2006.
At December 31, 2003 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 $2.0 million annually.
Following is a summary of the OP's debt obligations at December 31, 2003 (in thousands):
Expected Maturity Date
----------------------------------------------------------------------------------------------------
2004 2005 2006 2007 2008 Thereafter Total Fair Value
---------- ---------- ------ --------- --------- ------------ --------- ------------
Fixed Rate Debt: $ - $ 49,952 - $124,874 $164,727 $606,408 $945,961 $1,043,232
Average Interest Rate: - 8.38% - 7.25% 6.99% 7.18% 7.22%
Variable Rate Debt: 100,000 104,035 - - - 61,475 (1) 265,510 265,510
Average Interest Rate: 1.96% 2.09% - - - 2.62% 2.16%
| (1) | Subject to an interest rate swap which effectively produces a fixed rate of 7.2625% until January 1, 2006. |
Item 8. Financial Statements and Supplementary Data
The financial statements and financial information of the OP for the years ended December 31, 2003, 2002 and 2001 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.
Item 9A. Controls and Procedures
Our chief executive officer and chief financial officer evaluated the effectiveness of our disclosure controls and procedures (as defined in rule 13a-14c under the Securities Exchange Act of 1934, as amended) as of December 31, 2003 and, based on that evaluation, concluded that, as of the end of the period covered by this report, 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.
During the year ended December 31, 2003, 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 III
Items 10, 11, 12, 13 and 14.
The Operating Partnership does not have any Directors, executive officers or stock authorized, issued or outstanding. If the information were required it would be identical to the information contained in Items 10, 11, 12, 13 and 14 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 2004 Annual Meeting. Such information is incorporated by reference in the Form 10-K.
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 15 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 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 between 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 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. |
| 10.5 | 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. |
PART IV
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K (continued)
| 10.8 | 2002-2006 Long-Term Executive Incentive Plan. Incorporated by reference to Exhibit 10.8 to Form 10-K for the year ended December 31, 2002. |
| 10.9 | Agreement for Purchase and Sale dated May 8, 2003, as amended. Incorporated by reference to Exhibit 2 to current report on Form 8-K reporting on an event which occurred August 1, 2003 (“2003 8-K”). |
| 10.10 | Term Loan Agreement dated July 31, 2003 between CPG Partners, L.P. and Wachovia Bank, National Association. Incorporated by reference to Exhibit 10 to 2003 8-K. |
| 21 | List of Subsidiaries |
| 23.1 | Consent of Ernst & Young LLP. |
| 31.1 | Section 302 Chief Executive Officer Certificate |
| 31.2 | Section 302 Chief Financial Officer Certificate |