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, 2004
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.) |
105 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:
None
PART I
Item 1. Business
The OP
CPG Partners, L.P., a Delaware limited partnership, (the "Operating Partnership" or "OP") is 84.4% owned and managed by its sole general partner, Chelsea Property Group, Inc. (the "Company"). In October 2004, the Company merged with Simon Property Group, Inc. and became a private real estate investment trust ("REIT", see merger discussion in Recent Developments). The OP specializes in owning, developing, leasing, marketing and managing upscale and fashion-oriented manufacturers' outlet centers. As of December 31, 2004, the OP wholly or partially-owned 60 centers in 30 states, Japan and Mexico containing approximately 17.1 million square feet of gross leasable area ("GLA"); the OP's portfolio comprised 41 Domestic and International Outlet centers containing 14.5 million square feet of GLA (the "Outlets") and 19 other centers containing approximately 2.6 million square feet of GLA ("Other Retail") (collectively the "Properties"). The OP's Outlets generated approximately 97.0% and 96.4% of the OP's real estate net operating income for the years ended December 31, 2004, and 2003, respectively. The Outlets generally are located near metropolitan areas including New York City, Los Angeles, Chicago, Boston, Washington, D.C., San Francisco, Sacramento, Atlanta, Dallas, Mexico City, Mexico and Tokyo, Osaka and Fukuoka, Japan. Some Outlets are also located within 20 miles of major tourist destinations including Palm Springs, Napa Valley, Orlando, Las Vegas and Honolulu. During 2004, the OP's Domestic Outlets generated weighted average tenant sales of $402 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 105 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, by contacting the Company via the website. Simon Property Group, Inc. ("Simon"), the OP's parent company is located at 115 West Washington Street, Indianapolis, Indiana 46204 (telephone 317-636-1600). Simon's website can be accessed at www.simon.com.
Recent Developments
Mergers
On June 21, 2004, Simon Property Group, Inc. ("Simon") and the Company announced a merger agreement (the "Merger Agreement") whereby Simon would acquire all of the outstanding common stock of the Company and operating partnership units of the OP in a transaction valued at approximately $5.2 billion, including the assumption of debt. The merger was approved by the Company's shareholders and closed on October 14, 2004 ("the Merger").
The Company's common shareholders received consideration of $36.00 per share for each share of common stock in cash, a fractional share of 0.2936 of Simon common stock, and a fractional share of 0.3000 of Simon 6% Series I convertible perpetual preferred stock. The holders of OP limited partnership common units exchanged their units for common and convertible preferred units of Simon Property Group, L.P.
CPG Partners, L.P., became a wholly owned subsidiary of Simon Property Group, L.P as of October 14, 2004. The OP is managed as an operating division of Simon and continues to operate through its existing senior management headquartered in Roseland, NJ. The OP incurred costs of approximately $23 million in conjunction with the merger.
Acquisitions
In September 2004, the OP completed an all-cash acquisition of Carlsbad Company Stores, a 288,000 square-foot shopping center located in Carlsbad, California for $102.9 million. The OP exercised its option, which was granted prior to development of the center, to acquire the shopping center from a privately held company. The OP entered into a $100 million term loan to fund the acquisition. The term loan was repaid on October 14, 2004 in conjunction with the OP's merger with Simon.
Dispositions
The OP sold two non-core centers in April and May 2004: Factory Stores of America in Lake George, New York and in Iowa, Louisiana. Net proceeds from the sales of the two centers were $1.6 million and the combined net book value was $2.5 million. Accordingly, the OP recognized a $0.9 million impairment loss in the first quarter 2004, which was included in other expense in the accompanying financial statements.
The OP sold a 64,000 square-foot non-core center, Factory Stores of America in Hempstead, Texas in September 2004, generating net proceeds of approximately $0.5 million, which approximated the net book value.
The OP sold Santa Fe Premium Outlets located in Santa Fe, New Mexico in December 2004. Net proceeds from the sale of the center were approximately $7.7 million and the net book value was $10.3 million. As a result, the OP recognized a loss on sale of $2.6 million in the fourth quarter 2004, which was presented as a loss on sale of discontinued operations in the accompanying financial statements.
Chelsea Interactive
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 would no longer operate its e-commerce technology, but would retain a minority interest in GSI-Chelsea Solutions. Chelsea Interactive's largest clients entered into service agreements with GSI-Chelsea Solutions and transitioned e-commerce activities to the GSI-Chelsea platform in May 2004. The OP recognized a gain of $1.0 million in 2004 from the wind-down of operations of Chelsea Interactive.
The following table sets forth a summary of the GLA changes from developments, expansions, acquisitions and dispositions from January 1 through December 31, 2004:
GLA Number
Property Owned Date (1) (Sq. Ft.) of Stores Tenants (2)
- ---------------------------------------- ---------- --------- ------------- ---------- ---------------------------------
As of January 1, 2004.................... 16,127,000 3,953
New centers developed:
Chicago Premium Outlets.................. 50% 05/04 438,000 121 Ann Taylor, Banana Republic,
Aurora, IL Calvin Klein, Coach, Diesel,
Dooney & Bourke, Elie Tahari,
Gap, Giorgio Armani, Kate
Spade, Nike, Polo Ralph Lauren
Premium Outlets Punta Norte.............. 50% 12/04 232,000 115 Adidas, Levi's, Nautica, Nike,
Mexico City, Mexico Nine West, Puma, Reebok,
Rockport, Roberto Cavalli,
Samsonite, Sony, Zegna
Tosu Premium Outlets .................... 40% 03/04 187,000 103 BCBG, Bose, Coach, Cole Haan,
Fukuoka, Japan Lego, Nike, Petit Bateau, Max
Azria, Theory
------------- ----------
Total Development ....................... 857,000 339
Expansions:
Sano Premium Outlets.................... 40% 07/04 51,000 13 Bally, Brooks Brothers, Coach,
Sano, Japan Dunhill, Escada, Furla,
Harrod's, Kanzo, Nautica, New
Yorker, Nine West, Timberland
Rinku Premium Outlets.................... 40% 12/04 71,000 33 Armani, Bally, Coach, Dolce &
Izumisano, Japan Gabbana, Etro, Gap, Hugo Boss,
Lanvin, Nautica, Nike,
Salvatore Ferragamo, Versace
The Crossings Premium Outlets............ 100% 11/04 22,000 3 Ann Taylor, Banana Republic,
Tannersville, PA Coach, Liz Claiborne, Polo
Ralph Lauren, Reebok, Tommy
Hilfiger
Other (net) ............................. 1,000 8
------------- ----------
Total expansions......................... 145,000 57
Acquisitions:
Carlsbad Premium Outlets................. 100% 9/04 288,000 91 Banana Republic, Calvin Klein,
Carlsbad, CA Cole Haan, Gap, Guess, Polo
Ralph Lauren, Reebok, Tommy
Hilfiger
------------- ----------
Total acquisitions:...................... 288,000 91
Dispositions:
Santa Fe Premium Outlets................. 100% 12/04 (125,000) (38)
Santa Fe, NM
Factory Stores of America................ 100% 05/04 (109,000) (15)
Iowa, LA
Factory Stores of America................ 100% 09/04 (64,000) (4)
Hempstead, TX
Factory Stores of America................ 100% 04/04 (44,000) (11)
Lake George, NY
------------- ----------
Total dispositions....................... (342,000) (68)
Net additions for 2004................... 948,000 419
------------- ----------
Totals as of December 31, 2004........... 17,075,000 4,372
============= ==========
| 1) | Development, expansion, acquisition or disposition date. |
| 2) | Consists of tenants who lease at least 5,000 square feet of GLA or have estimated sales of more than $300 per square-foot. Most tenants pay a fixed base rent based on square feet leased and pay percentage rent based on sales. |
Recent Developments (continued)
Some of the most recent newly developed, acquired or expanded centers are discussed below:
Chicago Premium Outlets, Aurora, Illinois- Chicago Premium Outlets, a new 438,000 square-foot, single-phase center containing 121 stores opened in May 2004. The center is located in Aurora, the second largest city in Illinois, approximately 35 miles west of Chicago, off Interstate 88 at North Farnsworth Avenue. The population within a 15-mile, 30-mile and 60-mile radius is 1.1 million, 4.7 million and 9.8 million, respectively. Average household income within 30-mile radius is approximately $82,000.
Premium Outlets Punta Norte, Mexico City, Mexico- Premium Outlets Punta Norte, a 232,000 square-foot center opened its first phase containing 115 stores in December 2004. The new center is located in Mexico City, the cultural heart of Mexico, attracting a significant number of international and domestic visitors. The target population within a 20-mile radius is approximately 5.5 million. Average household income within the 20-mile radius is approximately $20,000.
Tosu Premium Outlets, Fukuoka, Japan- Tosu Premium Outlets, a 187,000 square-foot center containing 103 stores opened in March 2004. The new center is near the Tenjin area of Fukuoka City, as well as other metropolitan areas of Oita, Kumamoto and Nagasaki, Japan. The population within a 30-mile and 50-mile radius is approximately 4.5 million and 8.3 million, respectively.
Sano Premium Outlets, Sano, Japan- Sano Premium Outlets, a 229,000 square-foot center containing 110 stores, opened in March 2003 and expanded by 51,000 square feet in July 2004. 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.
Rinku Premium Outlets, Izumisano, Japan - Rinku Premium Outlets, a 321,000 square-foot center containing 153 stores, opened its initial phase in November 2000 and was expanded in March 2002 and December 2004. The Phase III expansion that opened in December 2004 consisted of 71,000 square feet of GLA and 33 stores. The center is located 45 miles south of Osaka near Kansai International Airport. The population within a 35-mile and 65-mile radius are approximately 12.0 million and 19.1 million, respectively.
The Crossings Premium Outlets, Tannersville, Pennsylvania- The Crossings Premium Outlets, a 390,000 square-foot center containing 111 stores was acquired in June 2003 and expanded by 22,000 square feet in November 2004, resulting in a total amount of GLA of 411,000 square feet. The center is located in Tannersville approximately 13 miles west of 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 $63,000.
Carlsbad Premium Outlets, Carlsbad, California- Carlsbad Premium Outlets, a 288,000 square-foot center containing 91 stores was acquired in September 2004. The center is located in the north coastal region of San Diego County, off Interstate 5, the primary north-south transportation passageway between Los Angeles and San Diego. This Southern California region is near popular tourist destinations, including San Diego Zoo, Disneyland, Universal Studios, SeaWorld Adventure Park and Knott's Theme Park. The population within a 15-mile, 30-mile and 60-mile radius is 0.7 million, 2.1 million and 6.5 million, respectively. Average household income within a 30-mile radius is approximately $77,000.
Strategic Alliances and Joint Ventures
In June 1999, the OP entered into an agreement with Mitsubishi Estate Co., Ltd. and Sojitz Corporation (formerly known as 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 four operating centers: Gotemba Premium Outlets, Rinku Premium Outlets, Sano Premium Outlets and Tosu Premium Outlets. Chelsea Japan opened its fifth center, Toki Premium Outlets, located near Nagoya, Japan, in March 2005.
During 2002, the OP and Simon agreed to develop two Premium Outlet centers under separate 50/50 joint ventures, the 435,000 square-foot Las Vegas Premium Outlets, which opened in August 2003 and the 438,000 square-foot Chicago Premium Outlets which opened in May 2004 ("Simon-Ventures").
Strategic Alliances and Joint Ventures (continued)
In May 2002, the OP entered into a 50/50 joint venture agreement with Sordo Madaleno y Asociados and affiliates to jointly develop Premium Outlet centers in Mexico. The 232,000 square-foot first phase of Premium Outlets Punta Norte located near Mexico City, opened in December 2004. The OP contributed its 50% share or $15.9 million of project costs through December 31, 2004.
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 Company as a REIT. Other risks of joint venture investments include impasse on decisions, such as a sale, because neither its co-venturer nor the 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
The Company (which owned 84.4% of the Operating Partnership as of December 31, 2004) 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 Banana Republic, Brooks Brothers, Chanel, Coach, Cole Haan, Giorgio Armani, 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 Outlets generated weighted average reported tenant sales during 2004 of $402 per square-foot. 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 formation, 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 continues 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 2004, Chelsea Japan opened the 187,000 square-foot first phase of Tosu Premium Outlets, located approximately 20 miles south of Fukuoka, Japan and expanded Rinku Premium Outlets, by 71,000 square-feet and Sano Premium Outlets by 51,000 square-feet. Gotemba Premium Outlets at 390,000 square feet is the OP's largest and most productive outlet center in Japan. The OP also opened its first center in Mexico in December 2004; a 232,000 square-foot first phase of Premium Outlets Punta Norte, located north of Mexico City, developed through a joint venture with Sordo Madaleno y Asociadios. Additional projects underway in Japan included the March 2005 opening of Toki Premium Outlets, a 178,000 square-foot, first phase center located near Nagoya, Japan. Toki Premium Outlets is Chelsea Japan's fifth premium development since its founding in 2000: after development of Toki Premium Outlets, Chelsea Japan has more than 1.3 million square-feet of GLA in its portfolio. The OP believes that there are significant opportunities to develop additional manufacturers' outlet centers internationally. 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. 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.
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, direct mailings and the internet. 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 661 full-time and 243 part-time employees. Of these employees, 515 full-time and 238 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. As a result of the Merger, the OP has access to capital under Simon's $2.0 billion credit facility. 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 Outlets 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.
Operating Strategy (continued)
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, 2004, the OP had 661 full-time and 243 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, 2004, the OP had 60 centers in 30 states, Japan and Mexico containing approximately 17.1 million square feet of gross leasable area. Of the 60 centers, 55 are owned 100% (50 in fee and 5 under long-term leases). The OP operates all 55 of its domestic centers; Chelsea Japan manages the centers in Japan and the OP's Mexican affiliate manages the center in Mexico.
The OP's domestic and international outlet centers consist of 41 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, Mexico City, Mexico and Tokyo, Osaka and Fukuoka, Japan, or within 20 miles of major tourist destinations including Palm Springs, Napa Valley, Orlando, Las Vegas and Honolulu. The Domestic Outlets were 99% leased as of December 31, 2004, and contained 3,338 stores with 674 different tenants. The International Outlets in Japan were 100% leased as of December 31, 2004 and contained 524 stores with approximately 270 different tenants. The Mexico center, which contains 115 stores, opened in December 2004 and was 33% leased as of year-end. The OP's Other Retail centers were 91% leased as of December 31, 2004, and contained 395 stores with 147 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 6% of the OP's base rents; and no tenant occupies more than 7% of the OP's total domestic GLA at December 31, 2004. 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, 2004, 2003 and 2002, respectively, 13%, 13% and 16% 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, 2004, 2003 and 2002, respectively, 23%, 23% and 25% of the OP's total revenues were derived from the OP's centers in California.
Woodbury Common Premium Outlets contributed more than 10% of the OP's consolidated gross revenues during 2004. No tenant leases more than 5% of the GLA of Woodbury Common. The following chart shows certain information for Woodbury Common.
Fiscal Occupancy Avg. Annual
Year Rate Rent Per Sq Ft
----------- ---------------- -----------------
2000 100.0% $38.55
2001 98.8% 38.63
2002 100.0% 41.23
2003 100.0% 44.62
2004 100.0% 48.78
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, 2004, the center's 214 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 $99,000.
Item 2. Properties (continued)
The following table shows lease expiration data as of December 31, 2004 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
--------------- ---------- ------------------- ------------ ----------- --------------------
2005 35,985 $42.06 $1,514,000 12 4.2%
2006 27,656 43.59 1,206,000 11 3.4%
2007 55,788 38.69 2,158,000 13 6.0%
2008 215,123 36.74 7,903,000 47 22.0%
2009 54,473 47.59 2,592,000 19 7.2%
2010 101,475 35.50 3,602,000 22 10.0%
2011 86,531 43.45 3,760,000 17 10.5%
2012 78,138 50.23 3,925,000 22 10.9%
2013 96,646 37.43 3,617,000 18 10.1%
2014 52,765 62.77 3,312,000 19 9.2%
Thereafter 39,686 58.72 2,330,000 13 6.5%
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, 2004, the federal income tax basis in this center was approximately $112.0 million.
The real estate tax on Woodbury Common Premium Outlets was $4.6 million in 2004 and it is estimated to be $5.2 million in 2005.
Set forth in the table below is certain property information as of December 31, 2004
Opened
or GLA No. of
Name/Location Acquired (Sq. Ft.) Stores Selected Tenants
- ------------------------------------------------- --------- --------- ------ -------------------------------------------------
Outlets:
Woodbury Common Premium Outlets........... 1985 844,000 214 Banana Republic, Brooks Brothers, Coach, Giorgio
Central Valley, NY (New York City area) Armani, Gucci, Neiman Marcus Last Call, Polo
Ralph Lauren, Salvatore Ferragamo, Zegna
Wrentham Village Premium Outlets.......... 1997 601,000 159 Barneys New York, Burberry, Hugo Boss, Kenneth
Wrentham, MA (Boston/Providence area) Cole, Nike, Polo Ralph Lauren, Sony, Versace
Gilroy Premium Outlets.................... 1990 577,000 144 Brooks Brothers, Calvin Klein, Coach, J. Crew,
Gilroy, CA (San Jose area) Hugo Boss, Nike, Polo Ralph Lauren, Sony,
Timberland, Tommy Hilfiger
North Georgia Premium Outlets............. 1996 540,000 132 Ann Taylor, Coach, Escada, J. Crew, Liz
Dawsonville, GA (Atlanta metro area) Claiborne, Polo Ralph Lauren, Restoration
Hardware, Tommy Hilfiger, Williams-Sonoma
Desert Hills Premium Outlets.............. 1990 499,000 133 Burberry, Christian Dior, Coach, Giorgio Armani,
Cabazon, CA (Palm Springs-Los Angeles) Gucci, MaxMara, Polo Ralph Lauren, Salvatore
Ferragamo, Versace, Yves Saint Laurent, Zegna
Las Vegas Outlet Center................... 2003 477,000 130 Calvin Klein, Liz Claiborne, Nike, Reebok, Tommy
Las Vegas, NV Hilfiger, VF Outlet, Waterford Wedgwood
Lighthouse Place Premium Outlets.......... 1987 476,000 113 Burberry, Coach, Crate & Barrel, Gap, Liz
Michigan City, IN (Chicago area) Claiborne, Old Navy, Polo Ralph Lauren, Tommy
Hilfiger
Leesburg Corner Premium Outlets........... 1998 463,000 104 Ann Taylor, Barneys New York, Kenneth Cole, Liz
Leesburg, VA (Washington DC area) Claiborne, Nike, Polo Ralph Lauren, Restoration
Hardware, Williams-Sonoma
Camarillo Premium Outlets................. 1995 454,000 122 Banana Republic, Barneys New York, Coach, Polo
Camarillo, CA (Los Angeles metro area) Ralph Lauren, Sony, St. John, Versace
Vacaville Premium Outlets................. 2001 448,000 104 Ann Taylor, Burberry, Coach, Gap, Liz Claiborne,
Vacaville, CA Nike, Polo Ralph Lauren, Restoration Hardware
Carolina Premium Outlets (2).............. 2001 439,000 81 Brooks Brothers, Gap, Liz Claiborne, Nike, Polo
Smithfield, NC (Raleigh area) Ralph Lauren, Timberland, Tommy Hilfiger
Chicago Premium Outlets................... 2004 438,000 121 Ann Taylor, Banana Republic, Calvin Klein, Coach,
Aurora, IL (Chicago area) Diesel, Dooney & Bourke, Elie Tahari, Gap,
Giorgio Armani, Kate Spade, Nike, Polo Ralph
Lauren
Las Vegas Premium Outlets................. 2003 435,000 123 A|X Armani Exchange, Calvin Klein, Coach, Dolce
Las Vegas, NV & Gabbana, Elie Tahari, Lacoste, Polo Ralph
Lauren, Theory
Albertville Premium Outlets............... 2002 430,000 104 Banana Republic, Calvin Klein, Gap, Kenneth
Albertville, MN (Minneapolis area) Cole, Old Navy, Polo Ralph Lauren, Tommy Hilfiger
Orlando Premium Outlets................... 2000 428,000 115 Barneys New York, Coach, Giorgio Armani, Hugo
Orlando, FL (between Sea World & Epcot) Boss, MaxMara, Nike, Polo Ralph Lauren, Timberland
The Crossings Premium Outlets............. 2003 411,000 111 Ann Taylor, Banana Republic, Coach, Liz
Tannersville, PA (Poconos Region) Claiborne, Polo Ralph Lauren, Reebok, Tommy
Hilfiger
Waterloo Premium Outlets.................. 1995 392,000 99 Ann Taylor, Brooks Brothers, Calvin Klein,
Waterloo, NY (Finger Lakes Region) Coach, Gap, J. Crew, Jones New York, Liz
Claiborne, Polo Ralph Lauren, Tommy Hilfiger
Osage Beach Premium Outlets.............. 2002 391,000 104 Brooks Brothers, Calvin Klein, Coach, Gap, Liz
Osage Beach, MO Claiborne, Polo Ralph Lauren, Tommy Hilfiger
Gotemba Premium Outlets(2)................ 2000 (1) 390,000 158 Armani, Bally, Bulgari, Coach, Diesel, Gap,
Gotemba City, Japan (Tokyo metro area) Gucci, Kate Spade, L.L. Bean, Nike, Tod's, Yves
Saint Laurent
Allen Premium Outlets.................... 2000 348,000 84 Brooks Brothers, Calvin Klein, Cole Haan, Crate &
Allen, TX (Dallas metro area) Barrel, Kenneth Cole, Liz Claiborne, Tommy
Hilfiger
St. Augustine Premium Outlets............ 2002 329,000 93 Banana Republic, Brooks Brothers, Coach, Gap,
St. Augustine, FL Movado, Nike, Polo Ralph Lauren, Reebok, Tommy
Bahama, Tommy Hilfiger
Rinku Premium Outlets(2)................. 2000 (1) 321,000 153 Armani, Bally, Coach, Dolce & Gabbana, Etro,
Izumisano, Japan (Osaka metro area) Gap, Hugo Boss, Lanvin, Nautica, Nike, Salvatore
Ferragamo, Versace
Edinburgh Premium Outlets.................... 2002 305,000 73 Banana Republic, Coach, Gap, Nautica, Nike,
Edinburgh, IN (Indianapolis metro area) OshKosh, Polo Ralph Lauren, Tommy Hilfiger
Aurora Farms Premium Outlets.............. 1987 300,000 66 Ann Taylor, Brooks Brothers, Calvin Klein, Coach,
Aurora, OH (Cleveland metro area) Gap, Liz Claiborne, Off 5th-Saks Fifth Avenue,
Polo Ralph Lauren, Tommy Hilfiger
Factory Merchants Branson(2)................. 2002 300,000 86 Carter's, Easy Spirit, Izod, Nautica,
Branson, MO Pfaltzgraff, Van Heusen
Folsom Premium Outlets.................... 1990 299,000 81 Bass, Brooks Brothers, Gap, Guess, Kenneth Cole,
Folsom, CA (Sacramento metro area) Liz Claiborne, Nike, Off 5th-Saks Fifth Avenue,
Tommy Hilfiger
Carlsbad Premium Outlets.................. 2004 288,000 91 Banana Republic, Calvin Klein, Cole Haan, Gap,
Carlsbad, CA (San Diego metro area) Guess, Polo Ralph Lauren, Reebok, Tommy Hilfiger
Jackson Outlet Village....................... 2002 286,000 76 Brooks Brothers, Calvin Klein, Gap, Nike, Polo
Jackson, NJ Ralph Lauren, Reebok, Timberland, Tommy Hilfiger
Johnson Creek Outlet Center................. 2002 277,000 62 Adidas, Calvin Klein, Gap, Lands' End, Nike, Old
Johnson Creek, WI Navy, Polo Ralph Lauren, Tommy Hilfiger
Clinton Crossing Premium Outlets............. 1996 272,000 66 Barneys New York, Calvin Klein, Coach, Dooney &
Clinton, CT (I-95/NY-New England Corridor) Bourke, Gap, Kenneth Cole, Liz Claiborne, Nike,
Polo Ralph Lauren
Premium Outlets Punta Norte................. 2004(3) 232,000 115 Adidas, Levi's, Nautica, Nike, Nine West, Puma,
Mexico City, Mexico Reebok, Rockport, Roberto Cavalli Samsonite,
Sony, Zegna
Sano Premium Outlets(2)...................... 2003(1) 229,000 110 Bally, Brooks Brothers, Coach, Dunhill, Escada,
Sano,Japan (Tokyo metro area) Furla, Harrod's, Kanzo, Nautica, New Yorker, Nine
West, Timberland
Factory Stores at North Bend .............. 2001 223,000 50 Adidas, Bass, Carter's, Eddie Bauer, Gap, Nike,
North Bend, WA OshKosh, Samsonite, VF Outlet
Waikele Premium Outlets....................... 1997 210,000 51 Adidas, A/X Armani Exchange, Banana Republic,
Waipahu, HI (Honolulu area) Barneys New York, Coach, Guess, MaxMara, Polo
Ralph Lauren
Petaluma Village Premium Outlets............. 1994 196,000 51 Brooks Brothers, Coach, Gap, Guess, Jones New
Petaluma, CA (San Francisco metro area) York, Liz Claiborne, Off 5th-Saks Fifth Avenue
Tosu Premium Outlets (2)..................... 2004(1) 187,000 103 BCBG, Bose, Coach, Cole Haan, Lego, Nike, Petit
Fukuoka, Japan (Kyushu area) Bateau, Max Azria, Theory
Napa Premium Outlets......................... 1994 179,000 51 Banana Republic, Barneys New York, Coach, J.
Napa, CA (Napa Valley) Crew, Jones New York, Kenneth Cole, Nautica,
Tommy Hilfiger, TSE
Liberty Village Premium Outlets................. 1981 174,000 56 Calvin Klein, Ellen Tracy, Jones New York, L.L.
Flemington, NJ (New York-Phila. metro area) Bean, Polo Ralph Lauren, Tommy Hilfiger,
Timberland, Waterford Wedgwood
Columbia Gorge Premium Outlets................ 1991 164,000 45 Adidas, Bass, Carter's, Gap, Liz Claiborne,
Troutdale, OR (Portland metro area) Samsonite, Van Heusen
Kittery Premium Outlets (2).................. 1984 151,000 32 Banana Republic, Calvin Klein, Coach, J. Crew,
Kittery, ME (Boston area) Polo Ralph Lauren, Reebok, Tumi
Patriot Plaza................................ 1986 77,000 11 Plow & Hearth, WestPoint Stevens
Williamsburg, VA (Norfolk-Richmond area)
------------ ---------
Domestic & International Outlets ............ 14,480,000 3,977
------------ ----------
Other Retail Properties:
Lakeland Factory Outlet Mall................. 2003 319,000 45 L'eggs Hanes Bali Playtex, VF Outlet,
Lakeland, TN (Memphis Area) Van Heusen
The Shoppes at Branson Meadows............... 2001 287,000 43 Dress Barn Woman, Easy Spirit, VF Outlet
Branson, MO
Factory Stores of America.................. 2001 184,000 31 Dress Barn, Samsonite, VF Outlet
Draper, UT
Factory Stores of America.................. 2001 177,000 27 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, Reebok,
Crossville, TN VF Outlet, Van Heusen
MacGregor Village.......................... 2001 145,000 45 Spa Health Club, Tuesday Morning
Cary, NC
Factory Stores of America -Tri-Cities...... 2001 133,000 14 Carolina Pottery, L'eggs Hanes Bali
Blountville, TN Playtex, Tri-Cities Cinemas
Factory Stores of America.................. 2001 129,000 12 Banister Shoes, VF Outlet
Tupelo, MS
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 Woman, Factory Brand Shoes,
Story City, IA VF Outlet, Van Heusen
Factory Stores of America (2).............. 2001 112,000 18 Banister Shoes, VF Outlet
Boaz, AL
Factory Stores of America.................. 2001 91,000 10 VF Outlet
West Frankfort, IL
Factory Stores of America.................. 2001 90,000 11 Bass, VF Outlet, Van Heusen
Arcadia, LA
Factory Stores of America.................. 2001 90,000 10 Dress Barn, VF Outlet
Nebraska City, NE
Factory Stores of America.................. 2001 86,000 13 Dress Barn, VF Outlet, Van Heusen
Lebanon, MO
Factory Stores of America.................. 2001 84,000 13 Factory Brand Shoes, VF Outlet, Van
Graceville, FL Heusen
Factory Stores of America.................. 2001 64,000 4 Banister Shoes, VF Outlet
Hanson, KY
Factory Stores of America.................. 2001 60,000 4 VF Outlet
Union City, TN
------------ ------
Total Other Retail Properties.............. 2,595,000 395
----------- ------
Grand Total................................ 17,075,000 4,372
=========== =======
Notes to Property Data:
| 1) | Chelsea Japan properties are 40%-owned through a joint venture with Mitsubishi Estate Co., Ltd. (30% ownership) and Sojitz Corporation (formerly known as 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; Factory Merchants Branson, November 2021; Sano Premium Outlets, June 2022; Tosu Premium Outlets, August 2023; Carolina Premium Outlets (87,000 sq ft), January 2029; Dare Centre, September 2058. |
| 3) | Property developed in Mexico City, Mexico is 50% owned through a joint venture agreement with Sordo Madaleno y Asociados and affiliates. |
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.
On June 24, 2004, a lawsuit was filed in the Court of Chancery in Essex County, New Jersey seeking to enjoin the Merger and naming the Company and each of the members of its board of directors as defendants.
The complaint alleged that the defendants violated fiduciary duties of care, loyalty, candor and independence owed to the public stockholders of the Company. The plaintiff sought, among other things, class action certification, a declaration that the Merger Agreement is unenforceable and a permanent injunction against the defendants from proceeding with or closing the Merger.
A settlement hearing was held on October 5, 2004 at which the court approved a settlement of the case involving certain additional disclosure and the payment by the Company of costs of approximately $0.9 million to the plaintiff's attorneys.
Item 4. Submission of Matters to a Vote of Security Holders
None
Part II
Item 5. Market for the Registrant's Common Stock, Related Security Matters and Issuer Purchases of Equity Securities.
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: 2004 2003 2002 2001 2000
-------------- -------------- -------------- -------------- ------------
Rental revenue.................................... $305,049 $ 275,856 $200,872 $141,342 $122,079
Total revenues.................................... 409,819 370,586 276,744 200,940 174,285
Total expenses (including interest)............... 308,764 261,536 192,906 145,176 119,596
Income from unconsolidated investments............ 23,939 11,006 9,802 15,025 6,723
Loss from and impairment of Chelsea
Interactive - - (47,756) (5,337) (2,364)
Gain on sale or write-down of assets.............. - - 10,911 617 -
Income from continuing operations................. 124,994 120,056 56,795 66,069 59,048
(Loss) income from discontinued operations........ (76) (1,223) 1,059 451 1,338
(Loss) gain on sale of discontinued operations.... (2,614) 5,625 - - -
Net income........................................ 122,304 124,458 57,854 66,520 60,386
Preferred unit requirement........................ (8,780) (9,184) (9,270) (10,036) (10,036)
Net income available to common unitholders $113,524 $ 115,274 $ 48,584 $ 56,484 $50,350
Net income per common unit (1):
General Partner................................. $2.20 $2.30 $1.09 $1.41 $1.30
Limited Partners................................ $2.20 $2.30 $1.07 $1.39 $1.30
Ownership Interest: (1)
General Partner................................... 44,065 42,613 38,245 33,678 31,880
Limited Partners.................................. 7,438 7,442 6,426 6,358 6,712
-------------- -------------- -------------- -------------- ------------
Weighted average units outstanding................ 51,503 50,055 44,671 40,036 38,592
Balance Sheet Data:
Rental properties before accumulated depreciation $2,274,119 $2,072,783 $ 1,837,174 $1,127,906 $908,344
Total assets...................................... 2,192,598 1,970,414 1,703,030 1,099,308 901,314
Unsecured and mortgage debt....................... 1,123,038 1,211,472 1,030,820 548,538 450,353
Notes payable - related party..................... 300,260 - - - -
Total liabilities ............................... 1,520,391 1,304,880 1,107,756 624,246 528,752
Partners' capital................................. 672,207 665,534 595,274 475,062 372,562
Distributions declared per common unit (1) ....... $2.33 $2.14 $ 1.86 $1.56 $1.50
Other Data:
Cash flows from:
Operating activities........................... $ 182,166 $ 181,634 $ 128,222 $ 121,723 $106,658
Investing activities........................... (237,020) (213,603) (404,178) (112,551) (121,479)
Financing activities........................... 69,740 27,894 273,903 (2,604) 23,995
GLA at end of period (2).......................... 17,075 16,127 14,386 12,574 8,159
Weighted average GLA (3).......................... 16,555 15,249 12,758 9,349 5,703
Centers in operation at end of the period......... 60 60 58 57 27
New centers developed............................. 3 2 - - 4
Centers expanded ................................. 3 2 4 1 3
Centers sold and lease terminated................. 4 3 5 1 1
Centers held for sale............................. 1 1 - - -
Centers acquired ................................. 1 2 7 31 4
Notes to Selected Financial Data:
| 1) | Assumes that the 2-for-1 unit split on May 28, 2002 had occurred on January 1, 2000. |
| 2) | At December 31, 2004, includes seven joint venture centers, ownership share ranging between 40% and 50%, containing a total of 2.2 million square feet of GLA. At year-end 2003, includes four joint venture centers, of which three were 40% owned containing 820,000 square feet of GLA and one was 50% owned center containing 435,000 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%. |
| 3) | GLA weighted by months in operation. |
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
The following discussion should be read in connection with the Financial Statements 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 its critical accounting policies affect its more significant judgments and estimates used in the preparation of its consolidated financial statements.
Bad Debt
The OP maintains an allowance for doubtful accounts for estimated losses resulting from the inability of its tenants to make required rent payments. If the financial condition of the OP's tenants were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required. The OP's allowance for doubtful accounts included in tenant accounts receivable totaled $2.2 million and $1.6 million at December 31, 2004 and 2003, 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. In 2004, the OP sold and recorded an impairment loss totaling $0.9 million for two non-core properties, Lake George, New York and Iowa, Louisiana. No impairment losses were recognized on real estate properties for the years ended December 31, 2003 and 2002. The OP recorded a $3.7 million impairment loss on its investment in Mexico in 2004 and a $34.4 million impairment loss on its investment in Chelsea Interactive in 2002.
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).
General Overview
Between January 1, 2002 and December 31, 2004, the OP added 5.7 million square feet of GLA to its portfolio by acquiring 11 wholly-owned centers, developing five and expanding eight centers. During the same period the OP also sold 12 centers, which reduced GLA by 1.2 million square feet. During the three-year period ended December 31, 2004, rental revenues grew to $305.0 million from $141.3 million, increasing $163.7 million, or 115.9%.
Base rent increased 118.3%, or $146.4 million, during the same three-year period, primarily from the acquisitions of domestic properties that contributed aggregate incremental revenue of $80.4 million and the buyout of partners' interests that added $42.9 million. New development and expansions also added revenue of $22.6 million during the three-year period.
Income from unconsolidated investments aggregated $44.7 million over the period, including a $10.9 million gain on sale of minority interests in 2002. During the three-year period ended December 31, 2004 income increased by $8.9 million to $23.9 million in 2004 from $15.0 million in 2001 primarily as a result of opening five new centers, and expanding three 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, 2004, the OP's portfolio consisted of 60 wholly or partially owned properties containing 17.1 million square feet of GLA. The OP's Outlets include 41 centers containing 14.5 million square feet of GLA and Other Retail includes 19 centers containing 2.6 million square feet of GLA.
Details of the 4.5 million square feet of net GLA added since January 1, 2002 are as follows:
Since
Jan. 1,
2002 2004 2003 2002
----------- -------- ---------- ----------
Changes in GLA (sf in 000's):
New centers developed:
Chicago Premium Outlets (50% owned) ............... 438 438 - -
Las Vegas Premium Outlets (50% owned) ............. 435 - 435 -
Premium Outlets Punta Norte (50% owned) ........... 232 232 - -
Tosu Premium Outlets (40% owned) ................. 187 187 - -
Sano Premium Outlets (40% owned)................... 180 - 180 -
----------- -------- ---------- ----------
Total new centers. ................................ 1,472 857 615 -
Centers expanded:
Gotemba Premium Outlets (40% owned) ............... 170 - 170 -
Albertville Premium Outlets........................ 125 - 125 -
Rinku Premium Outlets (40% owned) ................. 141 71 - 70
Sano Premium Outlets (40% owned)................... 51 51 - -
Desert Hills Premium Outlets....................... 23 - - 23
Liberty Village Premium Outlets.................... 23 - - 23
Napa Premium Outlets............................... 9 - - 9
The Crossings Premium Outlets...................... 22 22 - -
Other (net) ....................................... (46) 1 (30) (17)
----------- -------- ---------- ----------
Total centers expanded. ............................. 518 145 265 108
Centers acquired:
Las Vegas Outlet Center............................ 477 - 477 -
The Crossings Premium Outlets...................... 390 - 390 -
Lakeland Factory Outlet Mall (1) .................. 319 - 319 -
Osage Beach Premium Outlets........................ 391 - - 391
St. Augustine Premium Outlets...................... 329 - - 329
Edinburgh Premium Outlets.......................... 305 - - 305
Albertville Premium Outlets........................ 305 - - 305
Factory Merchants Branson........................... 300 - - 300
Jackson Outlet Village............................. 292 - - 292
Carlsbad Premium Outlets........................... 288 288 - -
Johnson Creek Outlet Center........................ 278 - - 278
----------- -------- ---------- ----------
Total centers acquired .............................. 3,674 288 1,186 2,200
Centers disposed:
American Tin Cannery Premium Outlets (2)............. (135) - (135) -
St. Helena Premium Outlets.......................... (23) - (23) -
Santa Fe Premium Outlets............................. (125) (125) - -
Other Retail........................................ (880) (217) (167) (496)
----------- -------- ---------- ----------
Total centers disposed: ............................. (1,163) (342) (325) (496)
Net GLA added during the period...................... 4,501 948 1,741 1,812
Other Data:
GLA at end of period .............................. 17,075 16,127 14,386
Weighted average GLA .............................. 16,555 15,249 12,758
Centers in operation at end of period.............. 60 60 58
New centers opened. ............................... 3 2 -
Centers expanded. ................................. 3 2 4
Centers acquired .................................. 1 3 7
Centers disposed................................... 4 3 5
| 1) |
Acquired Lakeland Factory Outlet Mall in August 2003 with the Las Vegas Outlet
Center. The Lakeland property is currently under contract for sale. The closing should take place by late first quarter or early second quarter 2005. |
| 2) | In January 2004, the OP terminated its long-term lease agreement, expiring December 2004. |
The OP's Domestic Outlet centers produced weighted average reported tenant sales of approximately $402 per square-foot in 2004, $372 per square-foot in 2003 and $351 per square-foot in 2002. 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 center located in Central Valley, New York, generated approximately 13%, 13% and 16% of the OP's total revenue for the years ended 2004, 2003 and 2002, respectively. In addition, approximately 23%, 23% and 25% of the OP's revenues for years 2004, 2003 and 2002, 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 6.0% of the OP's base rents; and no tenant occupied more than 7% of the OP's domestic GLA at December 31, 2004. In view of these facts 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, 2004 with year ended December 31, 2003.
Income from continuing operations was $125.0 million, representing an increase of $4.9 million, or 4.1% from $120.1 million in 2003. The increase was primarily the result of developing five centers and acquiring four centers in 2003 and 2004, expanding a center in 2004, higher rents from releasing and renewals and contribution to earnings from Chelsea Interactive, partially offset by increases in general and administrative, interest and other expenses due to the growth of the portfolio. The OP also incurred approximately $23 million of merger costs charged to general and administrative expenses.
Base rentals were $270.0 million, an increase of $23.1 million, or 9.4% from $246.9 million in 2003, primarily due to the acquisition of three centers in 2003 and one center in 2004, higher average rents on releasing and renewals, and the expansion of one wholly-owned center in late 2003. Base rental revenue per weighted average square-foot in the Domestic Outlets increased to $21.27 in 2004 from $20.37 in 2003.
Percentage rents rose $6.0 million or 20.9% to $35.0 million in 2004, from $29.0 million in the previous year, primarily from improved tenant sales and acquisitions during 2003 and 2004.
Expense reimbursements, representing contractual recoveries from tenants of certain common area maintenance, operating, real estate tax, promotional and management expenses, increased $8.1 million, or 9.5%, to $94.2 million from $86.1 million in 2003, due to the recovery of operating and maintenance costs from increased GLA. The average recovery of reimbursable expenses for the Domestic Outlets was 90.3% in 2004 compared with 89.9% in the earlier period.
Other income increased $1.8 million or 21.7% to $10.5 million from $8.7 million in 2003, primarily due to an increase in ancillary operating income and interest income from higher rates in 2004, partially offset by a gain on an outparcel sale in 2003.
Operating and maintenance expenses have increased $8.5 million, or 8.3%, to $110.7 million from $102.2 million in 2003. The increase was primarily due to costs related to increased GLA. On a weighted average of square-foot basis, Domestic Outlets operating and maintenance expenses increased to $8.46 in 2004 from $8.13 in 2003 primarily due to increased real estate taxes.
Depreciation and amortization expense was up $2.8 million or 4.0% to $72.5 million from $69.7 million in 2003 due to increased depreciation primarily from the acquisition of three centers and the expansion of one center in late 2003.
General and administrative expense grew $25.7 million or 207.3% to $38.1 million from $12.4 million in 2003, primarily due to merger costs as well as cost increases in compensation, corporate governance, professional fees and other legal fees.
Other expenses increased $1.9 million or 25.4% to $9.4 million in 2004 from $7.5 million in the previous year. The increase in expenses was primarily from a $3.7 million write-off of Mexico predevelopment costs, $0.9 million settlement of a shareholder lawsuit and the $0.9 impairment loss on two non-core centers sold in 2004, partially offset by Chelsea Interactive's contribution to earnings of $1.0 million in 2004 compared with a $2.5 million loss in 2003.
Income from unconsolidated investments was up $12.9 million, or 117.5%, to $23.9 million from $11.0 million in 2003, chiefly due to higher earnings from Chelsea Japan, resulting from the opening of two new centers and the expansion of one center and the opening of Las Vegas Premium Outlets in 2003 and Chicago Premium Outlets in May 2004.
Interest expense increased $8.3 million or 11.9% to $78.1 million from $69.8 million in 2003, due to higher debt that financed acquisitions and development.
Loss on sale of discontinued operations of $2.6 million resulted from the sale of Santa Fe Premium Outlets in New Mexico.
Gain on sale of discontinued operations in 2003 of $5.6 million and a loss from discontinued operations of $1.2 million, primarily reflects results from the sale of two centers.
Preferred unit requirement includes a $1.7 million write-off of offering costs associated with the redemption of the Series B Cumulative Redeemable Preferred Units in 2004.
Comparison of year ended December 31, 2003 to year ended December 31, 2002.
Income from continuing operations was $120.1 million, an increase of $63.3 million, or 111.4%, from $56.8 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 the impairment loss on Chelsea Interactive in 2002. These increases to income were largely offset by a gain of $10.9 million on the sale of an investment and higher operating and maintenance, general and administrative, interest and other expenses due to the expansion of the portfolio.
Base rentals increased $69.5 million, or 39.2%, to $246.9 million in 2003 from $177.4 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 Domestic Outlets increased to $20.37 in 2003 from $17.07 in 2002.
Percentage rents rose $5.5 million, or 23.2%, to $29.0 million in 2003 from $23.5 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 $21.7 million, or 33.7% to $86.1 million in 2003 from $64.4 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 Domestic Outlets was 89.9% compared with 91.0% in 2002.
Other income decreased $2.8 million or 24.7% to $8.7 million in 2003, from $11.5 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 $25.2 million, or 32.7%, to $102.2 million in 2003 from $77.0 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, Domestic Outlets operating and maintenance expenses increased to $8.13 in 2003 from $7.44 in 2002 primarily due to increased snow removal costs.
Depreciation and amortization expense was up $14.0 million, or 25.1%, to $69.7 million in 2003 from $55.7 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 $3.6 million, or 90.5%, to $7.5 million in 2003 from $3.9 million in 2002 due to a $2.5 million loss from Chelsea Interactive, increased legal and bad debt expenses in 2003, as well as ground leases assumed with the acquisition of new centers.
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 of $2.5 million was reclassified to other expense in 2003 compared to $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 and loss from discontinued operations of $1.2 million, primarily reflect the sale of two centers in 2003.
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, 2004 of $182.2 million is expected to increase with a full year of operations from the 0.9 million square feet of GLA added during 2004 as well as approximately 600,000 square feet of planned new GLA opening in 2005. As of December 31, 2004, the OP has a commitment of $12.6 million for active domestic development projects. The OP has adequate funding sources to complete these projects from available cash, loans from Simon and secured construction financing. In conjunction with the Merger, the OP's $200 million line of credit (the "Senior Credit Facility") was repaid and extinguished. The OP does, however, have access to capital through Simon's $2.0 billion credit facility.
Operating cash flow is expected to provide sufficient funds for 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 and partially fund development projects. Common distributions declared and recorded in 2004 were $120.1 million, or $2.33 per unit.
The OP's ratio of earnings-to-fixed charges for each of the three years ended December 31, 2004, 2003, and 2002 was 2.4, 2.5 and 2.4, 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.
A summary of the OP's contractual obligations (at par) as of December 31, 2004, is as follows (in thousands):
More
Less than 2 to 3 4 to 5 than
Total 1 Year Years Years 5 Years
--------- ------------ ------------ ----------- ------------
Unsecured bank debt $ 84,835 $ 13,445 $ 16,115 $ 3,600 $ 51,675
Notes payable-related party 300,260 300,260 - - -
Unsecured notes 725,000 50,000 125,000 150,000 400,000
Mortgage debt 307,086 7,459 16,671 160,580 122,376
------------ ------------ ------------ ----------- ------------
Total debt 1,417,181 371,164 157,786 314,180 574,051
Ground and operating leases 71,206 2,905 6,370 6,304 55,627
Real estate commitments 12,615 12,615 - - -
Deferred compensation 21,104 - 21,104 - -
------------ ------------ ------------ ----------- ------------
Total Obligations $1,522,106 $386,684 $185,260 $320,484 $629,678
============ ============ ============ =========== ============
In March 2004, the OP issued $100 million 3.5% unsecured notes due March 15, 2009. The notes were priced at 99.534% of par value to yield 3.603% to investors. Proceeds were used to repay borrowings under a $100 million bridge loan due July 2004.
In October 2004, the OP borrowed $65.0 million from Simon and issued an unsecured promissory note due December 31, 2004. The unsecured note was extended in January, through August 1, 2005. The interest is payable monthly at LIBOR plus 1% per annum. The borrowed funds were used primarily to redeem the Series C Preferred Stock prior to the Merger closing.
Also in October 2004, the OP borrowed $235.3 million from Simon and issued an unsecured promissory note due August 1, 2005. Interest is payable monthly at LIBOR plus 1% per annum. The borrowed funds were used to repay the OP's Senior Credit Facility, the $5 million term loan, and the $100 million term loan used to acquire Carlsbad Company Stores.
At December 31, 2004, construction underway for domestic and international development includes projects totaling approximately 600,000 square-feet of GLA. Domestically, projects include the first-phase of Seattle Premium Outlets, a 383,000 square-foot center located near Seattle, Washington, scheduled to open in May 2005. Internationally, projects included the 178,000 square-foot, first phase of Toki Premium Outlets located near Nagoya, Japan, which opened in March 2005. The Toki project is a development of Chelsea Japan Co., Ltd., the OP's 40%-owned Japanese joint venture. Other projects in various stages of development are expected to open in 2006 and beyond. There can be no assurance that these projects will be completed or opened, or that there will not be delays in opening or completion. All current development activity is fully financed either through project specific secured construction financing, the yen denominated line of credit, and the peso denominated line of credit, available cash or the Simon credit facility. The OP will seek to obtain permanent financing once the projects are completed and income has been stabilized.
The OP has an agreement with Mitsubishi Estate Co., Ltd. and Sojitz Corporation (formerly known as 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, 2004, are as follows:
Total Facility | Outstanding
------------------------------------ | --------------------------------------------------------------------
| Due Interest
Yen US $ Equivalent | Yen US $ Equivalent US $ Guarantee Date Rate
----------- --------------- | -------- --------------- --------------- ---- ----
3.8 billion (1) $37.0 million | 2.9 billion $28.5 million $11.2 million 2015 2.06%
0.6 billion (1) 5.8 million | 0.4 billion 4.3 million 1.7 million 2012 1.50%
| (1) | Facilities entered 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 December 2004, the joint venture opened its first project; the 232,000 square-foot first phase of Premium Outlets Punta Norte, located near Mexico City. As of December 31, 2004, the OP contributed its 50% share or $15.9 million of total expected development costs of $16.5 million. The balance of construction costs are expected to be paid during 2005. During the fourth quarter 2004, the OP recognized a write-off in other expense of $3.7 million related to previously capitalized professional and other costs.
In January 2004, a wholly-owned subsidiary of the OP entered into a 180.0 million peso revolving facility (USD $16.1 million as of December 31, 2004) to fund 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. The Company and the OP guarantee this facility. At December 31, 2004, the peso facility had an outstanding balance of 139.5 million pesos (approximately US $12.5 million). In February 2005, the OP repaid the entire outstanding balance.
In February 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 would no longer operate its e-commerce technology, but would retain a minority interest in GSI-Chelsea Solutions. Chelsea Interactive's largest clients entered into service agreements with GSI-Chelsea Solutions and transitioned e-commerce activities to the GSI-Chelsea platform in May 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, 2004, was $3.6 million. The OP has also provided $14.8 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. The outstanding guarantees expire in September 2005.
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. As a result of the Merger, the OP has access to capital under Simon's $2.0 billion credit facility.
Net cash provided by operating activities was $182.2 million and $181.6 million for the years ended December 31, 2004, and 2003, respectively. The increase was primarily due to increased operating cash flow generated on the growth of the OP's GLA offset by the purchase of the executive annuities pursuant to the Merger. Net cash used in investing activities increased to $237.0 million in 2004 from $213.6 million in 2003, primarily due to increased investing in new developments in 2004. Net cash provided by financing activities increased to $69.7 million from $27.9 million for the years ended December 31, 2004, and 2003, respectively. The increase was primarily the result of increased borrowings offset by increased distributions, the redemption of preferred units and decreased stock sale proceeds in 2004.
Recent Accounting Pronouncements
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 application of FIN 46-R did not have a significant impact on the OP's financial statements.
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, 2004, 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 $3.2 million annually.
Following is a summary of the OP's debt obligations at December 31, 2004 (in thousands):
Expected Maturity Date
------------------------------------------------------------------------------------------------------
2005 2006 2007 2008 2009 Thereafter Total Fair Value
----------- ------- --------- --------- --------- ----------- --------- ------------
Fixed Rate Debt: $49,982 - $124,906 $161,546 $149,561 $552,208 $1,038,203 $1,112,682
Average Interest Rate: 8.38% - 7.25% 6.99% 5.21% 7.05% 6.86%
Variable Rate Debt: $312,105 - $12,515 - - $ 60,475(1) $ 385,095 $385,095
Average Interest Rate: 2.81% - 10.60% - - 2.90% 3.06%
| (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, 2004, 2003 and 2002 and the Report of the Independent Registered Public Accounting Firm 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, 2004 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.
There have been no changes in the internal controls over financial reporting or in other factors that have materially affected, or are reasonably likely to materially affect these internal controls over financial reporting in the last quarter of 2004.
Management's Report on Internal Controls Over Financial Reporting
The management of the Partnership is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is defined in Rule 13a-15(f) or 15d-15(f) promulgated under the Securities Exchange Act of 1934 as a process designed by, or under the supervision of, the Partnership's principal executive and principal financial officers and effected by the Partnership's board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that:
| • | Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the Partnership; |
| • | Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Partnership are being made only in accordance with authorizations of management and directors of the Partnership; and |
| • | Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Partnership's assets that could have a material effect on the financial statements. |
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
The Partnership's management assessed the effectiveness of the Partnership's internal control over financial reporting as of December 31, 2004. In making this assessment, the Partnership's management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework.
Based on our assessment, management believes that, as of December 31, 2004, the Partnership's internal control over financial reporting is effective based on those criteria.
The Partnership's independent registered public accounting firm has issued an audit report on our assessment of the Partnership's internal control over financial reporting. This report appears on page F-2 of this Annual Report on Form 10-K.
Item 9B. Other Information
None.
PART III
Items 10, 11, 12 and 13.
The Operating Partnership does not have any Directors, executive officers or stock authorized, issued or outstanding.
Item 14. Principal Accountant Fees and Services
Fees for professional services provided by the OP's independent registered public accounting firm for the years ended December 31 in each of the following categories are:
2004 2003
---------- ----------
Audit Fees $764,500 $413,000
Audit-Related Fees 258,500 386,590
Tax Fees 235,000 372,951
All Other Fees - -
---------- ----------
Total $1,258,000 $1,172,541
========== ==========
Fees for audit services include fees associated with the annual audit and the attestation on management's annual report on internal control over financial reporting and the effectiveness of internal control over financial reporting, the reviews of the OP's quarterly reports on Form 10-Q and services rendered in connection with registration statements and issuance of comfort letters.
Audit-related fees principally included audit of employee benefit plan, audits of certain properties as required by lenders and joint venture partners and audits of acquired properties in accordance with SEC Rule 3-14.
Tax fees include tax advice, tax planning and other tax consulting services.
All audit related services, tax planning and other services were pre-approved by the Audit Committee, which concluded that the provision of such services by the OP's auditors was compatible with the maintenance of that firm's independence in the conduct of its auditing functions. The policy of the Audit Committee provides for pre-approval of these services on an annual basis and on individual engagements if minimum thresholds are exceeded. The Audit Committee may delegate to one or more of its members pre-approval authority with respect to permitted services.
PART IV
Item 15. Exhibits and Financial Statement Schedules
(a) 1 and 2. The response to this portion of Item 15 is submitted as a separate section of this report.
| 3. | Exhibits |
| 3.3 | Agreement of Limited Partnership for the Operating Partnership. Incorporated by reference to Exhibit 3.3 to Registration Statement filed by the Company on Form S-11 under the Securities Act of 1933 (file No. 33-67870) ("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. |
| 10.3 | 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. |
| 10.5 | 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 and Financial Statement Schedules (continued)
| 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"). |
| 21 | List of Subsidiaries |
| 31.1 | Section 302 Chief Executive Officer Certificate |
| 31.2 | Section 302 Chief Financial Officer Certificate |
| 32.1 | Section 906 Chief Executive Officer Certificate |
| 32.2 | Section 906 Chief Financial Officer Certificate |
| (c) |
Exhibits See (a) 3 |
| (d) | Financial Statement Schedules - The response to this portion of Item 15 is submitted as a separate schedule of this report. |
Item 8, Item 15(a)(1) and (2) and Item 15(d)
(a)1. Financial Statements
Consolidated Financial Statements–CPG Partners, L.P.
Report of Independent Registered Public Accounting Firm Consolidated Balance Sheets as of December 31, 2004 and 2003 Consolidated Statements of Income for the years ended December 31, 2004, 2003 and 2002 Consolidated Statements of Partners' Capital for the years ended December 31, 2004, 2003 and 2002 Consolidated Statements of Cash Flows for the years ended December 31, 2004, 2003 and 2002 Notes to Consolidated Financial Statements (a)2 and (d) Financial Statement Schedule Schedule III-Consolidated Real Estate and Accumulated Depreciation |
Form 10-K Report Page F-1-2 F-3 F-4 F-5 F-6 F-7 F-32 |
All other schedules are omitted since the required information is not present or is not present in amounts sufficient to require submission of the schedule, or because the information required is included in the consolidated financial statements and notes thereto.
Report of Independent Registered Public Accounting Firm
The Board of Directors
Simon Property Group, Inc.
We have audited the accompanying consolidated balance sheets of CPG Partners, L.P. as of December 31, 2004 and 2003, and the related consolidated statements of income, partners' capital and cash flows for each of the three years in the period ended December 31, 2004. Our audits also included the financial statement schedule listed in the Index at Item 15(d). These financial statements and schedule are the responsibility of the management of CPG Partners, L.P. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of CPG Partners, L.P. at December 31, 2004 and 2003, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2004, in conformity with U.S. generally accepted accounting principles. Also, in our opinion the related financial statement schedule when considered in relation to the basic financial statements taken as a whole, present fairly, in all material respects, the information set forth therein.
We also have audited, in accordance with the standards of the Public Company Oversight Board (United States), the effectiveness of CPG Partners, L.P.'s internal control over financial reporting as of December 31, 2004, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 11, 2005 expressed an unqualified opinion thereon.
/s/Ernst & Young LLP
New York, New York
March 11, 2005
Report of Independent Registered Public Accounting Firm
The Board of Directors
Simon Property Group, Inc.
We have audited management's assessment included in the accompanying Management Report on the Internal Control Over Financial Reporting, that CPG Partners, L.P. (the "Partnership") maintained effective internal control over financial reporting as of December 31, 2004, based on criteria established in Internal Control – Integrated Framework, issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). The Partnership's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management's assessment and an opinion on the effectiveness of the Partnership's internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management's assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepte