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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________ to______________
COMMISSION FILE NO. 1-12328
CHELSEA GCA REALTY, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
MARYLAND 22-3251332
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
103 EISENHOWER PARKWAY, ROSELAND, NEW JERSEY 07068
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES - ZIP CODE)
(973) 228-6111
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NAME OF EACH EXCHANGE ON
TITLE OF EACH CLASS WHICH REGISTERED
Common stock, $0.01 par value New York Stock Exchange
Securities registered pursuant to Section 12 (g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
Indicate by check mark if the disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [x]
Based on closing sales price on March 4, 1998 of $37.00 the aggregate market
value of the voting stock held by non-affiliates of the registrant was
$566,998,434.
The number of shares outstanding of the registrant's common stock, $0.01 par
value was 15,353,183 at March 4, 1998.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the registrant's definitive Proxy Statement relating to its 1998
Annual Meeting of Shareholders are incorporated by reference into Part III as
set forth herein.
PART I
ITEM 1. BUSINESS
THE COMPANY
Chelsea GCA Realty, Inc. (the "Company") is a self-administered and self-managed
real estate investment trust ("REIT") formed through the merger of The Chelsea
Group ("Chelsea") and Ginsburg Craig Associates ("GCA"). The Company made its
initial public offering of common stock on November 2, 1993 (the "IPO") and
simultaneously became the managing general partner of Chelsea GCA Realty
Partnership, L.P. (the "Operating Partnership"), a partnership that owns,
develops, redevelops, leases, markets and manages upscale and fashion-oriented
manufacturers' outlet centers. At the end of 1997, the Company owned and
operated 20 centers (the "Properties") with approximately 4.3 million square
feet of gross leasable area ("GLA") in 12 states. The Company also has
properties under development including one new center in Leesburg, Virginia, an
expansion of Woodbury Common (Central Valley, NY), its largest center, and
expansions of other existing centers. The Company's existing portfolio includes
properties in or near New York City, Los Angeles, San Francisco, Sacramento,
Boston, Portland (Oregon), Kansas City, Atlanta, Cleveland, Honolulu, the Napa
Valley, Palms Springs and the Monterey Peninsula.
The Company's executive offices are located at 103 Eisenhower Parkway, Roseland,
New Jersey 07068 (telephone 973- 228-6111). The Company was incorporated in
Maryland on August 24, 1993.
The Company is taxed as a REIT under the provisions of the Internal Revenue
Code. The Company generally will not be taxed at the corporate level on income
it currently distributes to its shareholders, provided it distributes at least
95% of its taxable income each year.
RECENT DEVELOPMENTS
Between January 1, 1997 and December 31, 1997, the Company added 698,000 square
feet of GLA to its portfolio as a result of a 227,000 square foot new center
opening, a 214,000 square foot acquisition and five expansions totaling 257,000
square feet.
A summary of development, acquisition and expansion activity from January 1,
1997 through December 31, 1997 is contained below:
Acquisition
or GLA Number
Development (Sq. of
PROPERTY Date(s) Ft.) Stores Certain Tenants
----------------- -------------- ------------ ---------------------
As of January 1, 1997........... 3,610,000 995
New center:
Wrentham Village........... 10/97 227,000 57 Bose, Brooks Brothers,
Donna Karan, GAP, Off 5th-Saks
Fifth Avenue, Versace
Acquisition:
Waikele Premium Outlets.... 3/97 214,000 51 Bose, Donna Karan, Guess, Levi's, Nine
West, Off 5th-Saks Fifth Avenue
Expansions:
North Georgia................... 5/97 111,000 32 Joan & David, Liz Claiborne, Williams
Sonoma
Camarillo Premium Outlets....... 9/97 85,000 18 Calvin Klein, GAP, J. Peterman
Desert Hills.................... 11/97 36,000 8 Emanuel/Emanuel Ungaro, Lacoste
Other (net)..................... 25,000 1 Emanuel/Emanuel Ungaro
-------------- ------------
Total expansions........... 257,000 59
-------------- -----------
As of December 31, 1997.............. 4,308,000 1,162
============== ===========
The most recent newly developed, expanded or acquired centers are discussed
below:
WRENTHAM VILLAGE, WRENTHAM, MASSACHUSETTS. Wrentham Village Premium Outlets, a
227,000 square foot center containing 57 stores, opened in October 1997 and is
located near the junction of interstates 95 and 495 between Boston and
Providence. The populations within a 30-mile, 60-mile and 100-mile radius are
approximately 3.9 million, 6.9 million and 10.3 million, respectively. Average
household income within a 30-mile radius is approximately $52,000.
WAIKELE, WAIPAHU, HAWAII. Waikele Premium Outlets, a 214,000 square foot center
containing 51 stores, was acquired on March 31, 1997 and is located on Oahu
Highway H-1, 15 miles northwest of Honolulu. The populations within a 15- mile
and 30-mile radius are approximately 700,000 and 900,000, respectively. Average
household income within a 30- mile radius is approximately $63,000.
Approximately 6.5 million tourists visited Hawaii in 1996.
NORTH GEORGIA, DAWSONVILLE, GEORGIA. North Georgia Premium Outlets, a 403,000
square foot center containing 108 stores, opened in two phases, in May 1996 and
May 1997. The center is located 40 miles north of Atlanta on Georgia State
Highway 400 bordering Lake Lanier, at the gateway to the North Georgia
mountains. The populations within a 30- mile, 60-mile and 100-mile radius are
approximately 700,000, 3.6 million and 5.8 million, respectively. Average
household income within a 30-mile radius is approximately $55,000.
CAMARILLO, CAMARILLO, CALIFORNIA. Camarillo Premium Outlets, a 365,000 square
foot center containing 103 stores, opened in five phases, from March 1995
through September 1997. The center is located 48 miles north of Los Angeles,
about 55 miles south of Santa Barbara on Highway 101. The populations within a
30-mile, 60-mile and 100-mile radius are approximately 1.1 million, 8.3 million
and 14.6 million, respectively. Average household income within a 30-mile radius
is approximately $66,000.
DESERT HILLS, CABAZON, CALIFORNIA. Desert Hills Premium Outlets, a 468,000
square foot center containing 117 stores, opened in three phases, in December
1990, June 1995 and November 1997. The center is located on Interstate 10, 18
miles west of Palm Springs and 75 miles east of Los Angeles. The populations
within a 30-mile, 60-mile and 100-mile radius are approximately 1.1 million, 4.7
million and 17.0 million, respectively. Average household income within a 30-
mile radius is approximately $42,000.
The Company has started construction of approximately 760,000 square feet of new
GLA scheduled for completion in 1998, including the 270,000 square foot first
phase of Leesburg Corner Premium Outlets (Leesburg, VA), a new center serving
the greater Washington, DC market; and expansions of 270,000 square feet at
Woodbury Common Premium Outlets (Central Valley, NY), 125,000 square feet at
Wrentham Village Premium Outlets, 45,000 square feet at Camarillo Premium
Outlets, 30,000 square feet at North Georgia Premium Outlets, and 20,000 square
feet at Folsom Premium Outlets (Folsom, CA). These projects are in various
stages of development and there can be no assurance that any of these projects
will be completed or opened, or that there will not be delays in the opening or
completion of any of these projects.
STRATEGIC ALLIANCE
In May 1997, the Company announced the formation of a strategic alliance with
Simon DeBartolo Group, Inc. ("Simon") to develop and acquire high-end outlet
centers with GLA of 500,000 square feet or more in the United States. The
Company and Simon will be co-managing general partners, each with 50% ownership
of the joint venture and any entities formed with respect to specific projects;
the Company will have primary responsibility for the day-to-day activities of
each project. In conjunction with the alliance, on June 16, 1997, the Company
completed the sale of 1.4 million shares of common stock to Simon, for an
aggregate price of $50 million. Proceeds from the sale were used to repay
borrowings under the Credit Facilities. Simon is one of the largest publicly
traded real estate companies in North America as measured by market
capitalization, and at March 1998 owns, has an interest in and or manages
approximately 145 million square feet of retail and mixed-use properties in 34
states.
ORGANIZATION OF THE COMPANY
The Company was organized to combine Chelsea and GCA, two leading outlet center
development companies, into the Operating Partnership, providing for greater
access to the public and private capital markets. All of the Company's assets
are held by and all of its business activities conducted through the Operating
Partnership. The Company is the sole general partner of the Operating
Partnership (which owned 81.7% in the Operating Partnership as of December 31,
1997) and has full and complete control over the management of the Operating
Partnership and each of the Properties.
THE MANUFACTURERS' OUTLET BUSINESS
Manufacturers' outlets are manufacturer-operated retail stores that sell
primarily first-quality, branded goods at significant discounts from regular
department and specialty store prices. Manufacturers' outlet centers offer
numerous advantages to both consumer and manufacturer: by eliminating the third
party retailer, manufacturers are often able to charge customers lower prices
for brand name and designer merchandise; manufacturers benefit by being able to
sell first quality in-season, as well as out-of-season, overstocked or
discontinued merchandise without compromising their relationships with
department stores or hampering the manufacturers' brand name. In addition,
outlet stores enable manufacturers to optimize the size of production runs while
maintaining control of their distribution channels.
BUSINESS OF THE COMPANY
The Company believes its strong tenant relationships, high-quality property
portfolio and managerial expertise give it significant advantages in the
manufacturers' outlet business.
STRONG TENANT RELATIONSHIPS. The Company maintains strong tenant relationships
with high fashion, upscale manufacturers that have a selective presence in the
outlet industry, such as Ann Taylor, Brooks Brothers, Cole Haan, Donna Karan,
Joan & David, Jones New York, Nautica, Polo Ralph Lauren and Tommy Hilfiger, as
well as with national brand-name manufacturers such as Nine West, Phillips-Van
Heusen (Bass, Geoffrey Beene, Van Heusen) and Sara Lee (Champion, Hanes, Coach
Leather). The Company believes that its ability to draw from both groups is an
important factor in providing broad customer appeal and higher tenant sales.
HIGH QUALITY PROPERTY PORTFOLIO. The Properties generated weighted average
reported tenant sales during 1997 of $360 per square foot. A significant number
of the Company's tenants, including Ann Taylor, Brooks Brothers, Burberrys,
Cole-Haan, Donna Karan, Emanuel/Emanuel Ungaro, Joan & David, Jones New York,
Nike, Nine West, Nautica, Polo Ralph Lauren Factory Store, Royal Doulton,
Timberland, Tommy Hilfiger and Waterford/Wedgwood, reported that the top store
in their outlet chain during 1996 (as measured by sales per square foot or gross
sales) was in one of the Company's centers. The Company believes that the
quality of its centers gives it significant advantages in attracting customers
and negotiating multi-lease transactions with tenants.
MANAGEMENT EXPERTISE. The Company believes it has a competitive advantage in the
manufacturers' outlet business as a result of its experience in the business,
long-standing relationships with tenants and expertise in the development and
operation of manufacturers' outlet centers. The Company's senior management has
been recognized as leaders in the outlet industry over the last two decades. The
Company was the first recipient of the VALUE RETAIL NEWS Award of Excellence. In
addition, management developed a number of the earliest and most successful
outlet centers in the industry, including Liberty Village (one of the first
manufacturers' outlet centers in the U.S.) in 1981, Woodbury Common in 1985, and
Desert Hills and Aurora Farms in 1990. Since the IPO, the Company has added
significantly to its senior management in the areas of development, leasing and
property management without increasing general and administrative expenses as a
percentage of total revenues; additionally, the Company intends to continue to
invest in systems and controls to support the planning, coordination and
monitoring of its activities.
GROWTH STRATEGY
The Company seeks growth through increasing rents in its existing centers;
developing new centers and expanding existing centers; and acquiring and
redeveloping centers.
INCREASING RENTS AT EXISTING CENTERS. The Company's leasing strategy includes
aggressively marketing available space and maintaining a high level of
occupancy; providing for inflation-based contractual rent increases or periodic
fixed contractual rent increases in substantially all leases; renewing leases at
higher base rents per square foot; re-tenanting space occupied by
underperforming tenants; and continuing to sign leases that provide for
percentage rents.
DEVELOPING NEW CENTERS AND EXPANDING EXISTING CENTERS. The Company believes
there will continue to be significant opportunities to develop manufacturers'
outlet centers across the United States. The Company intends to undertake such
development on a selective basis, and believes that it will have a competitive
advantage in doing so as a result of its development expertise, tenant
relationships and access to capital. The Company expects that the development of
new centers and the expansion of existing centers will continue to be a
substantial part of its growth strategy. The Company believes that its
development experience and strong tenant relationships enable it to determine
site viability on a timely and cost-effective basis. There can be no assurance
that any development or expansion projects will be commenced or completed as
scheduled.
ACQUIRING AND REDEVELOPING CENTERS. The Company intends to selectively acquire
individual properties and portfolios of properties that meet its strategic
investment criteria as suitable opportunities arise. The Company believes that
its extensive experience in the outlet center business, access to capital
markets, familiarity with real estate markets and advanced management systems
will allow it to evaluate and execute acquisitions competitively. Furthermore,
management believes that the Company will be able to enhance the operation of
acquired properties as a result of its (i) strong tenant relationships with both
national and upscale fashion retailers; and (ii) development, marketing and
management expertise as a full-service real estate organization. Additionally,
the Company may be able to acquire properties on a tax-advantaged basis through
the issuance of Operating Partnership units. There can be no assurance that any
acquisitions will be consummated or, if consummated, will result in an
advantageous return on investment for the Company.
OPERATING STRATEGY
The Company's primary business objectives are to enhance the value of its
properties and operations by increasing cash flow. The Company plans to achieve
these objectives through continuing efforts to improve tenant sales and
profitability, and to enhance the opportunity for higher base and percentage
rents.
LEASING. The Company pursues an active leasing strategy through long-standing
relationships with a broad range of tenants including manufacturers of men's,
women's and children's ready-to-wear, lifestyle apparel, footwear, accessories,
tableware, housewares, linens and domestic goods. Key tenants are placed in
strategic locations to draw customers into each center and to encourage shopping
at more than one store. The Company continually monitors tenant mix, store size,
store location and sales performance, and works with tenants to improve each
center through re-sizing, re-location and joint promotion.
MARKET AND SITE SELECTION. To ensure a sound long-term customer base, the
Company generally seeks to develop sites near densely-populated, high-income
metropolitan areas, and/or at or near major tourist destinations. While these
areas typically impose numerous restrictions on development and require
compliance with complex entitlement and regulatory processes, the Company
believes that these areas provide the most attractive long-term demographic
characteristics.
The Company generally seeks to develop sites that can support at least 400,000
square feet of GLA and that offer the long-term opportunity to dominate their
respective markets through a critical mass of tenants.
MARKETING. The Company pursues an active, property-specific marketing strategy
using a variety of media including newspapers, television, radio, billboards,
regional magazines, guide books and direct mailings. The centers are marketed to
tour groups, conventions and corporations; additionally, each property
participates in joint destination marketing efforts with other area attractions
and accommodations. Virtually all consumer marketing expenses incurred by the
Company are reimbursable by tenants.
PROPERTY DESIGN AND MANAGEMENT. The Company believes that effective property
design and management are significant factors in the success of its properties
and works continually to maintain or enhance each center's physical plant,
original architectural theme and high level of on-site services. Each property
is designed to be compatible with its environment and is maintained to high
standards of aesthetics, ambiance and cleanliness in order to promote longer
visits and repeat visits by shoppers. Of the Company's 326 full-time and 72
part-time employees, 228 full-time and 72 part-time employees are involved in
on-site maintenance, security, administration and marketing. Centers are
generally managed by an on-site property manager with oversight from a regional
operations manager.
FINANCING
The Company's financing strategy is to maintain a strong, flexible financial
position by: (i) maintaining a conservative level of leverage, (ii) extending
and sequencing debt maturity dates, (iii) managing floating interest rate
exposure and (iv) maintaining liquidity. Management believes these strategies
will enable the Company to access a broad array of capital sources, including
bank or institutional borrowings, secured and unsecured debt and equity
offerings.
It is the Company's policy to limit its borrowings to less than 40% of total
market capitalization (defined as the value of outstanding shares of common
stock including conversion of partnership units to common stock, plus the
liquidation preference value of preferred stock, plus total debt). Applying a
December 31, 1997 closing price of $38.1875 per common share, plus a liquidation
preference of $50.00 per preferred share, the Company's ratio of debt to total
market capitalization was approximately 27% at December 31, 1997.
The Company currently has in place two unsecured bank revolving lines of credit
with an aggregate maximum borrowing amount of $150 million (each, a "Credit
Facility" and collectively, the "Credit Facilities"). Each Credit Facility
expires on March 30, 1998 and bears interest on the outstanding balance, payable
monthly, at a rate equal to the London Interbank Offered Rate ("LIBOR") plus
1.15% or the prime rate, at the Company's option. A fee on the unused portion of
the Credit Facilities is payable quarterly at a rate of 0.25% per annum. The
Credit Facilities' are provided by five banks. The Company has agreed to a term
sheet with its agent bank for a new three year credit facility that generally
includes more favorable terms than the Credit Facilities and is expected to
close on or prior to March 30, 1998.
The Company completed the sale of 1.4 million shares of common stock to Simon,
for an aggregate price of $50 million, on June 16, 1997, in conjunction with a
strategic alliance. Proceeds from the sale were used to repay borrowings under
the Credit Facilities.
In October 1997, the Company issued 1.0 million shares of 8.375% Series A
Cumulative Redeemable Preferred Stock (the "Preferred Stock"), par value $0.01
per share, having a liquidation preference of $50.00 per share. The Preferred
Stock has no stated maturity and is not convertible into any other securities of
the Company. The Preferred Stock is redeemable on or after October 15, 2027 at
the Company's option. Net proceeds from the offering were used to repay
borrowings under the Company's Credit Facilities.
Also, in October 1997, the Company's Operating Partnership completed a $125
million public debt offering of 7.25% unsecured term notes due October 2007 (the
"7.25% Notes"). The 7.25% Notes were priced to yield 7.29% to investors, 120
basis points over the then 10-year U.S. Treasury rate. Net proceeds from the
offering were used to repay substantially all borrowings under the Company's
Credit Facilities, redeem $40 million of Remarketed Floating Rate Reset Notes
and for general corporate purposes.
COMPETITION
The Properties compete for retail consumer spending on the basis of the diverse
mix of retail merchandising and value oriented pricing. Manufacturers' outlet
centers have established a niche capitalizing on consumer demand desire for
value-priced goods. The Properties compete for customer spending with other
outlet locations, traditional shopping malls, off-price retailers, and other
sales channels in the retail industry. The Company believes that the Properties
are generally the leading manufacturers' outlet centers in each market. The
Company carefully considers the degree of existing and planned competition in
each proposed area before deciding to build a new center.
ENVIRONMENTAL MATTERS
The Company is not aware of any environmental liabilities relating to the
Properties that would have a material impact on the Company's financial position
and results of operations.
PERSONNEL
As of December 31, 1997, the Company had 326 full-time and 72 part-time
employees. None of the employees are subject to any collective bargaining
agreements, and the Company believes it has good relations with its employees.
ITEM 2. PROPERTIES
The Properties are upscale, fashion-oriented manufacturers' outlet centers
located near large metropolitan areas, including New York, Los Angeles, San
Francisco, Boston, Atlanta, Sacramento, Portland (Oregon), Kansas City and
Cleveland, or at or near tourists destinations, including Honolulu, the Napa
Valley, Palm Springs and the Monterey Peninsula. The Properties were 99% leased
as of December 31, 1997 and contained approximately 1,200 stores with
approximately 360 different tenants. During 1997 and 1996, the Properties
generated weighted average tenant sales of $360 and $345 per square foot,
respectively. As of December 31, 1997, the Company had 20 operating outlet
centers. Of the 20 operating centers, 18 are owned 100% in fee; and two,
American Tin Cannery Premium Outlets and Lawrence Riverfront Plaza Factory
Outlets, are held under long-term leases. The Company manages all of its
Properties.
Approximately 34% and 38% of the Company's revenues for the years ended December
31, 1997 and 1996, respectively, were derived from the Company's two centers
with the highest revenues, Woodbury Common Premium Outlets and Desert Hills
Premium Outlets. The loss of either center or a material decrease in revenues
from either center for any reason may have a material adverse effect on the
Company. In addition, approximately 38% and 44% of the Company's revenues for
the years ended December 31, 1997 and 1996, respectively, were derived from the
Company's centers in California.
The Company does not consider any one store lease to be material and no
individual tenant, combining all of its store concepts, accounts for more than
7% of the Company's gross revenues or total GLA. Only one tenant occupies more
than 4.3% of the Company's total GLA. In view of these statistics and the
Company's past success in re- leasing available space, the Company believes the
loss of any individual tenant would not have a significant effect on future
operations.
Set forth in the table below is certain property information as of December
31,1997:
YEAR GLA NO. OF
NAME/LOCATION OPENED (SQ.FT.) STORES CERTAIN TENANTS
- -------------- ----------- ------------- ------------ ------------------------------------
Woodbury Common......................... 1985 573,000 151 Brooks Brothers, Calvin Klein, Coach Leather,
Central Valley, NY (New York City Metro Donna Karan, GAP, Polo Ralph Lauren
area)
Desert Hills............................ 1990 468,000 117 Bose, Coach Leather, Donna Karan, Eddie
Cabazon, CA (Palm Springs-Los Angeles area) Bauer, Nautica, Polo Ralph
Lauren, Tommy Hilfiger
North Georgia........................... 1996 403,000 108 Bose, Brooks Brothers,
Dawsonville, GA (Atlanta metro area) Donna Karan, GAP, Off 5th-Saks Fifth Avenue,
Van Heusen, Williams Sonoma
Camarillo Premium Outlets............... 1995 365,000 103 Barneys New York, Donna Karan, J. Peterman,
Camarillo, CA (Los Angeles metro area) Levi's, Nine West, Off 5th-Saks Fifth Avenue
Aurora Premium Outlets.................. 1987 294,000 66 Ann Taylor, Brooks Brothers, Carters, Liz
Aurora, OH (Cleveland metro area) Claiborne, Off 5th-Saks Fifth Avenue, Reebok
Clinton Crossing........................ 1996 272,000 67 Bose, Coach Leather, Donna Karan, GAP,
Clinton, CT (I-95/NY-New England corridor) Off 5th-Saks Fifth Avenue, Polo Ralph
Lauren
Wrentham Village........................ 1997 227,000 57 Brooks Brothers, Calvin Klein, Donna Karan,
Wrentham, MA (Boston/Providence metro area) GAP, Versace
Folsom Premium Outlets.................. 1990 226,000 67 Bass, Donna Karan, Levi's, Nike, Nine West,
Folsom, CA (Sacramento metro area) Off 5th-Saks Fifth Avenue
Waikele Premium Outlets................. 1997 (1) 214,000 51 Bose, Donna Karan, Guess, Levi's, Nine
Waipahu, HI (Honolulu area) West, Off 5th-Saks Fifth Avenue
Petaluma Village........................ 1994 196,000 51 Ann Taylor, Brooks Brothers, Levi's,
Petaluma, CA (San Francisco metro area) Off 5th-Saks Fifth Avenue, Reebok
Napa Premium Outlets.................... 1994 171,000 49 Cole-Haan, Dansk, Ellen Tracy, Esprit,
Napa, CA (Napa Valley) J.Crew, Nautica, Timberland
Liberty Village......................... 1981 157,000 58 Calvin Klein, Donna Karan, Ellen Tracy,
Flemington, NJ (New York-Phila. metro area) Polo Ralph Lauren, Tommy Hilfiger
Columbia Gorge.......................... 1991 148,000 42 Carters, Harry & David, Levi's,
Troutdale, OR (Portland metro area) Mikasa, Norm Thompson
Lawrence Riverfront Plaza............... 1990 146,000 39 Bass, J.Crew, Jones New York Country,
Lawrence, KS (Kansas City metro area) London Fog
American Tin Cannery.................... 1987 137,000 49 Anne Klein, Carole Little, Joan & David,
Pacific Grove, CA (Monterey Peninsula) London Fog, Reebok, Rockport
Santa Fe Premium Outlets................ 1993 125,000 41 Brooks Brothers, Cole-Haan, Dansk,
Santa Fe, NM Donna Karan, Joan & David, Mondi
Patriot Plaza........................... 1986 76,000 11 Lenox, Polo Ralph Lauren, Westpoint
Williamsburg, VA (Norfolk-Richmond area) Stevens
Solvang Designer Outlets................ 1994 52,000 15 Bass, Donna Karan, Ellen Tracy, Nautica
Solvang, CA (Southern California area)
Mammoth Premium Outlets................. 1990 35,000 11 Bass, Polo Ralph Lauren
Mammoth Lakes, CA (Yosemite National Park)
St. Helena Premium Outlets.............. 1992 23,000 9 Brooks Brothers, Coach Leather, Donna Karan,
St. Helena, CA (Napa Valley) Joan & David
------------- ------------
Total................................ 4,308,000 1,162
============= ============
(1) Acquired in March 1997
The Company rents approximately 23,000 square feet of office space in its
headquarters facility in Roseland, New Jersey and approximately 4,000 square
feet of office space for its west coast regional office in Newport Beach,
California.
ITEM 3. LEGAL PROCEEDINGS
The Company is not presently involved in any material litigation other than
routine litigation arising in the ordinary course of business and which is
either expected to be covered by liability insurance or have no material impact
on the Company's financial position and results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
The following table sets forth the directors and executive officers of the
Company:
NAME AGE POSITION
---- --- --------
David C. Bloom................. 41 Chairman of the Board (term expires
in 1999) and Chief Executive Officer
William D. Bloom............... 35 Executive Vice President-Strategic
Relationships and Director
(term expires in 2000)
Brendan T. Byrne................ 73 Director (term expires in 1998)
Robert Frommer.................. 63 Director (term expires in 2000)
Barry M. Ginsburg............... 60 Vice Chairman and Director (term
expires in 1999)
Philip D. Kaltenbacher.......... 60 Director (term expires in 1999)
Reuben S. Leibowitz............. 50 Director (term expires in 2000)
Leslie T. Chao.................. 41 President and Chief Financial
Officer
Thomas J. Davis................. 42 Chief Operating Officer
Bruce Zalaznick................. 41 Executive Vice President-Real Estate
Michael J. Clarke............... 44 Senior Vice President-Finance
Christina M. Casey.............. 42 Vice President-Human Resources
Denise M. Elmer................. 41 Vice President, General Counsel and
Secretary
Anthony J. Galvin............... 38 Vice President-Leasing
Eric K. Helstrom................ 39 Vice President-Architecture and
Construction
John R. Klein................... 39 Vice President-Acquisitions and
Development
Gregory C. Link................. 48 Vice President-Operations
Michele Rothstein............... 39 Vice President-Marketing
Catherine A. Lassi.............. 38 Treasurer
Sharon M. Vuskalns.............. 34 Controller
DAVID C. BLOOM, Chairman of the Board and Chief Executive Officer since 1993.
Mr. Bloom was a founder and principal of Chelsea, and was President of Chelsea
from 1985 to 1993. As Chairman of the Board and Chief Executive Officer of the
Company, he sets policy and coordinates and directs all the Company's primary
functions including leasing and finance. Prior to founding Chelsea, he was an
equity analyst with The First Boston Corporation (now Credit Suisse First Boston
Corporation) in New York. Mr. Bloom graduated from Dartmouth College and
received an MBA from Harvard Business School.
WILLIAM D. BLOOM, Executive Vice President-Strategic Relationships since 1996
and Director since 1995. Mr. Bloom joined The Chelsea Group in 1986 and has been
responsible for the leasing of all of the Company's projects and was appointed
Executive Vice President-Leasing in 1993. In 1996, Mr. Bloom was named Executive
Vice President-Strategic Relationships and is responsible for developing and
maintaining relationships with major tenants. Prior to joining Chelsea GCA, he
was an institutional bond broker with Mabon Nugent in New York. Mr. Bloom
graduated from Boston University School of Management.
BRENDAN T. BYRNE, Director since 1993. Since 1982, Mr. Byrne has been a senior
partner in the law firm of Carella, Byrne, Bain, Gilfillan, Cecchi, Stewart &
Olstein. He previously served as Governor of New Jersey from 1974 to 1982,
Prosecutor Essex County (New Jersey), President of the Public Utility Commission
and Assignment Judge of the New Jersey Superior Court. He has also served as
Vice President of the National District Attorneys Association; Trustee of
Princeton University; Chairman of the Princeton University Council on New Jersey
Affairs; Chairman of the United States Marshals Foundation; and Chairman of the
National Commission on Criminal Justice Standards and Goals (1977). He serves on
a Board of the National Judicial College, is a former Commissioner of the New
Jersey Sports and Exposition Authority, and was a member of the board of
directors of New Jersey Bell Telephone Company, Elizabethtown Water Company,
Ingersoll-Rand Company and a former director of The Prudential Insurance Company
of America. He is a member of the Board of Mack-Cali, Inc. Mr. Byrne graduated
from Princeton University and received an LL.B. from Harvard Law School.
ROBERT FROMMER, Director since 1993. For the past 37 years, Mr. Frommer has been
responsible for developing major commercial, residential and mixed-use real
estate projects throughout the US in such cities as New York, Philadelphia,
Baltimore, Washington, DC, Chicago and Seattle. He has served as President of
the Pebble Beach Co., the Ritz-Carlton Hotel of Chicago and currently is
President of PG&E Properties of San Francisco. Mr. Frommer is a graduate of the
Wharton School of the University of Pennsylvania, and received an LL.B. from
Yale Law School.
BARRY M. GINSBURG, Vice Chairman and Director since 1993. Mr. Ginsburg was a
founder and principal of GCA and its predecessor companies from 1986 to 1993 and
has been involved during the last eleven years in all aspects of outlet center
development and operations. As Vice Chairman of the Company, he is involved in a
range of activities including corporate strategy, investor relations, marketing,
leasing and international development. From 1966 through 1985, he was employed
by Dansk International Designs, Ltd. and was corporate Chief Operating Officer
and Director from 1980 to 1985. Dansk operated a chain of 31 manufacturers'
outlet stores. Mr. Ginsburg graduated from Colby College and received an MBA
from Cornell University.
PHILIP D. KALTENBACHER, Director since 1993. Since 1974, Mr. Kaltenbacher has
been Chairman of the Board of Directors and Chief Executive Officer of Seton
Company, a manufacturer of leather; health care products; industrial foams,
films, tapes, adhesives and laminates; and chemicals. Mr. Kaltenbacher was a
Commissioner of The Port Authority of New York and New Jersey from September
1985 through February 1993, and served as Chairman from September 1985 through
April 1990. Mr. Kaltenbacher graduated from Yale University and received an
LL.B. from Yale Law School.
REUBEN S. LEIBOWITZ, Director since 1993. Mr. Leibowitz is a Managing Director
of E.M. Warburg, Pincus & Co., LLC ("Warburg, Pincus"), a venture banking and
investment counseling firm. He has been associated with Warburg, Pincus since
1984. Mr. Leibowitz graduated from Brooklyn College, received an MBA from New
York University, a JD from Brooklyn Law School, and an LL.M. from New York
University School of Law. Mr. Leibowitz currently serves on the board of
directors of Grubb & Ellis Company and Lennar Corporation.
LESLIE T. CHAO, President since April 1997 and Chief Financial Officer since
1993. Mr. Chao joined Chelsea in 1987 as Chief Financial Officer. As President
and Chief Financial Officer of the Company, he oversees project and corporate
finance, development, construction, legal, administrative, investor relations,
human resources and accounting functions of the Company. Prior to joining
Chelsea, he was a Vice President in the corporate finance/treasury area of
Manufacturers Hanover Corporation (now The Chase Manhattan Corporation), a New
York bank holding company. Mr. Chao graduated from Dartmouth College and
received an MBA from Columbia Business School.
THOMAS J. DAVIS, Chief Operating Officer since April 1997. As Chief Operating
Officer, Mr. Davis oversees the asset management activities of the Company
including leasing, operations and marketing. Mr. Davis joined Chelsea in 1996 as
Executive Vice President-Asset Management. From 1988 to 1995, he held various
senior positions at Phillips-Van Heusen Corporation, most recently as Vice
President-Real Estate. Mr. Davis has nineteen years of factory outlet industry
experience and has served the industry in various trade association positions
including Chairman of Manufacturers Idea Exchange as well as a board member of
the Steering Committee for FOMA (Factory Outlet Marketing Association). Mr.
Davis received the 1995 VALUE RETAIL NEWS Award of Excellence for individual
achievement in the outlet industry.
BRUCE ZALAZNICK, Executive Vice President-Real Estate since 1996. Mr. Zalaznick
joined the Company in 1994 as Vice President-Acquisitions responsible for the
Company's site acquisition activities. In August 1996, Mr. Zalaznick was named
Executive Vice President-Real Estate and is responsible for site acquisitions,
development, design and construction activities of the Company. From 1990 to
1994, he was Senior Vice President-Site Acquisition at Prime Retail, Inc., a
publicly traded REIT specializing in the development of upscale manufacturers'
outlet centers, and in that capacity was responsible for the acquisition and
entitlement of approximately three million square feet of outlet space in ten
states. Mr. Zalaznick graduated from Cornell University and received an MBA from
the Wharton School at the University of Pennsylvania.
MICHAEL J. CLARKE, Senior Vice President-Finance since 1998. Mr. Clarke joined
the Company in 1994 as Vice President- Finance. He is responsible for managing
Chelsea's financial functions, including treasury, accounting, budgeting,
internal and external reporting, banking and rating agency relations. From 1985
to 1993, he held various senior positions at Prime Hospitality Corp., a
NYSE-listed operator of hotels, most recently as Executive Vice President &
Chief Financial Officer. Mr. Clarke is a certified public accountant and
graduated from Seton Hall University.
CHRISTINA M. CASEY, Vice President-Human Resources since 1998. Ms. Casey joined
the Company in 1996 as Director of Human Resources. As Vice President-Human
Resources, she oversees all aspects of the Company's human resource activities,
including recruitment, benefits, compensation, policy development, training and
employee relations. From 1987 to 1996 she held various positions in Human
Resources with Boise Cascade Corporation, Specialty Paperboard and Rock-Tenn
Company. Ms. Casey graduated from Villanova University and received a Masters in
Social Service from Bryn Mawr Graduate School.
DENISE M. ELMER, Vice President, General Counsel and Secretary since 1993. Ms.
Elmer joined Chelsea as General Counsel in 1993. As Vice President, General
Counsel and Secretary, she oversees the legal activities of the Company,
including those related to property acquisition and development, leasing,
finance and operations. From 1988 to 1993, she was a lawyer in the New York law
firm of Stadtmauer Bailkin Levine & Masur, where she specialized in commercial
real estate law and became a partner in 1990. Ms. Elmer graduated from St.
Lawrence University and received a JD from Duke University School of Law.
ANTHONY J. GALVIN, Vice President-Leasing since 1997. As Vice President-Leasing,
Mr. Galvin is responsible for the management of the Company's leasing
activities. From 1995 to 1997, he was Director of Real Estate for Coach, a
division of Sara Lee Corporation. From 1987 to 1995 he held positions in both
real estate and construction at Phillips- Van Heusen Corporation. Mr. Galvin has
served the industry in various trade association positions including Chairperson
of the Northeast Merchants Association and the Board of Directors of ORMA
(Outlet Retail Merchants Association). Mr. Galvin is a graduate of Glassboro
State College (now Rowan University), where he serves on the Executive Committee
of the Alumni Advisory Council for the School of Business.
ERIC K. HELSTROM, Vice President-Architecture and Construction, since 1996. Mr.
Helstrom joined the Company in 1995 as Director-Development and was named Vice
President-Architecture and Construction in 1996. He oversees the design,
engineering and construction activities of the Company. From 1987 to 1995, he
held various positions including Director-Architecture/Construction with
Alexander Haagen Properties, an AMEX-listed REIT that develops and operates
neighborhood, community, power and regional shopping centers. Mr. Helstrom
graduated from California Polytechnic San Luis Obispo and received a Masters in
Real Estate Development from the University of Southern California. Mr. Helstrom
is a licensed architect and general contractor.
JOHN R. KLEIN, Vice President-Acquisitions and Development, since 1996. Mr.
Klein joined the Company in 1995 as Director-Acquisitions and was named Vice
President-Acquisitions and Development in 1996. He oversees the Company's
acquisitions and development activities including site selection and
entitlements. From 1991 to 1995, he held various positions at Prime Retail,
Inc., most recently as Vice President-Site Acquisition. At Prime, Mr. Klein was
involved in the acquisition and entitlement of over two million square feet of
manufacturers' outlet space in nine states. Mr. Klein graduated from Columbia
University and received an MBA from George Washington University School of
Business.
GREGORY C. LINK, Vice President-Operations since 1996. Mr. Link joined the
Company in 1994 as Vice President-Leasing responsible for the management of the
Company's leasing activities. In January 1996, Mr. Link was appointed Vice
President-Operations and is responsible for supervising property management
activities at the Company's operating properties. From 1987 to 1994, he was
Chairman, President and Chief Executive Officer of The Ribbon Outlet, Inc., an
affiliate of the world's largest ribbon manufacturer, and in that capacity
opened over 100 factory outlet stores across the United States. From 1971 to
1987 he held various senior merchandising positions with Phillips-Van Heusen
Corporation, Westpoint Pepperell Corporation, May Department Stores and
Associated Dry Goods Corporation. Mr. Link graduated from the College of
Business and Public Administration of the University of Arizona at Tucson.
MICHELE ROTHSTEIN, Vice President-Marketing since 1993. Ms. Rothstein joined
Chelsea in 1989 as Vice President- Marketing. As Vice President-Marketing of the
Company, she oversees all aspects of the Company's marketing and promotion
activities. From 1987 to 1989, she was a product manager at Regina Company and,
prior to 1987, was with Waring & LaRosa Advertising in New York. Ms. Rothstein
graduated from the School of Business at the State University of New York at
Albany.
CATHERINE A. LASSI, Treasurer since 1997. Ms. Lassi joined Chelsea in 1987,
became Controller in 1990 and Treasurer in January 1997. As Treasurer, she
oversees budgeting, forecasting, contract administration, cash management,
banking and information management activities for the Company. Ms. Lassi is a
certified public accountant and graduated from the University of South Florida.
SHARON M. VUSKALNS, Controller since 1997. Ms. Vuskalns joined the Company in
1995 as Director of Accounting Services. As Controller, she oversees the
accounting and financial reporting activities for the Company. Prior to joining
Chelsea, she was a Senior Audit Manager with Ernst & Young, LLP. Ms. Vuskalns is
a certified public accountant and graduated from Indiana University.
David C. Bloom and William D. Bloom are brothers.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY MATTERS
The common stock of the Company is traded on the New York Stock Exchange under
the ticker symbol CCG. As of March 4, 1998 there were 461 shareholders of
record. The Company believes it has more than 4,000 beneficial holders of common
stock. The following table sets forth the quarterly high and low closing sales
price per share (as derived from the WALL STREET JOURNAL) and the cash
distributions declared in 1997 and 1996:
SALES PRICE ($) DISTRIBUTIONS
QUARTER ENDED HIGH LOW ($)
December 31, 1997 42-1/8 36-13/16 0.69
September 30, 1997 41-3/4 37-1/8 0.63
June 30, 1997 38-1/4 34-1/2 0.63
March 31, 1997 36-7/8 33-1/8 0.63
December 31, 1996 34-5/8 29-7/8 0.63
September 30, 1996 31-7/8 28-1/2 0.575
June 30, 1996 31-3/4 28-1/4 0.575
March 31, 1996 30-3/8 28-1/2 0.575
While the Company intends to continue paying regular quarterly dividends, future
dividend declarations will be at the discretion of the Board of Directors and
will depend on: the actual cash flow and financial condition of the Company;
capital requirements; annual distribution requirements under the REIT provisions
of the Internal Revenue Code; covenant limitations under the Credit Facilities,
the Term Notes and the Reset Notes; and such other factors as the Board of
Directors deems relevant.
On October 15, 1997, the Company sold an aggregate of 1.0 million shares of
8.375% Series A Cumulative Redeemable Preferred Stock, par value $.01 per share
(the "Preferred Stock") for a total sales price of $50 million. The Preferred
Stock has a liquidation preference of $50.00 per share, does not have any stated
maturity and is not convertible into any other securities of the Company. The
Preferred Stock is redeemable on or after October 15, 2027 at the Company's
option. Net proceeds from the offering were used to repay borrowings under the
Company's Credit Facilities.
The Preferred Stock was sold to "Qualified Institutional Buyers" (as defined in
Rule 144A under the Securities Act of 1933) in compliance with Rule 144A.
Merrill Lynch & Co. acted as the initial purchaser in connection with the sale
of the Preferred Stock and purchased the Preferred Stock at a discount of $1.50
per share.
On June 16, 1997, pursuant to a Stock Subscription Agreement dated May 16, 1997
(the "Subscription Agreement") the Company sold to Simon DeBartolo Group, Inc.
an aggregate of 1,408,450 shares of Common Stock at a purchase price of $35.50
per share, for an aggregate purchase price of approximately $50 million. The
proceeds from the sale were used to repay borrowings under the Company's Credit
Facilities. The Common Stock was sold pursuant to an exemption from registration
in compliance with Section 4(2) of the Securities Act of 1933. Pursuant to the
Subscription Agreement, the Company agreed not to sell for cash any equity
securities (or securities convertible into or exercisable for equity securities)
unless it offers to Simon the right to buy a pro rata share of such securities.
For a period of five years from the date of the Subscription Agreement (or two
years after the Company-Simon joint venture is terminated), Simon agreed not to
acquire any additional securities of the Company or, directly or indirectly,
seek to acquire control of the Company without prior consent of the Company's
Board of Directors. If Simon acquires an aggregate of $100 million of securities
of the Company, it will have the right to elect a director of the Company.
ITEM 6: SELECTED FINANCIAL DATA
CHELSEA GCA REALTY, INC. AND PREDECESSOR BUSINESS (1)
(IN THOUSANDS EXCEPT PER SHARE, AND NUMBER OF CENTERS)
Period Period
Nov. Jan.
Year Ended 2, 1,
December 31, 1993 1993
to to
Dec. 31, Nov. 1,
--------------------------------------------
Operating Data:
1997 1996 1995 1994 1993 1993
---- ---- ---- ---- ----
Rental revenue...................................... $81,531 $63,792 $51,361 $38,010 $6,401 $21,398
Total revenues...................................... 113,417 91,356 72,515 53,145 8,908 29,844
Total expenses...................................... 78,262 59,996 41,814 28,179 4,618 28,372
Net income before minority interest and
extraordinary item.............................. 35,155 31,360 29,650 24,966 4,290 1,472
Minority interest................................... (6,595) (9,899) (10,078) (8,538) (1,470) (1,128)
Net income before extraordinary item................ 28,560 21,461 19,572 16,428 2,820 344
Extraordinary item - loss on retirement of debt..... (204) (607) - - (6,185) -
Net income (loss)................................... 28,356 20,854 19,572 16,428 (3,365) 344
Preferred dividend.................................. (907) - - - - -
Net income (loss) to common shareholders............ 27,449 20,854 19,572 16,428 (3,365) 344
Income per common share before
extraordinary item (diluted) (2)................... $1.86 $1.79 $1.73 $1.50 $0.26 -
Net income (loss) per common share (diluted) (2).... $1.85 $1.74 $1.73 $1.50 $(0.31) -
OWNERSHIP INTEREST:
REIT common shares.................................. 14,866 11,964 11,289 10,956 10,937 -
Operating Partnership units......................... 3,435 5,316 5,601 5,690 5,703 -
------- ------- ------- -------- ------- -----
Weighted average shares/units outstanding.......... 18,301 17,280 16,890 16,646 16,640 -
BALANCE SHEET DATA:
Rental properties before accumulated
depreciation.................................... $708,933 $512,354 $415,983 $332,834 $243,218 $192,565
Total assets........................................ 688,029 502,212 408,053 330,775 288,732 188,895
Total liabilities ................................. 342,106 240,878 141,577 68,084 24,496 173,012
Minority interest................................... 48,253 75,994 89,718 91,640 90,564 5,587
Stockholders'/owners' equity........................ $297,670 $185,340 $176,758 $171,051 $173,672 $10,296
Distributions declared per common share............. $2.58 $2.355 $2.135 $1.90 $0.30 -
OTHER DATA:
Funds from operations to common shareholders (3).... $57,417 $48,616 $41,870 $33,631 $5,648 $7,727
Cash flows from:
Operating activities............................. $56,594 $53,510 $36,797 $32,522 $4,746 $9,893
Investing activities............................. (199,250) (99,568) (82,393) (79,595) (63,607) (29,032)
Financing activities............................. $ 143,308 $55,957 $40,474 $(1,707) $116,570 $22,692
GLA at end of period................................ 4,308 3,610 2,934 2,342 1,879 1,620
Weighted average GLA (4)............................ 3,935 3,255 2,680 2,001 1,743 1,550
Centers at end of the period........................ 20 18 16 16 13 12
New centers opened.................................. 1 2 1 3 1 -
Centers expanded.................................... 5 5 7 4 3 2
Center sold......................................... - - 1 - - -
Center acquired..................................... 1 - - - - -
NOTES TO SELECTED FINANCIAL DATA:
(1) The selected financial data includes the combined statement of Chelsea GCA
Properties ("Predecessor Business") for the period prior to November 2,
1993, and the consolidated statements of Chelsea GCA Realty, Inc. for the
periods after November 1, 1993.
(2) The earnings per share amounts prior to 1997 have been restated as required
to comply with Statement of Financial Accounting Standards No. 128,
EARNINGS PER SHARE. For further discussion of earnings per share and the
impact of Statement No. 128, see the notes to the consolidated financial
statements beginning on page F-6.
(3) Management considers funds from operations ("FFO") an appropriate measure
of performance for an equity real estate investment trust. FFO does not
represent net income or cash flow from operations as defined by generally
accepted accounting principles and should not be considered an
alternative to net income as an indicator of operating performance or to
cash from operations, and is not necessarily indicative of cash flow
available to fund cash needs. See Management's Discussion and Analysis for
definition of FFO.
(4) GLA weighted by months in operation.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion should be read in connection with the financial
statements and notes thereto appearing elsewhere in this annual report.
Certain comparisons between periods have been made on a percentage or weighted
average per square foot basis. The latter technique adjusts for square footage
changes at different times during the year.
GENERAL OVERVIEW
At December 31, 1997, the Company operated 20 manufacturers' outlet centers,
compared to 18 at the end of 1996 and 16 at the end of 1995. The Company's
operating gross leasable area ("GLA") at December 31, 1997 was 4.3 million
square feet compared to 3.6 million square feet and 2.9 million square feet at
December 31, 1996 and 1995, respectively.
From January 1, 1995 to December 31, 1997, the Company grew by increasing rents
at its operating centers, opening four new centers, acquiring one center, and
expanding ten centers. The 2.0 million square feet ("sf") of GLA added is
detailed in the schedule that follows:
SINCE
JANUARY 1,
1995 1997 1996 1995
---------------- ---------------- ---------------- ----------------
Changes in GLA (sf in 000's):
NEW CENTERS DEVELOPED:
Wrentham Village....................... 227 227 - -
North Georgia.......................... 292 - 292 -
Clinton Crossing....................... 272 - 272 -
Camarillo Premium Outlets.............. 149 - - 149
---------------- ---------------- ---------------- ----------------
TOTAL NEW CENTERS.......................... 940 227 564 149
CENTERS EXPANDED:
North Georgia........................... 111 111 - -
Camarillo Premium Outlets............... 216 85 54 77
Desert Hills............................ 227 36 - 191
Folsom Premium Outlets.................. 37 15 22 -
Liberty Village......................... 16 12 4 -
Petaluma Village........................ 46 - 30 16
Woodbury Common......................... 21 - 2 19
Napa Premium Outlets.................... 99 - - 99
Patriot Plaza........................... 35 - - 35
Aurora Premium Outlets.................. 27 - - 27
Other................................... (9) (2) - (7)
---------------- ---------------- ---------------- ----------------
TOTAL CENTERS EXPANDED 826 257 112 457
CENTER SOLD:
Page Factory Stores...................... (14) - - (14)
CENTER ACQUIRED:
Waikele Premium Outlets.................. 214 214 - -
---------------- ---------------- ---------------- ----------------
GLA added during the period 1,966 698 676 592
OTHER DATA:
GLA at end of period..................... 4,308 3,610 2,934
Weighted average GLA (1)................. 3,935 3,255 2,680
Centers at end of period................. 20 18 16
New centers opened....................... 1 2 1
Centers expanded......................... 5 5 7
Center sold.............................. - - 1
Center acquired.......................... 1 - -
NOTE: (1) Average GLA weighted by months in operation
The Company's centers produced weighted average reported tenant sales of
approximately $360 per square foot in 1997 compared to $345 and $313 per square
foot in 1996 and 1995, respectively.
Two of the Company's centers, Woodbury Common and Desert Hills, provided
approximately 34%, 38% and 40% of the Company's total revenue for the years
1997, 1996, and 1995, respectively. In addition, approximately 38%, 44%, and 45%
of the Company's revenues for the years ended December 31, 1997, 1996 and 1995,
respectively, were derived from the Company's centers in California.
The Company does not consider any one store lease to be material and no
individual tenant, combining all of its store concepts, accounts for more than
7% of the Company's gross revenues or total GLA. Only one tenant occupies in
excess of 4.3% of the Company's total GLA. In view of these statistics and the
Company's past success in re-leasing available space, the Company believes the
loss of any individual tenant would not have a significant effect on future
operations.
The discussion below is based upon operating income before minority interest and
extraordinary item. The minority interest in net income varies from period to
period as a result of changes in Operating Partnership interests and the
Company's 50% investment in Solvang.
COMPARISON OF YEAR ENDED DECEMBER 31, 1997 TO YEAR ENDED DECEMBER 31, 1996
Operating income before interest, depreciation and amortization increased $16.7
million, or 28.4%, to $75.4 million in 1997 from $58.7 million in 1996. This
increase was primarily the result of the Company's expansions, new center
openings and a center acquired.
Base rentals increased $14.3 million, or 25.4%, to $70.7 million in 1997 from
$56.4 million in 1996 due to expansions, new center openings, one acquired
center and higher average rents. Base rental revenue per weighted average square
foot increased to $17.97 in 1997 from $17.32 in 1996 as a result of higher
rental rates on new leases and renewals.
Percentage rents increased $3.4 million, or 46.4%, to $10.8 million in 1997 from
$7.4 million in 1996. The increase was primarily due to increases in tenant
sales, new center openings, expansions at the Company's larger centers, a center
acquired and increases in tenants contributing percentage rents.
Expense reimbursements, representing contractual recoveries from tenants of
certain common area maintenance, operating, real estate tax, promotional and
management expenses, increased $4.2 million, or 17.1%, to $29.0 million in 1997
from $24.8 million in 1996, due to the recovery of operating and maintenance
costs at new and expanded centers. On a weighted average square foot basis,
expense reimbursements decreased 3.3% to $7.36 in 1997 from $7.61 in 1996. The
average recovery of reimbursable expenses was 92.2% in 1997 compared to 91.8% in
1996.
Other income increased $0.1 million to $2.9 million in 1997 from $2.8 million in
1996.
Interest, in excess of amounts capitalized, increased $6.6 million to $15.4
million in 1997 from $8.8 million in 1996, due to higher debt balances from new
centers, expansion openings and one center acquisition financed with borrowings.
Operating and maintenance expenses increased $4.4 million, or 16.5%, to $31.4
million in 1997 from $27.0 million in 1996. The increase was primarily due to
costs related to increased GLA. On a weighted average square foot basis,
operating and maintenance expenses decreased 3.6% to $7.99 in 1997 from $8.29 in
1996 as a result of decreased maintenance and snow removal costs.
Depreciation and amortization expense increased $6.0 million to $25.0 million in
1997 from $19.0 million in 1996. The increase was due to costs related to
increased GLA.
General and administrative expenses increased $0.5 million to $3.8 million in
1997 from $3.3 million in 1996. On a weighted average square foot basis, general
and administrative expenses decreased 5.8% to $0.97 in 1997 from $1.03 in 1996.
Increased personnel and overhead costs were more than offset by additions to
operating GLA.
Other expenses increased $0.7 million to $2.6 million in 1997 from $1.9 million
in 1996. The increase was primarily from legal expenses and additional reserves
for bad debt due to higher revenue.
COMPARISON OF YEAR ENDED DECEMBER 31, 1996 TO YEAR ENDED DECEMBER 31, 1995
Operating income before interest, depreciation and amortization increased $12.4
million, or 26.8%, to $59.1 million in 1996 from $46.7 million in 1995. This
increase was primarily the result of the Company's expansions and new center
openings.
Base rentals increased $10.4 million, or 22.5%, to $56.4 million in 1996 from
$46.0 million in 1995 due to expansions, new center openings and higher average
rents. Base rental revenue per weighted average square foot increased to $17.32
in 1996 from $17.17 in 1995 as a result of higher rental rates on new leases and
renewals.
Percentage rents increased $2.1 million, or 38.7%, to $7.4 million in 1996 from
$5.3 million in 1995. The increase was primarily due to increases in tenant
sales, new center openings and expansions at the Company's larger centers.
Expense reimbursements, representing contractual recoveries from tenants of
certain common area maintenance, operating, real estate tax, promotional and
management expenses, increased $5.1 million, or 25.6%, to $24.8 million in 1996
from $19.7 million in 1995, due to the recovery of operating and maintenance
costs at new and expanded centers. On a weighted average square foot basis,
expense reimbursements increased 3.5% to $7.61 in 1996 from $7.35 in 1995. The
average recovery of reimbursable expenses was 91.8% in 1996 compared to 93.9% in
1995.
Other income increased $1.3 million to $2.8 million in 1996 from $1.5 million in
1995 primarily as a result of an outparcel sale at one of the operating centers,
increased interest income and lease termination settlements.
Interest, in excess of amounts capitalized, increased $5.7 million to $8.8
million in 1996 from $3.1 million in 1995, due to higher debt balances from the
issuance of $200 million of public debt during 1996 and lower construction in
progress.
Operating and maintenance expenses increased $6.0 million, or 28.6%, to $27.0
million in 1996 from $21.0 million in 1995. The increase was primarily due to
costs related to expansions and new centers. On a weighted average square foot
basis, operating and maintenance expenses increased 5.9% to $8.29 in 1996 from
$7.83 in 1995 as a result of increased insurance expense and additional
maintenance and security services provided at the centers.
General and administrative expenses increased $0.3 million to $3.3 million in
1996 from $3.0 million in 1995. On a weighted average square foot basis, general
and administrative expenses decreased 7.2% to $1.03 in 1996 from $1.11 in 1995.
Increased personnel and overhead costs were offset by additions to operating
GLA.
Other expenses remained stable at $1.9 million in 1996 and 1995.
LIQUIDITY AND CAPITAL RESOURCES
The Company believes it has adequate financial resources to fund operating
expenses, distributions, and planned development and construction activities.
Operating cash flow in 1997 of $54.6 million is expected to increase with a full
year of operations of the 698,000 square feet of GLA added during 1997 and
scheduled openings of approximately 760,000 square feet in 1998, subject to
market demand. In addition, at December 31, 1997 the Company had $145 million
available under its Credit Facilities, access to the public markets through
shelf registrations covering $200 million of equity and $175 million of debt,
and cash and equivalents of $14.5 million.
Operating cash flow is expected to provide sufficient funds for distributions in
accordance with REIT federal income tax requirements. In addition, the Company
anticipates retaining sufficient operating cash to fund re-tenanting and lease
renewal tenant improvement costs, as well as capital expenditures to maintain
the quality of its centers.
In the fourth quarter of 1997, the Company raised its quarterly distribution to
$0.69 per share from $0.63 per share, a 9.5% increase. Common distributions
declared and recorded in 1997 were $47.3 million or $2.58 per share or unit. The
Company's 1997 distribution payout ratio as a percentage of net income before
depreciation and amortization, loss on extraordinary item and minority interest
was 82.4%. Distributions are limited by covenants of the Credit Facilities to
95% of net income before depreciation and amortization and minority interest.
The Company currently has in place two unsecured bank revolving lines of credit
with an aggregate maximum borrowing amount of $150 million (each, a "Credit
Facility" and collectively, the "Credit Facilities"). Each Credit Facility
expires on March 30, 1998 and bears interest on the outstanding balance, payable
monthly, at a rate equal to the London Interbank Offered Rate ("LIBOR") plus
1.15% or the prime rate, at the Company's option. A fee on the unused portion of
the Credit Facilities is payable quarterly at a rate of 0.25% per annum. The
Credit Facilities' are provided by five banks. The Company has agreed to a term
sheet with its agent bank for a new three year credit facility that generally
includes more favorable terms than the Credit Facilities and is expected to
close on or prior to March 30, 1998.
In June 1997, the Company completed the sale of 1.4 million shares of common
stock to Simon, for an aggregate price of $50 million, in conjunction with a
strategic alliance. Proceeds from the sale were used to repay borrowings under
the Credit Facilities.
In October 1997, the Company issued 1.0 million shares of 8.375% Series A
Cumulative Redeemable Preferred Stock (the "Preferred Stock"), par value $0.01
per share, having a liquidation preference of $50.00 per share. The Preferred
Stock has no stated maturity and is not convertible into any other securities of
the Company. The Preferred Stock is redeemable on or after October 15, 2027 at
the Company's option. Net proceeds from the offering were used to repay
borrowings under the Company's Credit Facilities.
Also in October 1997, the Company's Operating Partnership completed a $125
million public debt offering of 7.25% unsecured term notes due October 2007 (the
"7.25% Notes"). The 7.25% Notes were priced to yield 7.29% to investors, 120
basis points over the 10-year U.S. Treasury rate. Net proceeds from the offering
were used to repay substantially all borrowings under the Company's Credit
Facilities, redeem $40 million of Remarketed Floating Rate Reset Notes and for
general corporate purposes.
The Company is in the process of planning development for 1998 and beyond.
Approximately 760,000 square feet of the Company's planned 1998 development is
under construction. The Company anticipates 1998 development and construction
costs of $100 million to $120 million. Funding is currently expected from
borrowings under the Credit Facilities, additional debt offerings, and/or equity
offerings.
The Company's planned development also includes Houston Premium Outlets
(Houston, TX) which is expected to be the first project undertaken as part of
the Company's strategic alliance with Simon, announced in May 1997. Construction
is scheduled to begin on the 430,000 square foot first phase during the third
quarter of 1998, with completion scheduled for mid-year 1999. The Company will
be a co-managing general partner of a sole purpose joint venture and will have a
50% ownership interest in the project. The joint venture expects to finance this
project with partners' equity contributions and debt secured by the project.
Planned development projects are in various stages of completion and there can
be no assurance that any of these projects will be completed or opened, or that
there will not be delays in the opening or completion of any of these projects.
To achieve planned growth and favorable returns in both the short and long-term,
the Company's financing strategy is to maintain a strong, flexible financial
position by: (i) maintaining a conservative level of leverage; (ii) extending
and sequencing debt maturity dates; (iii) managing exposure to floating interest
rates; and (iv) maintaining liquidity. Management believes these strategies will
enable the Company to access a broad array of capital sources, including bank or
institutional borrowings and secured and unsecured debt and equity offerings.
It is the Company's policy to limit its borrowings to less than 40% of total
market capitalization (defined as the value of outstanding shares of common
stock including conversion of partnership units to common stock, plus the
liquidation preference value of preferred stock plus total debt). Applying a
December 31, 1997 closing price of $38.1875 per common share, plus a liquidation
preference of $50.00 per preferred share, the Company's ratio of debt to total
market capitalization was approximately 27% at December 31, 1997.
Net cash provided by operating activities was $56.6 million and $53.5 million
for the years ended December 31, 1997 and 1996, respectively. The increase was
primarily due to the growth of the Company's GLA to 4.3 million square feet in
1997 from 3.6 million square feet in 1996 and increases in accrued interest on
the borrowings offset by additions to deferred lease costs. Net cash used in
investing activities increased $99.7 million for the year ended December 31,
1997 compared to 1996, primarily as a result of the acquisition of Waikele
Factory Outlets and increased construction activity. Net cash provided by
financing activities increased $87.4 million primarily due to the sale of common
stock to Simon and the sale of Preferred Stock.
Net cash provided by operating activities was $53.5 million and $36.8 million
for the years ended December 31, 1996 and 1995, respectively. The increase was
primarily due to the growth of the Company's GLA to 3.6 million square feet in
1996 from 2.9 million square feet in 1995 and increases in accrued interest on
the borrowings. Net cash used in investing activities increased $17.2 million
for the year ended December 31, 1996 compared to 1995, primarily as a result of
increased construction activity. Net cash provided by financing activities
increased $15.5 million primarily due to debt offerings offset by repayments of
the Company's lines of credit.
YEAR 2000 COMPLIANCE
The Company has determined that is will need to modify or replace significant
portions of its software so that its computer systems will function properly
with respect to dates in the year 2000 and beyond. The Company's comprehensive
Year 2000 initiative is being managed by a team of internal staff and outside
consultants. The team's activities are designed to ensure that there are no
adverse effects on the Company's core business operations and that transactions
with customers, suppliers, and financial institutions are fully supported. The
Company is well under way with these efforts, which are scheduled to be
completed by the end of 1998. While the Company believes its planning efforts
are adequate to address its Year 2000 concerns, there can be no guarantee that
the systems of other companies on which the Company's systems and operations
rely will be converted on a timely basis and will not have a material effect on
the Company. The cost of the Year 2000 initiatives is not expected to be
material to the Company's results of operations or financial position.
FUNDS FROM OPERATIONS
Management believes that funds from operations ("FFO") should be considered in
conjunction with net income, as presented in the statements of operations
included elsewhere herein, to facilitate a clearer understanding of the
operating results of the Company. Management considers FFO an appropriate
measure of performance for an equity real estate investment trust. FFO, as
defined by the National Association of Real Estate Investment Trusts ("NAREIT"),
is net income applicable to common shareholders (computed in accordance with
generally accepted accounting principles), excluding gains (or losses) from debt
restructuring and sales of property, exclusive of outparcel sales, plus
depreciation and amortization (as defined by NAREIT), and after adjustments for
unconsolidated partnerships and joint ventures. Adjustments for unconsolidated
partnerships and joint ventures are calculated to reflect FFO on the same basis.
FFO does not represent net income or cash flow from operations as defined by
generally accepted accounting principles and should not be considered an
alternative to net income as an indicator of operating performance or to cash
from operations, and is not necessarily indicative of cash flow available to
fund cash needs.
Year Ended December 31,
1997 1996
-------------- --------------
Common income before extraordinary item...... $27,653 $21,461
Add:
Depreciation and amortization (1).......... 24,883 18,747
Amortization of deferred financing
costs and depreciation
of non-rental real estate assets......... (1,587) (1,234)
Minority interest (1)...................... 6,468 9,642
-------------- ------------
FFO.......................................... $57,417 $48,616
============== ============
Average shares/units outstanding............. 18,301 17,280
Dividends declared per share................. $2.58 $2.355
NOTE: (1) Excludes depreciation and minority interest
attributed to a third-party limited partner's interest in a
partnership for the years ended December 31, 1997 and 1996,
respectively.
ECONOMIC CONDITIONS
Substantially all leases contain provisions, including escalations of base rents
and percentage rentals calculated on gross sales, to mitigate the impact of
inflation. Inflationary increases in common area maintenance and real estate tax
expenses are substantially all reimbursed by tenants.
Virtually all tenants have met their lease obligations and the Company continues
to attract and retain quality tenants. The Company intends to reduce operating
and leasing risks by continually improving its tenant mix, rental rates and
lease terms, and by pursuing contracts with creditworthy upscale and national
brand-name tenants.
ITEM 7-A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
None.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and financial information of the Company for the years
ended December 31, 1997, 1996 and 1995 and the Report of the Independent
Auditors thereon are included elsewhere herein. Reference is made to the
financial statements and schedules in Item 14.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEMS 10, 11, 12 AND 13.
The required information in the following items will appear in the Company's
Proxy Statement furnished to shareholders in connection with the 1998 Annual
Meeting, and is incorporated by reference in this Form 10-K Annual Report.
Item 10. Directors and Executive Officers of the Registrant*
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and Management
Item 13. Certain Relationships and Related Transactions
* Certain information regarding Directors and Officers is included at the end
of Part I.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1 and 2. The response to this portion of Item 14 is submitted as a separate
section of this report.
3. Exhibits
3.1 Articles of Incorporation of the Company, as amended,
including Articles Supplementary relating to 8 3/8% Series
A Cumulative Redeemable Preferred Stock.
3.2 By-laws of the Company. Incorporated by reference to Exhibit
3.2 to Registration Statement filed by the Company on Form
S-11 under the Securities Act of 1933 (file No. 33-67870)
(S-11).
3.3 Agreement of Limited Partnership for the Operating
Partnership. Incorporated by reference to Exhibit
3.3 to S-11.
3.4 Amendments No. 1 and No. 2 to Partnership Agreement
dated March 31, 1997 and October 7, 1997
4.1 Form of Indenture among the Company, Chelsea GCA Realty
Partnership, L.P., and State Street Bank and Trust Company, as
Trustee. Incorporated by reference to Exhibit 4.4 to
Registration Statement filed by the Company on Form S-3 under
the Securities Act of 1933 (File No. 33-98136).
10.1 Registration Rights Agreement among the Company and recipients
of Units. Incorporated by reference to Exhibit 4.1 to S-11.
10.2 Consulting Agreement effective August 1, 1997, between the
Company and Robert Frommer.
10.3 Limited Liability Company Agreement of
Simon/Chelsea Development Co., L.L.C. dated May 16,
1997 between Simon DeBartolo Group, L.P. and Chelsea
GCA Realty Partnership, L.P.
10.4 Subscription Agreement dated as of March 31, 1997 by and among
Chelsea GCA Realty Partnership, L.P., WCC Associates and KM
Halawa Partners. Incorporated by reference to Exhibit 1 to
current report on Form 8-K reporting on an event which
occurred March 31, 1997.
10.5 Stock Subscription Agreement dated May 16, 1997
between Chelsea GCA Realty, Inc. and Simon DeBartolo
Group, L.P.
23.1 Consent of Ernst & Young LLP.
(b) Reports on Form 8-K.
None
(c) Exhibits
None
(d) Financial Statement Schedules - The response to this portion of
Item 14 is submitted as a separate schedule of this report.
Item 8, Item 14(a)(1)and (2) and Item 14(d)
(a)1. Financial Statements Form 10-K
Report Page
Consolidated Financial Statements-Chelsea GCA Realty, Inc.
Report of Independent Auditors..................................... F-1
Consolidated Balance Sheets as of December 31, 1997 and 1996....... F-2
Consolidated Statements of Operations for the years ended
December 31, 1997, 1996 and 1995................................. F-3
Consolidated Statements of Stockholders' Equity for the years
ended December 31, 1997, 1996 and 1995........................... F-4
Consolidated Statements of Cash Flows for the years December
31, 1997, 1996 and 1995.......................................... F-5
Notes to Consolidated Financial Statements......................... F-6
(a)2 and (d) Financial Statement Schedule
Schedule III-Consolidated Real Estate and Accumulated Depreciation.. F-16
and F-17
All other schedules are omitted since the required information is not present or
is not present in amounts sufficient to require submission of the schedule, or
because the information required is included in the consolidated financial
statements and notes thereto.
REPORT OF INDEPENDENT AUDITORS
BOARD OF DIRECTORS
CHELSEA GCA REALTY, INC.
We have audited the accompanying consolidated balance sheets of Chelsea GCA
Realty, Inc. as of December 31, 1997 and 1996, and the related consolidated
statements of operations, stockholders' equity and cash flows for each of the
three years in the period ended December 31, 1997. Our audits also included the
financial statement schedule listed in the Index as Item 14(a). These financial
statements and schedule are the responsibility of the management of Chelsea GCA
Realty, Inc. Our responsibility is to express an opinion on the financial
statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Chelsea GCA
Realty, Inc. as of December 31, 1997 and 1996, and the consolidated results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1997 in conformity with generally accepted accounting
principles. Also, in our opinion, the related financial statement schedule, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
ERNST & YOUNG LLP
NEW YORK, NEW YORK
FEBRUARY 13, 1998
CHELSEA GCA REALTY, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
DECEMBER 31,
1997 1996
----------- -----------
Assets
Rental properties:
Land.................................................................. $112,470 $ 80,312
Depreciable property.................................................. 596,463 432,042
---------- ---------
Total rental property...................................................... 708,933 512,354
Accumulated depreciation................................................... (80,244) (58,054)
----------- -----------
Rental properties, net..................................................... 628,689 454,300
Cash and equivalents....................................................... 14,538 13,886
Notes receivable-related parties........................................... 4,781 8,023
Deferred costs, net........................................................ 17,276 10,321
Other assets............................................................... 22,745 15,682
----------- -----------
TOTAL ASSETS............................................................... $ 688,029 $ 502,212
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Unsecured bank debt................................................... $ 5,035 $ -
7.75% Unsecured Notes due 2001........................................ 99,743 99,668
Remarketed Floating Rate Reset Notes due 2001......................... 60,000 100,000
7.25% Unsecured Notes due 2007........................................ 124,681 -
Construction payables................................................. 17,810 14,473
Accounts payable and accrued expenses................................. 14,442 10,904
Obligation under capital lease........................................ 9,729 9,805
Accrued dividend and distribution payable 3,276 3,038
Other liabilities..................................................... 7,390 2,990
----------- -----------
TOTAL LIABILITIES.......................................................... 342,106 240,878
Commitments and contingencies
Minority interest.......................................................... 48,253 75,994
Stockholders' equity:
8.375% series A cumulative redeemable preferred stock, $0.01 par value,
authorized 1,000 shares, issued and outstanding 1,000 shares in 1997
(aggregate liquidation preference $50,000 in 1997)................. 10 -
Common stock, $0.01 par value, authorized 50,000 shares,
issued and outstanding 15,353 in 1997 and 12,402 in 1996........... 154 124
Paid-in-capital......................................................... 331,226 207,910
Distributions in excess of net income................................... (33,720) (22,694)
----------- -----------
Total stockholders' equity................................................. 297,670 185,340
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY................................. $ 688,029 $502,212
=========== ==========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
CHELSEA GCA REALTY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
YEAR ENDED DECEMBER 31,
1997 1996 1995
-------------- -------------- --------------
REVENUES:
Base rental.................................... $70,693 $56,390 $46,025
Percentage rentals............................. 10,838 7,402 5,336
Expense reimbursements......................... 28,981 24,758 19,704
Other income................................... 2,905 2,806 1,450
-------------- -------------- --------------
TOTAL REVENUES...................................... 113,417 91,356 72,515
EXPENSES:
Interest....................................... 15,447 8,818 3,129
Operating and maintenance...................... 31,423 26,979 20,984
Depreciation and amortization 24,995 18,965 12,823
General and administrative..................... 3,815 3,342 2,967
Other.......................................... 2,582 1,892 1,911
-------------- -------------- --------------
TOTAL EXPENSES...................................... 78,262 59,996 41,814
Operating income.................................... 35,155 31,360 30,701
Loss on sale of center.............................. - - (1,051)
-------------- -------------- --------------
Net income before minority interest
and extraordinary item......................... 35,155 31,360 29,650
Minority interest................................... (6,595) (9,899) (10,078)
-------------- -------------- --------------
Net income before extraordinary item................ 28,560 21,461 19,572
Extraordinary item-loss on early extinguishment of
debt, net of minority interest in the amount of
$48 in 1997 and $295 in 1996 (204) (607) -
-------------- -------------- --------------
Net income.......................................... 28,356 20,854 19,572
Preferred dividend requirement (907) - -
-------------- -------------- --------------
NET INCOME TO COMMON SHAREHOLDERS................... $27,449 $20,854 $19,572
============== ============== ==============
BASIC:
Income per common share before extraordinary item ... $1.89 $1.82 $1.75
Extraordinary item per common share.................. (0.01) (0.05) -
-------------- -------------- --------------
Net income per common share......................... $1.88 $1.77 $1.75
============== ============== ==============
Weighted average common shares outstanding........... 14,605 11,802 11,188
============== ============== ==============
DILUTED:
Income per common share before extraordinary item .... $1.86 $1.79 $1.73
Extraordinary item per common share................... (0.01) (0.05) -
-------------- -------------- --------------
Net income per common share........................... $1.85 $1.74 $1.73
============== ============== ==============
Weighted average common shares outstanding............ 14,866 11,964 11,289
============== ============== ==============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
CHELSEA GCA REALTY, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT PER SHARE DATA)
PREFERRED COMMON
STOCK STOCK DISTRIB. TOTAL
AT AT PAID-IN- IN EXCESS STOCKHOLDER'S
PAR VALUE PAR VALUE CAPITAL NET INCOME EQUITY
------------- ------------ ------------- -------------- ---------------
Balance December 31, 1994.................... - $111 $181,998 ($11,058) $171,051
Net income................................... - - - 19,572 19,572
Cash distributions declared ($2.135 per share of
which $0.406 represented a return of
capital for federal income tax purposes).. - - - (23,940) (23,940)
Shares issued in exchange for units of the
Operating Partnership........................ - 1 1,628 - 1,629
Shares issued through dividend
reinvestment program.................... - 3 8,443 - 8,446
------------- ------------- ------------ --------------- -------------
Balance December 31, 1995.................... - 115 192,069 (15,426) 176,758
Net income................................... - - - 20,854 20,854
Cash distributions declared ($2.355 per share of
which $0.33 represented a return of
capital for federal income tax purposes)... - - - (28,122) (28,122)
Exercise of stock options.................... - 1 2,583 - 2,584
Shares issued in exchange for units of the
Operating Partnership................... - 8 12,626 - 12,634
Shares issued through dividend
reinvestment program..................... - - 632 - 632
------------- ------------- -------------- ----------- -----------
Balance December 31, 1996.................... - 124 207,910 (22,694) 185,340
NET INCOME................................... - - - 28,356 28,356
Preferred dividend requirement............... - - - (907) (907)
Cash distributions declared ($2.58 per
common share of which $0.49
represented a return of capital for
federal income tax purposes)............ - - - (38,475) (38,475)
Exercise of stock options.................... - - 1,205 1,205
Shares issued in exchange for units of the
Operating Partnership.................... - 15 19,984 - 19,999
Sales of stock (net of costs) 10 14 98,382 - 98,406
Shares issued through dividend
reinvestment program.................... - 1 3,745 - 3,746
------------- ------------- ------------- -------------- ---------------
Balance December 31, 1997 $10 $154 $331,226 ($33,720) $297,670
============= ============= ============= ============== ===============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
CHELSEA GCA REALTY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
Year ended December 31,
1997 1996 1995
-------------- -------------- --------------
Cash flows from operating activities
Net income............................................. $28,356 $20,854 $19,572
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization..................... 24,995 18,965 12,823
Minority interest in net income................... 6,547 9,604 10,078
Loss on sale of center............................ - - 1,051
Loss on early extinguishment of debt.............. 252 902 -
Additions to deferred lease costs.................... (6,629) (2,537) (1,245)
Other operating activities........................ 319 191 146
Changes in assets and liabilities:
Straight-line rent receivable..................... (1,523) (1,595) (1,357)
Other assets..................................... 287 597 (2,426)
Accounts payable and accrued expenses............ 3,990 6,529 (1,845)
-------------- -------------- --------------
Net cash provided by operating activities.............. 56,594 53,510 36,797
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to rental properties......................... (195,058) (97,585) (80,249)
Additions to deferred development costs................ (2,237) (1,477) (2,068)
Advances to related parties............................ - (67) (189)
Payments from related parties.......................... - 173 115
Proceeds from sale of center........................... - - 465
Other investing activities............................. (1,955) (612) (467)
-------------- -------------- --------------
Net cash used in investing activities.................. (199,250) (99,568) (82,393)
CASH FLOWS FROM FINANCING ACTIVITIES
Net proceeds from sale of preferred stock............. 48,406 - -
Net proceeds from sale of common stock................. 54,951 2,583 8,446
Distributions.......................................... (48,791) (47,124) (34,748)
Debt proceeds ......................................... 261,710 292,592 68,000
Repayments of debt..................................... (172,000) (189,000) -
Additions to deferred financing costs.................. (855) (3,660) (866)
Other financing activities............................. (113) 566 (358)
-------------- -------------- --------------
Net cash provided by financing activities.............. 143,308 55,957 40,474
Net increase (decrease) in cash and equivalents........ 652 9,899 (5,122)
Cash and equivalents, beginning of period.............. 13,886 3,987 9,109
-------------- -------------- --------------
Cash and equivalents, end of period.................... $14,538 $13,886 $3,987
============== ============== ==============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION AND BASIS OF PRESENTATION
ORGANIZATION
Chelsea GCA Realty, Inc. (the "Company") is engaged in the development,
ownership, acquisition and operation of manufacturers' outlet centers. As of
December 31, 1997 the Company operated 20 manufacturers' outlet centers in 12
states. The Company is a self-administered and self-managed real estate
investment trust ("REIT"). The Company is the sole general partner in Chelsea
GCA Realty Partnership, L.P. (the "Operating Partnership").
BASIS OF PRESENTATION
All of the Company's assets are held by, and all of its operations conducted
through, the Operating Partnership. Due to the Company's ability, as the sole
general partner, to exercise financial and operational control over the
Operating Partnership, the Operating Partnership is consolidated in the
accompanying financial statements. All intercompany transactions have been
eliminated in consolidation.
Through June 30, 1997, the Company was the sole general partner and had a 50%
interest in Solvang Designer Outlets ("Solvang"), a limited partnership.
Accordingly, the accounts of Solvang were included in the consolidated financial
statements of the Company. On June 30, 1997, the Company acquired the remaining
50% interest in Solvang. Solvang is not material to the operations or financial
position.
Disclosure about fair value of financial instruments is based on pertinent
information available to management as of December 31, 1997 using available
market information and appropriate valuation methodologies. Although management
is not aware of any factors that would significantly affect the reasonable fair
value amounts, such amounts have not been comprehensively revalued for purposes
of these financial statements since that date and current estimates of fair
value may differ significantly from the amounts presented herein.
Certain balances in the accompanying prior year financial statements have been
reclassified to conform to the current year presentation.
2. SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES
RENTAL PROPERTIES
Rental properties are presented at cost net of accumulated depreciation.
Depreciation is computed on the straight- line basis over the estimated useful
lives of the assets. The Company uses 25-40 year estimated lives for buildings,
and 15 and 5-7 year estimated lives for improvements and equipment,
respectively. Expenditures for ordinary maintenance and repairs are charged to
operations as incurred, while significant renovations and enhancements that
improve and/or extend the useful life of an asset are capitalized and
depreciated over the estimated useful life. During 1996, the Company adopted
Statement of Financial Accounting Standards No. 121 ("SFAS No. 121"), Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of. SFAS No. 121 requires that the Company review real estate assets for
impairment wherever events or changes in circumstances indicate that the
carrying value of assets to be held and used may not be recoverable. Impaired
assets are reported at the lower of cost or fair value. Assets to be disposed of
are reported at the lower of cost or fair value less cost to sell. No impairment
losses have been recorded in any of the periods presented.
CASH AND EQUIVALENTS
All demand and money market accounts and certificates of deposit with
original terms of three months or less from the date of purchase are considered
cash equivalents. At December 31, 1997 and 1996 cash equivalents consisted of
repurchase agreements which were held by one financial institution, commercial
paper and US Government agency securities which matured in January of the
following year. The carrying amount of such investments approximated fair value.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES (CONTINUED)
DEVELOPMENT COSTS
Development costs, including interest, taxes, insurance and other costs incurred
in developing new properties, are capitalized. Upon completion of construction,
development costs are amortized on a straight-line basis over the useful lives
of the respective assets.
CAPITALIZED INTEREST
Interest, including the amortization of deferred financing costs for borrowings
used to fund development and construction, is capitalized as construction in
progress and allocated to individual property costs.
RENTAL EXPENSE
Rental expense is recognized on a straight-line basis over the initial term of
the lease.
DEFERRED LEASE COSTS
Deferred lease costs consist of fees and direct costs incurred to initiate and
renew operating leases, and are amortized on a straight-line basis over the
initial lease term or renewal period as appropriate.
DEFERRED FINANCING COSTS
Deferred financing costs are amortized as interest costs on a straight-line
basis over the terms of the respective agreements. Unamortized deferred
financing costs are expensed when the associated debt is retired before
maturity.
REVENUE RECOGNITION
Leases with tenants are accounted for as operating leases. Minimum rental income
is recognized on a straight-line basis over the lease term. Due and unpaid rents
are included in other assets in the accompanying balance sheet. Certain lease
agreements contain provisions for rents which are calculated on a percentage of
sales and recorded on the accrual basis. Virtually all lease agreements contain
provisions for reimbursement of real estate taxes, insurance, advertising and
common area maintenance costs.
BAD DEBT EXPENSE
Bad debt expense included in other expense totaled $0.8 million, $0.3 million
and $0.4 million for the years ended December 31, 1997, 1996 and 1995,
respectively. The allowance for doubtful accounts included in other assets
totaled $0.8 million and $0.5 million at December 31, 1997 and 1996,
respectively.
INCOME TAXES
The Company is taxed as a REIT under Section 856(c) of the Internal Revenue Code
of 1986, as amended, commencing with the tax year ended December 31, 1993. As a
REIT, the Company generally is not subject to federal income tax. To maintain
qualification as a REIT, the Company must distribute at least 95% of its REIT
taxable income to its stockholders and meet certain other requirements. If the
Company fails to qualify as a REIT in any taxable year, the Company will be
subject to federal income tax on its taxable income at regular corporate rates.
The Company may also be subject to certain state and local taxes on its income
and property. Under certain circumstances, federal income and excise taxes may
be due on its undistributed taxable income. At December 31, 1997 and 1996, the
Company was in compliance with all REIT requirements and was not subject to
federal income taxes.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES (CONTINUED)
NET INCOME PER COMMON SHARE
Basic earnings per common share is computed using the weighted average number of
shares outstanding. Diluted earnings per common share is computed using the
weighted average number of shares outstanding adjusted for the incremental
shares attributed to outstanding options to purchase common stock of 0.3
million, 0.2 million and 0.1 million in 1997, 1996 and 1995 respectively.
STOCK OPTION PLAN
The Company follows Accounting Principles Board Opinion No. 25 (Accounting for
Stock Issued to Employees) and the related interpretations in accounting for its
employee stock options. In accordance with SFAS No. 123 (Accounting for
Stock-Based Compensation), the Company has provided the required footnote
disclosure for the compensation expense related to the fair value of the
outstanding stock options.
CONCENTRATION OF COMPANY'S REVENUE AND CREDIT RISK
Approximately 34%, 38% and 40% of the Company's revenues for the years ended
December 31, 1997, 1996 and 1995, respectively, were derived from the Company's
two centers with the highest revenues, Woodbury Common and Desert Hills. The
loss of either center or a material decrease in revenues from either center for
any reason may have a material adverse effect on the Company. In addition,
approximately 38%, 44% and 45% of the Company's revenues for the years ended
December 31, 1997, 1996 and 1995, respectively, were derived from the Company's
centers in California.
Management of the Company performs ongoing credit evaluations of its tenants and
requires certain tenants to provide security deposits. Although the Company's
tenants operate principally in the retail industry, there is no dependence upon
any single tenant.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
MINORITY INTEREST
Minority interest is comprised of the following:
o The unitholders' interest in the Operating Partnership which was
received in exchange for the assets contributed to the Operating
Partnership on November 2, 1993 and additional units exchanged for
property acquisitions during 1996 and 1997. The unitholders' interest
at December 31, 1997 and 1996 was 18.3% and 27.7%, respectively.
o Through June 30, 1997, the Company was the sole general
partner and had a 50% interest in Solvang Designer Outlets
("Solvang"), a limited partnership. Accordingly, the
accounts of Solvang were included in the consolidated
financial statements of the Company. On June 30, 1997, the
Company acquired the remaining 50% interest in Solvang.
Solvang is not material to the operations or financial
position.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES (CONTINUED)
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
Financial Accounting Standards Board Statement No. 131 ("FAS No. 131")
"Disclosure about Segments of an Enterprise and Related Information" is
effective for financial statements issued for periods beginning after December
15, 1997. FAS No. 131 requires disclosures about segments of an enterprise and
related information regarding the different types of business activities in
which an enterprise engages and the different economic environments in which it
operates. The Company does not believe that the implementation of FAS No. 131
will have an impact on its financial statements.
In 1997, the Financial Accounting Standards Board issued Statement No. 128,
EARNINGS PER SHARE. Statement 128 replaced the calculation of primary and fully
diluted earnings per share with basic and diluted earnings per share. Unlike
primary earnings per share, basic earnings per share excludes any dilutive
effects of options, warrants and convertible securities. Diluted earnings per
share is very similar to the previously reported fully diluted earnings per
share. All earnings per share amounts for all periods have been presented, and
where appropriate, restated to conform to the Statement 128 requirements.
3. RENTAL PROPERTIES
The following summarizes the carrying values of rental properties as of December
31 (in thousands):
1997 1996
-------------- -------------
Land and improvements.................... $207,186 $153,096
Buildings and improvements............... 434,565 335,242
Construction-in-process.................. 60,615 18,888
Equipment and furniture.................. 6,567 5,128
-------------- -------------
Total rental property.................... 708,933 512,354
Accumulated depreciation and amortization. (80,244) (58,054)
-------------- -------------
Total rental property, net............... $628,689 $454,300
============== =============
Interest costs capitalized as part of buildings and improvements were $4.8
million, $3.9 million and $3.7 million for the years ended December 31, 1997,
1996 and 1995, respectively.
Commitments for land, new construction, development, and acquisitions totaled
approximately $51.5 million at December 31, 1997.
Depreciation expense (including amortization of the capital lease) amounted to
$22.3 million, $16.9 million and $11.2 million for the years ended December 31,
1997, 1996 and 1995, respectively.
4. WAIKELE ACQUISITION
Pursuant to a Subscription Agreement dated as of March 31, 1997, the Company
acquired Waikele Factory Outlets, a manufacturers' outlet shopping center
located in Hawaii. The consideration paid by the Company consisted of the
assumption of $70.7 million of indebtedness outstanding with respect to the
property (which indebtedness was repaid in full by the Company immediately after
the closing) and the issuance of special partnership units in the Operating
Partnership, having a fair market value of $0.5 million. Immediately after the
closing, the Company paid a special cash distribution of $5.0 million on the
special units. The cash used by the Company in the transaction was obtained
through borrowings under the Company's Credit Facilities.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. WAIKELE ACQUISITION (CONTINUED)
The following condensed pro forma (unaudited) information assumes the
acquisition had occurred on January 1, 1996:
1997 1996
--------------- --------------
Total revenue................................ $115,349 $97,037
Common income before extraordinary items..... 28,137 22,580
Net income to common shareholders............ 27,933 21,973
Earnings per share:
Basic:
Income before extraordinary items........ $1.93 $1.91
Net income............................... $1.91 $1.86
Diluted:
Income before extraordinary items........ $1.89 $1.89
Net income............................... $1.88 $1.84
5. DEFERRED COSTS
The following summarizes the carrying amounts for deferred costs as of December
31 (in thousands):
1997 1996
----------- -----------
Lease costs.................................. $14,712 $8,095
Financing costs.............................. 9,184 8,329
Development costs............................ 4,348 2,111
Other........................................ 991 491
----------- -----------
Total deferred costs......................... 28,235 19,026
Accumulated amortization..................... (11,959) (8,705)
----------- -----------
Total deferred costs, net.................... $17,276 $10,321
=========== ===========
6. DEBT
The Company currently has in place two unsecured bank revolving lines of
credit with an aggregate maximum borrowing amount of $150 million (each, a
"Credit Facility" and collectively, the "Credit Facilities"). Each Credit
Facility expires on March 30, 1998 and bears interest on the outstanding
balance, payable monthly, at a rate equal to the London Interbank Offered Rate
("LIBOR") plus 1.15% (7.09% at December 31, 1997) or the prime rate, at the
Company's option. A fee on the unused portion of the Credit Facilities is
payable quarterly at a rate of 0.25% per annum. The Credit Facilities' are
provided by five banks.
In January 1996, the Company's Operating Partnership completed a $100 million
public debt offering of 7.75% unsecured term notes due January 2001 (the "7.75%
Notes"), which are guaranteed by the Company. The five-year non-callable 7.75%
Notes were priced at a discount of 99.592 to yield 7.85% to investors. Net
proceeds from the offering were used to pay down substantially all of the
borrowings under the Company's secured line of credit. The carrying amount of
the 7.75% Notes approximates their fair value.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
6. DEBT (CONTINUED)
In October 1996, the Company's Operating Partnership completed a $100 million
offering of Remarketed Floating Rate Reset Notes (the "Reset Notes"), which are
guaranteed by the Company. The interest rate will reset quarterly and was equal
to LIBOR plus 75 basis points during the first year. In October 1997, the
interest rate spread was reduced to LIBOR plus 48 basis points (6.39% at
December 31, 1997). The spread and the spread period for subsequent periods will
be adjusted in whole or part at the end of each year, pursuant to an agreement
with the underwriters. Unless previously redeemed, the Reset Notes will have a
final maturity of October 23, 2001. Net proceeds from the offering were used to
repay all of the then borrowings under the Credit Facilities and for working
capital. In October 1997, the Company redeemed $40 million of Reset Notes. The
carrying amount of the Reset Notes approximates their fair value.
Also, in October 1997, the Company's Operating Partnership completed a $125
million public debt offering of 7.25% unsecured term notes due October 2007 (the
"7.25% Notes"). The 7.25% Notes were priced to yield 7.29% to investors, 120
basis points over the 10-year U.S. Treasury rate. Net proceeds from the offering
were used to repay substantially all borrowings under the Company's Credit
Facilities, redeem $40 million of Reset Notes and for general corporate
purposes. The carrying amount of the 7.25% Notes approximates their fair value.
Interest paid, excluding amounts capitalized, was $14.1 million, $4.8 million
and $2.7 million for the years ended December 31, 1997, 1996 and 1995,
respectively.
7. PREFERRED STOCK
In October 1997, the Company issued 1.0 million shares of 8.375% Series A
Cumulative Redeemable Preferred Stock (the "Preferred Stock"), par value $0.01
per share, having a liquidation preference of $50.00 per share. The Preferred
Stock has no stated maturity and is not convertible into any other securities of
the Company. The Preferred Stock is redeemable on or after October 15, 2027 at
the Company's option. Net proceeds from the offering were used to repay
borrowings under the Company's Credit Facilities.
8. LEASE AGREEMENTS
The Company is the lessor and sub-lessor of retail stores under operating leases
with term expiration dates ranging from 1998 to 2012. Most leases are renewable
for five years after expiration of the initial term at the lessee's option.
Future minimum lease receipts under non-cancelable operating leases as of
December 31, 1997, exclusive of renewal option periods, were as follows (in
thousands):
1998............ $75,356
1999............ 69,296
2000............ 58,241
2001............ 45,797
2002............ 32,405
Thereafter...... 120,188
----------
$401,283
==========
In 1987, a Predecessor partnership entered into a lease agreement for property
in California. Land was estimated to be approximately 37% of the fair market
value of the property. The portion of the lease attributed to land is classified
as an operating lease and the remainder as a capital lease. The initial lease
term is 25 years with two options of 5 and 4 1/2 years, respectively. The lease
provides for additional rent based on specific levels of income generated by the
property. No additional rental payments were incurred during 1997, 1996 or 1995.
The Company has the option to cancel the lease upon six months written notice
and six months advance payment of the then fixed monthly rent. If the lease is
canceled, the building and leasehold improvements revert to the lessor.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
8. LEASE AGREEMENTS (CONTINUED)
OPERATING LEASES
Future minimum rental payments under operating leases for land and
administrative offices as of December 31, 1997 were as follows (in thousands):
1998........... $1,188
1999........... 1,208
2000........... 1,203
2001........... 786
2002........... 755
Thereafter..... 8,787
----------
$13,927
==========
Rental expense amounted to $1.0 million, $1.1 million and $0.9 million for the
years ended December 31, 1997, 1996 and 1995, respectively.
CAPITAL LEASE
A leased property included in rental properties at December 31 consists of the
following (in thousands):
1997 1996
----------------- ----------------
Building................................ $8,621 $8,621
Less accumulated amortization........... (3,592) (3,247)
--------------- ----------------
Leased property, net................... $5,029 $5,374
================= ================
Future minimum payments under the capitalized building lease, including the
present value of net minimum lease payments as of December 31, 1997 are as
follows (in thousands):
1998................................ $1,085
1999................................ 1,117
2000................................ 1,151
2001................................ 1,185
2002................................ 1,221
Thereafter.......................... 13,732
----------------
Total minimum lease payments........ 19,491
Amount representing interest........ (9,762)
----------------
Present value of net minimum capital $9,729
lease payments....................... ================
9. COMMITMENTS AND CONTINGENCIES
In August 1995, the Company's President (and Chief Operating Officer) resigned
and entered into a separation agreement with the Company that included
consulting services to be provided through 1999, certain non-compete provisions,
and the acquisition of certain undeveloped real estate assets. Upon completion
of development, such real estate assets may be re-acquired by the Company, at
its option, in accordance with a pre-determined formula based on cash flow.
Transactions related to the separation agreement are not material to the
financial statements of the Company.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
9. COMMITMENTS AND CONTINGENCIES (CONTINUED)
The Company is not presently involved in any material litigation nor, to its
knowledge, is any material litigation threatened against the Company or its
properties, other than routine litigation arising in the ordinary course of
business. Management believes the costs, if any, incurred by the Company related
to any of this litigation will not materially affect the financial position,
operating results or liquidity of the Company.
10. RELATED PARTY INFORMATION
In September 1995, the Company transferred property with a book value of $4.8
million to its former President (a current unitholder) in exchange for a $4.0
million note secured by units in the Operating Partnership (the "Secured Note")
and an $0.8 million unsecured note receivable (the "Unsecured Note"). The
secured note bears interest at a rate of LIBOR plus 250 basis points per annum,
payable monthly, and is due upon the earlier of the maker obtaining permanent
financing on the property, the Company repurchasing the property under an option
agreement, the maker selling the property to an unaffiliated third party, or
January 1999. The Unsecured Note bears interest at a rate of 8.0% per annum and
is due upon the earlier of the Company repurchasing the property under an option
agreement, the maker selling the property to an unaffiliated third party, or
September 2000.
On June 30, 1997 the Company forgave a $3.3 million related party note and paid
$2.4 million in cash to acquire the remaining 50% interest in Solvang. The
Company also collected $0.8 million in accrued interest on the note.
The Company had space leased to related parties of approximately 61,000, 61,000
and 56,000 square feet during the years ended 1997, 1996 and 1995,
respectively. Rental income from those tenants, including reimbursement for
taxes, common area maintenance and advertising, totaled $1.5 million, $1.3
million and $1.5 million during the years ended December 31, 1997, 1996 and
1995, respectively.
The Company has a consulting agreement with one of its directors through
December 31, 1999. The agreement calls for monthly payments of $10,000.
Certain Directors and unitholders guarantee Company obligations under leases for
one of the properties. The Company has indemnified these parties from and
against any liability which they may incur pursuant to these guarantees.
11. DIVIDEND REINVESTMENT PLAN
Shareholders who own at least 100 shares of the Company's common stock are
eligible to reinvest dividends quarterly at a discount. Costs and commissions
associated with the plan are paid by the Company.
12. STOCK OPTION PLAN
The Company elected Accounting Principles Board Opinion No. 25, Accounting for
Stock Issued to Employees ("APB No. 25") and related Interpretations in
accounting for its employee stock options. Under APB No. 25, no compensation
expense is recognized because the exercise price of the Company's employee stock
options equals the market price of the underlying stock on the date of grant.
The alternative fair value accounting provided for under SFAS No. 123,
"Accounting for Stock-Based Compensation," is not applicable because it requires
use of option valuation models that were not developed for use in valuing
employee stock options.
The Company's 1993 Stock Option Plan provides for an aggregate of 1.4 million
authorized shares reserved for issuance. The exercise price per share of initial
grants of non-qualified options will be fixed by the Compensation Committee on
the date of grant. The exercise price per share of incentive stock options will
not be less than the fair market value of the common stock on the date of grant,
except in the case of incentive stock options granted to individuals owning more
than 10% of the total voting shares of the Company. Their exercise price will be
at least 110% of the fair market value at the date of grant. Non-qualified and
incentive stock options are exercisable for a period of ten years from the date
of grant. On the first anniversary of the grant date, 20% of the options may be
exercised and an additional 20% may be exercised on or after each of the second
through fifth anniversaries.
Pro forma information regarding net income and earnings per share is required by
SFAS No. 123, and has been determined as if the Company had accounted for its
employee stock options under the fair value method. The fair value for these
options was estimated at the date of grant using a Black-Scholes option pricing
model with the following weighted-average assumptions for 1997: risk-free
interest rate of 6.00%; dividend yield of 8%; volatility factor of the expected
market price of the Company's common stock based on historical results of 0.174;
and an expected life of the option of four years.
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including expected stock price volatility. Because the
Company's employee stock options have characteristics significantly different
from those of traded options, and changes in the subjective input assumptions
can materially affect the fair value estimate, management believes the existing
models do not necessarily provide a reliable single measure of the fair value of
its employee stock options. The Company has elected not to present pro forma
information because the impact on reported net income is immaterial.
A summary of the Company's stock option activity, and related information for
the years ended December 31 follows:
1995 1996 1997
----
Options Wtd-avg Options Wtd-avg Options Wtd-avg
(000'S) Ex. price (000's) Ex. price (000's) Ex. price
Outstanding beginning of year 887.5 $24.17 917.5 $24.47 839.9 $24.88
Granted 50.0 $29.50 80.0 $28.88 75.0 $37.60
Exercised - (105.6) $24.59 (52.1) $23.38
Forfeited (20.0) $23.38 (52.0) $24.49 (33.0) $23.88
---------- ----------- ------------
Outstanding end of year 917.5 $24.47 839.9 $24.88 829.8 $26.16
Exercisable at end of year 207.5 $24.73 285.4 $24.62 380.8 $24.97
Weighted average fair value of
options granted during the year $3.49 $3.42 $2.65
Exercise prices for options outstanding as of December 31, 1997 ranged from
$23.38 to $38.69 per share. The weighted average remaining contractual life of
the options was 7.1 years.
13. EXTRAORDINARY ITEM
Deferred financing costs of $0.2 million (net of minority interest of $48,000)
and $0.6 million (net of minority interest of $0.3 million) were expensed in
1997 and 1996, respectively, and are reflected in the accompanying financial
statements as an extraordinary item.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
14. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
The following summary represents the results of operations, expressed in
thousands except per share amounts, for each quarter during 1997 and 1996. The
1996 and first three quarters of 1997 earnings per share amounts have been
restated to comply with Statement of Financial Accounting Standards No. 128,
EARNINGS PER SHARE.
March 31 June 30 September 30 December 31
--------------- --------------- --------------- ---------------
1997
Base rental revenue........................ $15,563 $17,286 $18,096 $19,748
Total revenues............................. 22,649 26,637 28,822 35,309
Common income before extraordinary item.... 5,140 5,613 7,658 9,242
Net income to common shareholders.......... 5,140 5,613 7,658 9,038
Income before extraordinary item per
weighted average common share (diluted). $0.37 $0.39 $0.49 $0.59
Net income per weighted average
common share (diluted).................. $0.37 $0.39 $0.49 $0.58
1996
Base rental revenue........................ $12,677 $13,746 $14,737 $15,230
Total revenues............................. 19,055 20,929 23,323 28,049
Common income before extraordinary item.... 4,761 5,456 5,593 5,651
Net income to common shareholders.......... 4,154 5,456 5,593 5,651
Income before extraordinary item per
weighted average common share (diluted). $0.41 $0.46 $0.47 $0.45
Net income per weighted average
common share (diluted)............... $0.36 $0.46 $0.47 $0.45
15. NON-CASH FINANCING AND INVESTING ACTIVITIES
In December 1997 and 1996, the Company declared distributions per unit of $0.69
and $0.63, respectively. The limited partners' distributions were paid in
January of each subsequent year. In December 1995, the Company declared
distributions per share or unit of $0.575, that were paid in January of the
subsequent year.
In June 1997, the Company forgave a $3.3 million related party note receivable
as partial consideration to acquire the remaining 50% interest in Solvang.
Other assets and other liabilities include $3.9 million related to a deferred
unit incentive program with certain key officers to be paid in 2002.
During 1997, 1996 and 1995, the Operating Partnership issued units with an
aggregate fair market value of $0.5 million, $1.6 million and $1.9 million,
respectively, to acquire properties.
During 1997, 1996 and 1995, respectively, 1.4 million, 0.8 million and 0.1
million Operating Partnership units were converted to common shares.
In September 1995, the Company transferred property with a book value of $4.8
million to a unitholder in exchange for a $4.0 million note collateralized by
units in the Operating Partnership and an $0.8 million unsecured note.
CHELSEA GCA REALTY, INC.
SCHEDULE III-CONSOLIDATED REAL ESTATE AND ACCUMULATED DEPRECIATION
FOR THE YEAR ENDED DECEMBER 31, 1997
Cost Step-Up
Capitalized Related Gross Amount
(Disposed of) to Acquisition Carried
Initial Subsequent of at Close of Period
Cost to to Acquisition Partnership December 31, 1997 Life
Company (Improvements) Interest (1) Used to
Compute
Deprectiation
Description Encum- Buildings, Buildings, Buildings, Buildings, in
Outlet Center brances Land Fixtures Fixtures Fixtures Fixtures Latest
Name and and and and Accumulated Date of Income
Equipment Land Equipment Land Equipment Land Equipment Total Depreciation Construction State-
ment
- -----------------------------------------------------------------------------------------------------------------------------------
American Tin $9,729 $ - $8,621 $ - $6,451 $ - $ - $ - $15,072 $15,072 $6,074 '87 25
Cannery, CA
Lawrence - - 14,300 15 2,830 - - 15 17,130 17,145 4,418 '90 40
Riverfront, KS
Liberty - 345 405 1,206 17,543 11,015 2,195 12,566 20,143 32,709 2,952 '81, '97 30
Village, NJ
Folsom, CA - 4,169 10,465 1,868 17,348 - - 6,037 27,813 33,850 4,857 '90, '92, 40
'93, '96,
'97
Aurora, OH - 637 6,884 879 16,973 - - 1,516 23,857 25,373 3,632 '90, '93, 40
'94, '95
Woodbury - 4,448 16,073 5,042 85,943 - - 9,490 102,016 111,506 18,152 '85, '93, 30
Common, NY '95
Petaluma - 3,735 - 2,934 29,261 - - 6,669 29,261 35,930 3,599 '93, '95, 40
Village, CA '96
Desert Hills, - 975 - 2,417 58,655 830 4,936 4,222 63,591 67,813 12,163 '90, '94, 40
CA '95, '97
Columbia - 934 - 428 11,357 497 2,647 1,859 14,004 15,863 3,069 '91, '94 40
Gorge, OR
Mammoth - 1,180 530 - 2,221 994 1,430 2,174 4,181 6,355 1,252 '78 40
Lakes, CA
St. Helena, CA - 1,029 1,522 (25) 513 38 78 1,042 2,113 3,155 381 '83 40
Patriot - 789 1,854 976 4,053 - - 1,765 5,907 7,672 1,447 '86, '93, 40
Plaza, VA '95
Santa Fe, NM - 74 - 1,317 11,392 491 1,772 1,882 13,164 15,046 1,652 '93 40
Corporate - - 60 - 3,925 - - - 3,985 3,985 1,295 - 5
Offices, NJ, CA
Napa, CA - 3,456 2,113 7,908 18,345 - - 11,364 20,458 31,822 2,593 '62, '93, 40
'95
Solvang, CA - - - 2,380 9,632 - - 2,380 9,632 12,012 1,226 '94 40
Camarillo, CA - 4,000 - 4,915 40,976 - - 8,915 40,976 49,891 3,122 '94, '95, 40
'96, '97
Clinton, CT - 4,124 43,656 - 4 - - 4,124 43,660 47,784 3,472 '95, '96 40
North - 2,960 34,726 66 7,784 - - 3,026 42,510 45,536 3,222 '95, '96, 40
Georgia, GA '97
Wrentham, MA - 157 2,817 2,909 39,327 - - 3,066 42,144 45,210 338 '95,'96, 40
'97
Waikele, HI - 22,800 54,357 - - - - 22,800 54,357 77,157 1,328 - -
Leesburg, VA - 6,296 - - - - - 6,296 - 6,296 - '96, '97 -
Houston, TX - 500 466 - - - - 500 466 966 - - -
Orlando, FL - 100 23 - - - - 100 23 123 - - -
Wall - 662 - - - - - 662 - 662 - '96, '97 -
Township, NJ
---------------------------------------------------------------------------------------------------------------------
$9,729 $63,370 $198,872 $35,235 $384,533 $13,865 $13,058 $112,470 $596,463 $708,933 $80,244
======================================================================================================================
The aggregate cost of the land, building, fixtures and equipment for federal tax
purposes was approximately $709 million at December 31, 1997.
(1) As part of the formation transaction assets acquired for cash have been accounted
for as a purchase.
The step-up represents the amount of the purchase price that exceeds the
net book value of the assets acquired (see Note 1).
CHELSEA GCA REALTY, INC.
SCHEDULE III-CONSOLIDATED REAL ESTATE
AND ACCUMULATED DEPRECIATION (CONTINUED)
THE CHANGES IN TOTAL REAL ESTATE:
YEAR ENDED DECEMBER 31,
1997 1996 1995
--------------- ---------------- ----------------
Balance, beginning of period............ $512,354 $415,983 $332,834
Additions............................... 196,941 96,621 89,871
Dispositions and other.................. (362) (250) (6,722)
--------------- ---------------- ----------------
Balance, end of period.................. $708,933 $512,354 $415,983
=============== ================ ================
THE CHANGES IN ACCUMULATED DEPRECIATION:
YEAR ENDED DECEMBER 31,
1997 1996 1995
--------------- ---------------- ----------------
Balance, beginning of period............ $58,054 $41,373 $30,439
Additions............................... 22,314 16,931 11,277
Dispositions and other.................. (124) (250) (343)
--------------- ---------------- ----------------
Balance, end of period.................. $80,244 $58,054 $41,373
=============== ================ ================
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized on the 12th of March 1998.
CHELSEA GCA REALTY, INC.
By: /S/ DAVID C. BLOOM
David C. Bloom, Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated:
SIGNATURE Title Date
/s/ DAVID C. BLOOM Chairman of the MARCH 12, 1998
- ------------------ Board and Chief
David C. Bloom Executive Officer
/s/ BARRY M. GINSBURG Vice Chairman MARCH 12, 1998
- ---------------------
Barry M. Ginsburg
/s/ WILLIAM D. BLOOM Executive Vice MARCH 12, 1998
- ---------------------- President-Strategic
William D. Bloom Relationships
/s/ LESLIE T. CHAO President MARCH 12, 1998
- ---------------------- and Chief
Leslie T. Chao Financial Officer
/s/ MICHAEL J. CLARKE Senior Vice MARCH 12, 1998
- ---------------------- President- Finance
Michael J. Clarke
/s/ BRENDAN T. BYRNE Director MARCH 12, 1998
- -----------------------
Brendan T. Byrne
/s/ ROBERT FROMMER Director MARCH 12, 1998
- ------------------------
Robert Frommer
/s/ PHILIP D. KALTENBACHER Director MARCH 12, 1998
- ---------------------------
Philip D. Kaltenbacher
/s/ REUBEN S. LEIBOWITZ Director MARCH 12, 1998
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Reuben S. Leibowitz
Exhibit Index
Exhibits Description Page No.
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3.1 Articles of Incorporation of the Company, as amended,
including Articles Supplementary relating to 8 3/8% Series
A Cumulative Redeemable Preferred Stock.
3.2 By-laws of the Company. Incorporated by reference to Exhibit
3.2 to Registration Statement filed by the Company on Form
S-11 under the Securities Act of 1933 (file No. 33-67870)
(S-11).
3.3 Agreement of Limited Partnership for the Operating
Partnership. Incorporated by reference to Exhibit
3.3 to S-11.
3.4 Amendments No. 1 and No. 2 to Partnership Agreement
dated March 31, 1997 and October 7, 1997
4.1 Form of Indenture among the Company, Chelsea GCA Realty
Partnership, L.P., and State Street Bank and Trust Company, as
Trustee. Incorporated by reference to Exhibit 4.4 to
Registration Statement filed by the Company on Form S-3 under
the Securities Act of 1933 (File No. 33-98136).
10.1 Registration Rights Agreement among the Company and recipients
of Units. Incorporated by reference to Exhibit 4.1 to S-11.
10.2 Consulting Agreement effective August 1, 1997, between the Company
and Robert Frommer.
10.3 Limited Liability Company Agreement of
Simon/Chelsea Development Co., L.L.C. dated May 16,
1997 between Simon DeBartolo Group, L.P. and Chelsea
GCA Realty Partnership, L.P.
10.4 Subscription Agreement dated as of March 31, 1997 by and among
Chelsea GCA Realty Partnership, L.P., WCC Associates and K M
Halawa Partners. Incorporated by reference to Exhibit 1 to
current report on Form 8-K reporting on an event which
occurred March 31, 1997.
10.5 Stock Subscription Agreement dated May 16, 1997
between Chelsea GCA Realty, Inc. and Simon DeBartolo
Group, L.P.
23.1 Consent of Ernst & Young LLP.