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, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
COMMISSION FILE NO. 33-98136
CHELSEA GCA REALTY PARTNERSHIP, L.P.
(Exact name of registrant as specified in its charter)
DELAWARE 22-3258100
(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)
(201) 228-6111
(Registrant's telephone number, including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE
Securities registered pursuant to Section 12 (g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
Indicate by check mark if the disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [x]
There are no outstanding shares of Common Stock or voting securities
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the definitive Proxy Statement of Chelsea GCA Realty, Inc. relating
to its 1997 Annual Meeting of Shareholders are incorporated by reference into
Part III as set forth herein.
PART I
ITEM 1. BUSINESS
THE OPERATING PARTNERSHIP
Chelsea GCA Realty Partnership, L.P., a Delaware limited partnership (the
"Operating Partnership"), is 72.1% owned and managed by its sole general
partner, Chelsea GCA Realty, Inc. ("Chelsea GCA" or the "Company"), a
self-administered and self-managed real estate investment trust ("REIT"). The
Operating Partnership owns, develops, redevelops, leases, markets and manages
upscale and fashion-oriented manufacturers' outlet centers. At the end of 1996,
the Operating Partnership owned and operated 18 centers (the "Properties") with
a total of approximately 3.6 million square feet of gross leasable area ("GLA")
in 10 states. The Operating Partnership also has properties under development
including one new center in Wrentham, Massachusetts, outside of Boston. The
Operating Partnership's existing portfolio includes properties in or near New
York City, Los Angeles, San Francisco, Sacramento, Portland (Oregon), Kansas
City, Atlanta, Cleveland, the Napa Valley, Palms Springs and the Monterey
Peninsula.
The Operating Partnership's executive offices are located at 103 Eisenhower
Parkway, Roseland, New Jersey 07068 (telephone 201-228-6111).
RECENT DEVELOPMENTS
Between the Company's IPO and December 31, 1996, the Operating Partnership has
developed and opened approximately 2.0 million square feet of new GLA, contained
in seven new centers and the expansion of eleven existing centers, a 123%
increase. Of the new GLA, 1,112,000 square feet was in the seven newly developed
centers and 878,000 square feet was in the expansions of eleven existing
centers. Approximately $200 million of such development and expansion costs were
funded with borrowings along with the balance funded with cash proceeds from the
IPO and undistributed funds from operations.
A summary of newly developed centers and expansions since the Company's IPO
through the end of 1996 is shown below:
PROPERTY Opening Date(s) GLA (sf) No. of
Stores
- --------------------------------------------- -------------------------------- ------------------ ------------------
New Centers:
Clinton Crossing..................... 8/96 272,000 67
North Georgia........................ 5/96 292,000 76
Camarillo Premium Outlets............ 3/95, 6/95 149,000 48
Petaluma Village..................... 12/94 150,000 43
Napa Premium Outlets 12/94 72,000 14
Santa Fe Factory Stores 12/93 125,000 44
Solvang Designer Outlets (1)......... 12/94 52,000 15
------------------ ------------------
TOTAL NEWLY DEVELOPED CENTERS...... 1,112,000 307
================== ==================
EXPANSIONS:
Desert Hills......................... 12/93, 6/95 203,000 46
Aurora Farms......................... 12/93, 5/94, 195,000 35
8/94, 11/95
Woodbury Common...................... 12/93, 12/94, 110,000 20
9/95, 10/95
Napa Premium Outlets................. 3/95, 6/95 99,000 35
Camarillo Premium Outlets............ 11/95, 11/96 131,000 28
Columbia Gorge....................... 6/94, 9/94 46,000 9
Petaluma Village..................... 12/95, 3/96, 6/96 46,000 10
Patriot Plaza........................ 2/95, 5/95 35,000 9
Folsom............................... 12/96 22,000 1
Other................................ (9,000) (1)
------------------ ------------------
TOTAL EXPANSIONS....................... 878,000 192
================== ==================
NOTE: (1) The Operating Partnership is the sole general partner and has a 50%
interest in the property.
The Operating Partnership is in the process of constructing one new project with
230,000 square feet of GLA, in Wrentham, MA (near the junction of Interstates 95
and 495, south of Boston) and a 270,000 square foot expansion of Woodbury Common
(Central Valley, NY), its flagship center in the New York City metropolitan
market. These projects are expected to open during late 1997 and early 1998.
On February 7, 1997, the Operating Partnership signed a letter of intent to
acquire Waikele Factory Outlets, a 214,000 square foot manufacturer's outlet
center located 15 miles west of Honolulu, Hawaii. Closing has been scheduled for
the end of March 1997 and is subject to final due diligence review and
documentation. The 17-acre outlet center property is part of Waikele Center, a
retail development that also contains 522,000 square feet of power-center
tenants including Borders Books, Computer City, Eagle Hardware, Kmart and Office
Max. Waikele Center is a shopping destination for international tourists as well
as local residents. Waikele Factory Outlets is 100% leased to 52 tenants
including Anne Klein, BCBG, Benetton, Bose, Carter's Childrenswear, Donna Karan,
Guess?, Kenneth Cole, Levi's, Off 5th-Saks Fifth Avenue Outlet and Villeroy &
Boch.
ORGANIZATION OF THE OPERATING PARTNERSHIP
The Operating Partnership was formed through the merger in 1993 of The Chelsea
Group ("Chelsea") and Ginsburg Craig Associates ("GCA"), two leading outlet
center development companies, providing for greater access to the public and
private capital markets. All of the Properties are held by and all of its
business activities conducted through the Operating Partnership. The Company
(which owned 72.1% in the Operating Partnership as of December 31, 1996) is the
sole general partner of the Operating Partnership and has full and complete
control over the management of the Operating Partnership and each of the
Properties.
THE MANUFACTURERS' OUTLET BUSINESS
Manufacturers' outlets are manufacturer-operated retail stores which 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 OPERATING PARTNERSHIP
The Operating Partnership 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 Operating Partnership maintains strong tenant
relationships both 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, Mark Cross). The Operating Partnership 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 1996 of $345 per square foot. A significant number
of the Operating Partnership's tenants, including Ann Taylor, Brooks Brothers,
Burberrys, Cole-Haan, Donna Karan, Emanuel/Emanuel Ungaro, Joan & David, Jones
New York, Nike, Nine West, 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 Operating Partnership's centers. The Operating
Partnership believes that the quality of its centers gives it significant
advantages in attracting customers and negotiating multi-lease transactions with
tenants.
Management Expertise. The Operating Partnership 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 Operating
Partnership's senior officers have been recognized leaders in the outlet
industry over the last two decades. The Operating Partnership 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 Company's IPO, the Operating Partnership 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 Operating
Partnership intends to continue to invest in systems and controls to support the
planning, coordination and monitoring of its activities.
GROWTH STRATEGY
The Operating Partnership 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 Operating Partnership'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 Operating Partnership
believes there will continue to be significant opportunities to develop
manufacturers' outlet centers across the United States. The Operating
Partnership 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
Operating Partnership 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 Operating Partnership believes that its development
experience and strong tenant relationships enable it to determine site viability
on a timely and cost-effective basis.
Acquiring and Redeveloping Centers. The Operating Partnership intends to
selectively acquire individual properties and portfolios of properties that meet
its strategic investment criteria as suitable opportunities arise. The Operating
Partnership 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 Operating Partnership
will be able to enhance the operation of acquired properties as a result of its
strong tenant relationships with both national and upscale fashion retailers;
and development, marketing and management expertise as a full-service real
estate organization. Additionally, the Operating Partnership may be able to
acquire properties on a tax-advantaged basis through the issuance of Operating
Partnership units.
OPERATING STRATEGY
The Operating Partnership's primary business objectives are to increase cash
generated from operations and to enhance the value of its properties and
operations. The Operating Partnership 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 Operating Partnership 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 Operating Partnership
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
Operating Partnership 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
Operating Partnership believes that they provide the most attractive long-term
demographic characteristics.
The Operating Partnership generally seeks to develop sites that can support
200,000 to 500,000 square feet of GLA and that offer the long-term opportunity
to dominate their respective markets through a critical mass of tenants.
Marketing. The Operating Partnership 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 Operating Partnership are reimbursable by tenants.
Property Design and Management. The Operating Partnership 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 Operating
Partnership's 285 full-time and 71 part-time employees, 212 full-time and 71
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 director of property management.
FINANCING
The Operating Partnership'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 Operating Partnership to access a broad array of
capital sources, including bank or institutional borrowings, secured and
unsecured debt and equity offerings.
It is the Operating Partnership's policy to limit its borrowings to less than
40% of total market capitalization (defined as the value of outstanding shares
of common stock of the Company on a fully diluted basis, including conversion of
Operating Partnership units to common stock, plus total debt). Applying a
December 31, 1996 closing price of $34.625 per share of common stock of the
Company, the Operating Partnership's ratio of debt to total market
capitalization was approximately 25% at December 31, 1996.
In January 1996, the Operating Partnership completed a $100 million public debt
offering of 7.75% unsecured term notes due January 2001 (the "Term Notes"),
which are guaranteed by the Company. The five-year non-callable Term Notes were
priced at a discount of 99.952 to yield 7.85% to investors. Net proceeds from
the offering were used to pay down substantially all of the borrowings under the
Secured Facility.
In March 1996, the Operating Partnership replaced its secured revolving credit
facility (the "Secured Facility") with a new unsecured $100 million revolving
credit facility (the "Unsecured Facility") that expires March 29, 1998. Interest
on the outstanding balance is payable monthly at a rate equal to the London
Interbank Offered Rate ("LIBOR") plus 1.75%, or the prime rate, at the Operating
Partnership's option. In January 1997, the Unsecured Facility was amended and
restated and the interest rate on the line was reduced to LIBOR plus 1.45%. A
fee on the unused portion of the Unsecured Facility is payable quarterly at a
rate of 0.25% per annum. The Unsecured Facility was completely unused at
December 31, 1996.
In October 1996, the 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 will equal LIBOR plus
75 basis points during the first year. The spread and the spread period for
subsequent periods will be adjusted in whole or part at the end of the first
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 borrowings under the
Unsecured Facility and for working capital.
COMPETITION
The Properties compete for retail consumer spending on the basis of the diverse
mix of retail merchandising and value oriented pricing. Manufacturers' outlet
centers have established a niche capitalizing on consumers' growing 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 Operating Partnership believes that
the Properties are generally the leading manufacturers' outlet centers in each
market. The Operating Partnership carefully considers the degree of existing and
planned competition in each proposed area before deciding to build a new center.
ENVIRONMENTAL MATTERS
The Operating Partnership is not aware of any environmental liabilities relating
to the Properties that would have a material impact on the Operating
Partnership's financial position and results of operations.
PERSONNEL
As of December 31, 1996, the Operating Partnership had 285 full-time and 71
part-time employees. None of the employees are subject to any collective
bargaining agreements, and the Operating Partnership believes it has good
relations with its employees.
ITEM 2. PROPERTIES
As of December 31, 1996, the Operating Partnership had 18 operating outlet
centers. Of the 18 operating centers, 15 are owned 100% in fee; one, Solvang
Designer Outlets, is 50%-owned through a limited partnership; and two, American
Tin Cannery Premium Outlets and Lawrence Riverfront Factory Outlets, are held
under long-term leases. The Operating Partnership manages all of its Properties.
Approximately 38% and 40% of the Operating Partnership's revenues for the years
ended December 31, 1996 and 1995, respectively, were derived from the Operating
Partnership'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 Operating Partnership. In addition, approximately
44% and 45% of the Operating Partnership's revenues for the years ended December
31, 1996 and 1995, respectively, were derived from the Operating Partnership's
centers in California.
Set forth in the table below is certain property information as of December
31,1996:
YEAR GLA (SQ. NO. OF
NAME/LOCATION OPENED FT.) STORES CERTAIN TENANTS
------------ -------------- ------------ ------------------------------------
Woodbury Common.......................... 1985 573,000 151 Brooks Brothers, Calvin Klein, Donna
Central Valley, NY (New York City Metro Karan, Polo/Ralph Lauren, Van Heusen,
area) Coach Leather
Desert Hills............................. 1990 432,000 106 Bose, Coach Leather, Donna Karan,
Cabazon, CA (Palm Springs-Los Angeles area) Eddie Bauer, Nautica, Tommy Hilfiger
Aurora Premium Outlets................... 1987 294,000 66 Ann Taylor, Brooks Brothers
Aurora, OH (Cleveland metro area) Carters, Liz Claiborne, Reebok,
metro area) Off 5th-Saks Fifth Ave
North Georgia............................ 1996 292,000 76 Bose, Brooks Brothers, Donna Karan,
Dawsonville, GA (Atlanta metro area) Off 5th-Saks Fifth Ave
Camarillo Premium Outlets................ 1995 280,000 86 Asics, Barneys New York, Jones New
Camarillo, CA (Los Angeles metro area) York, Levi's, Nine West, Off 5th-Saks
Fifth Ave
Clinton Crossing......................... 1996 272,000 67 Bose, Coach Leather, Donna Karan,
Clinton, CT (I-95/NY-New England corridor) Off 5th-Saks Fifth Ave, Polo/Ralph
Lauren
Folsom Premium Outlets................... 1990 211,000 58 Bass, Jones New York, Levi's, Nike,
Folsom, CA (Sacramento metro area) Nine West, Off 5th-Saks Fifth Ave
Petaluma Village......................... 1994 196,000 53 Ann Taylor, Brooks Brothers, Levi's
Petaluma, CA (San Francisco metro area) Reebok, Off 5th-Saks Fifth Ave
Napa Premium Outlets..................... 1994 171,000 49 Cole-Haan, Dansk, Ellen Tracy,
Napa, CA (Napa Valley) Esprit, J.Crew, Nautica,
Timberland
Columbia Gorge........................... 1991 148,000 42 Carters, Harry & David, Levi's,
Troutdale, (Portland metro area) Maidenform, Mikasa, Norm Thompson
Lawrence Riverfront...................... 1990 148,000 44 Bass, J.Crew, Jones New York County,
Lawrence, KS (Kansas City metro area) Mikasa
Liberty Village.......................... 1981 145,000 58 Calvin Klein, Donna Karan, Ellen
Flemington, NJ (New York-Phil. metro area) Tracy, Tommy Hilfiger, Waterfor
American Tin Cannery..................... 1987 137,000 49 Anne Klein, Carole Little, Joan &
Pacific Grove, CA (Monterey Penninsula) David, London Fog, Reebok, Rockport
Santa Fe Factory Stores.................. 1993 125,000 44 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,
Solvang, CA (Southern California area) Nautica
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, Donna Karan, Joan
St. Helena, CA (Napa Valley) & David, Coach Leather
-------------- ------------
Total................................. 3,610,000 995
============== ============
The following sets forth certain information relating to each of the Properties:
Woodbury Common, Central Valley, New York. Woodbury Common Premium Outlets
opened in November 1985 and is located approximately 50 miles north of New York
City at the Harriman exit of the New York State Thruway (Interstate 87).
Significant expansions of 19,000 and 85,000 square feet opened in 1995 and 1993,
respectively. The center currently has one of the largest single-center
concentrations of upscale/designer outlet stores in the United States.
Management believes that this is the most successful outlet center in the New
York-New Jersey Metropolitan area.
Desert Hills, Cabazon, California. Desert Hills Premium Outlets opened in August
1990 and is located on Interstate 10, 16 miles west of Palm Springs and 75 miles
east of Los Angeles. An expansion of 191,000 square feet opened in 1995. The
center serves the population of southern California as well as tourists.
Management believes this is the most successful outlet center in southern
California.
Aurora Premium Outlets, Aurora, Ohio. Founded over sixty years ago, Aurora
Premium Outlets opened as an outlet center in 1987 and is located approximately
30 miles southeast of Cleveland. Expansions of 27,000, 130,000 and 38,000 square
feet opened in 1995, 1994, and 1993, respectively.
North Georgia, Dawsonville, Georgia. Phase I of North Georgia Premium Outlets
opened in May 1996 and is located approximately 40 miles north of Atlanta on
State Road 400.
Camarillo Premium Outlets, Camarillo, California. Camarillo Premium Outlets
opened in March 1995 and is located 48 miles north of Los Angeles, about 55
miles south of Santa Barbara on Highway 101. Expansions of 54,000 and 77,000
square feet opened in 1996 and 1995, respectively.
Clinton Crossing, Clinton, Connecticut. Clinton Crossing Premium Outlets opened
in August 1996 and is located approximately 22 miles east of New Haven on I-95
at Exit 63.
Folsom Premium Outlets (formerly known as Natoma Station Factory Outlets),
Folsom, California. Folsom Premium Outlets opened in March 1990 and is located
approximately 20 miles east of Sacramento. An expansion of 22,000 square feet
opened in 1996.
Petaluma Village, Petaluma, California. Petaluma Village Premium Outlets opened
in November 1994. Expansions of 30,000 and 16,000 square feet opened in 1996 and
1995, respectively. The center is located one hour north of San Francisco and 40
miles north of the Golden Gate Bridge, in Sonoma County on Highway 101.
Napa Premium Outlets, Napa, California. Napa Premium Outlets opened in December
1994. The center is located on Highway 29, the main tourist corridor of the Napa
Valley wine region in Northern California, 20 miles south of St. Helena Factory
Stores, a smaller Operating Partnership-owned center. Expansions totaling 99,000
square feet opened during 1995.
Columbia Gorge, Troutdale, Oregon. Columbia Gorge Premium Outlets opened in
April 1991 and is located on Interstate 84, 20 miles east of Portland and along
the Columbia River Gorge. Expansions totaling 46,000 square feet opened in 1994.
Lawrence Riverfront, Lawrence, Kansas. Lawrence Riverfront opened in April 1990
and is located approximately 40 miles west of Kansas City and 30 miles east of
Topeka. Lawrence is home to the University of Kansas. The property is held under
a long-term operating land lease expiring in 2007 (subject to renewal at the
Operating Partnership's option until 2087) which provides for an annual rental
increase based on increases in the Consumer Price Index. Management believes
that the terms of this lease will not materially limit the growth in cash flow
to be received by the Operating Partnership from this property.
Liberty Village, Flemington, New Jersey. Liberty Village Premium Outlets opened
in May 1981 and is located approximately 60 miles southwest of New York City and
40 miles north of Philadelphia. Designed in an authentic colonial style, Liberty
Village was the industry's first architecturally themed outlet village.
American Tin Cannery, Pacific Grove, California. The Operating Partnership
introduced the manufacturers' outlet center concept to California in 1987 with
the opening of the American Tin Cannery Premium Outlets center on the Monterey
Peninsula. The center is a renovation of an existing structure along Cannery Row
and is located near the Monterey Bay Aquarium, minutes away from Carmel. It is
approximately 110 miles south of San Francisco. A 10,000 square foot expansion
opened in January 1994. The property is held under a long-term lease expiring in
2012 (subject to renewal at the Operating Partnership's option through 2022).
The lease provides for annual contingent payments to the landlord based on 20%
of gross rents (as defined) through 2004, escalating to 50% through its
expiration in 2012. The Operating Partnership has not paid contingent rent since
inception of the lease through 1996. Management believes that the terms of this
lease will not materially limit the growth in cash flow to be received by the
Operating Partnership from this property.
Santa Fe Factory Stores, Santa Fe, New Mexico. Santa Fe Factory Stores opened in
December 1993 and is located on Interstate 25 at the intersection of Route 68,
the main road into historic Santa Fe.
Patriot Plaza, Williamsburg, Virginia. Patriot Plaza opened in December 1986 and
is located near the historic tourist village of Colonial Williamsburg, 50 miles
east of Richmond and 50 miles west of Virginia Beach/Norfolk metro market. Over
two million tourists visit Williamsburg, the restored former colonial capital,
each year. A 13,000 square foot addition opened during February 1995 and a
22,000 square foot adjacent center was acquired in May 1995.
Solvang Designer Outlets, Solvang, California. Solvang Designer Outlets opened
in December 1994 and is located off Highway 101, two and one-half hours north of
Los Angeles and thirty minutes northeast of Santa Barbara. The center is 50%
owned through a limited partnership.
Mammoth Premium Outlets, Mammoth Lakes, California. Mammoth Premium Outlets
opened in 1990. It is located 20 miles from the eastern entrance to Yosemite
National Park and five miles from the most popular skiing area in California.
St. Helena Premium Outlets (formerly Village Outlets of Napa Valley) St. Helena,
California. St. Helena Premium Outlets opened in November 1992 and is located in
the Napa Valley wine region in Northern California, on Route 29, the main
thoroughfare for the area. The center is 20 miles north of Napa Premium Outlets.
The Operating Partnership 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 Operating Partnership 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 Operating Partnership's financial position and results of
operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED
SECURITY MATTERS
None.
ITEM 6: SELECTED FINANCIAL DATA
CHELSEA GCA REALTY PARTNERSHIP, L.P. AND PREDECESSOR BUSINESS (1)
(IN THOUSANDS EXCEPT PER SHARE, AND CENTER DATA)
Period Period
Year Ended Nov. 2, Jan. 1,
December 31, 1993 to 1993 to Year Ended
---------------------------------- Dec. 31, Nov. 1, Dec. 31,
1996 1995 1994 1993 1993 1992
---- ---- ---- ---- ----
Operating Data:
Rental income............................... $63,792 $51,361 $38,010 $6,401 $21,398 $23,419
Total revenues.............................. 91,356 72,515 53,145 8,908 29,844 32,763
Total expenses.............................. 59,996 41,814 28,179 4,618 28,372 29,923
Income before minority 31,360 29,650 24,966 4,290 1,472 2,840
interest ...................................
Minority interest........................... (257) (285) (49) - (1,128) (1,640)
Income before 31,103 29,365 24,917 4,290 344 1,200
extraordinary item..........................
Extraordinary item-loss
on retirement of debt....................... (902) - - (9,410) - -
Net income (loss)........................... 30,201 29,365 24,917 (5,120) 344 1,200
Net income (loss) per unit:.................
General partner (including $0.05 and $0.51
net loss per unit from extraordinary item
in 1996 and 1993, respectively)........... $1.77 $1.75 $1.50 $(0.31) - -
Limited partner (including $0.05 and $0.51
net loss per unit from extraordinary item
in 1996 and 1993, respectively)........... $1.76 $1.75 $1.50 $(0.31) - -
WEIGHTED AVERAGE UNITS OUTSTANDING:
General partner............................. 11,802 11,188 10,971 10,937 - -
Limited partners............................ 5,316 5,601 5,669 5,703 - -
Total....................................... 17,118 16,789 16,640 16,640 - -
BALANCE SHEET DATA:
Rental properties before accumulated
depreciation............................ $512,354 $415,983 $332,834 $243,218 $192,565 $158,473
Total assets................................ 502,212 408,053 330,775 288,732 188,895 152,926
Total liabilities ......................... 240,878 141,577 68,084 24,496 173,012 146,860
Minority interest........................... 5,698 5,441 5,156 - 5,587 4,121
Partner's capital........................... $255,636 $261,035 $257,535 $264,236 $2,297 $1,945
Distributions declared per unit............. $2.355 $2.135 $1.90 $0.30 - -
OTHER DATA:
Funds from operations (2) $48,616 $41,870 $33,631 $5,648 $7,727 $8,880
Cash flows from:
Operating activities..................... $52,898 $36,330 $32,522 $4,746 $9,893 $9,030
Investing activities..................... (98,956) (81,926) (79,595) (63,607) (29,032) (13,661)
Financing activities..................... $55,957 $40,474 $(1,707) $116,570 $22,692 $6,341
GLA at end of period........................ 3,610 2,934 2,342 1,879 1,620 1,444
Weighted average GLA (3).................... 3,255 2,680 2,001 1,743 1,550 1,401
Centers at end of the period................ 18 16 16 13 12 12
New centers opened.......................... 2 1 3 1 - 2
Centers expanded............................ 5 7 4 3 2 1
Centers sold................................ - 1 - - - -
NOTES TO SELECTED FINANCIAL DATA:
(1) The selected financial data includes the combined financial statements of
Chelsea GCA Properties ("Predecessor Business") for the periods prior to
November 2, 1993, and the consolidated financial statements of Chelsea GCA
Realty Partnership, L.P. for the periods after November 1, 1993.
(2) Management considers funds from operations ("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 (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.
(3) GLA weighted by months in operation.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in connection with the financial
statements included 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.
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards ("SFAS") No. 121 (Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of) and SFAS No. 123
(Accounting for Stock-Based Compensation) which are effective for fiscal years
beginning after December 15, 1995. The Operating Partnership adopted SFAS No.
121 in the first quarter of 1996 and provided the required footnote disclosure
under SFAS No. 123 in the financial statements. Adoption of SFAS No. 121 or 123
has no material impact on the Operating Partnership's financial position or
results of operations.
GENERAL OVERVIEW
At December 31, 1996, the Operating Partnership operated 18 manufacturers'
outlet centers, compared to 16 at the end of 1995 and 1994. The Operating
Partnership's operating gross leasable area ("GLA") at December 31, 1996 was 3.6
million square feet compared to 2.9 million square feet and 2.3 million square
feet at December 31, 1995 and 1994, respectively.
From January 1, 1994 to December 31, 1996, the Operating Partnership grew by
increasing rents at its operating centers, opening six new centers and expanding
ten centers. The 1.7 million square feet ("sf") of GLA added is detailed in the
schedule that follows:
SINCE
JANUARY 1
1994 1996 1995 1994
---------------- ---------------- ---------------- ----------------
Changes in GLA (sf in
000's):
NEW CENTERS OPENED:
Camarillo Premium Outlets 149 - 149 -
Petaluma Village....................... 150 - - 150
Napa Premium Outlets................... 72 - - 72
Solvang Designer Outlets............... 52 - - 52
North Georgia.......................... 292 292 - -
Clinton Crossing....................... 272 272 - -
---------------- ---------------- ---------------- ----------------
TOTAL NEW CENTERS......................... 987 564 149 274
CENTERS EXPANDED:
Desert Hills................................ 191 - 191 -
Aurora Premium Outlets...................... 157 - 27 130
Woodbury Common............................. 25 2 19 4
Napa Premium Outlets........................ 99 - 99 -
Camarillo Premium Outlets................... 131 54 77 -
Columbia Gorge.............................. 46 - - 46
Patriot Plaza............................... 35 - 35 -
Petaluma Village............................ 46 30 16 -
Folsom Premium Outlets...................... 22 22 - -
Liberty Village............................. 4 4 - -
Other....................................... 2 - (7) 9
---------------- ---------------- ---------------- ----------------
TOTAL CENTERS EXPANDED................... 758 112 457 189
CENTERS SOLD:
Page Factory Stores......................... (14) - (14) -
---------------- ---------------- ---------------- ----------------
GLA ADDED DURING THE PERIOD................. 1,731 676 592 463
OTHER DATA:
GLA at end of period...................... 3,610 2,934 2,342
Weighted average GLA (1).................. 3,255 2,680 2,001
Centers at end of period.................. 18 16 16
New centers opened........................ 2 1 3
Centers expanded.......................... 5 7 4
Centers sold.............................. - 1 -
NOTE: (1) Average GLA weighted by months in operation
The Operating Partnership's centers produced weighted average reported tenant
sales of approximately $345 per square foot in 1996 compared to $313 and $309
per square foot in 1995 and 1994, respectively.
Two of the Operating Partnership's centers, Woodbury Common and Desert Hills,
provided approximately 38%, 40% and 45% of the Operating Partnership's total
revenue for the years 1996, 1995 and 1994, respectively. In addition,
approximately 44%, 45% and 32% of the Operating Partnership's revenues for the
years ended December 31, 1996, 1995 and 1994, respectively, were derived from
the Operating Partnership's centers in California.
The Operating Partnership does not consider any of its lessees to be anchor
tenants and no individual tenant accounts for more than 10% of the Operating
Partnership's gross revenues or total GLA. Only one tenant, combining all of its
store concepts, occupies in excess of 2.7% of the Operating Partnership's total
GLA. In view of these statistics and the Operating Partnership's past success in
re-leasing available space, the Operating Partnership 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 the Company's 50% investment in Solvang.
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 Operating Partnership'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 Operating Partnership'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.
Comparison of year ended December 31, 1995 to year ended
December 31, 1994
Operating income before interest, depreciation and amortization increased $11.8
million, or 33.7%, to $46.7 million in 1995 from $34.9 million in 1994. This
increase was primarily the result of the Operating Partnership's expansions and
new center openings.
Base rentals increased $11.6 million, or 33.7%, to $46.0 million in 1995 from
$34.4 million in 1994 due to expansions and new center openings. Base rental
revenue per weighted average square foot remained stable at $17.17 in 1995
compared to $17.20 in 1994.
Percentage rents increased $1.7 million, or 48.4%, to $5.3 million in 1995 from
$3.6 million in 1994. The increase was primarily due to increases in tenant
sales and expansions at the Operating Partnership's larger centers.
Expense reimbursements, representing contractual recoveries from tenants of
certain common area maintenance, operating, real estate tax, promotional and
management expenses, increased $6.1 million, or 45.1%, to $19.7 million in 1995
from $13.6 million in 1994, due to the recovery of operating and maintenance
costs at new and expanded centers. On a weighted average square foot basis,
expense reimbursements increased 8.3% to $7.35 in 1995 from $6.79 in 1994. The
average recovery of reimbursable expenses was 93.9% in 1995 compared to 94.7% in
1994.
Other income decreased $0.1 million to $1.5 million in 1995 from $1.6 million in
1994 primarily as a result of declining interest income from investment of IPO
proceeds.
Interest, in excess of amounts capitalized, increased $2.1 million to $3.1
million in 1995 from $1.0 million in 1994, due to higher borrowings under the
Credit Facility.
Operating and maintenance expenses increased $6.7 million, or 46.4%, to $21.0
million in 1995 from $14.3 million in 1994. 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 9.4% to $7.83 in 1995 from
$7.16 in 1994 as a result of increased real estate taxes and additional
maintenance services.
General and administrative expenses increased $0.4 million to $3.0 million in
1995 from $2.6 million in 1994. On a weighted average square foot basis, general
and administrative expenses decreased 13.3% to $1.11 in 1995 from $1.28 in 1994.
Increased personnel and overhead costs were offset by additions to operating
GLA.
Other expenses increased $0.6 million to $1.9 million in 1995 from $1.3 million
in 1994. The increase included additional reserves for bad debts, legal fees,
and tenant improvement write-offs.
In December 1995, the Operating Partnership sold its smallest property to an
unrelated third party at a book loss of $1.1 million.
LIQUIDITY AND CAPITAL RESOURCES
The Operating Partnership believes it has adequate financial resources to fund
operating expenses, distributions, and planned development and construction
activities. Operating cash flow in 1996 of $52.9 million is expected to increase
with a full year of operations of the 676,000 square feet of GLA added during
1996 and scheduled openings of approximately 600,000 to 700,000 square feet of
expansions and a new center in 1997, subject to market demand. In addition, at
December 31, 1996 the Operating Partnership had $100 million available under its
Unsecured Facility, access to the public markets through its $200 million equity
shelf registration, and cash and cash equivalents of $13.9 million.
Operating cash flow is expected to provide sufficient funds for distributions.
In addition, the Operating Partnership 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 1996, the Operating Partnership raised its quarterly
distribution to $0.63 per share from $0.575 per share, a 9.6% increase.
Distributions declared and recorded in 1996 were $40.4 million or $2.355 per
unit. The Operating Partnership's 1996 distribution payout ratio as a percentage
of net income before depreciation and amortization, loss on sale of property and
minority interest was 83.0%. Distributions are limited by covenants of the
Unsecured Facility to 95% of net income before depreciation and amortization and
minority interest.
In January 1996, the Operating Partnership completed a $100 million public debt
offering of 7.75% unsecured term notes due January 2001 (the "Term Notes"),
which are guaranteed by the Company. The five-year non-callable Term Notes were
priced at a discount of 99.952 to yield 7.85% to investors. Net proceeds from
the offering were used to pay down substantially all of the borrowings under the
Secured Facility.
In March 1996, the Operating Partnership replaced its secured revolving credit
facility (the "Secured Facility") with a new unsecured $100 million revolving
credit facility (the "Unsecured Facility") which expires March 29, 1998.
Interest on the outstanding balance is payable monthly at a rate equal to the
London Interbank Offered Rate ("LIBOR") plus 1.75%, or the prime rate, at the
Operating Partnership's option. In January 1997, the interest rate on the line
was reduced to LIBOR plus 1.45%. A fee on the unused portion of the Unsecured
Facility is payable quarterly at a rate of 0.25% per annum. The Unsecured
Facility was completely unused at December 31, 1996.
In October 1996, the 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 will equal LIBOR plus
75 basis points during the first year. The spread and the spread period for
subsequent periods will be adjusted in whole or part at the end of the first
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 borrowings under the
Unsecured Facility and for working capital.
The Operating Partnership is in the process of planning development for 1997 and
beyond. At December 31, 1996, approximately 380,000 square feet of the Operating
Partnership's planned 1997 development was under construction. The Operating
Partnership anticipates 1997 development and construction costs of $90 million
to $100 million. Funding is currently expected from borrowings under the
Unsecured Facility, additional debt offerings, and/or equity offerings.
To achieve planned growth and favorable returns in both the short and long-term,
the Operating Partnership'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 Operating Partnership to access a broad array
of capital sources, including bank or institutional borrowings and secured and
unsecured debt and equity offerings.
It is the Operating Partnership's policy to limit its borrowings to less than
40% of total market capitalization (defined as the value of outstanding shares
of common stock of the Company on a fully diluted basis including conversion of
Operating Partnership units to common stock, plus total debt). Applying a
December 31, 1996 closing price of $34.625 per share of common stock of the
Company, the Operating Partnership's ratio of debt to total market
capitalization was approximately 25% at December 31, 1996.
Net cash provided by operating activities was $52.9 million and $36.3 million
for the years ended December 31, 1996 and 1995, respectively. The increase was
primarily due to the growth of the Operating Partnership'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 $17.0 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 Unsecured and Secured Facility.
Net cash provided by operating activities was $36.3 million and $32.5 million
for the years ended December 31, 1995 and 1994, respectively. The increase was
primarily due to the growth of the Operating Partnership's GLA to 2.9 million
square feet in 1995 from 2.3 million square feet in 1994. Net cash used in
investing activities increased $2.3 million for the year ended December 31, 1995
compared to 1994, primarily as a result of increased construction activity. Net
cash provided by financing activities increased $42.2 million primarily due to
increased borrowings for development and construction activity during 1995.
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 clear understanding of the operating
results of the Operating Partnership. 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 (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.
In March 1995, NAREIT issued a clarification of its definition of FFO. For
illustrative purposes, the following table presents the Operating Partnership's
FFO under both methods of calculation for the years 1996 and 1995:
CURRENT METHOD Old Method
YEAR ENDED Year Ended
DECEMBER 31, December 31,
1996 1995 1996 1995
------------- ------------- ------------ -------------
Net income before extraordinary item........... $31,103 $29,365 $31,103 $29,365
Add:
Depreciation and amortization(1)............. 18,747 12,645 18,747 12,645
Amortization of deferred financing costs and
depreciation of non-rental real estate
assets..................................... (1,234) (1,191) - -
Loss on sale of property..................... - 1,051 - 1,051
------------- ------------- ------------ -------------
FFO............................................ $48,616 $41,870 $49,850 $43,061
============= ============= ============ =============
Average units outstanding...................... 17,118 16,789 17,118 16,789
Distributions declared per unit................ $2.355 $2.135 $2.355 $2,135
Note: (1) Excludes depreciation of $218 and $178 for the years ended December
31, 1996 and 1995, respectively, attributed to the 50% limited partner in
Solvang.
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 virtually all reimbursed by tenants.
Virtually all tenants have met their lease obligations and the Operating
Partnership continues to attract and retain quality tenants. The Operating
Partnership intends to reduce operating and leasing risks by continually
improving its tenant mix, rental rates and lease terms, and pursuing contracts
with creditworthy upscale and national brand-name tenants.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and financial information of the Operating Partnership
for the years ended December 31, 1996, 1995 and 1994 and the Reports 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 Operating Partnership does not have any directors, executive officers or
stock authorized, issued or outstanding. If the information was required it
would be identical to the information contained in Items 10, 11, 12 and 13 of
the Company's Form 10-K, that will appear in the Company's Proxy Statement
furnished to shareholders in connection with the Company's 1997 Annual Meeting.
Such information is incorporated by reference in this Form 10-K.
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 Agreement of Limited Partnership for the Operating
Partnership. Incorporated by reference to Exhibit
3.3 to Registration Statement filed by the Company on
Form S-11 under the Securities Act of 1933 (File No.
33 - 67870) ("S-11").
4.1 Form of Indenture among the Company, Chelsea GCA Realty
Partnership, L.P., and State Street Bank and Trust Company, as
Trustee. Incorporated by reference to Exhibit 4.4 to
Registration Statement filed by the Company on Form S-3 under
the Securities Act of 1933 (File No. 33-98136).
10.1 Registration Rights Agreement among the Company and
recipients of Units. Incorporated by reference to
Exhibit 4.1 to S-11.
10.2 Amended and Restated Credit Agreement dated January
27, 1997 among Chelsea GCA Realty Partnership, L.P.,
Chelsea GCA Realty, Inc., The First National Bank of
Boston, individually and as agent, and other Lending
Institutions listed therein. Incorporated by
reference to Exhibit 10.2 to Form 10-K filed by the
Company for the fiscal year ended December 31, 1996.
10.3 Employment Agreement dated December 15, 1995 by
and between the Company and Thomas J. Davis.
Incorporated by reference to Exhibit 10.5 to Form 10-K
filed by the Company for the fiscal year ended
December 31, 1995.
10.4 Agreement dated August 25, 1996, among Chelsea
GCA Realty, Inc., Chelsea GCA Realty Partnership,
L.P. and Steven L. Craig. Incorporated by reference to
Exhibit 10.6 to Form 10-K filed by the Company for
the fiscal year ended December 31, 1995.
23.1 Consent of Ernst & Young LLP.
(b) Reports on Form 8-K filed during the period covered by this
report.
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
PARTNERSHIP, L.P.
Report of Independent Auditors...................................... F-1
Consolidated Balance Sheets as of December 31, 1996 and 1995........ F-2
Consolidated Statements of Operations for the years ended
December 31, 1996, 1995 and 1994.................................. F-3
Consolidated Statements of Partners' Capital for the years
ended December 31, 1996, 1995 and 1994............................ F-4
Consolidated Statements of Cash Flows for the years ended
December 31, 1996, 1995 and 1994.................................. 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-14
and F-15
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
TO THE OWNERS
CHELSEA GCA REALTY PARTNERSHIP, L.P.
We have audited the accompanying consolidated balance sheets of Chelsea GCA
Realty Partnership, L.P. as of December 31, 1996 and 1995, and the related
consolidated statements of operations, partners' capital and cash flows for
each of the three years in the period ended December 31, 1996. 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 Partnership, L.P. 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
Partnership, L.P. as of December 31, 1996 and 1995, and the consolidated results
of their operations and their cash flows for each of the three years in the
period ended December 31, 1996 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 12, 1997
CHELSEA GCA REALTY PARTNERSHIP, L.P.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
DECEMBER 31,
1996 1995
----------- ---------
Assets
Rental properties:
Land............................................. $ 80,312 75,224
Depreciable property............................. 432,042 340,759
----------- -----------
Total rental property.............................. 512,354 415,983
Accumulated depreciation........................... (58,054) (41,373)
----------- -----------
Rental properties, net............................. 454,300 374,610
Cash and equivalents............................... 13,886 3,987
Notes receivable-related parties................... 8,023 8,129
Deferred costs, net................................ 10,321 7,731
Other assets....................................... 15,682 13,596
----------- -----------
Total assets....................................... $502,212 $408,053
=========== ===========
LIABILITIES AND PARTNERS' CAPITAL
Liabilities:
Bank debt........................................ $ - $ 96,000
7.75% Unsecured Notes due January 2001........... 99,668 -
Remarketed Floating rate reset.notes............. 100,000 -
Construction payables............................ 14,473 18,617
Accounts payable and accrued expenses............ 12,257 5,730
Obligation under capital lease................... 9,805 9,845
Distribution payable............................. 3,038 9,790
Rent payable..................................... 1,637 1,595
----------- -----------
Total liabilities.................................. 240,878 141,577
Commitments and contingencies
Minority interest.................................. 5,698 5,441
Partners' capital:
General partner units outstanding, 12,402 in
1996 AND 11,485 IN 1995.......................... 185,340 176,758
Limited partners units outstanding, 4,808 in
1996 AND 5,541 IN 1995........................... 70,296 84,277
----------- -----------
Total partners' capital............................ 255,636 261,035
----------- -----------
Total liabilities and partners' capital............ $502,212 $408,053
=========== ===========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL
STATEMENTS.
CHELSEA GCA REALTY PARTNERSHIP, L.P.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER UNIT DATA)
YEAR ENDED DECEMBER 31,
1996 1995 1994
---------------- ---------------- ----------------
REVENUES:
Base rental................................. $56,390 $46,025 $34,415
Percentage rentals.......................... 7,402 5,336 3,595
Expense reimbursements...................... 24,758 19,704 13,584
Other income................................ 2,806 1,450 1,551
---------------- ---------------- ----------------
Total revenues................................... 91,356 72,515 53,145
EXPENSES:
Interest.................................... 8,818 3,129 982
Operating and maintenance................... 26,979 20,984 14,337
Depreciation and amortization............... 18,965 12,823 8,982
General and administrative.................. 3,342 2,967 2,561
Other....................................... 1,892 1,911 1,317
---------------- ---------------- ----------------
Total expenses................................... 59,996 41,814 28,179
Operating income................................. 31,360 30,701 24,966
Loss on sale of center........................... - (1,051) -
---------------- ---------------- ----------------
Income before minority interest and
extraordinary item.......................... 31,360 29,650 24,966
Minority interest................................ (257) (285) (49)
---------------- ---------------- ----------------
Income before extraordinary item................. 31,103 29,365 24,917
Extraordinary item-loss on early
extinguishment of debt...................... (902) - -
---------------- ---------------- ----------------
NET INCOME....................................... $30,201 $29,365 $24,917
================ ================ ================
NET INCOME:
General partner............................. $20,854 $19,572 $16,428
Limited partners............................ 9,347 9,793 8,489
---------------- ---------------- ----------------
Total............................................ $30,201 $29,365 $24,917
================ ================ ================
NET INCOME PER UNIT:
General partner (including $0.05 net loss
per unit from extraordinary item in
1996)...................................... $1.77 $1.75 $1.50
Limited partners (including $0.05 net loss
per unit from extraordinary item in 1996).. $1.76 $1.75 $1.50
WEIGHTED AVERAGE UNITS
OUTSTANDING:
General partner............................. 11,802 11,188 10,971
Limited partners............................ 5,316 5,601 5,669
---------------- ---------------- ----------------
Total............................................ 17,118 16,789 16,640
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE
FINANCIAL STATEMENTS.
CHELSEA GCA REALTY PARTNERSHIP, L.P.
CONSOLIDATED STATEMENTS OF PARTNERS' CAPITAL
(IN THOUSANDS)
General Limited Total
Partners' Partners' Partners'
Capital Capital Capital
--------------- --------------- ---------------
Balance December 31, 1993................................... 173,672 90,564 264,236
Net income.................................................. 16,428 8,489 24,917
Distributions............................................... (20,840) (10,778) (31,618)
Transfer of a limited partner's interest.................... 1,791 (1,791) -
--------------- --------------- ---------------
Balance December 31, 1994................................... 171,051 86,484 257,535
Contributions............................................... 8,446 1,932 10,378
Net income.................................................. 19,572 9,793 29,365
Distributions............................................... (23,940) (11,945) (35,885)
Transfer of a limited partner's interest.................... 1,629 (1,629) -
Purchase of a limited partner's interest.................... - (358) (358)
--------------- --------------- ---------------
BALANCE DECEMBER 31, 1995................................... 176,758 84,277 261,035
Contributions............................................... 3,216 1,556 4,772
NET INCOME.................................................. 20,854 9,347 30,201
DISTRIBUTIONS............................................... (28,122) (12,250) (40,372)
TRANSFER OF A LIMITED PARTNERS' INTEREST.................... 12,634 (12,634) -
--------------- --------------- ---------------
BALANCE DECEMBER 31, 1996................................... $185,340 $70,296 $255,636
=============== =============== ===============
The accompanying notes are an integral part of the
financial statements.
CHELSEA GCA REALTY PARTNERSHIP, L.P.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
Year ended December 31,
1996 1995 1994
---------------- ---------------- ---------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income ....................................... $30,201 $29,365 $24,917
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization................. 18,965 12,823 8,982
Minority interest in net income............... 257 285 49
Loss on sale of center........................ - 1,051 -
Loss on early extinguishment of debt.......... 902 - -
Additions to deferred lease costs............. (2,537) (1,245) (823)
Other operating activities.................... 191 146 -
Changes in assets and liabilities:
Straight-line rent receivable............... (1,595) (1,357) (1,205)
Other assets................................ (15) (2,893) (677)
Accounts payable and accrued expenses....... 6,529 (1,845) 1,279
---------------- ---------------- ---------------
Net cash provided by operating activities......... 52,898 36,330 32,522
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to rental properties.................... (97,585) (80,249) (76,071)
Additions to deferred development costs........... (1,477) (2,068) (755)
Advances to related parties....................... (67) (189) (2,769)
Payments from related parties..................... 173 115 -
Proceeds from sale of center...................... - 465 -
---------------- --------------- ----------------
Net cash used in investing activities............. (98,956) (81,926) (79,595)
CASH FLOWS FROM FINANCING ACTIVITIES
Net proceeds from sale of units................... 2,583 8,446 -
Contributions..................................... - - 2,429
Distributions..................................... (47,124) (34,748) (27,957)
Loan proceeds..................................... 292,592 68,000 28,000
Repayments of debt................................ (189,000) - -
Additions to deferred financing costs............. (3,660) (866) (4,179)
Other financing activities........................ 566 (358) -
---------------- --------------- ----------------
Net cash provided by (used in) financing
activities...................................... 55,957 40,474 (1,707)
Net increase (decrease) in cash and equivalents... 9,899 (5,122) (48,780)
Cash and equivalents, beginning of period......... 3,987 9,109 57,889
---------------- ---------------- ---------------
Cash and equivalents, end of period............... $13,886 $3,987 $9,109
================ ================ ===============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF FINANCIAL STATEMENTS.
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION AND BASIS OF PRESENTATION
ORGANIZATION
Chelsea GCA Realty Partnership, L.P. (the "Operating Partnership"), which
commenced operations on November 2, 1993, is engaged in the development,
ownership, acquisition, leasing and operation of manufacturers' outlet centers.
As of December 31, 1996, the Operating Partnership operated 18 manufacturers'
outlet centers in 10 states. The sole general partner in the Operating
Partnership, Chelsea GCA Realty, Inc. (the "Company") is a self-administered and
self-managed Real Estate Investment Trust.
BASIS OF PRESENTATION
The consolidated financial statements of the Operating Partnership include the
accounts of Solvang Designer Outlets ("Solvang"), a limited partnership in which
the Operating Partnership has had a 50% interest since February 24, 1994 (the
date of commencement of development). As sole general partner, the Operating
Partnership has the ability to exercise financial and operational control over
the partnership. Solvang is not material to the operations or financial position
of the Operating Partnership.
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 Operating Partnership uses 25-40 year estimated lives
for buildings, and 15 and 5-7 year estimated lives for land 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
Operating Partnership 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 Operating
Partnership 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. Prior to the adoption of SFAS No. 121, real estate
assets were stated at the lower of cost or net realizable value. 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 are considered cash equivalents. At December 31,
1996 and 1995 cash equivalents consisted of repurchase agreements which were
held by one financial institution 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
certain common area maintenance costs.
INCOME TAXES
No provision has been made for income taxes in the accompanying consolidated
financial statements since such taxes, if any, are the responsibility of the
individual partners.
NET INCOME PER PARTNERSHIP UNIT
Net income per partnership unit is determined by allocating net income to the
general partner and the limited partners based on their weighted average
partnership units outstanding during the respective periods presented.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES (CONTINUED)
CONCENTRATION OF OPERATING PARTNERSHIP'S REVENUE AND CREDIT RISK
Approximately 38%, 40% and 45% of the Operating Partnership's revenues for the
years ended December 31, 1996, 1995 and 1994, respectively, were derived from
the Operating Partnership'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 Operating Partnership. In addition, approximately 44%, 45% and 32% of the
Operating Partnership's revenues for the years ended December 31, 1996, 1995 and
1994, respectively, were derived from the Operating Partnership's centers in
California.
Management of the Operating Partnership performs ongoing credit evaluations of
its tenants and requires certain tenants to provide security deposits. Although
the Operating Partnership'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 joint venture limited partner's 50%
partnership interest in Solvang.
3. RENTAL PROPERTIES
The following summarizes the carrying values of rental properties as of December
31 (in thousands):
1996 1995
-------------- -------------
Land and improvements.......................... $153,096 $123,658
Buildings and improvements..................... 335,242 264,990
Construction-in-process........................ 18,888 23,861
Equipment and furniture........................ 5,128 3,474
-------------- -------------
Total rental property.......................... 512,354 415,983
Accumulated depreciation and amortization...... (58,054) (41,373)
amortization...................................
-------------- -------------
Total rental property, net..................... $454,300 $374,610
============== =============
Interest costs capitalized as part of buildings and improvements were $3.9
million, $3.7 million and $0.9 million for the years ended December 31, 1996,
1995 and 1994, respectively.
Commitments for land, new construction, development, and acquisitions totaled
approximately $52.0 million at December 31, 1996.
Depreciation expense (including amortization of the capital lease) amounted to
$16.9 million, $11.2 million and $8.3 million for the years ended December 31,
1996, 1995 and 1994, respectively.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. DEFERRED COSTS
The following summarizes the carrying amounts for deferred costs as of December
31 (in thousands):
1996 1995
----------- -----------
Lease costs................................ $8,095 $5,606
Financing costs............................ 8,329 4,669
Development costs.......................... 2,111 2,325
Other...................................... 491 491
----------- -----------
Total deferred costs....................... 19,026 13,091
Accumulated amortization................... (8,705) (5,360)
----------- -----------
Total deferred costs, net.................. $10,321 $7,731
=========== ===========
5. DEBT
In March 1996, the Operating Partnership replaced its secured revolving credit
facility (the "Secured Facility") with a new unsecured $100 million revolving
credit facility (the "Unsecured Facility") which expires March 29, 1998. In
connection with the termination of the Secured Facility, the Operating
Partnership expensed as an extraordinary item the unamortized deferred financing
costs of $0.9 million which had been incurred. Interest on the outstanding
balance is payable monthly at a rate equal to the London Interbank Offered Rate
("LIBOR") plus 1.75%, or the prime rate, at the Operating Partnership's option.
In January 1997, the interest rate on the line was reduced to LIBOR plus 1.45%.
A fee on the unused portion of the Unsecured Facility is payable quarterly at a
rate of 0.25% per annum. There was no outstanding balance at December 31, 1996.
The Unsecured Facility requires compliance with certain loan covenants relating
to debt service coverage, tangible net worth, cash flow, earnings, occupancy
rate, new development and dividends. The Operating Partnership has remained in
compliance with these covenants since inception of the facility.
In January 1996, the Operating Partnership completed a $100 million public debt
offering of 7.75% unsecured term notes due January 2001 (the "Term Notes"),
which are guaranteed by the Company. The five-year non-callable Term Notes were
priced at a discount of 99.952 to yield 7.85% to investors. Net proceeds from
the offering were used to pay down substantially all of the borrowings under the
Secured Facility. At December 31, 1996, in the opinion of management, the fair
value of the Term Notes was approximately $97 million. The fair value was
determined by calculating the present value of the future cash flows of interest
and principal at a discount rate for comparable obligations.
In October 1996, the 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 will equal LIBOR plus
75 basis points during the first year. The spread and the spread period for
subsequent periods will be adjusted in whole or part at the end of the first
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 borrowings under the
Unsecured Facility and for working capital. The carrying amount of the Reset
Notes approximates their fair value.
Interest paid, excluding amounts capitalized, amounted to $4.8 million, $2.7
million and $1.0 million for the years ended December 31, 1996, 1995 and 1994,
respectively.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
6. LEASE AGREEMENTS
The Operating Partnership is the lessor and sub-lessor of retail stores under
operating leases with term expiration dates ranging from 1997 to 2011. 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, 1996, exclusive of renewal option periods, were as
follows (in thousands):
1997............ $58,202
1998............ 54,631
1999............ 50,260
2000............ 42,673
2001............ 32,967
Thereafter 60,087
-------------
$298,820
=============
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 1996, 1995 or 1994.
The Operating Partnership 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.
OPERATING LEASES
Future minimum rental payments under operating leases for land and
administrative offices as of December 31, 1996 were as follows (in thousands):
1997........... $1,169
1998........... 1,188
1999........... 1,208
2000........... 1,203
2001........... 786
Thereafter 9,542
-------------
$15,096
=============
Rental expense amounted to $1.1 million, $0.9 million and $0.8 million for the
years ended December 31, 1996, 1995 and 1994, respectively.
CAPITAL LEASE
A leased property included in rental properties at December 31 consists of the
following (in thousands):
1996 1995
-------------- -------------
Building................................... $8,621 $8,621
Less accumulated amortization.............. (3,247) (2,903)
-------------- -------------
Leased property, net....................... $5,374 $5,718
============== =============
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
6. LEASE AGREEMENTS (CONTINUED)
Future minimum payments under the capitalized building lease, including the
present value of net minimum lease payments as of December 31, 1996 are as
follows (in thousands):
1997.................................................. $1,053
1998.................................................. 1,085
1999.................................................. 1,117
2000.................................................. 1,151
2001.................................................. 1,185
Thereafter............................................ 14,953
----------------
Total minimum lease payments.......................... 20,544
Amount representing interest.......................... (10,739)
----------------
Present value of net minimum capital
lease payments........................................ $9,805
================
7. COMMITMENTS AND CONTINGENCIES
In August 1995, the Company's President (and Chief Operating Officer) resigned
and entered into a separation agreement with the Operating Partnership 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
Operating Partnership, 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 Operating Partnership.
Management has determined that the foundation slab at one of its manufacturers'
outlet centers was installed improperly and will require corrective action. The
Operating Partnership is in the process of settling with the original contractor
and/or engineers. Management believes that any associated costs incurred by the
Operating Partnership for the corrective action will not have a material effect
on the financial position, operating results or liquidity of the Operating
Partnership.
The Operating Partnership is not presently involved in any material litigation
nor, to its knowledge, is any material litigation threatened against the
Operating Partnership or its properties, other than routine litigation arising
in the ordinary course of business. Management believes the costs, if any,
incurred by the Operating Partnership related to any of this litigation will not
materially affect the financial position, operating results or liquidity of the
Operating Partnership.
8. RELATED PARTY INFORMATION
In September 1995, the Operating Partnership 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 Operating Partnership 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 Operating
Partnership repurchasing the property under an option agreement, the maker
selling the property to an unaffiliated third party, or September 2000.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
8. RELATED PARTY INFORMATION (CONTINUED)
The Operating Partnership loaned its joint venture limited partner in Solvang
$3.2 million under a promissory note to fund a portion of the limited partner's
capital contributions. Interest only on the outstanding balance is payable
monthly at the stated interest rate of 10.0% per annum. The note was due in 1996
and is collateralized by the limited partner's interest in the property.
The Operating Partnership leased space to related parties of approximately
61,000, 56,000 and 48,000 square feet during the years ended December 31, 1996,
1995 and 1994, respectively. Rental income from those tenants, including
reimbursement for taxes, common area maintenance and advertising, totaled $1.3
million, $1.5 million and $1.3 million during the years ended December 31, 1996,
1995 and 1994, respectively.
Certain unitholders guarantee Operating Partnership obligations under leases for
one of the properties. The Operating Partnership has indemnified these parties
from and against any liability which they may incur pursuant to these
guarantees.
9. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
The following summary represents the results of operations, expressed in
thousands except per unit amounts, for each quarter during 1996 and 1995:
March 31 June 30 September December
30 31
--------------- ---------------- --------------- ---------------
1996
Base rental revenue............ $12,677 $13,746 $14,737 $15,230
Total revenues................. 19,055 20,929 23,323 28,049
Income before extraordinary
item...................... 7,071 8,040 8,085 7,907
Net income..................... 6,169 8,040 8,085 7,907
Income before extraordinary
item per weighted average
partnership unit.......... $0.41 $0.47 $0.47 $0.45
Net income per weighted
average partnership unit.. $0.36 $0.47 $0.47 $0.45
1995
Base rental revenue............ $10,337 $11,426 $11,902 $12,360
Total revenues................. 15,075 17,675 18,786 20,979
Net income..................... 7,065 7,277 7,214 7,809
Net income per weighted
average partnership unit.. $0.42 $0.44 $0.43 $0.46
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
10. NON-CASH FINANCING AND INVESTING ACTIVITIES
During 1996 and 1995, the Operating Partnership issued units with an aggregate
fair market value of $1.6 million and $1.9 million, respectively, to acquire
properties.
During 1996, 1995 and 1994, respectively, 789,700, 105,000 and 115,000 Operating
Partnership units were converted to common shares.
In September 1995, the Operating Partnership 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.
In December 1995 and 1994 the Operating Partnership declared distributions per
unit of $0.575 and $0.52, respectively, that were paid in January of each
subsequent year. In December 1996, the Operating Partnership declared
distributions per unit of $0.63. The limited partners distributions were paid in
January 1997.
In February 1994, the limited partner in Solvang contributed land with a value
of approximately $2.0 million to the joint venture partnership.
11. SUBSEQUENT EVENTS
On February 7, 1997, the Operating Partnership signed a letter of intent to
acquire Waikele Factory Outlets, a 214,000 square foot manufacturer's outlet
center located 15 miles west of Honolulu, Hawaii. Closing has been scheduled for
the end of March 1997, subject to final due diligence review and documentation.
CHELSEA GCA REALTY PARTNERSHIP, L.P.
SCHEDULE III-CONSOLIDATED REAL ESTATE AND ACCUMULATED DEPRECIATION
FOR THE YEAR ENDED DECEMBER 31, 1996
Cost Step-Up
Capitalized Related
(Disposed to
Initial of) Acquisition
Cost to Subsequent of
Company to Partnership
Acquisition Interest (1)
(Improvements)
---------------------- ----------------------- ------------------------
Buildings, Buildings, Buildings,
Fixtures Fixtures Fixtures
Description Encum- and and and
Outlet Center brances Land Equipment Land Equipment Land Equipment
Name
- -----------------------------------------------------------------------------------------------------------
American Tin $9,805 $ - $ 8,621 $ - $ 6,378 $ - $ -
Cannery, CA
Lawrence Riverfront, KS - - 14,300 15 2,322 - -
Liberty Village, NJ - 345 405 990 14,416 11,015 2,195
Folsom, CA - 4,169 10,465 3,218 13,018 - -
Aurora Farms, OH - 637 6,884 879 16,639 - -
Woodbury Common, NY - 4,448 16,073 5,039 51,198 - -
Petaluma Village, CA - 3,735 - 2,934 28,707 - -
Desert Hills, CA - 975 - 2,470 50,668 830 4,936
Columbia Gorge, OR - 934 - 428 11,340 497 2,647
Mammoth Lakes, CA - 1,180 530 - 2,212 994 1,430
St. Helena, CA - 1,029 1,522 (25) 496 38 78
Patriot Plaza, VA - 789 1,854 976 4,048 - -
Santa Fe, NM - 74 - 1,300 10,873 491 1,772
Corporate Offices, NJ CA - - 60 - 2,333 - -
Napa Valley, CA - 3,456 2,113 7,908 17,877 - -
Solvang, CA - - - 2,380 9,015 - -
Camarillo, CA - 4,000 - 4,304 33,418 - -
Clinton, CT - 4,124 43,656 - - - -
North Georgia, GA - 2,960 34,726 - - - -
Wrentham, MA - 157 2,817 - - - -
Leesburg, VA - 136 - - - - -
Wall Township, NJ - 483 - - - - -
----------------------------------------------------------------------------------
$9,805 $33,631 $144,026 $32,816 $274,958 $13,865 $13,058
==================================================================================
Gross Amount
Carried at Close
Of Period
December 31, 1996 Life Used
Description ----------------- to Compute
Outlet Buildings, Fixtures Depreciation in
Center and Accumulated Date of Latest Income
Name Land Equipment Total Depreciation Construction Statement
- --------------------------------------------------------------------------------------------------------
American Tin Cannery, CA $ - $14,999 $14,999 $5,439 '87 25
Lawrence Riverfront, KS 15 16,622 16,637 3,899 '90 40
Liberty Village, NJ 12,350 17,016 29,366 2,173 '81 30
Folsom, CA 7,387 23,483 30,870 3,883 '90,'92,'93,'96 40
Aurora Farms, OH 1,516 23,523 25,039 2,798 '90,'93,'94,'95 40
Woodbury Common, NY 9,487 67,271 76,758 15,239 '85,'93,'95 30
Petaluma Village, Ca 6,669 28,707 35,376 2,052 '93,'95,'96 40
Desert Hills, Ca 4,275 55,604 59,879 9,276 '90,'94,'95 40
Columbia Gorge, OR 1,859 13,987 15,846 2,583 '91,'94 40
Mammoth Lakes, Ca 2,174 4,172 6,346 1,086 '78 40
St. Helena, CA 1,042 2,096 3,138 303 '83 40
Patriot Plaza, VA 1,765 5,902 7,667 1,146 '86'93,'95, 40
Santa Fe, NM 1,865 12,645 14,510 1,229 '93 40
Corporate Offices, Nj, CA - 2,393 2,393 898 - 5
Napa Valley, CA 11,364 19,990 31,354 1,585 '62,'93,'95 40
Solvang, CA 2,380 9,015 11,395 809 '94 40
Camarillo, CA 8,304 33,418 41,722 1,542 '94,'95,'96 40
Clinton, CT 4,124 43,656 47,780 892 '95,'96 40
North Georgia, GA 2,960 34,726 37,686 1,222 '95,'96 40
Wrentham, MA 157 2,817 2,974 - '95,'96
Leesburg, VA 136 - 136 - '96
Wall Township, NJ 483 - 483 - '96
--------------------------------------------------
80,312 432,042 512,354 $58,054
==================================================
The aggregate cost of the land, building, fixtures and equipment for federal tax
purposes was approximately $512 million at December 31, 1996. (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 PARTNERSHIP, L.P.
SCHEDULE III-CONSOLIDATED REAL ESTATE
AND ACCUMULATED DEPRECIATION (CONTINUED)
THE CHANGES IN TOTAL REAL ESTATE:
YEAR ENDED DECEMBER 31,
1996 1995 1994
--------------- ---------------- ----------------
Balance, beginning of period $415,983 $332,834 $243,218
Additions............................... 96,621 89,871 89,708
Dispositions and other.................. (250) (6,722) (92)
--------------- ---------------- ----------------
Balance, end of period.................. $512,354 $415,983 $332,834
=============== ================ ================
THE CHANGES IN ACCUMULATED DEPRECIATION:
YEAR ENDED DECEMBER 31,
1996 1995 1994
--------------- ---------------- ----------------
Balance, beginning of period $41,373 $30,439 $22,119
Additions............................... 16,931 11,277 8,341
Dispositions and other.................. (250) (343) (21)
--------------- ---------------- ----------------
Balance, end of period.................. $58,054 $41,373 $30,439
=============== ================ ================
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 24th day of March
1997.
CHELSEA GCA REALTY PARTNERSHIP, L.P.
By: Chelsea GCA Realty, Inc., General Partner
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
Chairman of the March 24, 1997
/s/David C. Bloom Board President and
David C. Bloom Chief Executive Officer
/s/Barry M. Ginsburg Vice Chairman March 24, 1997
Barry M. Ginsburg
Executive Vice March 24, 1997
/s/ William D. Bloom President and Director
William D. Bloom
Executive Vice March 24, 1997
/s/ Leslie T. Chao President and Chief
Leslie T. Chao Financial Officer
Vice President-Finance March 24, 1997
/s/ Michael J. Clarke and Principal Accounting
Michael J. Clarke Officer
/s/Brendan T. Byrne Director March 24, 1997
Brendan T. Byrne
/s/ Robert Frommer Director March 24, 1997
Robert Frommer
/s/ Philip D. Kaltenbacher Director March 24, 1997
Philip D. Kaltenbacher
/s/ Reuben S. Leibowitz Director March 24, 1997
Reuben S. Leibowitz
/s/ John D. Santoleri Director March 24, 1997
John D. Santoleri
Consent of Independent Auditors
We consent to the incorporation by reference in the Registration Statement Form
S-3 (No. 33-98136) of Chelsea GCA Realty, Inc. and Chelsea GCA Realty
Partnership, L.P. and in the related Prospectus of our report dated February 12,
1997, with respect to the consolidated financial statements and schedule of
Chelsea GCA Realty Partnership, L.P. included in this Annual Report (Form 10-K)
for the year ended December 31, 1996.
Ernst & Young LLP
New York, New York
February 12, 1997
5
12-MOS
DEC-31-1996
DEC-31-1996
13,886
0
8,023
0
0
0
512,354
58,054
502,212
0
199,668
0
0
0
255,636
502,212
91,356
91,356
0
59,996
1,892
0
8,818
31,103
0
31,103
0
(902)
0
30,201
1.77
1.77
