UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1997
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to .
COMMISSION FILE NO. 1-12328
CHELSEA GCA REALTY, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
MARYLAND 22-3251332
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
103 EISENHOWER PARKWAY, ROSELAND, NEW JERSEY
07068 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES -
ZIP CODE)
(973) 228-6111
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
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 .
The number of shares outstanding of the registrant's common stock, $0.01 par
value, was 15,281,683 at November 6, 1997.
<PAGE>
CHELSEA GCA REALTY, INC.
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited) Page
Condensed Consolidated Balance Sheets
as of September 30, 1997 and December 31, 1996......... 2
Condensed Consolidated Statements of Income
for the three and nine months ended September 30,
1997 and 1996.......................................... 3
Condensed Consolidated Statements of Cash Flows
for the nine months ended September 30, 1997 and 1996.. 4
Notes to Condensed Consolidated Financial Statements......... 5
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations................................. 9
Signatures........................................................... 15
<PAGE>
ITEM 1. FINANCIAL STATEMENTS
CHELSEA GCA REALTY, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
SEPTEMBER 30, December 31,
1997 1996
--------------- ---------------
(Unaudited)
Assets
Rental properties:
<S> <C> <C>
Land........................................................ $ 106,840 $ 80,312
Depreciable property........................................ 559,568 432,042
--------------- ---------------
Total rental property............................................ 666,408 512,354
Accumulated depreciation......................................... (74,166) (58,054)
--------------- ---------------
Rental properties, net........................................... 592,242 454,300
Cash and equivalents............................................. 11,009 13,886
Notes receivable-related parties................................. 4,781 8,023
Deferred costs, net.............................................. 15,235 10,321
Other assets..................................................... 11,435 15,682
--------------- ---------------
TOTAL ASSETS..................................................... $ 634,702 $ 502,212
=============== ===============
</TABLE>
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
<S> <C> <C>
Unsecured bank debt......................................... $ 87,035 $ -
7.75% Unsecured Notes due 2001.............................. 99,722 99,668
Remarketed Floating Rate Reset Notes due 2001............... 100,000 100,000
Construction payables....................................... 16,840 14,473
Accounts payable and accrued expenses....................... 11,527 12,257
Obligation under capital lease.............................. 9,748 9,805
Distribution payable to stockholders........................ 9,617 -
Distribution payable to unitholders......................... 2,163 3,038
Rent payable................................................ 1,654 1,637
-------------- ---------------
TOTAL LIABILITIES................................................ 338,306 240,878
Commitments and contingencies
MINORITY INTEREST................................................ 48,602 75,994
Stockholders' equity:
Preferred stock, $0.01 par value,
5,000 shares authorized, none issued
Common stock, $0.01 par value,
50,000 shares authorized,
issued and outstanding 15,264 in 1997
and 12,402 in 1996........................................ 153 124
Paid-in-capital............................................. 279,847 207,910
Distributions in excess of net income (32,206) (22,694)
--------------- ---------------
TOTAL STOCKHOLDERS' EQUITY....................................... 247,794 185,340
--------------- ---------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY....................... $ 634,702 $ 502,212
=============== ===============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
</TABLE>
<PAGE>
CHELSEA GCA REALTY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, ENDED SEPTEMBER 30,
1997 1996 1997 1996
------------- ------------ ------------ ------------
Revenues:
<S> <C> <C> <C> <C>
Base rent................................................ $18,096 $14,737 $50,945 $41,160
Percentage rent.......................................... 2,694 2,028 5,776 3,707
Expense reimbursements................................... 7,215 5,958 19,641 16,812
Other income............................................. 817 600 1,746 1,628
------------- ------------ ------------ ------------
TOTAL REVENUES.............................................. 28,822 23,323 78,108 63,307
------------- ------------ ------------ ------------
EXPENSES:
Interest................................................. 3,785 2,484 11,343 5,910
Operating and maintenance................................ 7,876 6,718 21,403 18,314
Depreciation and amortization............................ 6,143 4,597 18,111 11,765
General and administrative............................... 1,019 829 2,489 2,270
Other.................................................... 619 554 1,833 1,657
------------- ------------ ------------ ------------
TOTAL EXPENSES.............................................. 19,442 15,182 55,179 39,916
------------- ------------ ------------ ------------
INCOME BEFORE MINORITY INTEREST AND
EXTRAORDINARY ITEM........................................ 9,380 8,141 22,929 23,391
Minority interest........................................... (1,722) (2,548) (4,518) (7,581)
------------- ------------ ------------ ------------
Net income before extraordinary item........................ 7,658 5,593 18,411 15,810
Extraordinary item - loss on early extinguishment of
debt, net of minority interest in the amount of $295........ - - - (607)
------------- ------------ ------------ ------------
NET INCOME.................................................. $7,658 $5,593 $18,411 $15,203
============= ============ ============ ============
PER SHARE DATA:
Income per share before extraordinary item.................. $0.49 $0.47 $1.26 $1.35
Extraordinary loss per share................................ - - - ($0.05)
------------- ------------ ------------ ------------
NET INCOME PER SHARE........................................ $0.49 $0.47 $1.26 $1.30
============= ============ ============ ============
Weighted average common shares outstanding 15,579 12,007 14,639 11,717
============= ============ ============ ============
DIVIDENDS DECLARED PER COMMON SHARE $0.63 $0.575 $1.89 $1.725
============= ============ ============ ============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
</TABLE>
<PAGE>
CHELSEA GCA REALTY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
1997 1996
------------- ------------
CASH FLOWS FROM OPERATING ACTIVITIES
<S> <C> <C>
Net income..................................................... $18,411 $15,203
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization............................. 18,111 11,765
Minority interest in net income........................... 4,518 7,286
Loss on early extinguishment of debt...................... - 902
Amortization of debt discount............................. 54 56
Other operating activities................................ 53 (164)
Additions to deferred lease costs......................... (4,928) (1,274)
Changes in assets and liabilities:
Straight line rent receivable............................ (1,144) (1,184)
Other assets............................................. 5,391 389
Accounts payable and accrued expenses.................... (770) 3,494
------------- ------------
Net cash provided by operating activities...................... 39,696 36,473
------------- ------------
Cash flows from investing activities
Additions to and acquisitions of rental properties............. (153,416) (81,052)
Additions to deferred development costs........................ (1,060) (1,894)
Advances to related parties.................................... - (67)
Payments from related parties.................................. - 173
------------- ------------
Net cash used in investing activities.......................... (154,476) (82,840)
------------- ------------
Cash flows from financing activities
Net proceeds from sale of common stock......................... 51,976 1,290
Distributions.................................................. (26,459) (29,472)
Debt proceeds.................................................. 137,035 188,592
Repayments of debt............................................. (50,000) (107,000)
Additions to deferred financing costs.......................... (536) (3,349)
Other financing activities..................................... (113) (25)
------------- ------------
Net cash provided by financing activities 111,903 50,036
------------- ------------
Net increase (decrease) in cash and equivalents................ (2,877) 3,669
Cash and equivalents, beginning of period...................... 13,886 3,987
------------- ------------
Cash and equivalents, end of period............................ $11,009 $7,656
============= ============
</TABLE>
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES: During the
nine months ended September 30, 1997 and 1996, 1.4 million and 0.5 million
Operating Partnership units with a book value of approximately $20.0 million and
$7.9 million, respectively, were converted to common shares. In June 1997, the
Company forgave a $3.3 million related party note receivable as partial
consideration to acquire the remaining 50% interest in Solvang. On March 31,
1997, the Company issued Operating Partnership units having a market value of
$0.5 million as partial consideration to acquire Waikele Factory Outlets.
Additionally, during 1996, the Company acquired property valued at $1.6 million
through the issuance of units in the Operating Partnership.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
<PAGE>
CHELSEA GCA REALTY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. ORGANIZATION AND BASIS OF PRESENTATION
Chelsea GCA Realty, Inc. (the "Company") is a self-administered and self-managed
real estate investment trust ("REIT"). The Company is the managing general
partner of Chelsea GCA Realty Partnership, L.P. (the "Operating Partnership"),
an operating partnership which at September 30, 1997 owned and provided
development, leasing, marketing and management services for 19 upscale and
fashion-oriented manufacturers' outlet centers (the "Properties") containing
approximately 4.1 million square feet of gross leasable area ("GLA"). The
Properties are located near large metropolitan areas including New York, Los
Angeles, San Francisco, Sacramento, Atlanta, Portland (Oregon), Kansas City and
Cleveland, or at or near tourist destinations including Honolulu, the Napa
Valley, Palm Springs and the Monterey Peninsula. The Company also has a number
of properties under development and expansion.
All of the Company's assets are held by, and all of its operations conducted
through, the Operating Partnership. Due to the Company's ability, as the sole
general partner, to exercise both financial and operational control over the
Operating Partnership, the Operating Partnership is consolidated in the
accompanying financial statements. All intercompany transactions have been
eliminated in consolidation.
Ownership of the Operating Partnership as of September 30, 1997 was as follows:
Company 81.6% 15,264,000 units
Unitholders 18.4% 3,433,000 units
---------------- -------------------
TOTAL 100.0% 18,697,000
The condensed consolidated financial statements of the Company include the
accounts of Solvang Designer Outlets ("Solvang"), a limited partnership. The
Company previously had a 50% interest and was the sole general partner. On June
30, 1997, the Company acquired the remaining 50% interest in Solvang. Solvang is
not material to the operations or financial position of the Company.
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
notes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for fair presentation have
been included. Operating results for the three and nine month periods ended
September 30, 1997 are not necessarily indicative of the results that may be
expected for the year ending December 31, 1997. These financial statements
should be read in conjunction with the consolidated financial statements and
accompanying notes included in the Company's Annual Report on Form 10-K for the
year ended December 31, 1996.
In February 1997, the Financial Accounting Standards Board issued Statement
No. 128, Earnings per Share, which is required to be adopted for the fiscal
years ending after December 15, 1997. The Company will be required to change the
method currently used to compute earnings per share and to restate all prior
periods. Under the new requirements for calculating basic earnings per share,
the dilutive effect of stock options will be excluded. Management does not
believe the adoption of Statement No. 128 will have a material impact on
earnings per share.
2. JOINT VENTURE AGREEMENT
In May 1997, the Company announced the formation of a strategic alliance with
Simon DeBartolo Group, Inc. ("Simon") to develop and acquire high-end outlet
centers with GLA of 500,000 square feet or more in the United States. The
Company and Simon will be co-managing general partners, each with 50% ownership
of the joint venture and any entities formed with respect to specific projects;
the Company will have primary responsibility for the day-to-day activities of
each project. In conjunction with the alliance, the Company completed the sale
on June 16, 1997 to Simon of 1.4 million shares of new common stock, for an
aggregate sales price of $50 million. Net proceeds from the sale were used to
repay borrowings under the Company's Unsecured Facility.
3. PROPERTY ACQUISITION
On March 31, 1997, the Company acquired Waikele Factory Outlets, a
manufacturers' outlet shopping center located near Honolulu, Hawaii. The
consideration paid by the Company consisted of the assumption of $70.7 million
of indebtedness outstanding with respect to the property (which indebtedness was
repaid in full by the Company immediately after the closing) and the issuance of
special partnership units in the Company's Operating Partnership having a fair
market value of $0.5 million. Immediately after the closing, the Company paid a
special cash distribution of $5.0 million to special unit holders. The cash used
by the Company in the acquisition was obtained through borrowings under the
Company's Unsecured Facility.
4. DEBT
In March 1996, the Company replaced its secured revolving credit facility (the
"Secured Facility") with an unsecured $100 million revolving credit facility
(the "Unsecured Facility") which expires March 29, 1998. In connection with the
termination of the Secured Facility, the Company expensed as an extraordinary
item unamortized deferred financing costs of $0.6 million (net of minority
interest of $0.3 million). In March 1997, the Company obtained a supplemental
$50 million unsecured revolving credit facility bearing the same terms and
conditions as the Unsecured Facility. Interest on the outstanding balance of the
unsecured facilities is payable monthly at a rate equal to the London Interbank
Offered Rate ("LIBOR") plus 1.45% (reduced to LIBOR plus 1.15% on October 10,
1997), or the prime rate, at the Company's option. Fees on the unused portion of
the unsecured facilities are payable quarterly at a rate of 0.25% per annum. The
outstanding balance at September 30, 1997 was $87.0 million, which approximates
fair value, leaving $63.0 million of borrowing availability. The Company repaid
substantially all borrowings under the Unsecured Facility with proceeds from two
offerings in October 1997. (See Note 6).
The unsecured facilities require compliance with certain loan covenants relating
to debt service coverage, tangible net worth, cash flow, earnings, occupancy
rate, new development and dividends. The Company has remained in compliance with
these covenants since inception of the facilities.
In January 1996, the Company's Operating Partnership completed a $100 million
public debt offering of 7.75% unsecured term notes due January 2001 (the "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 October 1996, the Company's Operating Partnership completed a $100 million
offering of Remarketed Floating Rate Reset Notes (the "Reset Notes"), which are
guaranteed by the Company. The interest rate will reset quarterly and 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. In October 1997, the Company redeemed
$40 million principal amount and reset the interest rate to LIBOR plus 48 basis
points for one year on the remaining $60 million of Reset Notes.
Interest and loan costs of approximately $3.5 million and $3.6 million were
capitalized as development costs during the nine months ended September 30, 1997
and 1996, respectively.
In October 1997, the Company's Operating Partnership completed a $125
million public debt offering of 7.25% unsecured term notes due October 2007 (the
"7.25% Notes"). The 7.25% Notes were priced to yield 7.29% to investors, 120
basis points over the then 10-year U.S. Treasury rate. The 7.25% Notes are
redeemable at the option of the Operating Partnership at any time and from time
to time at a premium. Net proceeds from the offering were used to repay
substantially all borrowings under the Company's Unsecured Facility, to redeem
$40 million of Reset Notes as mentioned above and for general corporate
purposes.
5. DIVIDENDS
On September 11, 1997, the Board of Directors of the Company declared a $0.63
per share dividend to shareholders of record on September 30, 1997. The
dividend, totaling $9.6 million, was paid on October 20, 1997. The Operating
Partnership simultaneously paid a $0.63 per unit cash distribution, totaling
$2.2 million, to its unitholders.
6. PREFERRED STOCK
In October 1997, the Company issued 1,000,000 shares of 8.375% Series A
Cumulative Redeemable Preferred Stock (the "Preferred Stock"), par value $0.01
per share, having a liquidation preference of $50.00 per share. The Preferred
Stock has no stated maturity and is not convertible into any other securities of
the Company. The Preferred Stock is redeemable on or after October 15, 2027 at
the Company's option. Net proceeds from the offering were used to repay
borrowings under the Company's Unsecured Facility.
7. INCOME TAXES
The Company is taxed as a REIT under Section 856(c) of the Internal Revenue Code
of 1986, as amended, and generally will not be subject to federal income tax to
the extent that it distributes at least 95% of its REIT taxable income to its
stockholders and meets certain other requirements. If the Company fails to
qualify as a REIT in any taxable year, it will be subject to federal income tax
on its taxable income at regular corporate rates. The Company may also be
subject to certain state and local taxes on its income and property and federal
income and excise taxes on its undistributed taxable income. At September 30,
1997 and 1996, the Company was in compliance with all REIT requirements and was
not subject to federal income taxes.
8. NET INCOME PER COMMON SHARE
Net income per common share is computed in accordance with the treasury stock
method and is based on the weighted average number of common shares and common
stock equivalent shares outstanding during the periods. The common stock
equivalent shares represent options outstanding.
9. COMMITMENTS AND CONTINGENCIES
The Company is not presently involved in any material litigation nor, to its
knowledge, is any material litigation threatened against the Company or its
properties, other than routine litigation arising in the ordinary course of
business. Management believes the costs, if any, incurred by the Company related
to this litigation will not materially affect the financial position, operating
results or liquidity of the Company.
10. RELATED PARTY INFORMATION
On June 30, 1997, the Company forgave a $3.3 million related party note and paid
$2.4 million in cash to acquire the remaining 50% interest in Solvang Designer
Outlets. The Company also collected $0.8 million in accrued interest on the
note.
The Company recognized lease settlement income of approximately $99,000 from a
related party during the nine months ended September 30, 1996. This amount is
included in other income in the accompanying condensed consolidated financial
statements.
11. EXTRAORDINARY ITEM
Deferred financing costs of $0.6 million (net of minority interest of $0.3
million) related to the Secured Facility replaced in March 1996 were expensed
and are reflected in the accompanying financial statements as an extraordinary
item.
<PAGE>
CHELSEA GCA REALTY, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the accompanying
unaudited condensed consolidated financial statements and notes thereto. These
financial statements include all adjustments that, in the opinion of management,
are necessary to reflect a fair statement of results for the interim periods
presented, and all such adjustments are of a normal recurring nature.
GENERAL OVERVIEW
The Company has grown by increasing rent at its existing centers, expanding its
existing centers, developing new centers and acquiring and redeveloping centers.
The Company operated 19 manufacturers' outlet centers at September 30, 1997
compared to 18 at the end of the same quarter in the prior year. The Company's
operating gross leasable area (GLA) at September 30, 1997, increased 15.1% to
4.1 million square feet from 3.5 million square feet at September 30, 1996. GLA
added since October 1, 1996 is detailed as follows:
<TABLE>
<CAPTION>
12 mos ended 9 mos ended 3 mos ended
September 30, September 30, December 31,
1997 1997 1996
------------------ ------------------ ----------------
GLA added (in 000's):
<S> <C> <C> <C>
CENTERS EXPANDED:
North Georgia................................ 111 111 -
Desert Hills................................. 18 18 -
Camarillo.................................... 139 85 54
Folsom....................................... 38 16 22
Liberty Village.............................. 18 13 5
Other........................................ (4) (4) -
------------ ------------- ------------
TOTAL CENTERS EXPANDED........................... 320 239 81
CENTER ACQUIRED:
Waikele...................................... 214 214 -
------------ ------------- ------------
Net GLA added during the period 534 453 81
GLA at end of period............................. 4,063 4,063 3,610
</TABLE>
RESULTS OF OPERATIONS
COMPARISON OF THE THREE MONTHS ENDED SEPTEMBER 30, 1997 TO THE THREE MONTHS
ENDED SEPTEMBER 30, 1996.
Net income before minority interest and extraordinary item increased $1.3
million to $9.4 million for the three months ended September 30, 1997 from $8.1
million for the three months ended September 30, 1996. Increases in revenues
were offset by higher interest expense and depreciation and amortization.
Base rental revenues increased $3.4 million, or 22.8%, to $18.1 million for the
three months ended September 30, 1997 from $14.7 million for the three months
ended September 30, 1996 due to expansions, new center openings, an acquisition
and higher average rents.
Percentage rent revenues increased $0.7 million to $2.7 million for the three
months ended September 30, 1997, from $2.0 million for the three months ended
September 30, 1996. The increase was primarily due to increases in tenant sales
at the Company's larger centers and an increase in tenants contributing
percentage rents.
Expense reimbursements, representing contractual recoveries from tenants of
certain common area maintenance, operating, real estate tax, promotional and
management expenses, increased $1.2 million, or 21.1%, to $7.2 million for the
three months ended September 30, 1997 from $6.0 million for the three months
ended September 30, 1996, due to the recovery of operating and maintenance costs
from increased GLA. The average recovery of reimbursable expenses was 91.6% in
the third quarter of 1997, compared to 92.2% in the third quarter of 1996.
Other income increased $0.2 million to $0.8 million for the three months ended
September 30, 1997 from $0.6 million for the three months ended September 30,
1996 as the result of an outparcel sale at one of the operating centers, net of
lease termination income in the 1996 period.
Interest in excess of amounts capitalized increased $1.3 million to $3.8 million
for the three months ended September 30, 1997 from $2.5 million for the three
months ended September 30, 1996 primarily due to higher debt balances from new
centers, expansion openings, and a center acquisition financed with borrowings.
Operating and maintenance expenses increased $1.2 million, or 17.2%, to $7.9
million for the three months ended September 30, 1997 from $6.7 million for the
three months ended September 30, 1996. The increase was primarily due to costs
related to increased GLA.
Depreciation and amortization expense increased $1.5 million, or 33.6%, to $6.1
million for the three months ended September 30, 1997 from $4.6 million for the
three months ended September 30, 1996. The increase was primarily related to
increased GLA.
General and administrative expenses increased $0.2 million, or 22.9%, to $1.0
million for the three months ended September 30, 1997 from $0.8 million for the
three months ended September 30, 1996 due to increased personnel and overhead
costs.
Other expenses remained flat at $0.6 million for the three months ended
September 30, 1997 and 1996.
Minority interest decreased $0.8 million, or 32.4%, to $1.7 million for the
three months ended September 30, 1997 from $2.5 million for the three months
ended September 30, 1996 primarily as a result of the conversion by one limited
partner of 1.3 million units in the Operating Partnership for an equal number of
common shares in the Company and a subsequent distribution of the shares to
third-party investors.
COMPARISON OF THE NINE MONTHS ENDED SEPTEMBER 30, 1997 TO THE NINE MONTHS ENDED
SEPTEMBER 30, 1996.
Net income before minority interest and extraordinary item decreased $0.4
million to $23.0 million for the nine months ended September 30, 1997, from
$23.4 million for the nine months ended September 30, 1996. Increases in
revenues were more than offset by higher interest expense and increases in
depreciation and amortization.
Base rental revenues increased $9.8 million, or 23.8%, to $51.0 million for the
nine months ended September 30, 1997, from $41.2 million for the nine months
ended September 30, 1996, due to expansions, new center openings, an acquisition
and higher average rents.
Percentage rent revenues increased $2.1 million to $5.8 million for the nine
months ended September 30, 1997 from $3.7 million for the nine months ended
September 30, 1996. The increase was primarily due to increases in tenant sales,
expansions at the Company's larger centers and increases in tenants contributing
percentage rents.
Expense reimbursements, representing contractual recoveries from tenants of
certain common area maintenance, operating, real estate tax, promotional and
management expenses, increased $2.8 million, or 16.8%, to $19.6 million for the
nine months ended September 30, 1997 from $16.8 million for the nine months
ended September 30, 1996, due to the recovery of operating and maintenance costs
from increased GLA. The average recovery of reimbursable expenses was 91.8% in
1997 compared to 93.1% in 1996.
Interest in excess of amounts capitalized increased $5.4 million to $11.3
million for the nine months ended September 30, 1997 from $5.9 million for the
nine months ended September 30, 1996 primarily due to higher debt balances from
new centers, expansion openings, and a center acquisition financed with
borrowings.
Operating and maintenance expenses increased $3.1 million, or 16.9%, to $21.4
million for the nine months ended September 30, 1997 from $18.3 million for the
nine months ended September 30, 1996. The increase was primarily due to costs
related to increased GLA.
Depreciation and amortization expense increased $6.3 million, or 53.9%, to $18.1
million for the nine months ended September 30, 1997 from $11.8 million for the
nine months ended September 30, 1996. The increase was primarily due to costs
related to increased GLA.
General and administrative expenses increased $0.2 million to $2.5 million for
the nine months ended September 30, 1997 from $2.3 million for the nine months
ended September 30, 1996 due to increased personnel and overhead costs.
Other expenses increased $0.2 million to $1.8 million for the nine months ended
September 30, 1997 from $1.6 million for the nine months ended September 30,
1996. The increase included additional reserves for bad debts.
Minority interest decreased $3.1 million, or 40.4%, to $4.5 million for the nine
months ended September 30, 1997 from $7.6 million for the nine months ended
September 30, 1996 primarily as a result of the conversion by one limited
partner of 1.3 million units in the Operating Partnership for an equal number of
common shares in the Company and a subsequent distribution of the shares to
third-party investors.
In March 1996, the Company replaced its Secured Facility. Deferred financing
costs of $0.6 million, net of minority interest of $0.3 million, were expensed
in connection with the early retirement of the Secured Facility.
LIQUIDITY AND CAPITAL RESOURCES
The Company believes it has adequate financial resources to fund operating
expenses, distributions, and planned development and construction activities.
Operating cash flow during 1997 is expected to increase with a full year of
operations of the 676,000 square feet of GLA added during 1996, the acquisition
of Waikele Factory Outlets and scheduled openings of one new center and several
expansions in 1997.
Operating cash flow is expected to provide sufficient funds for dividends and
distributions in accordance with REIT federal income tax requirements. In
addition, the Company anticipates retaining sufficient operating cash to fund
re-tenanting and lease renewal tenant improvement costs, as well as capital
expenditures to maintain the quality of its centers.
Distributions declared and recorded during the nine months ended September 30,
1997 were $34.4 million, or $1.89 per share or unit. The Company's dividend
payout ratio as a percentage of net income before depreciation and amortization,
exclusive of amortization of deferred financing costs, minority interest and
extraordinary item ("FFO") was 86.8% during the nine months ended September 30,
1997. The Unsecured Facility limits aggregate dividends and distributions to the
lesser of (i) 90% of FFO on an annual basis or (ii) 100% of FFO for any two
consecutive quarters.
In October 1997, the Company issued 1,000,000 shares of 8.375% Series A
Cumulative Redeemable Preferred Stock (the "Preferred Stock"), par value $0.01
per share, having a liquidation preference of $50.00 per share. The Preferred
Stock has no stated maturity and is not convertible into any other securities of
the Company. The Preferred Stock is redeemable on or after October 15, 2027 at
the Company's option. Net proceeds from the offering were used to repay
borrowings under the Company's Unsecured Facility.
In October 1997, the Company's Operating Partnership completed a $125 million
public debt offering of 7.25% unsecured term notes due October 2007 (the "7.25%
Notes"). The 7.25% Notes were priced to yield 7.29% to investors, 120 basis
points over the 10-year U.S. Treasury rate. Net proceeds from the offering were
used to repay substantially all borrowings under the Company's Unsecured
Facility, redeem $40 million of Reset Notes and for general corporate purposes.
Subsequent to the two offerings in October 1997, the Company had $145
million available under its unsecured facilities, access to the public markets
through its $200 million equity and $175 million debt shelf registration and
cash and cash equivalents of approximately $44 million.
The 227,000 square foot first phase of Wrentham Village Premium Outlets
(Wrentham, MA), located near the junction of Interstates 95 and 495 between
Boston and Providence, opened in mid-October. The Company expects to be under
construction by the end of November on approximately 730,000 square feet of new
GLA to be completed during the balance of 1997 and in 1998, including the
270,000 square foot first phase of Leesburg Corner Premium Outlets (Leesburg,
VA), a new center serving the greater Washington, D.C. market; and expansions,
already underway, of 270,000 square feet at Woodbury Common Premium Outlets
(Central Valley, NY), 140,000 square feet (Phase II) at Wrentham Village Premium
Outlets, 30,000 square feet at Desert Hills Premium Outlets (Cabazon, CA), and
20,000 square feet at Folsom Premium Outlets (Folsom, CA). These projects are in
various stages of development and there can be no assurance that any of them
will be completed or opened, or that there will not be delays in the opening or
completion of any of them. The Company anticipates development and construction
costs of approximately $75 million to $115 million annually.
To achieve planned growth and favorable returns in both the short and long term,
the Company's financing strategy is to maintain a strong, flexible financial
position by: (i) maintaining a conservative level of leverage; (ii) extending
and sequencing debt maturity dates; (iii) managing exposure to floating interest
rates; (iv) maintaining a significant level of unencumbered assets; and (v)
maintaining liquidity. Management believes these strategies will enable the
Company to access a broad array of capital sources, including bank or
institutional borrowings and secured and unsecured debt and equity offerings,
subject to market conditions.
It is the Company's policy to limit its borrowings to less than 40% of
total market capitalization (defined as the value of outstanding common and
preferred shares on a fully diluted basis including conversion of partnership
units to stock, plus total debt). After the two October 1997 offerings were
completed, using an October 21, 1997 closing price of $41.125 per common share
plus a liquidation preference of $50.00 per preferred share, the Company's ratio
of debt to total market capitalization was approximately 26%.
Net cash provided by operating activities was $39.7 million and $36.5 million
for the nine months ended September 30, 1997 and 1996, respectively. The
increase was primarily due to the growth of the Company's GLA to 4.1 million
square feet in 1997 from 3.5 million square feet in 1996 and decreases in
accounts receivable, offset by decreases in accrued expenses. Net cash used in
investing activities increased $71.6 million for the nine months ended September
30, 1997 compared to the corresponding 1996 period primarily as a result of the
acquisition of Waikele Factory Outlets. Net cash provided by financing
activities increased $61.9 million primarily due to the purchase of stock by
Simon.
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 Company. Management considers FFO an appropriate measure of
performance for an equity real estate investment trust. FFO, as defined by the
National Association of Real Estate Investment Trusts ("NAREIT"), is net income
(computed in accordance with generally accepted accounting principles),
excluding gains (or losses) from debt restructuring and sales of property,
exclusive of outparcel sales, plus real estate related depreciation and
amortization 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.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1997 1996 1997 1996
----------- -------- ---------- --------
<S> <C> <C> <C> <C>
Net income before extraordinary item..................... $7,658 $5,593 $18,411 $15,810
Add back:
Depreciation and amortization (1)........................ 6,143 4,539 17,999 11,604
Amortization of deferred financing costs and
depreciation of non-real estate assets.................. (430) (264) (1,166) (920)
Minority interest in the Operating Partnership (1)....... 1,722 2,492 4,391 7,386
---------- ------- ---------- ---------
FFO...................................................... $15,093 $12,360 $39,635 $33,880
========== ======== ========== =======
- ---------------------------------------
<FN>
(1) Excludes depreciation and minority interest attributed to a third-party
limited partner's interest in a partnership for the three months ended
September 30, 1996 and the nine months ended September 30, 1997 and 1996.
</FN>
</TABLE>
<PAGE>
CHELSEA GCA REALTY, INC.
SIGNATURES
Pursuant to the requirements 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.
CHELSEA GCA REALTY, INC.
By: /S/ LESLIE T. CHAO
-------------------------------------
Leslie T. Chao
President and Chief Financial Officer
Date: November 11, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JUL-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 11,009
<SECURITIES> 0
<RECEIVABLES> 4,781
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 666,408
<DEPRECIATION> (74,166)
<TOTAL-ASSETS> 634,702
<CURRENT-LIABILITIES> 0
<BONDS> 199,722
0
0
<COMMON> 153
<OTHER-SE> 247,641
<TOTAL-LIABILITY-AND-EQUITY> 634,702
<SALES> 28,822
<TOTAL-REVENUES> 28,822
<CGS> 0
<TOTAL-COSTS> 19,442
<OTHER-EXPENSES> 619
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,785
<INCOME-PRETAX> 9,380
<INCOME-TAX> 0
<INCOME-CONTINUING> 9,380
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,658
<EPS-PRIMARY> 0.49
<EPS-DILUTED> 0.49
</TABLE>
