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 MARCH 31, 1998
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 15,416,146 at May 6, 1998.
<PAGE>
CHELSEA GCA REALTY, INC.
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited) Page
Condensed Consolidated Balance Sheets as of March
31, 1998 and December 31,
1997.................................................. 3
Condensed Consolidated Statements of Income for the
three months ended March 31, 1998 and
1997.................................................. 4
Condensed Consolidated Statements of Cash Flows for
the three months ended March 31, 1998 and
1997................................................. 5
Notes to Condensed Consolidated Financial Statements... 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations .................. 9
Signatures..................................................... 13
<PAGE>
ITEM 1. FINANCIAL STATEMENTS
CHELSEA GCA REALTY, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
MARCH 31, December 31,
1998 1997
--------------- -------------
(Unaudited)
ASSETS
Rental properties:
<S> <C> <C>
Land ......................................................................... $ 112,727 $ 112,470
Depreciable property ......................................................... 620,696 596,463
------- -------
Total rental property .......................................................... 733,423 708,933
Accumulated depreciation ....................................................... (86,584) (80,244)
------- -------
Rental properties, net ......................................................... 646,839 628,689
Cash and equivalents ........................................................... 9,225 14,538
Notes receivable-related parties ............................................... 4,781 4,781
Deferred costs, net ............................................................ 16,655 17,276
Other assets ................................................................... 18,037 22,745
------ ------
TOTAL ASSETS ................................................................... $ 695,537 $ 688,029
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Unsecured bank debt ......................................................... $ 13,035 $ 5,035
7.75% Unsecured Notes due 2001 .............................................. 99,763 99,743
Remarketed Floating Rate Reset Notes due 2001 ............................... 60,000 60,000
7.25% Unsecured Notes due 2007 .............................................. 124,689 124,681
Construction payables ....................................................... 12,497 17,810
Accounts payable and accrued expenses ....................................... 14,013 14,442
Obligation under capital lease .............................................. 9,700 9,729
Accrued dividend and distribution payable ................................... 13,869 3,276
Other liabilities ........................................................... 8,088 7,390
----- -----
TOTAL LIABILITIES .............................................................. 355,654 342,106
Commitments and contingencies
Minority interest .............................................................. 47,120 48,253
Stockholders' equity:
8.375% series A cumulative redeemable preferred stock, $0.01
par value, authorized 1,000 shares, issued and outstanding
1,000 shares in 1997 and 1998 (aggregate liquidation preference
50,000)................................................................... 10 10
Common stock, $0.01 par value, authorized 50,000 shares,
issued and outstanding 15,354 in 1998 and 15,353 in 1997 ................. 154 154
Paid-in-capital ............................................................. 331,230 331,226
Distributions in excess of net income ....................................... (38,631) (33,720)
------- -------
TOTAL STOCKHOLDERS' EQUITY ..................................................... 292,763 297,670
------- -------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ..................................... $ 695,537 $ 688,029
========= =========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
<PAGE>
CHELSEA GCA REALTY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1997
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
1998 1997
---- ----
REVENUES:
<S> <C> <C>
Base rental ........................................................ $ 19,266 $ 15,563
Percentage rental .................................................. 1,786 1,298
Expense reimbursements ............................................. 6,800 5,364
Other income ....................................................... 654 424
--- ---
TOTAL REVENUES ........................................................ 28,506 22,649
------ ------
EXPENSES:
Interest ........................................................... 4,125 3,157
Operating and maintenance .......................................... 7,590 5,890
Depreciation and amortization ...................................... 7,278 5,778
General and administrative ......................................... 886 707
Other .............................................................. 628 630
--- ---
TOTAL EXPENSES ........................................................ 20,507 16,162
------ ------
Income before minority interest ....................................... 7,999 6,487
Minority interest ..................................................... (1,270) (1,347)
------ ------
Net income ............................................................ 6,729 5,140
Preferred dividend requirement ........................................ (1,047) --
------ ---------
NET INCOME TO COMMON SHAREHOLDERS ..................................... $ 5,682 $ 5,140
======== ========
BASIC:
Net income per common share ........................................... $ 0.37 $ 0.37
Weighted average common shares outstanding ............................ 15,353 13,749
DILUTED:
Net income per common share ........................................... $ 0.36 $ 0.37
Weighted average common shares outstanding ............................ 15,611 13,993
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 THREE MONTHS ENDED MARCH 31, 1998 AND 1997
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
1998 1997
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
<S> <C> <C>
Net income ................................................................. $ 6,729 $ 5,140
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization ........................................... 7,278 5,778
Minority interest in net income ......................................... 1,270 1,347
Additions to deferred lease costs ....................................... (978) (314)
Other operating activities .............................................. 97 20
Changes in assets and liabilities:
Straight line rent receivable ......................................... (329) (322)
Other assets .......................................................... 5,762 3,902
Accounts payable and accrued expenses ................................. (200) (2,195)
---- ------
Net cash provided by operating activities ..................................... 19,629 13,356
------ ------
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to rental properties ................................................ (27,238) (99,392)
Additions to deferred development costs ....................................... (890) (146)
Other investing activities .................................................... (285) --
-------- --------
Net cash used in investing activities ......................................... (28,413) (99,538)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Net proceeds from sale of common stock ........................................ 25 327
Distributions ................................................................. (3,414) (3,039)
Debt proceeds ................................................................. 12,000 85,035
Repayments of debt ............................................................ (4,000) --
Additions to deferred financing costs ......................................... (1,083) (225)
Other financing activities .................................................... (57) --
------- --------
Net cash provided by financing activities ..................................... 3,471 82,098
----- ------
Net decrease in cash and equivalents .......................................... (5,313) (4,084)
Cash and equivalents, beginning of period ..................................... 14,538 13,886
------ ------
Cash and equivalents, end of period ........................................... $ 9,225 $ 9,802
======== ========
</TABLE>
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
During 1997, 1.4 million Operating Partnership units with a book value of
approximately $20.0 million were converted to common shares. On March 31, 1997,
the Company issued units having a market value of $0.5 million as partial
consideration to acquire Waikele Factory Outlets.
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 March 31, 1998 owned and provided development,
leasing, marketing and management services for 20 upscale and fashion-oriented
manufacturers' outlet centers (the "Properties") containing approximately 4.4
million square feet of gross leasable area ("GLA"). The Properties are located
near large metropolitan areas including New York City, Los Angeles, San
Francisco, Sacramento, Boston, 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, it is consolidated in the accompanying financial
statements. All intercompany transactions have been eliminated in consolidation.
Ownership of the Operating Partnership as of March 31, 1998 was as follows:
Company 81.7% 15,354,000 units
Unitholders 18.3% 3,431,000 units
---- ---------
TOTAL 100.0% 18,785,000
Through June 30, 1997, the Company was the sole general partner and had a 50%
interest in Solvang Designer Outlets ("Solvang"), a limited partnership.
Accordingly, the accounts of Solvang were included in the consolidated financial
statements of the Company. On June 30, 1997, the Company acquired the remaining
50% interest in Solvang. Solvang is not material to the operations or financial
position.
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 month period ended March 31, 1998
are not necessarily indicative of the results that may be expected for the year
ending December 31, 1998. 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, 1997.
In 1997, the Financial Accounting Standards Board issued Statement No. 128 ("FAS
No. 128"), "Earnings per Share". FAS No. 128 replaced the calculation of primary
and fully diluted earnings per share with basic and diluted earnings per share.
Unlike primary earnings per share, basic earnings per share excludes any
dilutive effects of options, warrants and convertible securities. Diluted
earnings per share is very similar to the previously reported fully diluted
earnings per share. All earnings per share amounts have been presented, and
where appropriate, restated to conform to the FAS No. 128 requirements.
Financial Accounting Standards Board Statement No. 131 ("FAS No. 131")
"Disclosure about Segments of an Enterprise and Related Information" is
effective for financial statements issued for periods beginning after December
15, 1997. FAS No. 131 requires disclosures about segments of an enterprise and
related information regarding the different types of business activities in
which an enterprise engages and the different economic environments in which it
operates. FAS No. 131 does not have an impact on the Company's financial
statements.
2. WAIKELE ACQUISITION
Pursuant to a Subscription Agreement dated as of March 31, 1997, the Company
acquired Waikele Factory Outlets, a manufacturers' outlet shopping center
located in Hawaii. The consideration paid by the Company consisted of the
assumption of $70.7 million of indebtedness outstanding with respect to the
property (which indebtedness was repaid in full by the Company immediately after
the closing) and the issuance of special partnership units in the 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
on the special units. The cash used by the Company in the transaction was
obtained through borrowings under the Company's Credit Facilities. Waikele was
not included in the Company's operating results for the first quarter of 1997.
3. DEBT
On March 30, 1998, the Company replaced its two unsecured bank revolving lines
of credit, totaling $150 million (the "Credit Facilities"), with a new $160
million senior unsecured bank line of credit (the "Senior Credit Facility"). The
Senior Credit Facility expires on March 30, 2001 and bears interest on the
outstanding balance, payable monthly, at a rate equal to the London Interbank
Offered Rate ("LIBOR") plus 1.05% (6.74% at March 31, 1998) or the prime rate,
at the Company's option. A fee on the unused portion of the Senior Credit
Facility is payable quarterly at rates ranging from 0.15% to 0.25% depending on
the balance outstanding. The lenders have an option to extend the facility
annually on a rolling three year basis.
Also on March 30, 1998, the Company entered into a $5 million term loan (the
"Term Loan") which carries the same interest rate and maturity as the Senior
Credit Facility.
In January 1996, the Company's Operating Partnership completed a $100 million
public offering of 7.75% unsecured term notes due January 2001 (the "7.75%
Notes"), which are guaranteed by the Company. The five-year non-callable 7.75%
Notes were priced at a discount of 99.592 to yield 7.85% to investors. Net
proceeds from the offering were used to pay down substantially all of the
borrowings under the Company's secured line of credit. The carrying amount of
the 7.75% Notes approximates their fair value.
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 resets quarterly and was equal to
LIBOR plus 75 basis points during the first year. In October 1997, the interest
rate spread was reduced to LIBOR plus 48 basis points (6.11% at March 31, 1998).
The spread and the spread period for subsequent periods will be adjusted in
whole or part at the end of each year, pursuant to an agreement with the
underwriters. Unless previously redeemed, the Reset Notes will have a final
maturity of October 23, 2001. Net proceeds from the offering were used to repay
all of the then borrowings under the Credit Facilities and for working capital.
In October 1997, the Company redeemed $40 million of Reset Notes. The carrying
amount of the Reset Notes approximates their fair value.
In October 1997, the Company's Operating Partnership completed a $125 million
public offering of 7.25% unsecured term notes due October 2007 (the "7.25%
Notes"). The 7.25% Notes were priced to yield 7.29% to investors, 120 basis
points over the 10-year U.S. Treasury rate. Net proceeds from the offering were
used to repay substantially all borrowings under the Company's Credit
Facilities, redeem $40 million of Reset Notes and for general corporate
purposes. The carrying amount of the 7.25% Notes approximates their fair value.
Interest and loan costs of approximately $1.6 million and $0.8 million were
capitalized as development costs during the three months ended March 31, 1998
and 1997, respectively.
4. PREFERRED STOCK
In October 1997, the Company issued 1.0 million shares of 8.375% Series A
Cumulative Redeemable Preferred Stock (the "Preferred Stock"), par value $0.01
per share, having a liquidation preference of $50.00 per share. The Preferred
Stock has no stated maturity and is not convertible into any other securities of
the Company. The Preferred Stock is redeemable on or after October 15, 2027 at
the Company's option. Net proceeds from the offering were used to repay
borrowings under the Company's Credit Facilities.
5. DIVIDENDS
On March 12, 1998, the Board of Directors of the Company declared a $0.69 per
share dividend to shareholders of record on March 31, 1998. The dividend,
totaling $10.6 million, was paid on April 20, 1998. The Operating Partnership
simultaneously paid a $0.69 per unit cash distribution, totaling $2.4 million,
to its unitholders.
6. 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 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, the Company will be subject to federal
income tax on its taxable income at regular corporate rates. The Company may
also be subject to certain state and local taxes on its income and property and
federal income and excise taxes on its undistributed taxable income. At March
31, 1998 and 1997, the Company was in compliance with all REIT requirements and
was not subject to federal income taxes.
7. NET INCOME PER COMMON SHARE
Basic earnings per common share is computed using the weighted average number of
shares outstanding. Diluted earnings per common share is computed using the
weighted average number of shares outstanding adjusted for the incremental
shares attributed to outstanding options to purchase common stock of 0.3 million
and 0.2 million for the three months ended March 31, 1998 and 1997,
respectively.
8. 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.
9. RELATED PARTY INFORMATION
In September 1995, the Company transferred property with a book value of $4.8
million to its former President (a current unitholder) in exchange for a $4.0
million note secured by units in the Operating Partnership (the "Secured Note")
and an $0.8 million unsecured note receivable (the "Unsecured Note"). The
Secured Note bears interest at a rate of LIBOR plus 250 basis points per annum,
payable monthly, and is due upon the earlier of the maker obtaining permanent
financing on the property, the Company repurchasing the property under an option
agreement, the maker selling the property to an unaffiliated third party, or
January 1999. The Unsecured Note bears interest at a rate of 8.0% per annum and
is due upon the earlier of the Company repurchasing the property under an option
agreement, the maker selling the property to an unaffiliated third party, or
September 2000.
<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 which, 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 20 manufacturers' outlet centers at March 31, 1998 compared
to 19 at the end of the same quarter in the prior year. The Company's operating
gross leasable area (GLA) at March 31, 1998, increased 15.8% to 4.4 million
square feet from 3.8 million square feet at March 31, 1997. GLA added since
April 1, 1997 is detailed as follows:
<TABLE>
<CAPTION>
12 mos ended 3 mos ended 9 mos ended
March 31, March 31, December 31,
1998 1998 1997
---------------- ---------------- ---------------
GLA ADDED (IN 000'S):
NEW CENTERS OPENED:
<S> <C> <C>
Wrentham Village ..................................... 227 -- 227
TOTAL NEW CENTERS ..................................... 227 -- 227
CENTERS EXPANDED:
Woodbury Common ........................................ 122 122 --
Desert Hills ......................................... 31 6 25
North Georgia ........................................ 111 -- 111
Camarillo Premium Outlets ............................ 85 -- 85
Folsom Premium Outlets ............................... 16 -- 16
Liberty Village ...................................... 14 -- 14
Other (net) .......................................... (2) (1) (1)
TOTAL CENTERS EXPANDED ................................. 377 127 250
Net GLA added during the period ........................ 604 127 477
GLA at end of period ................................... 4,435 4,435 4,308
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
RESULTS OF OPERATIONS
COMPARISON OF THE THREE MONTHS ENDED MARCH 31, 1998 TO THE THREE MONTHS ENDED
MARCH 31, 1997.
Net income before minority interest increased $1.5 million to $8.0 million for
the three months ended March 31, 1998 from $6.5 million for the three months
ended March 31, 1997. Increases in revenues, primarily the result of the
Company's expansions, a new center and a center acquired, were offset by higher
interest on borrowings and depreciation and amortization.
Base rentals increased $3.7 million, or 23.8%, to $19.3 million for the three
months ended March 31, 1998 from $15.6 million for the three months ended March
31, 1997 due to expansions, a new center opened, one acquired center and higher
average rents.
<PAGE>
Percentage rents increased $0.5 million to $1.8 million for the three months
ended March 31, 1998, from $1.3 million for the three months ended March 31,
1997. The increase was primarily due to one new center, a center acquired and
expansions of existing centers.
Expense reimbursements, representing contractual recoveries from tenants of
certain common area maintenance, operating, real estate tax, promotional and
management expenses, increased $1.4 million, or 26.8%, to $6.8 million for the
three months ended March 31, 1998 from $5.4 million for the three months ended
March 31, 1997, due to the recovery of operating and maintenance costs at new
and expanded centers. The average recovery of reimbursable expenses was 89.6% in
the first quarter of 1998, compared to 91.1% in the first quarter of 1997.
Interest in excess of amounts capitalized increased $1.0 million to $4.1 million
for the three months ended March 31, 1998 from $3.1 million for the three months
ended March 31, 1997 due to higher debt balances related to the unsecured public
debt offering in October 1997, offset by increased construction in progress.
Operating and maintenance expenses increased $1.7 million, or 28.9%, to $7.6
million for the three months ended March 31, 1998 from $5.9 million for the
three months ended March 31, 1997. The increase was primarily due to costs
related to expansions, a new center and a center acquired.
Depreciation and amortization expense increased $1.5 million, or 26.0%, to $7.3
million for the three months ended March 31, 1998 from $5.8 million for the
three months ended March 31, 1997. The increase was primarily related to
expansions and new centers.
General and administrative expenses increased $0.2 million to $0.9 million for
the three months ended March 31, 1998 from $0.7 million for the three months
ended March 31, 1997. The increase in personnel and overhead costs was offset by
additions to operating GLA.
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 1998 is expected to increase with a full year of
operations of the 698,000 square feet of GLA added during 1997, including the
opening of Wrentham Village Premium Outlets in October 1997, and expansions and
one scheduled new center opening in 1998, subject to market demand. In addition,
at March 31, 1998 the Company had $152.0 million available under its Senior
Credit Facility, access to the public markets through shelf registrations
covering $200 million of equity and $175 million of debt, and cash equivalents
of $9.2 million.
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 three months ended March 31, 1998
were $13.0 million, or $0.69 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 93.7% during the three months ended March 31,
1998. The Senior Credit Facility limits aggregate dividends and distributions to
the lesser of (i) 90% of FFO on an annual basis or (ii) 100% of FFO for any two
consecutive quarters.
On March 30, 1998, the Company replaced its two unsecured bank revolving lines
of credit, totaling $150 million (the "Credit Facilities"), with a new $160
million senior unsecured bank line of credit (the "Senior Credit Facility"). The
Senior Credit Facility expires on March 30, 2001 and bears interest on the
outstanding balance, payable monthly, at a rate equal to the London Interbank
Offered Rate ("LIBOR") plus 1.05% (6.74% at March 31, 1998) or the prime rate,
at the Company's option. A fee on the unused portion of the Senior Credit
Facility is payable quarterly at rates ranging from 0.15% to 0.25% depending on
the balance outstanding. The lenders have an option to extend the facility
annually on a rolling three year basis.
<PAGE>
The Company is in the process of planning development for 1998 and beyond,
including the 270,000 square foot first phase of Leesburg Corner Premium Outlets
(Leesburg, Virginia), a new center serving the greater Washington, D.C. market;
the 145,000 square foot balance of a 270,000 square foot expansion at Woodbury
Common Premium Outlets (Central Valley, New York); and expansions of 125,000
square feet at Wrentham Village Premium Outlets, 45,000 square feet at Camarillo
Premium Outlets (Camarillo, California), 30,000 square feet at North Georgia
Premium Outlets (Dawsonville, Georgia) and 35,000 square feet at four other
properties. These projects are in various stages of development and there can be
no assurance that any of these projects will be completed or opened, or that
there will not be delays in the opening or completion of any of them. The
Company anticipates development and construction costs of $120 million to $145
million annually.
The Company is expected to begin construction in mid-1998 on the 430,000
square foot first phase of Houston Premium Outlets (Houston, Texas), with
completion scheduled for the second half of 1999. Additionally, the Company
announced the development of Orlando Premium Outlets, a new 440,000 square foot
center to be located on Interstate 4 in Orlando, Florida (midway between Walt
Disney World/EPCOT and Sea World), preliminarily scheduled to open in early
2000. The Houston and Orlando centers are expected to be the first two joint
venture projects to be part of the Company's strategic alliance with Simon
DeBartolo Group, Inc.
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 shares of common
stock on a fully diluted basis including conversion of partnership units to
common stock, plus the liquidation preference value of the Company's preferred
stock, plus total debt). Applying a March 31, 1998 closing price of $37.00 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 29%.
Net cash provided by operating activities was $19.6 million and $13.4 million
for the three months ended March 31, 1998 and 1997, respectively. The increase
was primarily due to the growth of the Company's GLA to 4.4 million square feet
in 1998 from 3.8 million square feet in 1997, increased collections on accounts
receivable and increases in accrued interest on debt borrowings. Net cash used
in investing activities decreased $71.1 million for the three months ended March
31, 1998 compared to the corresponding 1997 period, primarily as a result of the
Waikele Factory Outlets acquisition in March 1997. At March 31, 1998, net cash
provided by financing activities decreased $78.6 million primarily due to
borrowings for the Waikele Factory Outlets acquisition in the first quarter
1997.
YEAR 2000 COMPLIANCE
The Company has determined that is will need to modify or replace significant
portions of its software so that its computer systems will function properly
with respect to dates in the year 2000 and beyond. The Company's comprehensive
Year 2000 initiative is being managed by a team of internal staff and outside
consultants. The team's activities are designed to ensure that there are no
adverse effects on the Company's core business operations and that transactions
with customers, suppliers, and financial institutions are fully supported. The
Company is well under way with these efforts, which are scheduled to be
completed by the end of 1998. While the Company believes its planning efforts
are adequate to address its Year 2000 concerns, there can be no guarantee that
the systems of other companies on which the Company's systems and operations
rely will be converted on a timely basis and will not have a material effect on
the Company. The cost of the Year 2000 initiatives is not expected to be
material to the Company's results of operations or financial position.
<PAGE>
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
applicable to common shareholders (computed in accordance with generally
accepted accounting principles), excluding gains (or losses) from debt
restructuring and sales of property, exclusive of outparcel sales, plus 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 March 31,
1998 1997
------------------ --------------------
<S> <C> <C>
Net income to common shareholders ........................... $ 5,682 $ 5,140
Add back:
Depreciation and amortization (1) ........................... 7,278 5,720
Amortization of deferred financing costs and
depreciation of non-real estate assets ................... (400) (335)
Minority interest in the Operating Partnership (1) .......... 1,270 1,297
----- -----
FFO ......................................................... $ 13,830 $ 11,822
======== ========
- ---------------------------------------
(1) Excludes depreciation and minority interest attributed to a third-party
limited partner's interest in a partnership for 1997.
</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: May 12, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 9225
<SECURITIES> 0
<RECEIVABLES> 4781
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 733423
<DEPRECIATION> (86584)
<TOTAL-ASSETS> 695537
<CURRENT-LIABILITIES> 0
<BONDS> 284452
0
10
<COMMON> 154
<OTHER-SE> 292435
<TOTAL-LIABILITY-AND-EQUITY> 695537
<SALES> 0
<TOTAL-REVENUES> 28506
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 20507
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4125
<INCOME-PRETAX> 6729
<INCOME-TAX> 0
<INCOME-CONTINUING> 6729
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6729
<EPS-PRIMARY> .37
<EPS-DILUTED> .36
</TABLE>
