| In-Depth
Profile: Chelsea Property Group |
Published: January 1, 2004
Operating as a real estate investment trust (REIT), Chelsea Property
Group is one of the nation's largest owners of specialty outlet malls.
More specifically, the firm owns, operates, develops, markets and leases
over 60 factory outlet centers located in 31 states and Japan. All told,
Chelsea's properties house roughly 3,500 stores with 15 million square
feet of leasable retail space. The firm rents this vast property
portfolio out to over 700 different tenants, most of which are high
fashion, upscale manufacturers and retailers. Chelsea's list of
high-profile tenants includes the likes of Adidas, Armani, Brooks
Brothers, Chanel, Gucci, Nike, Polo Ralph Lauren, Timberland, Tommy
Hilfiger, Van-Heusen and Versace, among others.
Competitive Advantages:
· Location -- This is one of the most important
factors to look at when evaluating any real estate investment trust. We
like the fact that the majority of the firm's properties are located
within a 30-mile radius of major population centers with populations of
over 1 million and average annual household incomes of greater than
$50,000. These areas include New York City, Boston, Los Angeles,
Atlanta, San Francisco, Sacramento, Cleveland, Portland, Washington
D.C., Tokyo and Osaka, Japan. In addition, most of Chelsea's other
properties are located within 20 miles of major tourist destinations,
including Palm Springs, Orlando and Honolulu. By strategically buying up
and/or developing premium outlet malls near such major population
centers, Chelsea has given itself a clear advantage over the
competition.
· Discount Prices -- Chelsea's manufacturer-operated outlet
stores offer something unique that regular department stores and
regional malls simply can't match -- high-quality, fashionable
name-brand goods at deep-discount prices.
· Relationships with Manufacturers and Retailers -- Major
manufacturers benefit from their relationship with Chelsea because their
outlet stores allow them to move substantial quantities of in-season or
out-of-season goods, overstocked and discontinued merchandise. Chelsea
benefits by being able to offer discounted merchandise from popular
retailers. It's worth noting that most major manufacturers do not have
thousands (or even hundreds) of outlet stores. Instead, they tend to
open them up only in select markets, and most have already worked with
Chelsea in the past. Firms that already have profitable relationships
with Chelsea are going to be much more apt to work with the firm in the
future as Chelsea continues to expand. These existing relationships
should give the firm a solid competitive edge in the years ahead.
The Bull Story:
· Strong Financial Track Record -- Chelsea's rental
income has increased at an impressive 23% annual clip since 1992,
jumping from $23.4 million back then to $206 million in 2002. (It's also
worth noting that the firm's rental income has never fallen once during
this period.) The story is much the same when you look at Chelsea from
just about any other financial angle. For example, the firm's net income
has increased at a similar rate over the past ten years. And looking at
more current data, the firm's revenues and earnings growth has actually
accelerated somewhat in recent years thanks to a host of new
acquisitions. Here's a quick look at some of the company's key financial
data
| Revenues
($ in Millions) |
| |
2003 |
2002 |
2001 |
2000 |
1999 |
1998 |
| 1Q |
84.35 |
56.68 |
44.82 |
39.59 |
36.96 |
28.51 |
| 2Q |
87.41 |
65.03 |
46.30 |
42.22 |
38.88 |
32.07 |
| 3Q |
92.58 |
71.49 |
49.07 |
44.57 |
40.38 |
34.92 |
| 4Q |
-- |
90.01 |
66.67 |
53.69 |
46.70 |
43.82 |
| Yr. |
-- |
283.2 |
206.9 |
179.9 |
162.9 |
139.3 |
|
| Earnings
Per Share (EPS) |
| |
2003 |
2002 |
2001 |
2000 |
1999 |
1998 |
| 1Q |
0.43 |
0.32 |
0.26 |
0.25 |
0.24 |
0.18 |
| 2Q |
0.47 |
0.34 |
0.29 |
0.27 |
0.24 |
0.07 |
| 3Q |
0.53 |
0.61 |
0.35 |
0.34 |
0.27 |
0.26 |
| 4Q |
E0.72 |
-0.20 |
0.47 |
0.44 |
0.33 |
0.04 |
| Yr. |
E2.15 |
1.05 |
1.37 |
1.29 |
1.07 |
0.56 |
|
· Solid Balance Sheet -- Chelsea currently boasts nearly $2
billion in total assets, yet has taken out just $1.2 billion in
long-term debt. The firm is small enough that it should be able to
continue to grow at a fast clip, yet it is large enough to dominate most
of its smaller, local competition. Chelsea's strong balance sheet and
relatively low borrowing costs give it an edge over many would-be
competitors.
· Rich Dividend Yield -- In order to qualify as a REIT for
tax purposes, a company is required to pay out at least 90% of its net
income to shareholders in the form of dividends. Chelsea not only pays
out a healthy annual dividend of well over $2.00 per share, but the firm
has also boosted its dividend payout by an average of more than 30% per
year since 1993! We expect this trend to continue as the firm's net
income grows in the years ahead.
· High Sales Per Square Foot -- In addition to its
traditional rental income, Chelsea's rental contracts generally require
its tenants to pay the firm a small percentage of their sales. The good
news for investors is that Chelsea's tenants boast some of the best
sales characteristics in the retail industry. Sales per square foot at
the firm's premium outlet centers averaged $383 in 2002 -- well above
industry averages. Looking ahead, we expect to see solid same-store
sales growth at most of the firm's properties in the coming years.
· High Occupancy Rates -- Chelsea separates its property
portfolio into two groups -- Premium Outlets and Other Retail Centers.
Occupancy rates at its premium outlets have held steady at 98% or higher
over the past year. Meanwhile, occupancy rates at its Other Retail
Centers have hovered around 95%. Both of those figures are head and
shoulders above the occupancy rates seen by most other retail REITs.
· Value-Oriented Niche -- Although many regional malls and
traditional shopping centers are losing sales to discount giants such as
Wal-Mart (WMT) and Target (TGT), Chelsea has managed to hold its own
thanks to the firm's emphasis on discounted brand-name apparel.
· Aggressive U.S. and International Expansion -- Chelsea has
fueled its tremendous growth both through internal means and by way of
new acquisitions both at home and abroad. Here's a look at a few
of the firm's recent factory outlet center developments:
-- Las Vegas Premium Outlets (opened August 2003)
-- Sano Premium Outlets (opened March 2003 near Tokyo, Japan)
-- A 170,000 sq. foot expansion of Gotemba Premium Outlets (opened July
2003 near Tokyo, Japan)
Looking ahead, top management has indicated that it still sees plenty
of attractive domestic acquisition targets and that internal expansion
should remain robust in the years ahead. To supplement this growth, the
company is also expanding by leaps and bounds on the international
front. For example, Chelsea already holds an interest in several outlet
centers in Japan, and further expansion in that country is already
underway. In addition, Chelsea has plans to move into Mexico in 2004. A
number of other countries could be next on the firm's international
expansion list, so the long-term potential here is enormous.
The Bear Story:
· Valuation -- With projected EPS (earnings per
share) of $2.15 in 2003 and $2.64 in 2004, CPG is trading at a P/E ratio
of well above 20. When looked at strictly on this basis, the stock is
indeed trading at a premium to the average firm in the S&P 500. This
fact alone has led many analysts to question the company's current
valuation. However, when you take the firm's above-average growth into
account, as well as its $2+ annual dividend payment, we feel that this
premium is justified. In addition, the appropriate way to value most
real estate firms is to look at FFO (funds from operations -- the most
common earnings metric for REITs) instead of EPS data. With projected
FFO of $3.52 in 2003 and $3.92 in 2004, Chelsea is by no means
overvalued when looked at from this perspective.
· Retail Sales Slump? -- U.S. consumers have remained
resilient in recent years, but should consumer spending slow down in
2004 and beyond, this could have a major impact on sales at Chelsea's
retail outlets, putting pressure on company earnings.
StreetAuthority's Outlook for 2004 and Beyond:
12-month price target -- $64
24-month price target -- $80
There's a lot to like about Chelsea Property Group. The
firm's track record is solid, its earnings are soaring thanks to recent
acquisitions, new outlet developments, expansion of existing facilities,
stable occupancy rates and higher rental rates, and the stock pays an
annual dividend of well over $2.00 per share. Best of all, everything
we're looking at now indicates that Chelsea's recent winning streak
should continue well into the future.
Looking ahead to 2004, the company's aggressive
expansion efforts show no signs of slowing down. The firm now has the
following projects under development:
-- Chicago Premium Outlets (438,000 square feet,
opening in spring 2004)
-- 124,000 square foot expansion of Albertville Premium Outlets (opening
spring 2004 in Minnesota)
-- Tosu Premium Outlets (185,000 square feet, opening near Fukuoka,
Japan in March 2004)
-- Punta Norte Premium Outlets (230,000 square feet, opening in Mexico
City in late 2004)
With these new outlet centers about to come on board
and plenty of similar expansion opportunities likely in future years,
CPG should have no trouble growing at a 20+% annual clip for the
foreseeable future. In our minds, the stock is the single most
attractive REIT on the market today and it remains one of our top picks
for 2004 and beyond!
|
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