SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2001
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 number 001-12844
JDN REALTY CORPORATION
(Exact Name of Registrant as Specified in Its Charter)
Maryland 58-1468053
(State or other Jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
359 East Paces Ferry Road, NE, Suite 400, Atlanta, GA 30305
(Address of Principal Executive Offices) (Zip Code)
(404) 262-3252
(Registrant's Telephone Number, including Area Code)
Not applicable
(Former Name, Former Address and Former Fiscal Year, if
Changed Since Last Report)
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
--- ---
As of April 30, 2001, 32,865,081 shares of the Registrant's Common Stock,
$.01 par value, were outstanding.
FORWARD-LOOKING STATEMENTS IN FORM 10-Q
Management has included herein certain forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. When used,
statements which are not historical in nature, including the words "anticipate,"
"estimate," "should," "expect," "believe," "intend" and similar expressions are
intended to identify forward-looking statements. Forward-looking statements are,
by their nature, subject to known and unknown risks and uncertainties.
Forward-looking statements include statements regarding the future shopping
center property sales, future development activities with certain tenants, and
projected capital requirements for, number of, and timing of shopping centers to
be delivered from the Company's development pipeline. Among the factors that
could cause actual results to differ materially from those anticipated are the
following: changes in the composition of senior management and the Board of
Directors; the ability to attract and retain key employees; business conditions
and the general economy, especially as they affect interest rates and value-
oriented retailers; the federal, state and local regulatory environment; the
ability to refinance maturing debt obligations on acceptable terms; the
availability of debt and equity capital with acceptable terms and conditions
including, without limitation, the availability of bank credit to fund
development activities; the ability to sell operating shopping center properties
and parcels of land on schedule and upon economically favorable terms; the
availability of partners for joint venture projects and the ability to negotiate
favorable joint venture terms; the availability of new development
opportunities; changes in the financial condition or corporate strategy of or
business relations with primary retail tenants; the outcome and timing of any
resolution and costs of pending litigation and investigations; the ability to
fund, complete and lease existing development and redevelopment projects on
schedule and within budget; the ability to maintain or obtain all necessary
licenses, permits and approvals required to conduct the Company's business; tax
legislation affecting the development business of JDN Realty Corporation and JDN
Development Company, Inc.; and the ability of JDN Realty Corporation to maintain
its qualification as a real estate investment trust ("REIT"). Other risks,
uncertainties and factors that could cause actual results to differ materially
from those projected are detailed from time to time in press releases and
reports filed by JDN Realty Corporation with the Securities and Exchange
Commission, including Forms 8-K, 10-Q and 10-K. For examples, see "Risk Factors"
under Part I, Item 1 of the Company's Annual Report on Form 10-K for the year
ended December 31, 2000.
1
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Page No.
Condensed Consolidated Balance Sheets - March 31, 2001 and December 31, 2000 3
Condensed Consolidated Statements of Income - Three Months Ended March 31, 2001
and 2000 4
Condensed Consolidated Statements of Cash Flows - Three Months Ended March 31,
2001 and 2000 5
Notes to Condensed Consolidated Financial Statements 6
2
JDN REALTY CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
March 31, December 31,
---------- ------------
(Unaudited)
(In thousands)
ASSETS
Shopping center properties, at cost:
Land $ 296,017 $ 208,653
Buildings and improvements 635,852 626,042
Property under development 158,898 45,020
---------- ----------
1,090,767 879,715
Less: accumulated depreciation and amortization (82,731) (80,113)
---------- ----------
Shopping center properties, net 1,008,036 799,602
Cash and cash equivalents 8,702 9,277
Restricted cash - escrow 3,131 102
Accounts receivable 17,641 11,511
Investments in and advances to unconsolidated
entities 7,137 246,799
Deferred costs, net of amortization 8,470 6,039
Other assets 17,247 10,513
---------- ----------
$1,070,364 $1,083,843
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Unsecured notes payable $ 234,713 $ 234,697
Secured line of credit and term loan 223,400 242,000
Mortgage notes payable 96,627 97,444
Accounts payable an accrued expenses 12,789 14,438
Other liabilities 9,639 5,151
---------- ----------
Total liabilities 577,168 593,730
Third party investors' interest 3,042 3,504
Shareholders' Equity
Preferred stock, par value $.01 per share -
authorized 20,000,000 shares: 9 3/8%
Series A Cumulative Redeemable Preferred
Stock, liquidation preference $25 per share,
issued and outstanding 2,000,000 shares in
2001 and 2000, respectively 20 20
Common stock, par value $.01 per share -
authorized 150,000,000 shares, issued
and outstanding 32,876,234 and 32,867,354
shares in 2001 and 2000, respectively 329 329
Paid-in capital 489,645 489,239
Retained earnings (accumulated deficit) 160 (3,029)
---------- ----------
490,154 486,609
---------- ----------
$1,070,364 $1,083,843
========== ==========
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
3
JDN REALTY CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended March 31,
2001 2000
(In thousands)
Revenues:
Minimum and percentage rents $22,946 $23,062
Recoveries from tenants 3,894 3,094
Other revenue 774 -
------- -------
Total revenues 27,614 26,156
Operating expenses:
Operating and maintenance 2,848 2,206
Real estate taxes 1,897 1,541
General and administrative 3,419 2,092
Corporate investigation and legal costs 573 1,490
Impairment losses - 1,289
Depreciation and amortization 5,480 5,403
------- -------
Total operating expenses 14,217 14,021
------- -------
Income from operations 13,397 12,135
Other income (expense):
Interest expense, net (8,750) (5,837)
Other income, net 79 352
Equity in net income (loss) of unconsolidated entities (313) 667
------- -------
Income before minority interest in net income of
consolidated subsidiaries, net gain on real estate
sales, extraordinary items and cumulative effect
of change in accounting principle 4,413 7,317
Minority interest in net income of consolidated
subsidiaries (42) (96)
------- -------
Income before net gain on real estate sales,
extraordinary items and cumulative effect
of change in accounting principle 4,371 7,221
Net gain on real estate sales,
Operating 9,761 6,838
Non-operating 1,979 -
------- -------
Income before extraordinary items and cumulative
effect of change in accounting principle 16,111 14,059
Extraordinary items (1,608) -
------- -------
Income before cumulative effect of change in
accounting principle 14,503 14,059
Cumulative effect of change in accounting principle (280) -
------- -------
Net income 14,223 14,059
Dividends to preferred shareholders (1,172) (1,172)
------- -------
Net income attributable to common shareholders $13,051 $12,887
======= =======
Income per common share - basic:
Income before extraordinary items and cumulative
effect of change in accounting principle (net
of preferred dividends) $ 0.46 $ 0.40
Extraordinary items (0.05) -
Cumulative effect of change in accounting principle (0.01) -
------- -------
Net income attributable to common shareholders $ 0.40 $ 0.40
======= =======
Income per common share - diluted:
Income before extraordinary items and cumulative
effect of change in accounting principle (net
of preferred dividends) $ 0.46 $ 0.04
Extraordinary items (0.05) -
Cumulative effect of change in accounting principle (0.01) -
------- -------
Net income attributable to common shareholders $ 0.40 $ 0.40
======= =======
Dividends per common share $ 0.300 $ 0.395
======= =======
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
4
JDN REALTY CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended March 31,
2001 2000
------- --------
(In thousands)
Net cash provided by operating activities $ 16,952 $ 12,247
Cash flows from investing activities:
Development of shopping center properties (25,269) (42,892)
Improvements to shopping center properties (1,176) (103)
Investments in and advances to unconsolidated entities (791) (21,573)
Proceeds from real estate sales 49,080 29,168
Other (8) 58
-------- --------
Net cash provided by (used in) investing activities 21,836 (35,342)
Cash flows from financing activities:
Proceeds from line of credit and term loan 250,400 83,216
Principal payments on line of credit and term loan (269,000) (77,996)
Principal payments on mortgages and notes payable (4,094) (663)
Repurchases of common stock - (6,843)
Distributions paid to preferred shareholders (1,172) (1,172)
Distributions paid to common shareholders (9,863) (13,025)
Proceeds from deferred exchange of properties - 38,452
Other (5,634) (950)
-------- --------
Net cash provided by (used in) financing activities (39,363) 21,019
-------- --------
Decrease in cash and cash equivalents (575) (2,076)
Cash and cash equivalents, beginning of period 9,277 2,076
-------- --------
Cash and cash equivalents, end of period $ 8,702 $ -
======== ========
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
5
JDN REALTY CORPORATION
Notes to Condensed Consolidated Financial Statements
(Unaudited)
March 31, 2001
1. THE COMPANY
JDN Realty Corporation (the "Company") is a real estate company
specializing in the development and asset management of shopping centers. As of
March 31, 2001, the Company's operating shopping centers and development
projects were located in 22 states. The Company has elected to be taxed as a
real estate investment trust ("REIT").
Effective January 1, 2001, the Company acquired 100% of the ownership of
JDN Development Company, Inc. ("JDN Development"). Prior to this acquisition,
the Company owned 99% of the economic interest in JDN Development while the
remaining 1% economic interest was owned by a former executive officer of the
Company. As a result of this acquisition, the Company has changed its accounting
for JDN Development from the equity method to the consolidated method. In
addition, the Company and JDN Development elected taxable REIT subsidiary status
for JDN Development. Had JDN Development been consolidated effective January 1,
2000, the Company's revenues for the three months ended March 31, 2000 would
have been $27.6 million. Net Income and earnings per share would not have
been materially different than amounts previously reported.
2. BASIS OF PRESENTATION
The financial statements represent the consolidated financial statements of
the Company, its wholly-owned and majority-owned subsidiaries. All significant
intercompany balances and transactions have been eliminated. 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 footnotes
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 a fair presentation have been
included. The consolidated balance sheet at December 31, 2000 has been derived
from the audited consolidated financial statements at that date. Operating
results for the three months ended March 31, 2001 are not necessarily indicative
of the results that may be expected for the year ending December 31, 2001 or any
other interim period. For further information, refer to the consolidated
financial statements and footnotes thereto included in the Company's Annual
Report on Form 10-K for the year ended December 31, 2000.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Derivative Instruments and Hedging Activities. Effective January 1, 2001,
the Company adopted Statement of Financial Accounting Standards No. 133,
Accounting for Derivative Instruments and Hedging Activities ("Statement No.
133"). Statement No. 133 requires the Company to recognize all derivatives on
the balance sheet at fair value. For derivatives designated as hedges, the
change in the fair value of the derivative will either be offset against the
change in the fair value of the hedged asset, liability, or firm commitment
through earnings or recognized in other comprehensive income until the hedged
item is recognized in earnings. Derivatives that are not hedges must be adjusted
to fair value through income. As of March 31, 2001, the Company had one interest
rate swap agreement and one interest rate cap agreement to hedge against
exposure to interest rate risk. Upon the adoption of Statement No. 133, the
Company recognized an expense, as a cumulative effect of change in accounting
principle, of approximately $280,000, relating to the interest rate cap
agreement.
Income Taxes. JDN Realty Corporation has elected to be taxed as a REIT
under the Internal Revenue Code of 1986, as amended (the "Code"). As a result,
JDN Realty Corporation is not subject to federal income taxes, except for income
taxes on undistributed earnings, to the extent that it distributes annually at
least 90% of its taxable income to its shareholders and satisfies certain other
requirements defined in the Code.
6
Reclassifications. Certain amounts as previously reported have been
reclassified to conform to the current period's presentation.
4. CREDIT AGREEMENTS
On March 29, 2001, the Company closed a Third Amended and Restated Master
Credit Agreement (the "2001 Credit Agreement") with Fleet National Bank as
Agent. Proceeds from the 2001 Credit Agreement paid in full amounts outstanding
under the Second Amended and Restated Credit Agreement and an Amended and
Restated Term Loan (the "Secured Credit Agreements"). The 2001 Credit Agreement
provides for maximum borrowings of $300.0 million, comprised of a $150.0 million
revolving credit facility and a $150.0 million term loan. Loans made pursuant to
the 2001 Credit Agreement bear interest at LIBOR plus 2.00% and will range from
LIBOR plus 1.75% to LIBOR plus 2.25% based on the Company's leverage and credit
quality. The 2001 Credit Agreement matures December 31, 2002, which may be
extended until January 1, 2003 provided that the Company is in compliance with
the terms of the agreement.
The 2001 Credit Agreement provides that the loans thereunder will be
initially secured by first priority security interests in 52 properties valued
at approximately $512.3 million. The Company may, however, add, remove or
substitute certain of its other properties as Borrowing Base Properties (as
defined in the 2001 Credit Agreement) subject to the conditions set forth in the
2001 Credit Agreement. The 2001 Credit Agreement contains certain requirements
for each property within the Borrowing Base Properties and certain value and
occupancy requirements for the Borrowing Base Properties in the aggregate.
The 2001 Credit Agreement contains financial covenants including, but not
limited to, a liabilities-to-assets ratio, fixed charges coverage ratios and a
net worth covenant. In addition, the 2001 Credit Agreement restricts, subject
to certain exceptions, the amount of distributions to the Company's shareholders
to 95% of the Company's funds from operations (as defined in the 2001 Credit
Agreement). The Company incurred fees and expenses associated with the closing
of the 2001 Credit Agreement of approximately $5.1 million.
In connection with the 2001 Credit Agreement, the Company entered into an
interest rate swap agreement with a notional amount of $150.0 million that
effectively fixes the underlying LIBOR rate on loans outstanding under the 2001
Credit Agreement at 4.62%.
The Company charged approximately $1.6 million of unamortized deferred
costs to expense as an extraordinary item related to the repayment of the
Secured Credit Agreements.
5. SHOPPING CENTER DISPOSITIONS
During the first quarter of 2001, the Company sold the following operating
properties:
7
Disposition Company GLA
Location Date (square feet) Sales Price
--------------------------------------------------------------------------------
Riverdale, Georgia 1/18/01 22,405 $ 2,125,000
Warner Robins, Georgia (1) 2/13/01 131,575 9,400,000
Macon, Georgia 2/13/01 102,098 9,000,000
Buford, Georgia (1) 3/21/01 128,997 10,968,000
South Boston, Virginia (2) 3/30/01 176,002 2,834,417
Lexington, Virginia (2) 3/30/01 176,226 3,421,806
---------- -----------
737,303 $37,749,223
========== ===========
(1) Sale of only the Lowes at this location
(2) Sale of only the Wal-Mart at this location
6. CONTINGENCIES
The Company has been named in a number of lawsuits since the discovery of
undisclosed compensation arrangements with two former executive officers of JDN
Development and the Company, additional unauthorized benefits to these same two
former executive officers, and undisclosed related party transactions involving
these two former officers and the former Chairman and Chief Executive Officer of
the Company. One or more of these suits also names as defendants JDN
Development and certain current and former officers and directors of JDN
Development and/or the Company.
Certain class actions filed in federal court allege violations of the
federal securities laws asserting that by failing to report the undisclosed
compensation, unauthorized benefits and related party transactions to the public
in the Company's financial statements, public filings, and otherwise, the
defendants made or participated in making material misstatements or omissions
which caused the plaintiffs to purchase the Company's common and preferred stock
at artificially inflated prices. Included in the class actions is a lawsuit
which names among the defendants certain underwriters involved in the preferred
stock offering by the Company in 1998 (the "Preferred Stock Class Action"). The
Preferred Stock Class Action raises allegations similar to those raised in the
other class action cases, but it is based on purported misrepresentations or
omissions in the Company's registration statement and prospectus in connection
with the 1998 offering. The plaintiffs in these lawsuits seek compensatory
damages of an indeterminate amount, interest, attorneys' fees, experts' fees and
other costs and disbursements. On April 17, 2000, the federal court entered an
order consolidating the various class actions in the United States District
Court for the Northern District of Georgia ("Consolidated Class Actions"). On
June 13, 2000, the federal court entered an order appointing Clarion-CRA
Securities lead plaintiff and the law firm of Chitwood & Harley as lead
plaintiff's counsel. On February 13, 2001, plaintiffs in the Preferred Stock
Class Action purported to amend their complaint to add Waller Lansden Dortch &
Davis, PLLC, the Company's securities counsel, as a defendant. The purported
amendment was not filed by the lead plaintiff and the Company has filed a motion
to strike the purported amendment as improper.
A class action lawsuit was also filed by the Company's shareholders against
the Company, JDN Development, and four former officers and directors of these
companies in the Superior Court of Fulton County, Georgia. The complaint
contains substantially the same factual allegations asserted in the federal
class actions, but purports to seek relief under state law for damages which
these plaintiffs allege should have been paid to the class as dividends. The
original complaint contained claims of common law fraud, conversion and
purported violations of Georgia's Racketeer Influenced and Corrupt Organizations
Act, but
8
the fraud count has now been dropped by way of an amended complaint recently
filed by the plaintiffs. The plaintiffs seek compensatory and punitive damages,
attorneys' fees and expenses, interest and equitable relief. The case was
removed to federal court, but has now been remanded back to Superior Court,
where it is currently pending.
Lawsuits have also been filed against the Company as a nominal defendant,
as well as individual defendants J. Donald Nichols, Elizabeth L. Nichols, Craig
Macnab, Philip G. Satre, William G. Byrnes, Haywood D. Cochrane, Jr., William B.
Greene, Jeb L. Hughes, C. Sheldon Whittelsey, IV and William J. Kerley in the
United States District Court for the Northern District of Georgia, Atlanta
Division and in Fulton County Superior Court. Each of the named individuals is a
current or former officer or director of the Company and/or JDN Development. A
similar suit has been filed in State Court of Fulton County naming Ernst &
Young LLP, the Company's auditors, in addition to the above-referenced
defendants. The plaintiffs purport to bring these suits as derivative actions.
The complaints allege that the individual defendants, from 1994 through 1999,
violated certain duties in connection with the previously undisclosed
compensation arrangements. The complaints also allege claims for breach of
fiduciary duty, abuse of control, waste of corporate assets, unjust enrichment
and gross mismanagement. The plaintiffs, on behalf of the Company, seek
injunctive relief, compensatory and punitive damages and disgorgement of all
profits and gains by the individual defendants.
The Company believes that it has meritorious defenses to the claims brought
in the lawsuits described above, but there can be no assurance that such
defenses will be successful or that the lawsuits will not have a material
adverse effect on the Company's financial position, results of operations and
cash flows. In addition, the timing of the final resolution of these proceedings
is uncertain.
The Company is also subject to a formal order of investigation initiated by
the Securities and Exchange Commission ("SEC") as of August 2, 2000. Pursuant to
this order, the Company has voluntarily provided certain documents and other
information to the SEC regarding the compensation arrangements, unauthorized
benefits and related party transactions mentioned above. The SEC has completed
their investigation, and by letter dated March 5, 2001, the SEC staff advised
the Company that it intended to recommend that the SEC institute a proceeding
against the Company. The Company continues to cooperate fully with the SEC staff
in order to resolve this matter as expeditiously as practicable. Management does
not expect that the resolution of this matter will have a material adverse
effect on the Company's business, financial condition or results of operation.
However, the Company is unable to predict with certainty the timing or ultimate
outcome of this matter.
In an unrelated lawsuit, on February 2, 2000, Dogwood Drive L.L.C.
("Dogwood") filed suit against the Company and WHF, Inc. ("WHF"), a wholly-owned
subsidiary of JDN Development, which, until April 1999, owned a 72% interest in
Dogwood and served as the operating member of the entity. The suit was filed in
the Superior Court of Gwinnett County, Georgia. The complaint asserts, among
other things, breach of fiduciary duty against WHF and improper receipt of funds
by the Company. The Company believes that it and WHF have meritorious defenses
to the claims and intends to vigorously defend the suit.
On April 28, 2000, Lake Lucerne Estates Civic Club, Inc., a nonprofit
homeowners association located in Gwinnett County, Georgia, and a number of
individual plaintiffs, filed suit against JDN Development, Lowe's Companies,
Inc., and Haygood Contracting, Inc. The suit was filed in the Superior Court of
Fulton County, Georgia. The complaint asserts trespass, nuisance and negligence
against JDN Development in connection with the development of a shopping center
anchored by Lowe's. JDN Development has filed defensive pleadings denying
liability, and discovery is now being conducted by both sides.
The Company is from time to time a party to other legal proceedings which
arise in the ordinary course of its business. The Company is not currently
involved in any litigation in addition to the lawsuits described above the
outcome of which would, in management's judgement based on information currently
available, have a material adverse effect on the results of operations or
financial condition of the Company, nor is management aware of any such
litigation threatened against the Company.
9
7. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted
earnings per share (in thousands, except per share data):
Three months ended March 31,
2001 2000
--------------------------------------------------------------------------------
Numerator:
Income before extraordinary items and cumulative
effect of change in accounting principle $16,111 $14,059
Extraordinary items (1,608) -
Cumulative effect of change in accounting
principle (280) -
------- -------
Net income 14,223 14,059
Dividends to preferred shareholders (1,172) (1,172)
------- -------
Net income attributable to common shareholders $13,051 $12,887
======= =======
Denominator:
Weighted-average shares outstanding 32,866 32,970
Unvested restricted stock outstanding (351) (646)
------- -------
Denominator for basic earnings per share 32,515 32,324
Dilutive effect of stock options and
unvested restricted stock 145 38
------- -------
Denominator for diluted earnings pe share 32,660 32,362
======= =======
Income per common share - basic:
Income before extraordinary items and cumulative
effect of change in accounting principle (net
of preferred dividends) $ 0.46 $ 0.40
Extraordinary items (0.05) -
Cumulative effect of change in accounting
principle (0.01) -
------- -------
Net income attributable to common shareholders $ 0.40 $ 0.40
======= =======
Income per common share - diluted:
Income before extraordinary items and cumulative
effect of change in accounting principle (net
of preferred dividends) $ 0.46 $ 0.40
Extraordinary items (0.05) -
Cumulative effect of change in accounting
principle (0.01) -
------- -------
Net income attributable to common shareholders $ 0.40 $ 0.40
======= =======
Of total options outstanding, options to purchase 809,459 and 2,807,470 shares
of common stock for the three months ended March 31, 2001 and 2000,
respectively, were outstanding but were not included in the computation of
diluted earnings per share because the options' exercise prices were higher than
the average market price of the common shares for the applicable periods.
Therefore, the effect of these options on earnings per share would be
antidilutive.
10
The Company is the general partner in a limited partnership that issued
limited partnership units initially valued at $3.0 million in a limited
partnership formed to own and operate a shopping center in Milwaukee, Wisconsin.
Subject to certain conditions, the limited partnership units are exchangeable
for cash or 139,535 shares of the Company's common stock. As of March 31, 2001,
none of the limited partnership units have been exchanged for shares. Using the
"if-converted" method, the effect of these units is antidilutive; therefore,
they have been excluded from the computation of earnings per share.
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Overview
JDN Realty Corporation is a real estate company specializing in the
development and asset management of shopping centers. When referred to herein,
the term "Company" represents JDN Realty Corporation and its wholly owned or
majority-owned subsidiaries. As of March 31, 2001, the Company owned and
operated 110 shopping center properties containing approximately 11.2 million
square feet of gross leasable area ("Company GLA") located in 19 states, with
the highest concentrations in Georgia, Tennessee, and Florida. The principal
tenants of the Company's properties include Lowe's, Wal-Mart and TJX Companies.
As of March 31, 2001, the Company had 21 projects under construction. The
Company was incorporated under Maryland law in 1993 and has elected to be
treated as a real estate investment trust ("REIT") for federal income tax
purposes.
Effective January 1, 2001, JDN Realty Corporation acquired 100% of the
ownership of JDN Development Company, Inc. ("JDN Development"). Prior to this
date, JDN Realty Corporation owned 99% of the economic interest while the
remaining 1% economic interest was owned by a former executive officer of the
Company. As a result of this acquisition, the Company has changed its accounting
for JDN Development from the equity method to the consolidated method. In
addition, JDN Realty Corporation and JDN Development elected taxable REIT
subsidiary status for JDN Development. See "Federal Income Tax Legislative
Developments" below. Because it is not a REIT, JDN Development may engage in
certain activities in which JDN Realty Corporation cannot, such as sales of all
or portions of development projects and third-party fee development. While
taxable REIT subsidiaries may engage in a variety of activities unrelated to
real estate, the Company does not expect the activities of JDN Development to
expand significantly beyond the development activities in which JDN Development
has historically engaged.
Results of Operations
Comparison of the Three Months Ended March 31, 2001 to the Three Months Ended
March 31, 2000
During 2001 and 2000, the Company began operations at 28 properties which
it developed totaling approximately 2.1 million square feet (the "Development
Properties"). During 2001 and 2000, the Company disposed of 18 properties
totaling approximately 3.6 million square feet (the "Disposition Properties").
In addition, as a result of the consolidation of JDN Development, effective
January 1, 2001 amounts previously reported in equity in net income of
unconsolidated entities are now recorded in other line items in the condensed
consolidated statements of income. As indicated below, the Company's results of
operations were affected by the Development Properties, the Disposition
Properties and the consolidation of JDN Development.
Minimum and percentage rents decreased $116,000 or 0.5% to $22.9 million
for the three months ended March 31, 2001 from $23.1 million for the same period
in 2000. Minimum and percentage rents increased by $1.1 million as a result of
the Development Properties and $631,000 as a result of JDN Development. These
increases are offset by a $2.2 million decrease related to the Disposition
Properties. The remaining increase relates to an increase in minimum and
percentage rents at existing properties.
Recoveries from tenants increased $800,000 or 25.9% to $3.9 million for the
three months ended March 31, 2001 from $3.1 million for the same period in 2000.
Recoveries from tenants increased by $321,000 as a result of the Development
Properties and $280,000 as a result of JDN Development. These increases are
offset by a $106,000 decrease related to the Disposition Properties. The
remaining increase relates to net increases in recoverable income from tenants
at existing properties caused by net increases in recoverable expenses.
Other revenue of $774,000 for the three months ended March 31, 2001
represents development fees and leasing commissions earned from brokering space
to third parties recognized by JDN Development.
12
Operating and maintenance expenses increased $642,000 or 29.1% to $2.8
million for the three months ended March 31, 2001 from $2.2 million for the same
period in 2000. Operating and maintenance expenses increased by $301,000 as a
result of the Development Properties and $182,000 as a result of JDN
Development. These increases are offset by a $100,000 decrease related to the
Disposition Properties. The remaining increases are a result of increased
operating and maintenance expenses at existing properties.
Real estate taxes increased $356,000 or 23.1% to $1.9 million for the three
months ended March 31, 2001 from $1.5 million for the same period in 2000. Real
estate taxes increased by $153,000 as a result of the Development Properties and
$29,000 as a result of JDN Development. These increases are offset by a $74,000
decrease related to the Disposition Properties. The remaining increase relates
to real estate taxes at existing properties.
General and administrative expenses increased $1.3 million for the three
months ended March 31, 2001 over the same period in 2000. Of this increase,
$1.0 million related to JDN Development. The remaining increase relates
primarily to increases in professional fees and to changes in capitalization
policies for salaries of executive officers.
Corporate investigation and legal costs decreased $917,000 or 61.5% to
$573,000 for the three months ended March 31, 2001 from $1.5 million for the
same period in 2000. These costs represent the professional fees incurred by
the Company primarily as a result of the Special Committee investigation, the
investigation by the Securities and Exchange Commission (the "SEC") and the
class action lawsuits. See "Undisclosed Transactions, Lease Discrepancies and
Management Changes" under Part I, Item 1 of the Company's Annual Report on Form
10-K for the year ended December 31, 2000.
Impairment losses on shopping centers held for sale for the three months
ended March 31, 2000 of $1.3 million represent charges to reduce the basis of
shopping centers held for sale to their estimated fair value less costs to sell.
There were no such impairment losses during the three months ended March 31,
2001.
Depreciation and amortization expense increased $77,000 or 1.4% to $5.5
million for the three months ended March 31, 2001 from $5.4 million for the same
period in 2000. Depreciation and amortization increased by $387,000 as a result
of the Development Properties and $296,000 as a result of JDN Development. These
increases are offset by a $507,000 decrease related to the Disposition
Properties. The remaining decrease primarily relates to the reversal of excess
depreciation recognized in previous quarters.
Interest expense, net of capitalized amounts, increased $2.9 million or
49.9% to $8.8 million for the three months ended March 31, 2001 from $5.8
million for the same period in 2000. Of this increase, $1.6 million represents
interest that was previously expensed at JDN Development. The remaining
increase relates primarily to an increase in amortization of deferred loan
costs.
Other income, net decreased $273,000 or 76.6% to $79,000 for the three
months ended March 31, 2001 from $352,000 for the same period in 2000. This
decrease results primarily from a decrease in interest income recorded by the
Company and an increase in provisions for abandoned development projects
recorded at JDN Development.
Equity in net income (loss) of unconsolidated entities decreased $980,000
to a net loss of $313,000 for the three months ended March 31, 2001 from a net
income of $667,000 for the same period in 2000. As noted above, this decrease
is primarily related to the consolidation of JDN Development. The remaining
amount relates to losses incurred at four unconsolidated joint ventures.
Minority interest in net income of consolidated subsidiary decreased
$54,000 or 56.3% to $42,000 for the three months ended March 31, 2001 from
$96,000 for the same period in 2000. This decrease results from a decrease in
net income allocated to the third-party investors in a consolidated limited
partnership.
Net gain on real estate sales for the three months ended March 31, 2001
represents a net gain on the sales of six shopping center properties and three
parcels of land. Net gain on real estate sales for the three months ended March
31, 2000 of $6.8 million represents a net gain on the sales of four shopping
center properties.
Extraordinary items for the three months ended March 31, 2001
of $1.6 million represents the write-off of unamortized deferred costs related
to the repayment of the Second Amended and Restated Credit Agreement and an
Amended and Restated Term Loan (the "Secured Credit Agreements"). See Note 4 to
the Condensed Consolidated Financial Statements.
13
Funds From Operations
Funds from operation ("FFO") is defined by the National Association of Real
Estate Investment Trusts, Inc. to mean net income, computed in accordance with
generally accepted accounting principles ("GAAP"), excluding gains or losses
from debt restructuring and sales of property, depreciation and amortization of
real estate assets, cumulative effect of accounting changes and after
adjustments for unconsolidated partnerships and joint ventures. The Company
believes that FFO is helpful to investors as a measure of the performance of an
equity REIT because, along with cash provided by operating activities, investing
activities and financing activities, it provides investors with an indication of
the Company's ability to make capital expenditures and to fund other cash needs.
The Company's method of calculating FFO may be different from methods used by
other REITs and, accordingly, may not be comparable to such other REITs. FFO
does not represent cash provided by operating activities as defined by GAAP,
should not be considered an alternative to net income (determined in accordance
with GAAP) as an indication of operating performance and is not indicative of
cash available to fund all cash flow needs, including the Company's ability to
make cash distributions. The Company has presented below the calculation of FFO
for the periods indicated:
Three Months Ended March 31,
(In thousands) 2001 2000
--------- ---------
Net income attributable to common shareholders $13,051 $12,887
Depreciation of real estate assets 4,995 5,079
Amortization of tenant allowances and tenant
improvements 79 59
Amortization of deferred leasing commissions 201 120
Impairment losses on shopping centers held
for sale - 1,289
Net gain on real estate sales (9,761) (6,838)
Extraordinary items 1,608 -
Change in accounting principle 280 -
Adjustments related to activities in
unconsolidated entities 26 186
------- -------
FFO $10,479 $12,782
======= =======
Leasing and Property Information
As of March 31, 2001, Lowe's, Wal-Mart and TJX Companies represented 16.1%,
5.2% and 3.4% respectively, of the annualized base rent of the Company
(collectively, "Annualized Base Rent"). In addition, at that date, anchor
tenants represented 39.5% of Annualized Base Rent and national and regional
tenants represented 83.8% of Annualized Base Rent. As of March 31, 2001,
properties owned and operated by the Company and affiliated entities were 94.9%
leased. Occupancy decreased from 95.8% as of December 31, 2000 primarily due to
low occupancy rates at portions of several recently completed development
projects.
As of March 31, 2001, the Company operated shopping center properties in 19
states. Shopping center properties located in Georgia, Tennessee, North Carolina
and Wisconsin represented 38.9%, 12.1%, 7.2% and 6.6% respectively, of
Annualized Base Rent.
The Company derives the majority of its rental income and development
activities from the retail industry; and as such, is exposed to adverse trends
or events affecting segments of the retail industry. As of March 31, 2001, the
Company was exposed to the following segments of the retail industry:
14
Percentage
Annualized Base
Type Rent
--------------------------------------------------------------------------------
Home Improvement 16.3%
Supermarket 13.9%
Restaurant 8.9%
Discount 7.1%
Discount Department Stores 4.4%
Apparel 4.4%
Home Goods 3.7%
Office Supplies 3.1%
Theatre 2.2%
Drug Store 2.1%
Several companies in the Theatre segment recently filed for protection
under Chapter 11 of the bankruptcy code. Of the Company's six leases with
theatre companies, three leases are with companies who have filed for Chapter 11
protection representing 1.4% of Annualized Base Rent. As of April 30, 2001, two
of these leases have been modified for rental rate reductions totaling
approximately $1.1 million, one of which has been approved by the bankruptcy
court. The third lease has not been approved, but currently has no provision for
rental rate reduction. Rejection of one or more of these leases or modification
resulting in rate reductions could have an adverse effect on the Company's
results of operations in future periods.
The Office Supplies segment has recently experienced lower than expected
comparable store sales. The Company has 13 leases with Office Supply retailers
representing approximately 3.1% of the Company's Annualized Base Rent. The
Company believes that its Office Supply tenants are well positioned in high
barrier-to-entry markets, and unlikely to experience any material negative
impact from a slowdown in their retail segment. However, if the Office Supply
segment continues to experience slowing sales, then the Company's results of
operations could be adversely affected in future periods.
New Development Activities
The Company's primary business has historically been to develop shopping
centers anchored by retailers such as Lowe's and Wal-Mart. The Company has also
historically developed for other retailers such as Kohl's, Kroger and PetsMart.
Further, the Company is involved in development activities with 10 different
secondary anchor tenants such as Best Buy and Bed, Bath and Beyond. The Company
expects to continue to pursue development opportunities with retailers with
which it has traditionally worked while broadening the tenant and product mix to
include grocers and grocery-anchored shopping centers. Management intends to
become more selective in the development projects it approves with a focus on
locations in larger metropolitan markets that have high barriers to new supply
with demographic attributes that allow for net operating income growth over
time.
As a result of management adopting more selective criteria when considering
new developments, along with other factors, such as cost of capital, management
changes and changing relations with retail customers, the Company expects that
the volume of new development projects will decrease over the next 12 to 18
months. This reduction in activity may cause the rate of historical growth in
revenues to decrease and income from land sales and development fees to
decrease. These decreases could affect the Company's ability to increase its
dividend to shareholders from its current level.
Liquidity and Capital Resources
Sources and Uses of Funds
-------------------------
Historically, the Company's primary sources of funds have been cash
provided by operating activities, proceeds from lines of credit, term debt,
secured mortgage notes payable, debt and equity
15
offerings, and shopping center and land sales. The Company's primary uses of
funds have historically been development, redevelopment and acquisition of
shopping center properties, distributions to shareholders, repayment of
outstanding indebtedness, repurchase of common stock, scheduled debt
amortization, leasing costs and capital improvements to its existing shopping
center properties. The Company generally has used cash provided by operating
activities to fund its distributions to shareholders, capital improvements to
existing properties and scheduled debt amortization. The Company has used
proceeds from its lines of credit, term debt, secured mortgage notes payable,
debt and equity offerings and shopping center and land sales to repay
outstanding indebtedness, to repurchase common stock and to fund its ongoing
development, redevelopment and acquisition activities.
The Company incurred $25.3 million in development costs during the three
months ended March 31, 2001. To fund these development activities, the Company
sold all or portions of six shopping centers and three vacant parcels of land
for net proceeds of approximately $49.1 million. Proceeds from these real estate
sales in excess of development costs were used to reduce the Company's line of
credit.
Indebtedness
------------
As of March 31, 2001, the Company's indebtedness consisted of the
following:
Effective Percent
Principal Interest Maturity of Total Months to
Balance Rate Date Indebtedness Maturity
--------- --------- -------- ------------ --------
(in thousands)
Fixed Rate
----------
Mortgage note payable - Denver, Colorado $ 21,409 6.81% 17-Jul-01 3.9% 4
Mandatory Par Put Remarketed Securities
("MOPPRS")(1) 75,000 7.08%(2) 31-Mar-03 13.5% 24
Mortgage note payable - Richmond, Kentucky 5,953 8.00%(3) 01-Dec-03 1.1% 32
Seven Year Notes 74,882 7.10%(2) 01-Aug-04 13.5% 40
Ten Year Notes 84,831 7.23%(2) 01-Aug-07 15.3% 76
Mortgage note payable - Milwaukee, Wisconsin 4,380 7.75% 01-Aug-09 0.8% 100
Mortgage note payable - Jackson, Mississippi 6,651 9.25%(4) 01-Mar-17 1.2% 191
Mortgage note payable - Marietta, Georgia 10,677 7.66%(2) 15-Nov-17 1.9% 200
Mortgage note payable - Lilburn, Georgia 12,322 6.70%(2) 10-Feb-18 2.2% 203
Mortgage note payable - Woodstock, Georgia 11,585 6.55%(2) 15-Apr-18 2.1% 205
Mortgage note payable - Hendersonville, Tennessee 10,482 7.66%(2) 15-Jan-19 1.9% 214
Mortgage note payable - Alpharetta, Georgia 13,168 6.62%(2) 15-Apr-19 2.4% 217
-------- ---- ----- ---
331,340 7.19% 59.7% 76
Floating Rate (6)
-----------------
Team Loan 150,000 8.96%(5) 31-Dec-02 13.2% 21
Revolving Line of Credit 73,400 9.97%(5) 31-Dec-02 27.0% 21
-------- ---- ----- ---
223,400 9.29% 40.3% 21
-------- ---- ----- ---
$554,740 8.04% 100.0% 54
======== ==== ===== ===
(1) Represents notes payable with a stated rate of 6.918% and a stated maturity
date of March 31, 2013. These notes are subject to mandatory tender on
March 31, 2003.
(2) Represents stated rate plus amortization of deferred loan cost.
(3) The interest rate on this note is adjusted on December 1 of each year.
(4) The note can be prepaid after March 1, 2002 with 90 days written notice to
the Lender. The Company will not incur any prepayment penalties in
association with the loan prepayment after this date.
(5) Represents stated rate of LIBOR plus 2.00% plus amortization of deferred
loan costs.
(6) Floating rate debt exposure is limited through investment in financial
derivatives. As of March 31, 2001, $150,000 of the $223,400 was hedged with
a swap that fixes the underlying LIBOR rate at 4.62% and expires on
December 31, 2002, while the remaining floating rate debt was hedged with a
LIBOR cap of 7.25% that expires on August 21, 2002.
On March 29, 2001, the Company closed a Third Amended and Restated Master
Credit Agreement with Fleet National Bank as Agent (the "2005 Credit
Agreement"), replacing the existing Secured Credit Agreement. The 2001 Credit
Agreement provides for maximum borrowings of $300.0 million, comprised of a
$150.0 million revolving credit facility and a $150.0 million term loan. Loans
made pursuant to the 2001 Credit Agreement bear interest at LIBOR plus 2.00% and
will range from LIBOR plus 1.75% to
16
LIBOR plus 2.25% based on Company leverage and credit quality. The 2001 Credit
Agreement matures December 31, 2002.
The 2001 Credit Agreement provides that the loans thereunder will be
initially secured by first priority security interests in 52 properties valued
at approximately $512.3 million. The Company may, however, add, remove or
substitute certain of its other properties as Borrowing Base Properties (as
defined in the 2001 Credit Agreement) subject to the conditions set forth in the
2001 Credit Agreement. The 2001 Credit Agreement contains certain requirements
for each property within the Borrowing Base Properties and certain value and
occupancy requirements for the Borrowing Base Properties in the aggregate.
The 2001 Credit Agreement contains financial covenants including, but not
limited to, a liabilities-to-assets ratio, fixed charges coverage ratios and a
net worth covenant. In addition, the 2001 Credit Agreement restricts, subject to
certain exceptions, the amount of distributions to the Company's shareholders to
95% of the Company's Funds From Operations (as defined in the 2001 Credit
Agreement). The Company incurred fees and expenses associated with the closing
of the 2001 Credit Agreement of approximately $5.1 million.
Upon closing of the 2001 Credit Agreement, the Company entered into an
interest rate swap agreement with a notional amount of $150.0 million that
effectively fixes the underlying LIBOR rate at 4.62%.
Dispositions
------------
The disposition strategy of the Company is designed to generate capital to
fund development activities and to dispose of shopping center properties the
returns and growth potential of which do not meet the Company's objectives.
Management analyzes properties for potential dispositions, identifies assets
that do not fit the overall Company strategy and seeks to replace them with
assets located in high barrier-to-entry, high growth markets with an emphasis on
high rates of profitability.
During the three months ended March 31, 2001, the Company sold all or
portions of six shopping center properties for gross proceeds of approximately
$37.7 million. As of April 30, 2001, the Company was negotiating the sale of
all or portions of 20 shopping centers with an aggregate net book value of
approximately $93.6 million for estimated aggregate proceeds of approximately
$102.0 million, 15 of which were subject to definitive agreements at that date.
The Company expects that most of these properties will be sold in 2001 and the
first half of 2002. The Company expects to begin marketing additional shopping
centers that are expected to close after the first half of 2001. The closing of
the dispositions is dependent upon, among other things, completion of due
diligence and the ability of some of the purchasers to successfully obtain
financing. Therefore, there can be no assurance that any of these transactions
will close when expected or at all, and there can be no assurance that, if
closed, the disposition transactions will produce sufficient liquidity to enable
the Company to fund its planned development projects.
The Company expects the sale of all or portions of operating shopping
center properties in addition to the sale of various parcels of land adjacent to
its operating properties to be the primary source of capital for the Company to
fund its development needs and certain other uses of funds noted above. In
addition, the Company expects funds from the sale of its properties to be used
to satisfy potential liabilities arising out of pending litigation, governmental
proceedings and settlement agreements.
Future Sources and Uses of Funds
--------------------------------
The most significant expected use of capital for the Company is its
development activities. The Company had 21 projects under construction as of
March 31, 2001 and intends to commence construction during 2001 on approximately
four additional projects. The Company expects that the capital required to fund
the future costs of these 25 projects, net of estimated construction
reimbursements and expected land sales to retailers who will build and own their
space in these projects, is approximately $149.0 million. These future costs are
expected to be incurred during the remainder of 2001 and 2002. This projected
capital requirement includes a number of assumptions including commitments by
secondary
17
anchor tenants. If some or all of these tenants do not execute leases,
management anticipates that the amount required to finance these projects will
be less.
Another potential use of capital is the satisfaction of any liabilities
arising out of pending litigation and governmental proceedings. The Company is
a party to certain litigation and government regulatory proceedings and may
become subject to additional litigation or proceedings in the future. These
matters may result in liabilities, fines, penalties or other remedies that, if
material, could adversely affect the Company's financial condition, future
results of operations and liquidity.
The Company believes that cash provided by operating activities will be
sufficient to fund its required distributions to shareholders (90% of taxable
income), improvements to the Company's operating shopping centers, leasing costs
and scheduled debt amortization through the end of 2001.
The Company has historically utilized the public debt and equity markets to
fund its development activities. However, the Company believes that it will be
unable to issue unsecured debt, common stock or preferred stock as a result of,
among other things, unfavorable capital markets for the foreseeable future.
Also, because of the delay in filing the Company's Annual Report on Form 10-K
for the year ended December 31, 1999, and the delay in filing the Company's
Quarterly Report on Form 10-Q for the three months ended March 31, 2000, the
Company is not currently eligible to issue securities under its Form S-3 and
will not be eligible to use Form S-3 until it has made timely filings of
periodic reports with the SEC for at least twelve calendar months after August
2000. Therefore, even if capital markets were to become more favorable for the
issuance of securities, public issuances of debt or equity securities before
August 2001 would be costly and require significant time to consummate.
Furthermore, the Company is limited on the amount of debt that may be
outstanding at any given time. Under the applicable indentures for its MOPPRS,
Seven Year Notes and Ten Year Notes, and the 2001 Credit Agreement, the Company
is limited in the amount of secured debt it may have outstanding to 40% of its
Consolidated Total Assets, as defined. As of March 31, 2001, the Company's ratio
of Secured Debt to Consolidated Total Assets was 28.4%. Under the 2001 Credit
Agreement, the Company is limited in the amount of total debt it may have
outstanding to 60% of Total Consolidated Assets, as defined. As of March 31,
2001, the Company's ratio of total debt to Total Consolidated Assets, as
defined, was 49.5%. The Company is also restricted on additional indebtedness
in its interest coverage and fixed charges coverage ratios in the 2001 Credit
Agreement. Therefore, the Company has a limited ability to fund its development
projects with proceeds from additional indebtedness.
The Company has engaged a financial advisor to assist in the implementation
of the Company's strategy and in particular, assistance with financing
alternatives. These alternative means could include, for example, the formation
of joint ventures with institutional investors or other partners with available
capital at attractive rates.
Management believes that proceeds from asset sales, construction loans on
certain development projects and any financing alternatives identified by its
financial advisor will provide the additional funding necessary to complete its
current development pipeline. The ability to obtain construction loans will be
dependent upon a number of factors, including achievement of adequate pre-
leasing of the project and satisfaction of any environmental, title or other
issues with respect to the underlying real estate. If the Company is
unsuccessful in raising capital adequate to fund its development activities, it
will be required to discontinue the funding of some or all of its projects and
will be required to liquidate some or all of its projects on potentially
unfavorable terms. These unfavorable terms could result in significant losses
upon liquidation and would have an adverse impact on future rental income, FFO
and the Company's ability to continue the level of its current distributions to
holders of its common stock.
In order for the Company to continue to qualify as a REIT, it must annually
distribute to its shareholders at least 90% of its taxable income (excluding net
capital gains). Management believes that the Company will be able to meet this
requirement in 2001 with cash provided by operating activities.
As of March 31, 2001, the Company's debt requires the following payments in
the future:
18
(Dollars in thousands)
Percent of Debt
Year Total Expiring
--------------------------------------------------------------------------------
2001 $ 23,230 4.2%
2002 225,360 40.6%
2003 82,680 14.9%
2004 77,010 13.9%
2005 2,283 0.4%
2006 2,457 0.4%
2007 87,475 15.8%
2008 2,850 0.5%
2009 2,978 0.5%
2010 3,620 0.7%
Thereafter 44,797 8.1%
-------- -----
$554,740 100.0%
======== =====
The Company is negotiating to refinance a $21.4 million mortgage note
payable secured by a shopping center in Denver, Colorado which matures July 17,
2001. The Company expects this refinancing to close on or before the maturity
date of this indebtedness. With respect to its other maturing obligations,
management will evaluate various alternatives based on market conditions at the
time. There can be no assurance, however, that the debt or equity capital
markets will be favorable or available in the future, and unfavorable or
unavailable markets could limit the Company's ability to continue to operate its
business as it has in the past, complete development projects or repay or
refinance maturing debt.
Derivatives and Market Risk
---------------------------
The Company utilizes variable rate debt to fund its development activities.
This variable rate debt exposes the Company to interest rate risk that may
impact its current and future cash flows. The Company's primary strategy to
protect against this risk is to enter into derivative transactions to minimize
the variability that changes in interest rates could have on cash flows. A
secondary objective of the hedge program is to minimize the income statement
effect of hedge effectiveness. In order to achieve the risk management
objectives described above, the Company acquires derivative instruments (cash
flow hedges) that are intended to react in a predetermined manner to offset the
changes in future cash flows caused by changes in benchmark interest rates.
Fundamental to the Company's approach to risk management in general, and
interest rate risk management in particular, is its willingness to tolerate a
relatively small amount of risk through use of floating-rate debt instruments
and some shorter-term debt maturities. The Company attempts to eliminate
significant interest rate risk through the use of interest rate swaps and caps
on a significant amount of floating-rate borrowings. The Company documents the
terms and conditions and establishes the hedge's effectiveness at the inception
of each individual hedge.
As of March 31, 2001, the Company had one interest rate swap agreement and
one interest rate cap agreement as described below:
19
Effective Termination
Description of Agreement Notional Amount Strike Price Date Date
------------------------ --------------- ------------ --------- -----------
(in thousands)
LIBOR, 30-day "Rate Cap" $100,000 7.25% 8/20/00 8/21/02
LIBOR, 30-day "Rate Swap" $150,000 4.62% 3/29/01 12/31/02
The Company's future earnings, cash flows and fair values of financial
instruments are primarily dependent upon market rates of interest such as LIBOR.
Contingencies
See "Undisclosed Transactions, Lease Discrepancies and Management Changes"
under Part I, Item 1 of the Company's Annual Report on Form 10-K for the year
ended December 31, 2000.
During the three months ended March 31, 2001, the Company has expensed
approximately $573,000 in legal and professional fees related to the SEC
investigation and the class action litigation. The Company cannot reasonably
predict, with any degree of certainty, the additional legal and professional
fees which will be incurred related to the litigation, the SEC investigation or
any related investigation by other regulatory bodies.
Federal Income Tax Legislative Developments
New legislation became effective January 1, 2001 that significantly
modified the REIT-related provisions of the Code. In addition to the provisions
that directly affected the Company (discussed below), the legislation also
contained provisions relating to the following: (i) special foreclosure rules
for healthcare REITs; (ii) clarification of the definition of independent
contractors; and (iii) modification of the earnings and profits rules.
Investment Limitations
----------------------
The REIT asset tests are modified by adding a requirement that except for
(i) "Safe Harbor Debt" and (ii) the ownership of stock in "taxable REIT
subsidiaries," a REIT cannot own more than 10 percent of the total value of the
securities of any corporation. "Safe Harbor Debt" is non-contingent, non-
convertible debt ("straight debt") which satisfies one of the following three
requirements: (a) the straight debt is issued by an individual, (b) all of the
securities of the issuer owned by the REIT is "straight debt" or (c) the issuer
is a partnership in which the REIT owns at least 20% of the partnership's
profits.
Taxable REIT Subsidiaries
-------------------------
A REIT is permitted to operate a "taxable REIT subsidiary" which can
provide a limited amount of services to tenants and other customers of the REIT
(even if such services were not considered customarily furnished in connection
with the rental of real property) and can manage or operate properties,
generally for third parties, without causing the rents received by the REIT from
such parties not to be treated as rent from real properties. A taxable REIT
subsidiary is subject to regular federal income tax, and state and local income
tax where applicable, as a regular "C" corporation. The value of the securities
of all taxable REIT subsidiaries cannot exceed 20% of the total value of the
REIT's assets. In addition, interest paid by a taxable REIT subsidiary to the
related REIT is subject to the earnings stripping rules contained in Section
163(j) of the Code and, therefore, the taxable REIT subsidiary cannot deduct
interest in any year that would exceed 50% of the subsidiary's adjusted gross
income. If any amount of interest, rent, or other deductions of the taxable REIT
subsidiary to be paid to the REIT is determined not to be at arm's length, an
excise tax of 100% is imposed on the portion that is determined
20
to be excessive. However, rent received by a REIT will not fail to qualify as
rents from real property by reason of the fact that all or any portion of such
rent is redetermined for purposes of the excise tax.
After considering the new investment limitations and taxable REIT
subsidiary provisions, the Company and JDN Development have jointly elected to
treat JDN Development as a taxable REIT subsidiary effective January 1, 2001. In
addition, effective January 1, 2001, the Company acquired the remaining voting
stock in JDN Development and, therefore, owns 100% of the capital stock of JDN
Development. The Company has consolidated JDN Development's operations in its
financial statements effective with the first reporting period in 2001.
Distribution Requirements
-------------------------
In order to continue to maintain its qualification as a REIT, a REIT is
required to distribute annually 90% of its REIT taxable income (excluding net
capital gain).
Rents from Personal Property
----------------------------
A REIT may treat rent from personal property as rent from real property so
long as the rent from personal property does not exceed 15% of the total rent
from both real and personal property for the taxable year. This determination
will now be made by comparing the fair market value of the personal property to
the fair market value of the real and personal property.
Inflation
The Company's leases generally contain provisions designed to mitigate the
adverse impact of inflation on net income. These provisions include clauses
enabling the Company to pass through to tenants certain operating costs,
including real estate taxes, common area maintenance, utilities and insurance,
thereby reducing the Company's exposure to increases in costs and operating
expenses resulting from inflation. Certain of the Company's leases contain
clauses enabling the Company to receive percentage rents based on tenants' gross
sales, which generally increase as prices rise, and, in certain cases,
escalation clauses, which generally increase rental rates during the terms of
the leases. In addition, many of the Company's non-anchor leases are for terms
of less than ten years, which permits the Company to seek increased rents upon
re-leasing at higher market rates.
21
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
See "Derivatives and Market Risk" in Part I, Item 2 of this report.
During the three months ended March 31, 2001, an interest rate swap
agreement with a notional amount of $50.0 million and a strike price of 6.49%,
expired. The Company entered into an interest rate swap agreement in conjunction
with the closing of the 2001 Credit Agreement with a notional amount of $150.0
million that effectively fixes the underlying LIBOR rate at 4.62%.
There were no other material changes to the quantitative and qualitative
disclosures about market risks since the Company filed its Annual Report on Form
10-K for the year ended December 31, 2000.
22
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
See Note 6 to the condensed consolidated financial statements in Part
I, Item 1 of this report.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Not applicable
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
3.1 Articles of Restatement of JDN Realty Corporation (1)
3.2 Articles of Merger of JDN Enterprises, Inc. with and into
the Company (2)
3.3 Amended and Restated Bylaws of the Company, as amended (3)
3.4 Form of Articles Supplementary of JDN Realty Corporation
classifying the 9 3/8% Series A Cumulative Redeemable
Preferred Stock (4)
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4.1 Specimen Common Stock Certificate (5)
4.2 Form of the Company's 9 3/8% Series A Cumulative
Redeemable Preferred Stock Certificate (4)
4.3 Form of 6.918% Mandatory Par Put Remarketed
Securities (sm) ("MOPPRS(sm)") due March 31, 2013 (6)
4.4 Form of 6.80% Global Note due August 1, 2004 (7)
4.5 Form of 6.95% Global Note due August 1, 2007 (7)
4.6 Form of Articles Supplementary of JDN Realty Corporation
classifying the 9 3/8% Series A Cumulative Redeemable
Preferred Stock (4)
10.1 Employment Agreement by and between John D. Harris, Jr.
and JDN Realty Corporation dated as of July 1, 2000
10.2 Employment Agreement by and between David L. Henzlik and
JDN Realty Corporation dated as of November 27, 2000
10.3 Employment Agreement by and between Leilani L. Jones and
JDN Realty Corporation dated as of November 27, 2000
10.4 Employment Agreement by and between Michael A. Quinlan and
JDN Realty Corporation dated as of July 1, 2000
10.5 Employment Agreement by and between Laurie A. Farris and
JDN Realty Corporation dated as of November 27, 2000
10.6 Indemnification Agreement by and between JDN Realty
Corporation and Craig Macnab dated April 2, 2000
(1) Filed as an exhibit to the Company's filing on Form 8-K
dated November 7, 1996, previously filed pursuant to the
Securities Exchange Act of 1934, and hereby incorporated
by reference.
(2) Filed as an exhibit to the Company's Registration
Statement on Form S-11 (No. 33-73710) previously filed
pursuant to the Securities Act of 1933 and hereby
incorporated by reference.
(3) Filed as an exhibit to the Company's filing on Form 10-K
for the year ended December 31, 2000, previously filed
pursuant to the Securities Exchange Act of 1934 and hereby
incorporated by reference.
(4) Filed as an exhibit to the Company's filing on Form 8-A
dated September 17, 1998, previously filed pursuant to the
Securities Exchange Act of 1934 and hereby incorporated by
reference.
(5) Filed as an exhibit to the Company's Registration
Statement on Form S-3 (No. 333-22339) previously filed
pursuant to the Securities Act of 1933 and hereby
incorporated by reference.
(6) Filed as an exhibit to the Company's filing on Form 8-K
dated April 1, 1998, previously filed pursuant to the
Securities Exchange Act of 1934 and hereby incorporated by
reference.
(7) Filed as an exhibit to the Company's filing on Form 8-K
dated August 1, 1997, previously filed pursuant to the
Securities Exchange Act of 1934 and hereby incorporated by
reference.
(b) Reports on Form 8-K
During the three months ended March 31, 2001, the Company did
not file any reports on Form 8-K.
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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.
JDN Realty Corporation
---------------------------------
(Registrant)
Date: May 14, 2001 By: /s/ Craig Macnab
---------------------------------
Craig Macnab
President and Chief Executive
Officer
Date: May 14, 2001 By: /s/ John D. Harris, Jr.
---------------------------------
John D. Harris, Jr.
Senior Vice President and Chief
Financial Officer
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INDEX TO EXHIBITS
Exhibit
Number Exhibit
------- -------
3.1 Articles of Restatement of JDN Realty Corporation (1)
3.2 Articles of Merger of JDN Enterprises, Inc. with and into the Company (2)
3.3 Amended and Restated Bylaws of the Company, as amended (3)
3.4 Form of Articles Supplementary of JDN Realty Corporation classifying the 9
3/8% Series A Cumulative Redeemable Preferred Stock (4)
4.1 Specimen Common Stock Certificate (5)
4.2 Form of the Company's 9 3/8% Series A Cumulative Redeemable Preferred
Stock Certificate (4)
4.3 Form of 6.918% Mandatory Par Put Remarketed Securities (sm) ("MOPPRS(sm)")
due March 31, 2013 (6)
4.4 Form of 6.80% Global Note due August 1, 2004 (7)
Form of 6.95% Global Note due August 1, 2007 (7)
4.5 Form of Articles Supplementary of JDN Realty Corporation classifying the 9
3/8% Series A Cumulative Redeemable Preferred Stock (4)
10.1 Employment Agreement by and between John D. Harris, Jr. and JDN Realty
Corporation dated as of July 1, 2000
10.2 Employment Agreement by and between David L. Henzlik and JDN Realty
Corporation dated as of November 27, 2000
10.3 Employment Agreement by and between Leilani L. Jones and JDN Realty
Corporation dated as of November 27, 2000
10.4 Employment Agreement by and between Michael A. Quinlan and JDN Realty
Corporation dated as of July 1, 2000
10.5 Employment Agreement by and between Laurie A. Farris and JDN Realty
Corporation dated as of November 27, 2000
10.6 Indemnification Agreement by and between JDN Realty Corporation and
Craig Macnab dated April 2, 2000
(1) Filed as an exhibit to the Company's filing on Form 8-K dated November 7,
1996, previously filed pursuant to the Securities Exchange Act of 1934, and
hereby incorporated by reference.
(2) Filed as an exhibit to the Company's Registration Statement on Form S-11
(No. 33-73710) previously filed pursuant to the Securities Act of 1933 and
hereby incorporated by reference.
(3) Filed as an exhibit to the Company's filing on Form 10-K for the year ended
December 31, 2000, previously filed pursuant to the Securities Exchange Act
of 1934 and hereby incorporated by reference.
(4) Filed as an exhibit to the Company's filing on Form 8-A dated September 17,
1998, previously filed pursuant to the Securities Exchange Act of 1934 and
hereby incorporated by reference.
(5) Filed as an exhibit to the Company's Registration Statement on Form S-3
(No. 333-22339) previously filed pursuant to the Securities Act of 1933 and
hereby incorporated by reference.
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(6) Filed as an exhibit to the Company's filing on Form 8-K dated April 1,
1998, previously filed pursuant to the Securities Exchange Act of 1934 and
hereby incorporated by reference.
(7) Filed as an exhibit to the Company's filing on Form 8-K dated August 1,
1997, previously filed pursuant to the Securities Exchange Act of 1934 and
hereby incorporated by reference.
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