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 September 30, 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 October 31, 2001, 32,850,143 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 future sales of real
estate, future development activities, including the level of such activities
with certain tenants, future redevelopment of shopping center properties 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 effect of recent economic and political events
particularly as they relate to the Company's ability to complete the secondary
anchor tenant leasing of its current development projects, the growth plans of
the Company's tenant customers and potential bankruptcy of tenants in the
Company's operating shopping centers; 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 and redevelopment activities; the ability to sell operating
shopping center properties and parcels of land as projected 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. The
Company assumes no obligation to publicly release any revisions to these
forward-looking statements, which may be made to reflect events or circumstances
after the date hereof or to reflect the occurrence of unanticipated events.
1
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Page No.
--------
Condensed Consolidated Balance Sheets - September 30, 2001 and December 31, 2000 3
Condensed Consolidated Statements of Operations - Three Months Ended September 30, 2001
and 2000 4
Condensed Consolidated Statements of Operations - Nine Months Ended September 30, 2001
and 2000 5
Condensed Consolidated Statements of Cash Flows - Nine Months Ended September 30,
2001 and 2000 6
Notes to Condensed Consolidated Financial Statements 7
2
JDN REALTY CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
September 30, December 31,
2001 2000
------------- -------------
(Unaudited)
(In thousands)
ASSETS
Shopping center properties, at cost:
Land $ 282,197 $ 208,653
Buildings and improvements 612,591 626,042
Property under development 183,708 45,020
--------------------------
1,078,496 879,715
Less: accumulated depreciation and amortization (83,615) (80,113)
----------- -----------
Shopping center properties, net 994,881 799,602
Cash and cash equivalents -- 9,277
Restricted cash - escrow 4,333 102
Accounts receivable 17,354 11,511
Investments in and advances to unconsolidated entities 13,068 246,799
Deferred costs, net of amortization 7,247 6,039
Other assets 12,940 10,633
----------- -----------
$ 1,049,823 $ 1,083,963
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Unsecured notes payable $ 234,744 $ 234,697
Secured line of credit and term loan 200,000 242,000
Mortgage notes payable 97,020 97,444
Accounts payable and accrued expenses 60,624 14,558
Other liabilities 13,515 5,151
----------- -----------
Total liabilities 605,903 593,850
Third party investors' interest 3,046 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 32,848,503 and 32,867,354 shares
in 2001 and 2000, respectively 329 329
Paid-in capital 461,527 489,289
Accumulated other comprehensive loss (4,016) --
Accumulated deficit (16,986) (3,029)
----------- -----------
440,874 486,609
----------- -----------
$ 1,049,823 $ 1,083,963
=========== ===========
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
3
JDN REALTY CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended September 30,
2001 2000
-------- --------
(In thousands)
Revenues:
Minimum and percentage rents $ 21,762 $ 23,045
Recoveries from tenants 3,247 2,845
Other revenue 77 1,905
-------- --------
Total revenues 25,086 27,795
Operating expenses:
Operating and maintenance 2,352 1,992
Real estate taxes 1,845 1,538
General and administrative 2,607 1,901
Corporate investigation and legal costs -- 479
Severance expense -- 3,376
Impairment losses 1,002 --
Depreciation and amortization 5,558 5,200
Settlement recovery (3,825) --
-------- --------
Total operating expenses 9,539 14,486
-------- --------
Income from operations 15,547 13,309
Other income (expense):
Interest expense, net (7,347) (6,120)
Other income (expense), net (196) 736
Equity in net income (loss) of unconsolidated entities (1) 319
-------- --------
Income before minority interest in net income of consolidated
subsidiaries and net gain on real estate sales 8,003 8,244
Minority interest in net income of consolidated subsidiaries (46) (42)
-------- --------
Income before net gain on real estate sales 7,957 8,202
Net gain on real estate sales
Operating 7,393 3,821
Non-operating 2,788 --
-------- --------
Net income 18,138 12,023
Dividends to preferred shareholders (1,172) (1,172)
-------- --------
Net income attributable to common shareholders $ 16,966 $ 10,851
======== ========
Income per common share:
Basic $ 0.52 $ 0.34
======== ========
Diluted $ 0.52 $ 0.34
======== ========
Dividends per common share $ 0.270 $ 0.300
======== ========
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
4
JDN REALTY CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Nine Months Ended September 30,
2001 2000
--------------- ---------------
(In thousands)
Revenues:
Minimum and percentage rents $ 67,011 $ 69,528
Recoveries from tenants 10,672 8,792
Other revenue 782 1,907
-------------- -------------
Total revenues 78,465 80,227
Operating expenses:
Operating and maintenance 7,912 6,129
Real estate taxes 5,632 4,611
General and administrative 8,709 5,769
Corporate investigation and legal costs 982 2,729
Severance expense - 3,711
Impairment losses 1,643 1,289
Depreciation and amortization 16,503 16,157
Settlement expenses 43,785 -
-------------- -------------
Total operating expenses 85,166 40,395
-------------- -------------
Income (loss) from operations (6,701) 39,832
Other income (expense):
Interest expense, net (23,562) (19,039)
Other income, net 203 1,526
Equity in net income (loss of unconsolidated entities (358) 2,196
-------------- -------------
Income (loss) 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 (30,418) 24,515
Minority interest in net income of consolidated subsidiaries (130) (180)
-------------- -------------
Income (loss) before net gain on real estate sales, extraordinary items
and cumulative effect of change in accounting principle (30,548) 24,335
Net gain on real estate sales
Operating 16,673 12,350
Non-operating 5,323 -
-------------- -------------
Income (loss) before extraordinary items and cumulative effect of
change in accounting principle (8,552) 36,685
Extraordinary items (1,608) -
-------------- -------------
Income (loss) before cumulative effect of change in accounting principle (10,160) 36,685
Cumulative effect of change in accounting principle (280) -
-------------- -------------
Net income (loss) (10,440) 36,685
Dividends to preferred shareholders (3,516) (3,516)
-------------- -------------
Net income (loss) attributable to common shareholders $ (13,956) $ 33,169
============== =============
Income (loss) per common share-basic:
Income (loss) before extraordinary items and cumulative effect of change
in accounting principle (net of taxes and preferred dividends) $ (0.37) $ 1.03
Extraordinary items (0.05) -
Cumulative effect of change in accounting principle (0.01) -
-------------- -------------
Net income (loss) attributable to common shareholders $ (0.43) $ 1.03
Income (loss) per common share-diluted: ============== =============
Income (loss) before extraordinary items and cumulative effect of change in
accounting principle (net of taxes and preferred dividends) $ (0.37) $ 1.02
Extraordinary items (0.05) -
Cumulative effect of change in accounting principle (0.01) -
-------------- -------------
Net income (loss) attributable to common shareholders $ (0.43) $ 1.02
============== =============
Dividends per common share $ 0.870 $ 0.995
============== =============
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
5
JDN REALTY CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended September 30,
2001 2000
--------- --------
(In thousands)
Net cash provided by operating activities $ 39,705 $ 39,038
Cash flows from investing activities:
Development and redevelopment of shopping center properties (101,698) (31,125)
Improvements to shopping center properties (938) (1,158)
Investments in and advances to unconsolidated entities (1,756) (75,473)
Proceeds from real estate sales 136,516 79,796
Other 2,953 (1,276)
--------- --------
Net cash provided by (used in) investing activities 35,077 (29,236)
Cash flows from financing activities:
Proceeds from line of credit and term loan 330,400 151,996
Proceeds from mortgages and notes payable 23,000 --
Principal payments on line of credit and term loan (372,400) (154,996)
Principal payments on mortgages and notes payable (26,686) (2,269)
Repurchases of common stock -- (6,843)
Distributions paid to preferred shareholders (3,516) (3,516)
Distributions paid to common shareholders (28,590) (32,644)
Proceeds from deferred exchange of properties -- 40,476
Payments for deferred loan financing charges (5,848) (2,426)
Other (419) 645
--------- --------
Net cash used in financing activities (84,059) (9,577)
--------- --------
Decrease in cash and cash equivalents (9,277) 225
Cash and cash equivalents, beginning of period 9,277 2,076
--------- --------
Cash and cash equivalents, end of period $ -- $ 2,301
========= ========
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
6
JDN REALTY CORPORATION
Notes to Condensed Consolidated Financial Statements
(Unaudited)
September 30, 2001
1. THE COMPANY
JDN Realty Corporation (the "Company") is a real estate company
specializing in the development and asset management of retail shopping centers
anchored by value-oriented and necessity-item retailers. As of September 30,
2001, the Company's operating shopping centers and development projects were
located in 21 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 consolidation 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 and nine months ended
September 30, 2000 would have been $29.0 million and $84.8 million,
respectively. Net income and earnings per share would not have been materially
different than amounts previously reported.
2. BASIS OF PRESENTATION
The accompanying financial statements represent the consolidated financial
statements of the Company and its wholly-owned and majority-owned subsidiaries.
All significant intercompany balances and transactions have been eliminated in
consolidation. 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) and certain
reclassifications 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 and nine months ended September 30, 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, Hedging Activities and Other Comprehensive Income.
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 fair value of the hedged asset, liability or firm
commitment through earnings or recognized in other comprehensive
7
income until the hedged item is recognized in earnings. Derivatives that are not
hedges must be adjusted to fair value through income.
The Company hedges a portion of its variable interest cash flows
principally through interest rate swaps with financial institutions. The Company
has two interest rate swap contracts with notional amounts of $150 million and
$50 million that convert its variable interest payments on the term loan and $50
million of the revolving line of credit to fixed interest payments by
effectively fixing the underlying LIBOR rate at 4.62% and 3.585%, respectively.
These swaps have been designated and qualify under the provisions of Statement
No. 133 as cash flow hedges, and the Company has determined that they are highly
effective in offsetting the variable interest cash flows on the related debt
instruments. The Company recognized a cumulative effect adjustment of $280,000
in the three months ended March 31, 2001 upon adoption of Statement No. 133.
For the three and nine months ended September 30, 2001, the aggregate fair value
of the Company's interest rate swaps is a liability of approximately $3.3
million and $4.0 million, respectively. The fluctuations in the fair value of
the interest rate swaps are included in accumulated other comprehensive loss, a
component of shareholders' equity, and other liabilities in the condensed
consolidated balance sheets.
Impairment Losses. The Company records impairment losses and reduces the
carrying amount of assets held for sale when the carrying amounts exceed the
estimated selling price less costs to sell.
Income Taxes. The Company has elected to be taxed as a REIT under the
Internal Revenue Code of 1986, as amended (the "Code"). As a result, the Company
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. Additionally, JDN Development, which would normally be subject to
federal and state income taxes, has incurred no federal income tax expense for
the nine months ended September 30, 2001 as a result of a net operating loss
("NOL") carryforward of approximately $12.5 million from prior years. JDN
Development plans to net its NOL carryforward against federal taxable income in
future periods until the NOL carryforward is exhausted or expires, whichever
occurs first.
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 the Amended and
Restated Term Loan (the "Secured Credit Agreements") with Wachovia Bank, N.A, as
Agent. 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. Interest on loans made pursuant to the 2001 Credit Agreement
will range from LIBOR plus 1.75% to LIBOR plus 2.25%, based upon the Company's
leverage and credit quality or, at the Company's discretion, the Agent's prime
lending rate. The revolving credit facility and term loan each currently bear
interest at LIBOR plus 2.25%. The 2001 Credit Agreement expires December 31,
2002, but the term may be extended until January 1, 2003 provided that the
Company is in compliance with its terms.
Effective June 30, 2001, the 2001 Credit Agreement was amended (the "2001
Credit Agreement Amendment"). The 2001 Credit Agreement Amendment reduced the
net worth covenant, reduced the fixed charges coverage ratio minimum and changed
the definition of EBITDA to exclude gains and losses from land sales. The 2001
Credit Agreement Amendment also provides that in the event the United States
District Court for the Northern District of Georgia does not approve the
settlement of the Consolidated Class Action and Derivative Actions, as
described in Note 6, or if the settlement is materially modified or not fully
consummated, the changes referred to above shall not be effective.
8
5. SHOPPING CENTER DISPOSITIONS
During the three months ended September 30, 2001, the Company sold the
following operating properties:
Disposition Company GLA
Location Date (square feet) Sales Price
--------------------------------------------------------------------------------
Greensboro, NC 7/13/2001 131,051 $ 16,850,000
Lawrenceville, GA 7/25/2001 322,262 13,450,000
Ft. Walton Beach, FL 8/1/2001 21,902 850,000
Peachtree City, GA (1) 8/9/2001 10,800 2,200,000
Woodstock, GA (1) 8/9/2001 11,020 2,700,000
Fayetteville, GA 8/10/2001 156,066 7,900,000
Nashville, TN (2) 9/10/2001 200,083 14,300,000
Lexington, VA 9/16/2001 28,503 2,050,000
South Boston, VA 9/16/2001 24,404 1,800,000
Winston Salem, NC 9/16/2001 196,053 2,100,000
Antioch, TN 9/18/2001 51,534 2,950,000
------------ -------------
1,153,678 $ 67,150,000
============ =============
(1) Sale of only the Pike Nurseries 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
the undisclosed compensation arrangements, payments and related party
transactions discussed in its filing on Form 10-K for the year ended December
31, 2000. One or more of these suits also named as defendants JDN Development
and certain current and former officers and directors of JDN Development and/or
the Company. As described below, during the third quarter of 2001 the Company
reached agreements to settle all remaining class and derivative actions.
Among the lawsuits filed after the Company's February 14, 2000 announcement
of the above-referenced events were certain class action lawsuits filed in
federal court alleging violations of the federal securities laws and asserting
that by failing to accurately report certain undisclosed compensation, payments
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. On April 17, 2000, the federal court entered an order consolidating the
various class action lawsuits into one action (the "Consolidated Class Action")
pending before the United States District Court for the Northern District of
Georgia (the "Federal Court"). On July 6, 2001, the Company, JDN Development,
the current officers and directors named in the lawsuit, former officer William
J. Kerley, and former officer and director Elizabeth L. Nichols reached an
agreement with the plaintiffs to settle the Consolidated Class Action. The
settlement does not resolve the claims against J. Donald Nichols, Jeb L. Hughes
and C. Sheldon
9
Whittelsey, IV, all former officers and/or directors of the Company or JDN
Development, and the Consolidated Class Action will remain pending against those
individuals, as well as against the Company's former outside counsel, McCullough
Sherrill, L.L.P. and certain of its individual lawyers.
The terms of the settlement of the Consolidated Class Action are set forth
in detail in the Stipulation and Agreement of Settlement filed with the Federal
Court on August 14, 2001 (the "Class Action Settlement Agreement"). A Letter
Agreement pertaining to the settlement terms was filed with the Securities and
Exchange Commission ("SEC") in a filing on Form 8-K on July 30, 2001. Under the
terms of the Class Action Settlement Agreement, the Company and JDN Development
agreed to pay the plaintiffs approximately $16.8 million in cash and to issue
1,681,568 shares of the Company's common stock. In addition, the Company and JDN
Development agreed to provide a $4.0 million guarantee that class members will
receive a minimum of $7.5 million by virtue of recoveries from or settlements
with the former officers and directors not dismissed from the Consolidated Class
Action as well as McCullough Sherrill and certain of its individual lawyers.
Moreover, the Company and JDN Development have agreed to take action against
such parties to recover damages it believes the Company and JDN Development have
suffered as a result of their actions. Accordingly, on June 15, 2001 the Company
and JDN Development filed claims against J. Donald Nichols, Jeb L. Hughes, C.
Shelton Whittelsey, IV, ALA Associates, Inc., McCullough Sherrill, L.L.P. and
certain of its individual lawyers in the Superior Court of Fulton County,
Georgia. The first $8.0 million of amounts received from third parties in either
the Consolidated Class Action or the actions brought by the Company will go to
the class members, and amounts received in excess of $3.5 million will reduce
the Company's $4.0 million guarantee dollar for dollar. Amounts recovered in
excess of $8.0 million, if any, will be divided, with one-third of any such
recoveries going to the Company and JDN Development, and two-thirds going to the
class members. In addition, the Class Action Settlement Agreement contains
certain restrictions on the issuance of common stock below $11.70 per share and
below $13.50 per share until certain dates and/or events set forth in the Class
Action Settlement Agreement have occurred. The Class Action Settlement Agreement
also provides for a full release of the Company and JDN Development from all
claims asserted in the Consolidated Class Action or that could have been
asserted based on or in connection with the facts underlying the consolidated
complaint.
The settlement of the Consolidated Class Action on the terms set forth in
the Class Action Settlement Agreement has received preliminary approval by the
Federal Court and notice to the class has been given. However, the settlement is
subject to objections by class members and final approval by the Federal Court
after a hearing on the fairness of the settlement. On November 2, 2001, the
Company funded the cash portion of the settlement into an escrow with the
plaintiffs' attorneys until the judgement by the Federal Court is final. There
can be no assurance that the Court will find the settlement to be fair to the
class. Moreover, members of the class are entitled to opt out of the lawsuit,
and there can be no assurance that any individuals who may chose to opt out will
not name the Company and/or JDN Development as parties to additional lawsuits.
Derivative lawsuits were also filed as a result of the same undisclosed
compensation, payments and related-party transactions discussed above in Federal
Court and in Fulton County Superior Court, naming the Company as a nominal
defendant and raising claims against certain current and former members of
management and the Company's board of directors. A similar suit was filed in
State Court of Fulton County naming Ernst & Young LLP, the Company's auditors,
in addition to the above-referenced defendants (collectively, the "Derivative
Actions"). The complaints filed in the Derivative Actions 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,
sought injunctive relief, compensatory and punitive damages and disgorgement of
all profits and gains by the individual defendants. On July 26, 2001, the
Company and certain of the individual defendants reached an agreement to settle
the Derivative Actions on terms set forth in a Stipulation of Settlement of
Derivative Actions filed with the Federal Court on September 26, 2001 (the
"Derivative Settlement Agreement"). A Memorandum of Understanding pertaining to
the settlement terms was filed with the SEC in a filing on Form 8-K on July 30,
2001. Under the terms of the Derivative Settlement Agreement, the Company will
implement or formalize certain corporate governance policies, many of which have
already been adopted by the Company, and will pay the plaintiffs' attorneys'
fees using 248,000 shares of the Company's common stock. The settlement has
received preliminary approval by the Federal Court and notice to the class has
been sent. The settlement, however, is subject to objections by
10
shareholders and final approval by the Federal Court after a hearing on the
fairness of the settlement. There can be no assurances that the Court will
approve the proposed settlement.
The Derivative Settlement Agreement includes a dismissal of the claims
against all of the defendants to those actions with prejudice, except for the
claims against J. Donald Nichols, C. Sheldon Whittelsey, IV and Jeb L. Hughes,
which are to be dismissed without prejudice. The Company and JDN Development,
are, however, as mentioned above, pursuing their own claims against those
individuals in the action styled JDN Realty Corporation v. Nichols, et. al.,
Superior Court of Fulton County, Georgia.
The Company is also subject to a formal order of investigation initiated by
the 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 its 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 operations. However, the Company is
unable to predict with certainty the timing or ultimate outcome of this matter.
The Company is from time to time a party to other legal proceedings that
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.
7. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted
earnings per share (in thousands, except per share data):
11
Three months ended September 30, Nine months ended September 30,
2001 2000 2001 2000
------------------------------------------------------------------------------------------------------------------------------------
Numerator:
Income (loss) before extraordinary items and cumulative
effect of change in accounting principle $ 18,138 $ 12,023 $ (8,552) $ 36,685
Extraordinary items -- -- (1,608) --
Cumulative effect of change in accounting principle -- -- (280) --
-------- -------- -------- --------
Net income (loss) 18,138 12,023 (10,440) 36,685
Dividends to preferred shareholders (1,172) (1,172) (3,516) (3,516)
-------- -------- -------- --------
Net income (loss) attributable to
common shareholders $ 16,966 $ 10,851 $(13,956) $ 33,169
======== ======== ======== ========
Denominator:
Weighted-average shares outstanding 32,855 32,797 32,861 32,835
Unvested restricted stock outstanding (264) (427) (301) (522)
-------- -------- -------- --------
Denominator for basic earnings per share 32,591 32,370 32,560 32,313
Dilutive effect of stock options and
unvested restricted stock 108 21 -- 57
-------- -------- -------- --------
Denominator for diluted earnings per share 32,699 32,391 32,560 32,370
======== ======== ======== ========
Income (loss) per common share - basic:
Income (loss) before extraordinary items and cumulative
effect of change in accounting principle (net of
preferred dividends) $ 0.52 $ 0.34 $ (0.37) $ 1.03
Extraordinary items -- -- (0.05) --
Cumulative effect of change in accounting principle -- -- (0.01) --
-------- -------- -------- --------
Net income (loss) attributable to common shareholders $ 0.52 $ 0.34 $ (0.43) $ 1.03
======== ======== ======== ========
Income (loss) per common share - diluted:
Income (loss) before extraordinary items and cumulative
effect of change in accounting principle (net of
preferred dividends) $ 0.52 $ 0.34 $ (0.37) $ 1.02
Extraordinary items -- -- (0.05) --
Cumulative effect of change in accounting principle -- -- (0.01) --
-------- -------- -------- --------
Net income (loss) attributable to common shareholders $ 0.52 $ 0.34 $ (0.43) $ 1.02
======== ======== ======== ========
Of total options outstanding, options to purchase 642,750 and 828,209
shares of common stock for the three months ended September 30, 2001 and 2000,
respectively, were outstanding but were not considered 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.
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 September 30,
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.
12
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 retail shopping centers anchored by
value-oriented and necessity-item retailers. When referred to herein, the term
"Company" represents JDN Realty Corporation and its wholly owned or
majority-owned subsidiaries. As of September 30, 2001, the Company owned and
operated 101 shopping center properties containing approximately 11 million
square feet of gross leasable area ("Company GLA") located in 20 states, with
the highest concentrations of Company GLA in Georgia, Tennessee, and Florida.
The principal tenants of the Company's properties include Lowe's, Wal-Mart and
Kohl's. As of September 30, 2001, the Company had 20 projects under
construction. JDN Realty Corporation 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 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
consolidation method. In addition, JDN Realty Corporation and JDN Development
elected taxable REIT subsidiary status for JDN Development. 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 September 30, 2001 to the Three Months
Ended September 30, 2000
During 2001 and 2000, the Company developed and began operations at 29
properties totaling approximately 2.4 million square feet (the "Development
Properties"). During 2001 and 2000, the Company disposed of 25 properties
totaling approximately 4.0 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 Operations. 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 $1.3 million or 5.6% to $21.8
million for the three months ended September 30, 2001 from $23.0 million for the
same period in 2000. Minimum and percentage rents increased by $337,000 as a
result of the Development Properties and $979,000 as a result of the
consolidation of JDN Development. These increases are offset by a $2.5 million
decrease related to the Disposition Properties. The remaining decrease is the
result of a decrease in occupancy at existing properties.
Recoveries from tenants increased $401,000 or 14.1% to $3.2 million for the
three months ended September 30, 2001 from $2.8 million for the same period in
2000. Recoveries from tenants increased $284,000 as a result of the Development
Properties and $73,000 as a result of the consolidation of JDN Development.
These increases are partially offset by a $173,000 decrease related to the
Disposition Properties. The remaining increase is caused by net increases in
recoverable expenses at existing properties.
13
Other revenue decreased $1.8 million to $77,000 for the three months ended
September 30, 2001 from $1.9 million for the same period in 2000. Other revenue
for the three months ended September 30, 2000 of $1.9 million represents two
one-time lease termination fees at two of the Company's operating properties.
Other revenue for the three months ended September 30, 2001 of $77,000
represents management fees earned on third-party management services previously
recorded at JDN Development.
Operating and maintenance expenses increased $360,000 or 18% to $2.4
million for the three months ended September 30, 2001 from $2.0 million for the
same period in 2000. Operating and maintenance expenses increased by $156,000 as
a result of the Development Properties and $120,000 as a result of the
consolidation of JDN Development. These increases are partially offset by a
$125,000 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 $307,000 or 20.0% to $1.8 million for the three
months ended September 30, 2001 from $1.5 million for the same period in 2000.
Real estate taxes increased by $137,000 as a result of the Development
Properties and $115,000 as a result of the consolidation of JDN Development.
These increases are partially offset by a $43,000 decrease related to the
Disposition Properties. The remaining increase relates to an increase in real
estate taxes at existing properties.
General and administrative expenses increased $706,000 for the three months
ended September 30, 2001 over the same period in 2000. This increase is
primarily the result of the consolidation of JDN Development.
Corporate investigation and legal costs decreased $479,000 to $0 for the
three months ended September 30, 2001 from the same period in 2000. The costs
incurred in 2000 represent the professional fees incurred by the Company
primarily as a result of the investigation by 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.
Severance expense for the three months ended September 30, 2000 of $3.4
million represents severance paid as a result of the resignation of an officer.
There were no such severance payments in the three months ended September 30,
2001.
Impairment losses for the three months ended September 30, 2001 of $1.0
million represent charges to reduce the basis of land and shopping centers held
for sale to estimated fair value less costs to sell. Of this amount, $522,000
relates to impairment charges of operating shopping centers and $480,000 relates
to impairment charges of non-operating land.
Depreciation and amortization expense increased $358,000 or 6.9% to $5.6
million for the three months ended September 30, 2001 from $5.2 million for the
same period in 2000. Depreciation and amortization increased by $253,000 as a
result of the Development Properties and $279,000 as a result of the
consolidation of JDN Development. These increases are partially offset by a
$329,000 decrease related to the Disposition Properties. The remaining increase
primarily relates to improvements to existing properties.
Settlement expense for the three months ended September 30, 2001 of $3.8
million relates primarily to a decrease in the liability for the settlement of
the Consolidated Class Action and Derivative Actions in addition to settlement
charges of another lawsuit. The Company is required to adjust the value of the
common stock portion of the Class Action Settlement Agreement and Derivative
Settlement Agreement until the shares are issued. As a result of a decrease in
the Company's common stock price during the third quarter of 2001, the Company
reduced the liability by approximately $4.1 million. 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
and Note 6 to the condensed consolidated financial statements in Part I, Item 1
of this report for further discussion.
Interest expense, net of capitalized amounts, increased $1.2 million or
20.1% to $7.3 million for the three months ended September 30, 2001 from $6.1
million for the same period in 2000. Of this increase, $1.5 million represents
interest that was previously expensed at JDN Development. The remaining decrease
relates primarily to a reduction in average balances outstanding as well as an
overall reduction in the underlying LIBOR rate paid on the Company's bank credit
facilities.
14
Other income (expense), net decreased $932,000 or 126.6% to net expense of
$196,000 for the three months ended September 30, 2001 from net income of
$736,000 for the same period in 2000. Of this decrease, $225,000 relates to a
decrease in interest income recorded by the Company on an impaired mortgage note
receivable and $752,000 related to the consolidation of JDN Development. The
remaining increase relates to an increase in miscellaneous interest income.
Equity in net income (loss) of unconsolidated entities decreased $320,000
for the three months ended September 30, 2001. This decrease is primarily
related to the consolidation of JDN Development. The remaining amount relates to
the Company's portion of income and losses incurred by five unconsolidated joint
ventures.
Net gain on real estate sales increased $6.3 million to a net gain of $10.2
million for the three months ended September 30, 2001 from a net gain of $3.8
million for the same period in 2000. Net gain on real estate sales for the three
months ended September 30, 2001 represents a net gain on the sale of 11 shopping
centers and 14 parcels of land. Net gain on real estate sales for the three
months ended September 30, 2000 represents a net gain on the sale of two
shopping centers.
Comparison of the Nine Months Ended September 30, 2001 to the Nine Months Ended
September 30, 2000
Minimum and percentage rents decreased $2.5 million or 3.6% to $67.0
million for the nine months ended September 30, 2001 from $69.5 million for the
same period in 2000. Minimum and percentage rents increased by $1.7 million as a
result of the Development Properties and $2.1 million as a result of the
consolidation of JDN Development. These increases are offset by a $6.5 million
decrease related to the Disposition Properties. The remaining increase relates
to a net increase in rental revenue at existing properties.
Recoveries from tenants increased $1.9 million or 21.4% to $10.7 million
for the nine months ended September 30, 2001 from $8.8 million for the same
period in 2000. Recoveries from tenants increased by $801,000 as a result of the
Development Properties and $430,000 as a result of the consolidation of JDN
Development. This increase is partially offset by a $164,000 decrease related to
the Disposition Properties. The remaining increase relates to net increases in
recoveries from tenants at existing properties.
Other revenue decreased $1.12 million to $782,000 for the nine months ended
September 30, 2001 from $1.9 million for the same period in 2000. Other revenue
for the nine months ended September 30, 2000 of $1.9 million represents two
one-time lease termination fees at two of the Company's shopping center
properties. Other revenue for the nine months ended September 30, 2001 of
$782,000 represents management fees earned on third-party management services
and a lease termination fee of $559,000 recognized at one of the Company's
shopping center properties.
Operating and maintenance expenses increased $1.8 million or 29.1% to $7.9
million for the nine months ended September 30, 2001 from $6.1 million for the
same period in 2000. Operating and maintenance expenses increased by $635,000 as
a result of the Development Properties and $417,000 as a result of the
consolidation of JDN Development. This increase is partially offset by a
$198,000 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 $1.0 million or 22.1% to $5.6 million for the
nine months ended September 30, 2001 from $4.6 million for the same period in
2000. Real estate taxes increased by $411,000 as a result of the Development
Properties and $350,000 as a result of the consolidation of JDN Development.
These increases are partially offset by a $66,000 decrease related to the
Disposition Properties. The remaining increase relates to increases in real
estate taxes at existing properties.
General and administrative expenses increased $2.9 million or 51.0% for the
nine months ended September 30, 2001 over the same period in 2000. This increase
is primarily the result of the consolidation of JDN Development.
15
Corporate investigation and legal costs decreased $1.7 million or 64.0% to
$982,000 for the nine months ended September 30, 2001 from $2.7 million for the
same period in 2000. These costs represent the professional fees incurred by the
Company primarily as a result of the investigation by 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.
Severance expense for the nine months ended September 30, 2000 of $3.7
million represents severance paid as a result of the resignation of certain
former executive officers. There were no such severance payments in the nine
months ended September 30, 2001.
Impairment losses for the nine months ended September 30, 2001 of $1.6
million represent charges to reduce the basis of land and shopping centers held
for sale to estimated fair value less costs to sell. Of this amount, $818,000
relates to impairment charges of operating shopping centers and $825,000 relates
to impairment charges of non-operating land.
Depreciation and amortization expense increased $346,000 or 2.1% to $16.5
million for the nine months ended September 30, 2001 from $16.2 million over the
same period in 2000. Depreciation and amortization expense increased by $869,000
as a result of the Development Properties and $703,000 as a result of the
consolidation of JDN Development. These increases are partially offset by a $1.5
million decrease related to the Disposition Properties. The remaining increase
primarily relates to improvements at existing properties.
Settlement expense for the nine months ended September 30, 2001 of $43.8
million represents net settlement charges incurred in the second and third
quarters of 2001. Of this amount, $43.0 million resulted from settlement of the
Consolidated Class Actions and Derivative Actions and approximately $800,000
related to the settlement of two other 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 and
Note 6 to the Condensed Consolidated Financial Statements in Part I, Item 1 of
this report for further discussion.
Interest expense, net of capitalized amounts, increased $4.5 million or
23.8% to $23.6 million for the nine months ended September 30, 2001 from $19.0
million for the same period in 2000. Interest expense increased $6.0 million as
a result of the consolidation of JDN Development. The remaining decrease relates
primarily to a $2.7 million decrease resulting from a reduction in average
balances outstanding as well as an overall reduction in the underlying LIBOR
rate paid on the Company's bank credit facilities partially offset by an
increase in amortization of deferred loan costs.
Other (expense) income, net decreased $1.3 million or 86.7% to $203,000 for
the nine months ended September 30, 2001 from $1.5 million for the same period
in 2000. Of this decrease, $670,000 relates to a decrease in interest income
recorded by the Company on an impaired mortgage note receivable and $1.0 million
relates to the consolidation of JDN Development. The remaining increase relates
to an increase in miscellaneous interest income.
Equity in net income of unconsolidated entities decreased $2.6 million for
the nine months ended September 30, 2001 from the same period in 2000. This
decrease is primarily related to the consolidation of JDN Development. The
remaining amount relates to the Company's portion of income and losses incurred
by five unconsolidated joint ventures.
Minority interest in net income of consolidated subsidiary decreased
$50,000 or 27.8% to $130,000 for the nine months ended September 30, 2001 from
$180,000 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 increased $9.6 million to a net gain of $22.0
million for the nine months ended September 30, 2001 from a net gain of $12.3
million for the same period in 2000. Net gain on real estate sales for the nine
months ended September 30, 2001 represents a net gain on the sale of 16 shopping
centers and 19 parcels of land. Net gain on real estate sales for the nine
months ended September 30, 2000 represents a net gain on the sale of eight
shopping centers and one parcel of land.
16
Funds From Operations
Funds from operations ("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 September 30, Nine Months Ended September 30,
(In thousands) 2001 2000 2001 2000
---------- ----------- ---------- ----------
Net income (loss) attributable to common shareholders $ 16,966 $ 10,851 $(13,956) $ 33,169
Depreciation of real estate assets 5,037 4,799 14,987 15,033
Amortization of tenant allowances and tenant improvements 113 74 330 190
Amortization of deferred leasing commissions 212 144 623 395
Impairment losses on shopping centers held for sale 522 -- 818 1,289
Net gain on sale of operating real estate (7,393) (3,821) (16,673) (12,350)
Extraordinary items -- -- 1,608 --
Change in accounting principle -- -- 280 --
Adjustments related to activities in unconsolidated entities 10 106 44 (1,852)
-------- -------- -------- --------
FFO $ 15,467 $ 12,153 $(11,939) $ 35,874
======== ======== ======== ========
Leasing and Property Information
As of September 30, 2001, Lowe's, Wal-Mart and Kohl's Companies represented
16.4%, 5.1% and 3.5%, respectively, of the annualized base rent of the Company
("Annualized Base Rent"). In addition, at that date, anchor tenants represented
40.4% of Annualized Base Rent and national and regional tenants represented 83%
of Annualized Base Rent. As of September 30, 2001, properties owned and operated
by the Company and affiliated entities were 93.9% leased. Occupancy decreased in
the third quarter from 94.2% as of June 30, 2001 primarily due to a 112,000
square feet anchor tenant vacancy at a shopping center located in Lynchburg,
Virginia and the disposition of 11 shopping centers in the third quarter of 2001
whose average occupancy was 96.5%.
As of September 30, 2001, the Company operated shopping center properties
in 20 states. Shopping center properties located in Georgia, Tennessee,
Wisconsin and North Carolina represented 39.6%, 10.5%, 6.8% and 5.4%,
respectively, of Annualized Base Rent.
The Company derives the majority of its rental income and development
activities from the retail industry and is therefore exposed to adverse trends
or events affecting segments of the retail industry. As
17
of September 30, 2001, the Company was exposed primarily to the following
segments of the retail industry:
Percentage of
Annualized Base
Retail Segment Rent
--------------------------------------------------------------------------------
Home Improvement 16.6%
Supermarket 12.3%
Restaurant 9.5%
Discount 8.1%
Discount Department Stores 5.6%
Apparel 4.5%
Office Supplies 4.1%
Home Goods 2.9%
Pet Supply 2.2%
Theater 1.8%
Drug Store 1.5%
Management is uncertain how the Company's tenants will react to the current
recessionary economic environment and to the recent terrorist attacks and
resulting military conflict. Management believes that the Company is reasonably
well positioned to not be adversely affected by this environment and these
events. Traditionally, the Supermarket, Discount, Discount Department Store and
Drug Store segments perform well during recessionary periods as compared to
other retail segments and these segments represent 27.5% of the Company's
Annualized Base Rent. In addition, within the Company's Home Improvement sector,
Lowe's, an investment grade company, comprises 16.4% of Annualized Base Rent. On
the other hand, recent same store sales data show that Apparel, Office Supply
and Pet Supply retailers are not meeting analysts' expectations and these
segments could continue to deteriorate in the current environment. The Company's
combined exposure to these segments is 10.8%. Should these segments continue to
experience lower than expected same store sales or if other segments with
significant Company exposure begin to suffer in the current economic
environment, tenants may have difficulty honoring their existing lease
obligations, and the Company may have difficulty leasing new space at its
development projects.
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.
The Company is currently involved in development activities with 10 different
secondary anchor tenants including Best Buy and Bed, Bath and Beyond. The
Company expects to continue to pursue development opportunities with retailers
with whom it has traditionally worked while broadening its 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.
The Company is currently evaluating several new development opportunities
with various tenants in some of the same markets in which it is currently
developing. Management expects to approve and begin construction on more
development projects in 2002 than it commenced in 2001. However, there can be no
assurances that the volume of the Company's new development activities will
increase as expected which could have an adverse impact on the Company's
revenue, net income and FFO.
During the third quarter of 2001, the Company acquired a 49% interest in a
limited liability company, which operates a newly completed shopping center
located in Suwanee, Georgia, anchored by K-Mart, Kohl's, Michael's and Staples.
Redevelopment Activities
18
A component of management's repositioning strategy is the redevelopment of
shopping centers as a method of adding value to the Company's existing operating
portfolio. The Company is currently involved in a shopping center redevelopment
located in Brown Deer, Wisconsin and a re-tenanting of vacant anchor space in
Denver, Colorado and Milwaukee, Wisconsin. Management anticipates that
redevelopment activity may increase as a result of the weakening retail market
and the vacancies that would be created by a possible consolidation of retail
tenants.
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 offerings, and sales of real
estate. 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, repurchases 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,
leasing costs and 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, sales of shopping
centers and land sales to repay outstanding indebtedness and to repurchase
common stock and to fund its ongoing development, redevelopment and acquisition
activities.
During the nine months ended September 30, 2001, the Company incurred
$101.6 million in development costs. To fund these development activities, the
Company sold all or portions of 16 shopping centers and 19 vacant land parcels
for proceeds of approximately $136.5 million. Proceeds from sales of shopping
centers and sale of vacant land in excess of development costs were used to
reduce the outstanding balances on the Company's revolving line of credit.
Indebtedness
------------
As of September 30, 2001, the Company's indebtedness consisted of the
following:
19
Effective Percent
Principal Interest Maturity of Total Months to
Balance Rate Date Indebtedness Maturity
-------------- ------------- ------------ -------------- -----------
(in thousands)
Fixed Rate
----------
Mandatory Par Put Remarketed Securities ("MOPPRS") 75,000 7.08%(1) 31-Mar-03 14.0% 18
Mortgage note payable - Richmond, Kentucky 5,875 8.00%(2) 01-Dec-03 1.1% 26
Seven Year Notes 74,900 7.10%(1) 01-Aug-04 14.0% 34
Ten Year Notes 84,844 7.23%(1) 01-Aug-07 15.9% 70
Mortgage note payable - Milwaukee, Wisconsin 4,191 7.75% 01-Aug-09 0.8% 94
Mortgage note payable - Jackson, Mississippi 6,558 9.25%(3) 01-Mar-17 1.2% 185
Mortgage note payable - Marietta, Georgia 10,543 7.72%(1) 15-Nov-17 2.0% 194
Mortgage note payable - Lilburn, Georgia 12,123 6.74%(1) 10-Feb-18 2.3% 197
Mortgage note payable - Woodstock, Georgia 11,400 6.63%(1) 15-Apr-18 2.1% 199
Mortgage note payable - Hendersonville, Tennessee 10,350 7.71%(1) 15-Jan-19 1.9% 208
Mortgage note payable - Alpharetta, Georgia 12,980 6.70%(1) 15-Apr-19 2.4% 211
-------------- --------- ------------- -----------
308,764 7.27% 57.8% 75
Floating Rate (4)
-----------------
Revolving Line of Credit 50,000 7.35%(5) 31-Dec-02 9.8% 15
Term Loan 150,000 8.41%(5) 31-Dec-02 28.1% 15
Mortgage note payable - Denver, Colorado 23,000 6.59%(6) 27-Feb-02 4.3% 5
-------------- --------- ------------- -----------
223,000 5.59% 42.2% 14
-------------- --------- ------------- -----------
$ 531,764 7.53% 100.0% 49
============== ========= ============= ===========
(1) Represents stated rate plus amortization of deferred loan costs.
(2) The interest rate on this note is adjusted on December 1 of each year.
(3) 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.
(4) Floating rate debt exposure is limited through investment in financial
derivatives. As of September 30, 2001, the $150,000 term loan and $50,000 of
the revolving line of credit were hedged with interest rate swaps that
effectively fix the underlying LIBOR rate at 4.62% and 3.585%, respectively.
(5) Represents stated rate of LIBOR plus 2.25% plus interest rate swap
differential and amortization of deferred loan costs.
(6) Represents stated rate of LIBOR plus 2.00% plus amortization of deferred
loan costs.
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 the Amended and
Restated Term Loan (the "Secured Credit Agreements") with Wachovia Bank, N.A, as
agent. The 2001 Credit Agreement provides for maximum borrowings of $300.0
million, comprised of a $150.0 million revolving credit facility (the "Revolving
Line of Credit") and a $150.0 million term loan (the "Term Loan"). Interest on
loans made pursuant to the 2001 Credit Agreement will range from LIBOR plus
1.75% to LIBOR plus 2.25%, based upon the Company's leverage and credit quality
or, at the Company's discretion, the Agent's prime lending rate. The Revolving
Line of Credit and Term Loan each currently bear interest at LIBOR plus 2.25% as
of September 30, 2001. The 2001 Credit Agreement expires December 31, 2002, but
the term may be extended until January 1, 2003 provided that the Company is in
compliance with its terms.
The 2001 Credit Agreement provides that the loans thereunder be secured by
first priority security interests in retail shopping center properties. As of
September 30, 2001, there were 49 properties valued at approximately $474.1
million securing these loans. The 2001 Credit Agreement contains certain
requirements for each property within the Borrowing Base Properties (as defined
in the 2001 Credit Agreement) and certain value and occupancy requirements for
the Borrowing Base Properties in the aggregate. The Company may, however, add,
remove or substitute certain of its other properties as Borrowing Base
Properties subject to the conditions set forth in the 2001 Credit Agreement.
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.
20
The Company and the bank group amended the 2001 Credit Agreement, effective
June 30, 2001 (the "2001 Credit Agreement Amendment"), by reducing the net worth
covenant, reducing the fixed charges coverage ratio minimum and changing the
definition of EBITDA to exclude gains and losses from land sales. The 2001
Credit Agreement Amendment also provides that in the event the United States
District Court for the Northern District of Georgia does not approve the
settlement of the Consolidated Class Actions and Derivative Actions, as
described in Note 6 to the condensed consolidated financial statements in Part
I, Item 1 of this report, or if the settlement is materially modified or not
fully consummated, the changes referred to above shall not be effective.
On July 27, 2001 the Company refinanced a mortgage note payable secured by
a shopping center located in Denver, Colorado with a $23.0 million mortgage loan
secured by the same shopping center. The new mortgage loan matures on February
27, 2002 and bears interest at LIBOR plus 2%. The loan provides for two
three-month extension options provided certain conditions are met. The Company
intends to refinance this loan on a long term basis once re-leasing of an anchor
tenant space is complete.
Future Sources and Uses of Funds
--------------------------------
The Company's most significant expected use of capital is its development
and redevelopment activities. The Company had 22 projects under construction as
of September 30, 2001 and intends to commence construction during the remainder
of 2001 on approximately three 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 $110.0 million. These
future costs are expected to be incurred by the end of 2003. This projected
capital requirement includes a number of assumptions, including commitments by
secondary 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 use of capital is the satisfaction of the liabilities that have
arisen out of the Consolidated Class Actions. In November 2001, the Company
funded approximately $16.8 million into an escrow account with the plaintiffs'
attorneys pursuant to the Class Action Settlement Agreement. Upon final approval
of the Class Action Settlement Agreement, the $16.8 million is expected to be
released to the class members. The Company may also have to fund a related $4.0
million guarantee in the first quarter of 2002. Interest expense will increase
as a result of the use of debt to fund the cash portion of the settlement.
Dividend payments will increase once common stock is issued in connection with
the Class Action Settlement Agreement and Derivative Settlement Agreement, which
is expected to occur in the fourth quarter of 2001.
Management believes that proceeds from asset sales, construction loans on
certain development projects and its Revolving Line of Credit will provide the
additional funding necessary to complete its current development pipeline and to
fund its obligations related to the settlement of the Consolidated Class Action.
As of September 30, 2001, the Company was negotiating the sale of two
shopping center properties with an aggregate net book value of approximately
$17.1 million and annual net operating income of approximately $1.5 million for
estimated proceeds of approximately $17.1 million. Both properties were subject
to definitive agreements at October 31, 2001. Additionally, the Company was
marketing for sale or lease approximately 257 acres of land as of September 30,
2001, with an aggregate book value of approximately $43.9 million and an
estimated market value of approximately $52.0 million. Of this land, 21 acres
were sold in October 2001 for proceeds of approximately $8.6 million. The
Company expects to sell or lease the remaining properties by the end of 2003.
Management expects to continue to evaluate its real estate holdings and to
continue selling operating shopping center properties that no longer fit its
long-term investment criteria, which include high barrier to entry
characteristics and strong demographics. The closing of 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.
The Company is currently negotiating construction loans on four of its
development projects which should provide gross proceeds of between $65 million
and $75 million through completion of the projects. The Company expects these
loans to close in 2001 and the first half of 2002. The Company expects to
selectively add additional construction loans on future development projects
which meet underwriting standards for traditional construction financing. The
ability to obtain construction loans will be dependent upon a number of factors,
including achievement of adequate pre-leasing of the projects and satisfaction
of any environmental, title or other issues with respect to the underlying real
estate.
As of September 30, 2001, the Company had $85 million available under its
Revolving Line of Credit. Once certain projects are added to the borrowing base,
the Company will have $100 million available under its Revolving Line of Credit.
The Company is limited under its 2001 Credit Agreement and under the
applicable indentures for its unsecured notes payable on the amount of secured
indebtedness and total indebtedness it may have outstanding. Based on its
expected development activity and asset sales activity, the Company believes
that it will remain within the restrictions imposed on such indebtedness.
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 development and redevelopment projects and will be required to
liquidate some or all of its development and redevelopment 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.
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
21
operating shopping centers, leasing costs and scheduled debt amortization
through the end of 2001. However, there can be no assurance that the Company's
results from operations will not fluctuate in the future and at times affect its
ability to meet its operating requirements and the amount of its distributions.
As of September 30, 2001, the Company's debt requires the following
payments in the future:
(Dollars in thousands)
Percent of Debt
Year Total Expiring
--------------------------------------------------------------------------------
2001 $ 624 0.1%
2002 223,671 42.1%
2003 81,467 15.3%
2004 75,627 14.2%
2005 780 0.1%
2006 839 0.2%
2007 85,746 16.1%
2008 1,204 0.2%
2009 4,022 0.8%
2010 928 0.2%
Thereafter 56,856 10.7%
--------- ------
$ 531,764 100.0%
========= ======
In 2002, a $23.0 million mortgage loan and the Company's 2001 Credit
Agreement matures. As noted above, management expects to refinance the $23.0
million mortgage loan on a long term basis once re-tenating is completed at the
shopping center securing the loan. Management expects to extend or refinance its
2001 Credit Agreement on similar or more favorable terms during the first half
of 2002. With respect to maturing obligations in 2003 and beyond, 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, among other things, 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,
22
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 both at the inception of each individual hedge and on an
ongoing basis in accordance with its risk management policy.
As of September 30, 2001, the Company had two interest rate swap agreements
and one interest rate cap agreement as described below:
Effective Termination
Description of Agreement Notional Amount Strike Price Date Date Fair Value
---------------------------- ----------------- -------------- ----------- ------------- --------------
(in thousands) (in thousands)
LIBOR, 30-day "Rate Cap" $ 100,000 7.25% 8/20/2000 8/21/2002 $ -
LIBOR, 30-day "Rate Swap" $ 150,000 4.62% 3/29/2001 12/31/2002 $ (3,500)
LIBOR, 30-day "Rate Swap" $ 50,000 3.59% 9/11/2001 12/31/2002 $ (500)
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 and Note 6 to the condensed consolidated financial
statements in Part I, Item 1 of this report for further discussion.
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 certain 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.
23
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See "Derivatives and Market Risk" in Part I, Item 2 and Note 3 to the condensed
consolidated financial statements in Part I, Item 1 of this report.
24
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
None
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)
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% MadatOry 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 First Amendment to Third Amended, Restated and Consolidated
Master Credit Agreement dated as of August 14, 2001 among
JDN Realty Corporation and Fleet Nation Bank as Agent
(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.
25
(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 September 30, 2001, the Company
filed the following report on Form 8-K:
Form 8-K dated July 30, 2001 containing (1) Letter Agreement
dated as of July 6, 2001 between JDN Realty Corporation and
Clarion-CRA Securities, L.P. as lead plaintiff,
(2) Memorandum of Understanding dated as of July 26, 2001
between JDN Realty Corporation and counsel for the
plaintiffs for the derivative action and (3) press release
related thereto.
26
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
----------------------
Date: 12 Nov 2001 By: /s/ Craig Macnab
-------------------- -------------------------------------
Craig Macnab
President and Chief Executive Officer
Date: 12 Nov 2001 By: /s/ John D. Harris, Jr.
-------------------- -------------------------------------
John D. Harris, Jr.
Senior Vice President and Chief Financial
Officer
27
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% MadatOry 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 First Amendment to Third Amended, Restated and Consolidated
Master Credit Agreement dated as of August 14, 2001 among JDN
Realty Corporation and Fleet National Bank as Agent
(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.
28