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 June 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
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(Exact Name of Registrant as Specified in Its Charter)
Maryland 58-1468053
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(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
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(Address of Principal Executive Offices) (Zip Code)
(404) 262-3252
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(Registrant's Telephone Number, including Area Code)
Not applicable
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(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 July 31, 2001, 32,857,573 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 shopping center
property sales, future development activities , including the level of such
activities, with certain tenants, future redevelopments 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 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 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. 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 - June 30, 2001 and
December 31, 2000 3
Condensed Consolidated Statements of Operations - Three
Months Ended June 30, 2001 and 2000 4
Condensed Consolidated Statements of Operations - Six Months
Ended June 30, 2001 and 2000 5
Condensed Consolidated Statements of Cash Flows - Six Months
Ended June 30, 2001 and 2000 6
Notes to Condensed Consolidated Financial Statements 7
2
JDN REALTY CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
June 30, December 31,
2001 2000
----------- -----------
(Unaudited)
(In thousands)
ASSETS
Shopping center properties, at cost:
Land $ 308,252 $ 208,653
Buildings and improvements 640,794 626,042
Property under development 185,156 45,020
-------------------------
1,134,202 879,715
Less: accumulated depreciation and amortization (87,734) (80,113)
----------- -----------
Shopping center properties, net 1,046,468 799,602
Cash and cash equivalents -- 9,277
Restricted cash - escrow 2,681 102
Accounts receivable 15,483 11,511
Investments in and advances to unconsolidated entities 6,519 246,799
Deferred costs, net of amortization 7,852 6,039
Other assets 16,350 10,633
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$1,095,353 $1,083,963
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Unsecured notes payable $ 234,728 $ 234,697
Secured line of credit and term loan 247,000 242,000
Mortgage notes payable 95,878 97,444
Accounts payable and accrued expenses 67,649 14,558
Other liabilities 11,276 5,151
----------- -----------
Total liabilities 656,531 593,850
Third party investors' interest 3,000 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 32,856,829 and 32,867,354 shares
in 2001 and 2000, respectively 329 329
Paid-in capital 470,082 489,289
Accumulated other comprehensive loss (658) --
Accumulated deficit (33,951) (3,029)
----------- -----------
435,822 486,609
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$1,095,353 $1,083,963
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SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
3
JDN REALTY CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended June 30,
2001 2000
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(In thousands)
Revenues:
Minimum and percentage rents $ 22,303 $ 23,421
Recoveries from tenants 3,532 2,853
Other revenue 637 2
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Total revenues 26,472 26,276
Operating expenses:
Operating and maintenance 2,712 1,931
Real estate taxes 1,889 1,532
General and administrative 2,947 1,776
Corporate investigation and legal costs 408 760
Severance expense -- 335
Impairment losses 456 --
Depreciation and amortization 5,465 5,554
Settlement expenses 47,610 --
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Total operating expenses 61,487 11,888
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Income (loss) from operations (35,015) 14,388
Other income (expense):
Interest expense, net (7,465) (7,081)
Other income (expense), net (123) 438
Equity in net income (loss) of unconsolidated entities (44) 1,210
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Income (loss) before minority interest in net income of consolidated
subsidiaries and net gain (loss) on real estate sales (42,647) 8,955
Minority interest in net income of consolidated subsidiaries (42) (42)
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Income (loss) before net gain (loss) on real estate sales (42,689) 8,913
Net gain (loss) on real estate sales
Operating (481) 1,691
Non-operating 370 --
------------- -------------
Net income (loss) (42,800) 10,604
Dividends to preferred shareholders (1,172) (1,172)
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Net income (loss) attributable to common shareholders $ (43,972) $ 9,432
============= =============
Income (loss) per common share:
Basic $ (1.35) $ 0.29
============= =============
Diluted $ (1.35) $ 0.29
============= =============
Dividends per common share $ 0.300 $ 0.300
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SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
4
JDN REALTY CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Six Months Ended June 30,
2001 2000
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(In thousands)
Revenues: $ 45,249 $ 46,483
Minimum and percentage rents 7,426 5,947
Recoveries from tenants 705 2
Other revenue ------------- -------------
Total revenues 53,380 52,432
Operating expenses:
Operating and maintenance 5,560 4,136
Real estate taxes 3,787 3,073
General and administrative 6,102 3,868
Corporate investigation and legal costs 982 2,250
Severance expense -- 335
Impairment losses 456 1,289
Depreciation and amortization 10,945 10,958
Settlement expenses 47,610 --
------------- -------------
Total operating expenses 75,442 25,909
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Income (loss) from operations (22,062) 26,523
Other income (expense):
Interest expense, net (16,215) (12,919)
Other income, net 398 790
Equity in net income (loss) of unconsolidated entities (357) 1,877
------------- -------------
Income (loss) before minority interest in net income of consolidated
subsidiaries and net gain on real estate sales,
and cumulative effect of change in accounting principle (38,236) 16,271
Minority interest in net income of consolidated subsidiaries (84) (138)
------------- -------------
Income (loss) before net gain on real estate sales, extraordinary
items and cumulative effect of change in accounting principle (38,320) 16,133
Net gain on real estate sales
Operating 9,280 8,529
Non-operating 2,350 --
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Income (loss) before extraordinary items and cumulative effect of
change in accounting principle (26,690) 24,662
Extraordinary items (1,608) --
------------- -------------
Income (loss) before cumulative effect of change in accounting
principle (28,298) 24,662
Cumulative effect of change in accounting principle (280) --
------------- -------------
Net income (loss) (28,578) 24,662
Dividends to preferred shareholders (2,344) (2,344)
------------- -------------
Net income (loss) attributable to common shareholders $ (30,922) $ 22,318
============= =============
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) $ (0.89) $ 0.69
Extraordinary items (0.05) --
Cumulative effect of change in accounting principle (0.01) --
------------- -------------
Net income (loss) attributable to common shareholders $ (0.95) $ 0.69
============= =============
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) $ (0.89) $ 0.69
Extraordinary items (0.05) --
Cumulative effect of change in accounting principle (0.01) --
------------- -------------
Net income (loss) attributable to common shareholders $ (0.95) $ 0.69
============= =============
Dividends per common share $ 0.600 $ 0.695
============= =============
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
5
JDN REALTY CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended June 30,
2001 2000
------------- -------------
(In thousands)
Net cash provided by operating activities $ 29,700 $ 27,526
Cash flows from investing activities:
Development of shopping center properties (57,278) (13,052)
Improvements to shopping center properties (10,271) (3,745)
Investments in and advances to unconsolidated entities 4,748 (81,923)
Proceeds from real estate sales 52,003 56,607
Other (79) (1,276)
------------- -------------
Net cash used in investing activities (10,877) (43,389)
Cash flows from financing activities:
Proceeds from line of credit and term loan 316,900 117,996
Principle payments on line of credit and term loan (311,900) (105,996)
Principle payments on mortgages and notes payable (4,828) (1,336)
Repurchases of common stock -- (6,843)
Distributions paid to preferred shareholders (2,344) (2,344)
Distributions paid to common shareholders (19,721) (22,791)
Proceeds from deferred exchange of properties -- 40,476
Proceeds from deferred loan financing charges (5,838) (1,038)
Other (369) (632)
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Net cash (used in) provided by financing activities (28,100) 17,492
------------- -------------
Decrease in cash and cash equivalents (9,277) 1,629
Cash and cash equivalents, beginning of period 9,277 2,076
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Cash and cash equivalents, end of period $ -- $ 3,705
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SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
6
JDN REALTY CORPORATION
Notes to Condensed Consolidated Financial Statements
(Unaudited)
June 30, 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
June 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 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 and six months ended June 30,
2000 would have been $28.2 million and $55.8 million, respectively. 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) 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 six months ended
June 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 income until
the hedged item is recognized in earnings. Derivatives that are not hedges must
be adjusted to fair value through income.
As of June 30, 2001, the Company had one interest rate swap agreement with
a notional value of $150 million maturing on December 31, 2002 and one interest
rate cap agreement to hedge against exposure to interest rate risk. Upon
adoption of Statement No. 133, the Company recognized a cumulative effect
adjustment of $280,000 in the three months ended March 31, 2001 representing the
change in fair value of its ineffective interest rate cap agreement. In the
second quarter of 2001, the Company recorded a derivative instrument liability
of $658,000 and an adjustment of $658,000 to accumulated other comprehensive
loss, a shareholders' equity account, representing the fair value of its
outstanding interest rate swap agreement at June 30, 2001.
The Company utilizes variable rate debt to fund, among other things, its
developmental 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
both at the inception of each individual hedge and on an ongoing basis in
accordance with its risk management policy.
Comprehensive loss was $44.6 million for the quarter ended June 30, 2001.
Comprehensive loss encompasses net loss and "other comprehensive income," which
includes all other non-owner transactions and events that change stockholder's
equity. Other comprehensive income is composed of changes in the fair value of
the Company's interest rate swap.
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 six months ended June 30, 2001 as a result of a net
7
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. Loans made pursuant to the 2001 Credit Agreement will range
from LIBOR plus 1.75% to LIBOR plus 2.25% or the Agent's Prime lending rate at
the Company's discretion and based upon the Company's leverage and credit
quality. Revolving and term loans currently bear interest at LIBOR plus 2.13%
and loans made from the swing line portion of the revolving credit facility
currently bear interest at the Agent's Prime lending rate, or 6.75% at June 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.
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 at 4.62% on loans outstanding under
the term loan portion of the 2001 Credit Agreement.
The Company and the bank group have agreed to amend the 2001 Credit
Agreement, to be effective June 30, 2001, by changing the definition of Minimum
Tangible Net Worth from $450.0 million to $400.0 million, the fixed charges
coverage ratio minimum from 1.60x to 1.40x and the definition of EBITDA to
exclude gains and losses from land sales. Had it not obtained this amendment,
the Company would have violated the Minimum Tangible Net Worth covenant as a
result of the settlement charge taken in the second quarter of 2001. This
amendment also provides that in the event the Court does not approve the
settlement of the Consolidated Class Actions 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.
5. SHOPPING CENTER DISPOSITIONS
During the second quarter of 2001, the Company sold a 10,125 square foot
shopping center to an unrelated party in Lawrenceville, Georgia for $2.4
million.
6. CONTINGENCIES
The Company has been named in a number of lawsuits since the discovery of
undisclosed compensation arrangements and related party transactions discussed
in its 1999 and 2000 filings on Form 10-K. 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. As set forth below, the Company
has reached preliminary agreements to settle certain of these pending actions
and another action has been dismissed.
Certain class actions were filed in federal court and allege violations of
the federal securities laws asserting that by failing to report 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
8
the 1998 offering. The plaintiffs in these lawsuits sought 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 (the "Consolidated Class Actions"). On July 6,
2001, the Company and certain of the individual defendants reached an agreement
to settle the Consolidated Class Actions. Under the agreement, the Company will
pay the plaintiffs approximately $16.8 million in cash, issue 1,681,568 shares
of its common stock and provide a $4.0 million guarantee that class members will
receive a minimum of $7.5 million from recoveries or settlements from outside
parties. Amounts received from third parties in excess of $3.5 million will
reduce this guarantee dollar for dollar. In addition, the agreement contains
certain restrictions on the issuance of common equity at or below $11.70 per
share until the earlier of the distribution of common stock consideration to the
class members or June 30, 2002. Upon payment and performance of other certain
obligations, the agreement provides for the release of the Company and JDN
Development from further liability for the related claims. The settlement with
the plaintiffs is subject to various conditions, including preliminary approval
by the Court, notice to the class and final approval by the Court after a
hearing on the fairness of the settlement. There can be no assurances that the
Court will find the settlement to be fair to the class or that, because certain
members of the class may opt out of the lawsuit, JDN will not be a party to
additional lawsuits or claims brought by individuals.
Related lawsuits were also filed against the Company as a nominal
defendant, as well as certain current and former members of management and
members of the Company's board of directors in the United States District Court
for the Northern District of Georgia, Atlanta Division and in Fulton County
Superior Court. 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 "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, 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. Under the
agreement, the Company will implement or formalize certain corporate governance
policies, many of which have already been adopted by the Company, as applicable,
and will pay the plaintiffs' attorneys' fees using 248,000 shares of the
Company's common stock. The settlement is subject to preliminary approval by the
Court, notice and final approval by the Court after a hearing on the fairness of
the settlement. There can be no assurances that the Court will approve the
proposed settlement.
A class action lawsuit was also filed by the Company's shareholders
against the Company, JDN Development, and certain current and former officers
and directors of these companies in the Superior Court of Fulton County,
Georgia. The complaint contained substantially the same factual allegations
asserted in the federal class actions, but purported to seek relief under state
law for damages which these plaintiffs allege should have been paid to the class
as dividends (the "Fulton County Class Action"). The original complaint
contained claims of common law fraud, conversion and purported violations of
Georgia's Racketeer Influenced and Corrupt Organizations Act, but the fraud
count was dropped by way of an amended complaint recently filed by the
plaintiffs. The plaintiffs sought compensatory and punitive damages, attorneys'
fees and expenses, interest and equitable relief. On May 8, 2001, the Superior
Court granted the defendants' motion to dismiss the Fulton County Class Action.
No appeal was taken from the Court's order and the time for filing an appeal has
expired.
During the second quarter of 2001, the Company recorded a settlement
expense of $45.8 million related to the settlement of the Consolidated Class
Actions and the Derivative Actions. In addition the Company also recorded $1.3
million in legal and other costs that the Company expects to incur related to
the aforementioned settlements.
9
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.
On April 28, 2000, Lake Lucern 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. in the Superior Court of Fulton County,
Georgia. The complaint asserted trespass, nuisance and negligence against JDN
Development in connection with the development of a shopping center anchored by
Lowe's. On July 9, 2001, the Company reached a settlement with the plaintiffs.
Under the terms of the settlement, the Company paid approximately $750,000 to
the plaintiffs and recovered $250,000 from a co-defendant in the suit. The
Company recorded a settlement expense related to this matter in the three and
six months ended June 30, 2001 in the amount of $500,000. Upon execution of this
settlement, the Company and all other defendants in the lawsuit will be released
from further liabilities related to the allegations in this lawsuit, provided
certain conditions are met.
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.
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):
10
Three months ended June 30, Six months ended June 30,
2001 2000 2001 2000
------------------------------------------------------------------------------------------------------------------------------
Numerator:
Income (loss) before extraordinary items and cumulative
effect of change in accounting principle $ (42,800) $ 10,604 $ (26,690) $ 24,662
Extraordinary items -- -- (1,608) --
Cumulative effect of change in accounting principle -- -- (280) --
------------- ------------- ------------- -------------
Net income (loss) (42,800) 10,604 (28,578) 24,662
Dividends to preferred shareholders (1,172) (1,172) (2,344) (2,344)
------------- ------------- ------------- -------------
Net income (loss) attributable to common shareholders $ (43,972) $ 9,432 $ (30,922) $ 22,318
============= ============= ============= =============
Denominator:
Weighted-average shares outstanding 32,861 32,737 32,864 32,853
Unvested restricted stock outstanding (288) (420) (319) (533)
------------- ------------- ------------- -------------
Denominator for basic earnings per share 32,573 32,317 32,545 32,320
Dilutive effect of stock option and unvested restricted stock -- 113 -- 75
------------- ------------- ------------- -------------
Denominator for diluted earnings per share 32,573 32,430 32,545 32,395
============= ============= ============= =============
Income (loss) per common share - basic:
Income (loss) before extraordinary items and cumulative
effect of change in accounting principle
(net of preferred dividends) $ (1.35) $ 0.29 $ (0.89) $ 0.69
Extraordinary items -- -- (0.05) --
Cumulative effect of change in accounting principle -- -- (0.01) --
------------- ------------- ------------- -------------
Net income (loss) attributable to common shareholders $ (1.35) $ 0.29 $ (0.95) $ 0.69
============= ============= ============= =============
Income (loss) per common share - diluted:
Income (loss) before extraordinary items and cumulative
effect of change in accounting principle
(net of preferred dividends) $ (1.35) $ 0.29 $ (0.89) $ 0.69
Extraordinary items -- -- (0.05) --
Cumulative effect of change in accounting principle -- -- (0.01) --
------------- ------------- ------------- -------------
Net income (loss) attributable to common shareholders $ (1.35) $ 0.29 $ (0.95) $ 0.69
============= ============= ============= =============
Of total options outstanding, options to purchase 1,267,921 shares of
common stock for the three months ended June 30, 2000 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 June 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.
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 June 30, 2001, the Company owned and operated
109 shopping center properties containing approximately 11.4 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 TJX Companies.
As of June 30, 2001, the Company had 19 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. 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 June 30, 2001 to the Three Months Ended
June 30, 2000
During 2001 and 2000, the Company developed and began operations at 30
properties totaling approximately 2.4 million square feet (the "Development
Properties"). During 2001 and 2000, the Company disposed of 16 properties
totaling approximately 2.9 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 $1.1 million or 4.8% to $22.3
million for the three months ended June 30, 2001 from $23.4 million for the same
period in 2000. Minimum and percentage rents increased by $666,000 as a result
of the Development Properties and $512,000 as a result of the consolidation of
JDN Development. These increases are offset by a $2.3 million decrease related
to the Disposition Properties.
Recoveries from tenants increased $679,000 or 23.8% to $3.5 million for
the three months ended June 30, 2001 from $2.9 million for the same period in
2000. Recoveries from tenants increased by $301,000 as a result of the
Development Properties and $57,000 as a result of the consolidation of JDN
Development. These increases are partially offset by a $52,000 decrease related
to the Disposition Properties. The remaining increase is caused by net increases
in recoverable expenses at existing properties.
12
Other revenue of $637,000 for the three months ended June 30, 2001
represents management fees earned on third-party management services recognized
by JDN Development and a lease termination fee of $559,000 recognized at one of
the Company's shopping center properties.
Operating and maintenance expenses increased $781,000 or 40.5% to $2.7
million for the three months ended June 30, 2001 from $1.9 million for the same
period in 2000. Operating and maintenance expenses increased by $247,000 as a
result of the Development Properties and $132,000 as a result of the
consolidation of JDN Development. These increases are partially offset by a
$90,000 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 $357,000 or 23.3% to $1.9 million for the
three months ended June 30, 2001 from $1.5 million for the same period in 2000.
Real estate taxes increased by $159,000 as a result of the Development
Properties and $46,000 as a result of the consolidation of JDN Development. The
remaining increase relates to an increase in real estate taxes at existing
properties.
General and administrative expenses increased $1.1 million for the three
months ended June 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 $352,000 or 46.3% to
$408,000 for the three months ended June 30, 2001 from $760,000 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.
Impairment losses for the three months ended June 30, 2001 of $456,000
represent charges, net of increases in estimated fair value of properties
written down in previous periods, to reduce the basis of land and shopping
centers held for sale to estimated fair value less costs to sell.
Depreciation and amortization expense decreased $89,000 or 1.6% to $5.5
million for the three months ended June 30, 2001 from $5.6 million for the same
period in 2000. Depreciation and amortization increased by $321,000 as a result
of the Development Properties and $147,000 as a result of the consolidation of
JDN Development. These increases are offset by a $610,000 decrease related to
the Disposition Properties. The remaining increase primarily relates to
improvements to existing properties.
Settlement expense for the three months ended June 30, 2001 of $47.6
million represents net settlement charges incurred in the second quarter. Of
this amount, $500,000 resulted from the settlement of a lawsuit brought by the
Lake Lucern Estates Civic Club, Inc. Of the remaining settlement charge, $45.8
million resulted from settlement of the Consolidated Class Actions and
Derivative Actions and $1.3 million represents legal and other costs the Company
expects to incur related to the aforementioned settlements. 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 $384,000 or 5.4%
to $7.5 million for the three months ended June 30, 2001 from $7.1 million for
the same period in 2000. Of this increase, $1.7 million represents interest that
was primarily expensed at JDN Development. The remaining decrease relates to a
reduction in the rate paid on the Company's bank credit facilities.
Other income (expense), net decreased $561,000 or 128.1% to a net loss of
$123,000 for the three months ended June 30, 2001 from a net income of $438,000
for the same period in 2000. Of this decrease, $375,000 relates to the
consolidation of JDN Development and $222,000 relates to a decrease in interest
income recorded by the Company on an impaired mortgage note receivable. These
decreases are partially offset by an increase in miscellaneous interest income.
Equity in net income (loss) of unconsolidated entities decreased $1.3
million to a net loss of $44,000 for the three months ended June 30, 2001 from a
net income of $1.2 million for the same period
13
in 2000. As noted above, this decrease is primarily related to the consolidation
of JDN Development. The remaining amount relates to losses incurred by four
unconsolidated joint ventures.
Net gain (loss) on real estate sales for the three months ended June 30,
2001 represents gains on the sale of one shopping center and three parcels of
land offset by trailing costs of shopping centers sold in previous periods.
Comparison of the Six Months Ended June 30, 2001 to the Six Months Ended June
30, 2000
Minimum and percentage rents decreased $1.2 million or 2.7% to $45.2
million for the six months ended June 30, 2001 from $46.5 million for the same
period in 2000. Minimum and percentage rents increased by $1.8 million as a
result of the Development Properties and $1.2 million as a result of the
consolidation of JDN Development. These increases are partially offset by a $4.5
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 $1.5 million or 24.9% to $7.4 million
for the six months ended June 30, 2001 from $5.9 million for the same period in
2000. Recoveries from tenants increased by $615,000 as a result of the
Development Properties and $354,000 as a result of the consolidation of JDN
Development. This increase is partially offset by a $92,000 decrease related to
the Disposition Properties. The remaining increase relates to net increases in
recoveries from tenants at existing properties.
Other revenue of $705,000 for the six months ended June 30, 2001
represents management fees earned on third-party management services recognized
by JDN Development and a lease termination fee of $559,000 recognized at one of
the Company's shopping center properties.
Operating and maintenance expenses increased $1.4 million or 34.4% to $5.6
million for the six months ended June 30, 2001 from $4.1 million for the same
period in 2000. Operating and maintenance expenses increased by $539,000 as a
result of the Development Properties and $297,000 as a result of the
consolidation of JDN Development. This increase is partially offset by a
$189,000 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 $714,000 or 23.2% to $3.8 million for the six
months ended June 30, 2001 from $3.1 million for the same period in 2000. Real
estate taxes increased by $313,000 as a result of the Development Properties and
$58,000 as a result of the consolidation of JDN Development. The remaining
increase relates to increases in real estate taxes at existing properties.
General and administrative expenses increased $2.2 million or 57.8% for
the six months ended June 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 $1.3 million or 56.3% to
$982,000 for the six months ended June 30, 2001 from $2.3 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.
Impairment losses for the six months ended June 30, 2001 of $456,000
represent charges, net of increases in estimated fair value of properties
written down in previous periods, to reduce the basis of land and shopping
centers held for sale to estimated fair value less costs to sell.
Depreciation and amortization expense decreased $13,000 or .1% to $10.9
million for the six months ended June 30, 2001 over the same period in 2000.
Depreciation and amortization increased by $709,000 as a result of the
Development Properties and $426,000 as a result of the consolidation of JDN
Development. These increases are partially offset by a $1.1 million decrease
related to the Disposition Properties. The remaining increase primarily relates
to improvements at existing properties.
14
Settlement expense for the six months ended June 30, 2001 of $47.6 million
represents net settlement charges incurred in the second quarter. Of this
amount, $500,000 resulted from the settlement of a lawsuit brought by Lake
Lucern Estates Civic Club, Inc. Of the remaining settlement charge, $45.8
million resulted from settlement of the Consolidated Class Actions and
Derivative Actions and $1.3 million represents legal and other costs the Company
expects to incur related to the aforementioned settlements. 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 $3.3 million or
25.5% to $16.2 million for the six months ended June 30, 2001 from $12.9 million
for the same period in 2000. Of this increase, $3.4 million represents interest
that was previously expensed at JDN Development. The remaining increase relates
primarily to an increase in amortization of deferred loan costs offset by a $1.1
million decrease due to a reduction in the rate paid on the Company's bank
credit facilities.
Other (expense) income, net decreased $392,000 or 49.6% to $398,000 for
the six months ended June 30, 2001 from $790,000 for the same period in 2000. Of
this decrease, $240,000 relates to a decrease in interest income recorded by the
Company on an impaired mortgage note receivable and $24,000 relates to the
consolidation of JDN Development. The remaining decrease relates to a decrease
in miscellaneous interest income.
Equity in net income of unconsolidated entities decreased $2.2 million or
119% to a $357,000 net loss for the six months ended June 30, 2001 from income
of $1.9 million income 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 by four unconsolidated joint
ventures.
Minority interest in net income of consolidated subsidiary decreased
$54,000 or 39.3% to $84,000 for the six months ended June 30, 2001 from $138,000
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 six months ended June 30, 2001
represents gains on the sale of seven shopping centers and five parcels of land
offset by trailing costs of shopping centers and land parcels sold in previous
periods.
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:
15
Three Months Ended June 30, Six Months Ended June 30,
(In thousands) 2001 2000 2001 2000
------------- ------------- ------------- -------------
Net income (loss) attributable to common shareholders $ (43,972) $ 9,432 $ (30,922) $ 22,318
Depreciation of real estate assets 4,955 5,155 9,949 10,234
Amortization of tenant allowances and tenant improvements 114 80 217 162
Amortization of deferred leasing commissions 211 132 412 251
Impairment losses on shopping centers held for sale 296 -- 296 1,289
Net (gain) loss on sale of operating real estate 481 (1,692) (9,280) (8,529)
Extraordinary items -- -- 1,608 --
Change in accounting principle -- -- 280 --
Adjustments related to activities in unconsolidated entities 8 (2,144) 34 (1,958)
------------- ------------- ------------- -------------
FFO $ (37,907) $ 10,963 $ (27,406) $ 23,767
============= ============= ============= =============
Leasing and Property Information
As of June 30, 2001, Lowe's, Wal-Mart and TJX Companies represented 16.0%,
5.2% and 3.3% respectively, of the annualized base rent of the Company
("Annualized Base Rent"). In addition, at that date, anchor tenants represented
39.6% of Annualized Base Rent and national and regional tenants represented
82.7% of Annualized Base Rent. As of June 30, 2001, properties owned and
operated by the Company and affiliated entities were 94.2% leased. Occupancy
decreased from 94.9% as of March 31, 2001 primarily due to anchor tenant
vacancies at three shopping centers in the second quarter of 2001, representing
approximately 140,000 square feet.
As of June 30, 2001, the Company operated shopping center properties in 20
states. Shopping center properties located in Georgia, Tennessee, North Carolina
and Wisconsin represented 38.6%, 12.3%, 7.3% and 6.7%, 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 of June 30, 2001, the
Company was exposed primarily to the following segments of the retail industry:
16
Percentage of
Annualized Base
Retail Segment Rent
-------------------------------------------------------------------------------
Home Improvement 16.1%
Supermarket 13.7%
Restaurant 9.1%
Discount 7.1%
Discount Department Stores 4.7%
Apparel 4.4%
Office Supplies 3.4%
Home Goods 2.8%
Pet Supply 2.5%
Theater 2.2%
Drug Store 1.7%
Several companies in the Theater segment recently filed for protection
under Chapter 11 of the bankruptcy code. Of the Company's five leases with
theater companies as of July 31, 2001, three leases are with companies who have
filed for Chapter 11 protection, representing an aggregate of 1.4% of Annualized
Base Rent. As of July 31, 2001, two of these leases have been modified for
rental rate reductions totaling an aggregate of 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 modifications resulting in rate reductions could
have an adverse effect on the Company's results of operations in future periods.
During the first half of 2001, the retail industry continued to report
lower than expected same store sales. While drug stores, wholesale clubs and
discount chains achieved modest sales increases in the second quarter, apparel,
office supply, and pet supply retailers' sales have not met analysts'
expectations. The Company's exposure to the apparel, office supply and pet
supply retail segments is approximately 4.4%, 3.4% and 2.5%, respectively, of
Annualized Base Rent. Should the retail industry continue to experience lower
than expected same store sales, 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 such as 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 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 number 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
17
decrease and income from land sales and development fees to decrease. These
decreases along with the loss of net operating income resulting from disposition
of shopping center properties could affect the Company's ability to increase its
dividend to shareholders from its current level.
Redevelopment Activities
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. 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 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, 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 first six months of 2001, the Company incurred $57.3 million in
development costs. To fund these development activities, the Company sold all or
portions of seven shopping centers and six vacant parcels of land for proceeds
of approximately $52.0 million, and funded the remaining costs with proceeds
from its line of credit.
Indebtedness
------------
As of June 30, 2001, the Company's indebtedness consisted of the
following:
18
Effective Percent
Principal Interest Maturity of Total Months to
Balance Rate Date Indebtedness Maturity
------------ ------------ ------------- ------------ ------------
(in thousands)
Fixed Rate
Mortgage note payable - Denver, Colorado $ 21,254 6.81% 17-Jul-01 3.7% 1
Mandatory Par Put Remarketed Securities ("MOPPRS")(1) 75,000 7.08%(2) 31-Mar-03 13.2% 21
Mortgage note payable - Richmond, Kentucky 5,914 8.00%(3) 01-Dec-03 1.0% 29
Seven Year Notes 74,891 7.10%(2) 01-Aug-04 13.2% 37
Ten Year Notes 84,837 7.23%(2) 01-Aug-07 14.9% 73
Mortgage note payable - Milwaukee, Wisconsin 4,287 7.75% 01-Aug-09 0.8% 97
Mortgage note payable - Jackson, Mississippi 6,605 9.25%(4) 01-Mar-17 1.2% 188
Mortgage note payable - Marietta, Georgia 10,610 7.66%(2) 15-Nov-17 1.9% 197
Mortgage note payable - Lilburn, Georgia 12,223 6.70%(2) 10-Feb-18 2.2% 200
Mortgage note payable - Woodstock, Georgia 11,493 6.55%(2) 15-Apr-18 2.0% 202
Mortgage note payable - Hendersonville, Tennessee 10,417 7.66%(2) 15-Jan-19 1.8% 211
Mortgage note payable - Alpharetta, Georgia 13,075 6.62%(2) 15-Apr-19 2.3% 214
------------ ------------ ------------ ------------
330,606 7.19% 58.2% 73
Floating Rate(7)
Fleet Revolver 93,000 7.46%(5) 31-Dec-02 15.2% 18
Fleet Term Loan 150,000 7.42%(5) 31-Dec-02 26.4% 18
Fleet Swing Line of Credit 4,000 8.10%(6) 31-Dec-02 0.2% 18
------------ ------------
247,000 7.66% 41.8% 7
------------ ------------ ------------ ------------
$577,606 7.30% 100.0% 50
============ ============ ============ ============
(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 costs.
(3) The interest rate on this note is adjusted on December 1 of each year.
(4) The note can be prepaid without penalty after March 1, 2000 with 90 days
written notice to the lender.
(5) Represents stated rate of LIBOR plus 2.125% plus amortization of deferred
loan costs.
(6) Represents stated rate of Prime plus amortization of deferred loan costs.
(7) Floating rate debt exposure is limited through investment in financial
derivatives. As of June 30, 2001, 150,000 of the $247,000 was hedged with
a swap with a fixed rate of 4.62% that 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 (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. Loans made pursuant to the 2001 Credit Agreement will range
from LIBOR plus 1.75% to LIBOR plus 2.25% or the agent's Prime lending rate at
the Company's discretion and based upon the Company's leverage and credit
quality. Revolving and term loans currently bear interest at LIBOR plus 2.13%
and loans made from the swing line portion of the revolving credit facility
currently bear interest at the agent's Prime lending rate, or 6.75% at June 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 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
19
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 $5.4 million.
The Company and the bank group have agreed to amend the 2001 Credit
Agreement, to be effective June 30, 2001, by changing the definition of Minimum
Tangible Net Worth from $450.0 million to $400.0 million, the fixed charges
coverage ratio minimum from 1.60x to 1.40x and the definition of EBITDA to
exclude gains and losses from land sales. Had it not obtained this amendment,
the Company would have violated the Minimum Tangible Net Worth covenant as a
result of the settlement charge taken in the second quarter of 2001. This
amendment also provides that in the event the Court 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 its mortgage note payable -
Denver, Colorado with a $23.0 million mortgage loan secured by the same shopping
center located in Denver, Colorado. The new mortgage loan matures February 15,
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.
Dispositions
------------
The disposition strategy of the Company is to dispose of shopping center
properties the returns and growth potential of which are no longer consistent
with the Company's objectives and to generate capital to fund development and
redevelopment activities and to pay the Company's legal fees and costs
associated with the Consolidated Class Actions and Derivative Actions.
Management seeks to hold for long-term investment properties with assets located
in high barrier-to-entry, high growth markets with an emphasis on rates of
profitability that meet the Company's objectives.
During the six months ended June 30, 2001, the Company sold all or
portions of seven shopping center properties and five parcels of land for
aggregate proceeds of approximately $52.0 million. In July 2001, the Company
sold three shopping centers and three parcels of land for aggregate proceeds of
approximately $34.7 million. As of July 31, 2001, the Company was negotiating
the sale of all or portions of 12 shopping center properties with an aggregate
net book value of approximately $47.5 million and annual net operating income of
approximately $5.0 million for estimated proceeds of approximately $49.4
million. Nine of those properties were subject to definitive agreements at July
31, 2001. Additionally, the Company was marketing for sale approximately 271
acres of land at July 31, 2001, with an aggregate book value of approximately
$41.9 million for estimated proceeds of approximately $52.1 million. The Company
expects that most of these properties and land will be sold in 2001 and the
first half of 2002. 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 and redevelopment 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
certain of 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.
Future Sources and Uses of Funds
--------------------------------
The Company's most significant expected use of capital is its development
activities. The Company had 19 projects under construction as of June 30, 2001
and intends to commence construction during the remainder of 2001 on
approximately four additional projects. The Company expects that the capital
required to fund the future costs of these 23 projects, net of estimated
construction reimbursements and expected land sales to retailers who will build
and own their space in these projects,
20
is approximately $128.5 million. These future costs are expected to be incurred
during the remainder of 2001, 2002 and 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 potential use of capital is the satisfaction of the liabilities
that have arisen out of the Consolidated Class Actions. The Company expects to
fund approximately $16.8 million in the second half of 2001 to satisfy its
obligation to pay cash under the settlement agreement in connection with the
Consolidated Class Actions. The Company may also have to fund a related $4.0
million guarantee in the first quarter of 2002. Issuance of common stock in
connection with settlements of the Consolidated Class Actions and Derivative
Actions may increase the Company's dividend expense in future periods, and
interest expense will increase if debt is used to pay the cash settlement.
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 is
currently reviewing its distribution policy in light of the cash and common
stock consideration expected to be used in the settlement of its litigation.
The Company has historically utilized the public debt and equity markets
to fund its development and redevelopment activities. However, the Company
believes that it will be unable to issue unsecured debt, common stock or
preferred stock as a result of the uneconomical pricing that would be available
to the Company for the foreseeable future and, therefore, must dispose of more
shopping center properties and land parcels than would otherwise be the case.
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 June 30, 2001, the Company's ratio
of Secured Debt to Consolidated Total Assets was 30%. 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 June 30,
2001, the Company's ratio of total debt to Total Consolidated Assets, as
defined, was 57%. 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, to explore
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 and to fund its obligations related to the
settlement of the Consolidated Class Actions. 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 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.
As of June 30, 2001, the Company's debt requires the following payments in
the future:
21
(Dollars in thousands)
Percent of Debt
Year Total Expiring
--------------------------------------------------------------------------------
2001 $ 22,482 3.9%
2002 248,960 43.1%
2003 82,680 14.3%
2004 77,019 13.3%
2005 2,283 0.4%
2006 2,457 0.4%
2007 87,481 15.1%
2008 2,850 0.5%
2009 2,823 0.5%
2010 3,775 0.7%
Thereafter 44,797 7.8%
--------- ------
$577,607 100.0%
========= ======
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, 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, 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.
22
As of June 30, 2001, the Company had one interest rate swap agreement and
one interest rate cap agreement as described below:
Effective Termination Fair
Description of Agreement Notional Amount Strike Price Date Date Value
------------------------- --------------- ------------ --------- ----------- -----
(in thousands)
LIBOR, 30-day "Rate Cap" $100,000 7.25% 8/20/00 8/12/02 --
LIBOR, 30-day "Rate Swap" $150,000 4.62% 3/29/01 12/31/02 (658)
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 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
On May 17, 2001, the Company held its annual meeting of shareholders, at which
time the shareholders elected William B. Greene and William G. Byrnes as Class I
directors until the annual meeting of shareholders in 2004 or until their
successors are elected and have qualified and Lee S. Wielansky as a Class II
director until the annual meeting of shareholders in 2002 or until his successor
is elected and has qualified.
The votes were as follows:
William B. William G. Lee S.
Greene Byrnes Wielansky
---------- ---------- ----------
Votes cast for 27,382,656 27,384,893 27,387,242
Votes cast against 0 0 0
Votes withheld/broker non-votes 102,254
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)
25
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 Letter Agreement dated as of July 6, 2001 between JDN
Realty Corporation and Clarion - CRA Securities, L.P. as
lead plaintiff (8)
10.2 Memorandum of Understanding, dated as of July 26, 2001
between JDN Realty Corporation and the counsel for the
plaintiffs for the Derivative Action (8)
10.3 Exhibits and Schedules to Third Amended and Restated
Master Credit Agreement
(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.
(8) Filed as an exhibit to the Company's filing a Form 8-K
dated July 30, 2001, 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 June 30, 2001, the Company did
not file any reports on Form 8-K.
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: August 14, 2001 By: /s/ Craig Macnab
---------------------------------------
Craig Macnab
President and Chief Executive Officer
Date: August 14, 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 Letter Agreement dated as of July 6, 2001 between JDN Realty
Corporation and Clarion - CRA Securities, L.P. as lead
plaintiff (8)
10.2 Memorandum of Understanding, dated as of July 26, 2001 between
JDN Realty Corporation and the counsel for the plaintiffs for
the Derivative Action (8)
10.3 Exhibits and Schedules to Third Amended and Restated Master
Credit Agreement
(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.
28
(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.
(8) Filed as an exhibit to the Company's filing a Form 8-K dated
July 30, 2001, previously filed pursuant to the Securities
Exchange Act of 1934 and hereby incorporated by reference.
29