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JDN Branches Out

Once limited to new development in the Southeast, this realty company is stretching its limbs with acquisitions in other markets.

JDonald Nichols founded JDN Realty Corp. in 1978 with the purpose of developing a small, 65,000 sq. ft. Wal-Mart-anchored shopping center in Franklin, Tenn., a Nashville suburb. That first center was completed on time and became successful, giving the company a firm footing on which to build.

The following year, Nichols went looking for the company's next development effort. At the request of Wal-Mart, he undertook the retailer's expansion program in the Atlanta area, where JDN is now headquartered.

>From these small acorns many oaks have grown and sprawled over the Southeast retail real estate market. Staying true to its niche - development and asset management of centers with value-oriented retail anchors - the firm currently is an $800 million equity capital real estate investment trust with a portfolio of 75 shopping centers in 12 states.

"The strong relationships we have developed with our anchor tenants is an important key to our success," says Elizabeth Nichols, JDN's president, who met future husband J. Donald Nichols while serving as a mortgage banker on the Franklin project. J. Donald Nichols is the company's chairman and chief executive officer.

Choosing to work with Wal-Mart in 1979 was not the obvious choice it would be today. "Wal-Mart wasn't a household name at that time," says Elizabeth Nichols. "But, of course, it proved to be an excellent decision."

JDN opened numerous sites for Wal-Mart in Atlanta and across Georgia and in the meantime created new relationships with national retailers, completing projects for them as well. This kind of "developing on assignment" is the origin of most of JDN's development projects.

Today, about 86 percent of JDN's tenants are national credit retailers. Among them: Lowe's, Home Depot, Kroger, Food Lion, Kohl's and T.J.Maxx. "Creditworthiness of our anchors is very important," explains Nichols, "but we also look at the business strategy and business plan of the retailer to see if it is a winner."

The value-oriented retail segment has proven resilient to economic downturns. "This segment does well through all economic cycles because it provides savings on groceries and other basic goods that people cannot do without," explains William J. Kerley, JDN's chief financial officer.

The company has benefited, too, from its geographic location. "The Southeast has been a tremendous growth area," Kerley says. "The quality of life and strong job growth in the region have led to a great increase in population. And that adds up to a demand for more retail." Furthermore, he points out, the Southeast is home to some of the more aggressive discount retailers, such as Home Depot and Lowe's.

"Clearly," adds Nichols, "our development is driven by the anchors, with the caveat that we have a lot of market knowledge about the Southeast."

During JDN's first 16 years, growth was based on development of new centers, not acquisition. With this emphasis on development, the early 1990s were becoming a challenge. Projects were growing in size and expense. With lender equity requirements at 20 percent, finding capital to enter multiple projects simultaneously was difficult.

"We had many development opportunities available to us, but we knew we would not be able to act on them without better access to capital," says Nichols.

Like many of its peers, JDN took the plunge into the public markets and became a real estate investment trust.

"The firm went public on March 22, 1994," recalls Kerley, who had joined the firm in 1993 in preparation for the move. "The IPO was successful and raised $149.3 million."

At the time of the IPO, the company had a portfolio of 33 properties comprising about 3.3 million sq. ft., compared with today's 75 properties and 9.4 million sq. ft. JDN stock, which opened at $22 a share, was valued in mid-February at $33.25 a share. In addition, the company has been paying a $2-per-share yearly dividend.

Despite this tremendous growth, the company's debt-to-equity ratio, which indicates how much is owed on the company's total assets, is still a modest 26.6 percent.

The total return for shareholders, Kerley reports, was 20.9 percent in 1995, 31.9 percent in 1996 and 24.3 percent last year.

"Our financial performance over the last three years has increased our strength in the capital markets. We have done very well for investors," Kerley says, adding that the firm has conducted six equity offerings since its IPO, raising another $469 million in capital.

This financial strength also has earned the firm a $150 million unsecured line of credit with Wachovia Bank and investment-grade ratings for its unsecured bonds.

Investors like JDN, says Nichols, because it has mitigated a good deal of the risks associated with development: The firm never develops without an assignment from an anchor tenant and does not close on a site until the anchor lease is signed. Ground is not broken until the property is as least 80 percent leased. And JDN will not develop a project unless it promises a return at least in the 12 percent range.

"You can have all the ability in the world, but without tenants you can't get things done," says Nichols. "In addition, our ability to raise capital merely endorses the fact that the stock market likes our corporate story."

Since becoming a REIT, JDN has begun to acquire existing properties. "We will acquire centers if they have growth potential," says Nichols. "The first questions I have about a property we are considering for acquisition are: Are the tenants' needs being met? Are the tenants going to expand? Are the tenants likely to leave the center?"

Still, development has remained the focus of JDN's growth strategy. In 1997, the firm added $133 million in new development to its portfolio compared with just $40 million of acquisition properties. Kerley estimates that this year, JDN will add $180 million of new developments and $80 million of acquisitions.

Becoming a REIT has changed the company more than just financially. "We were a low-key company that never advertised, but we found that as a public company you have to take the opposite tack," says Nichols. Perception being reality, public companies must not only succeed but also promote their successes.

Also, JDN has started to expand outside the Southeast, with the eventual goal of becoming a national player. Currently, expansion efforts beyond the Southeast center on the Midwest and Southwest and include the February acquisition of a portfolio of five centers in Milwaukee.

Kerley says the Midwest and Southwest contain a large amount of communities with 35,000 or more households, which usually means they are ripe for discount retailers. And again, these retailers blaze the trails for JDN. "We are going with these tenants to new markets," he says.

Expansion to new regions also will give JDN the opportunity to expand its tenant roster as it encounters regional retailers. "That is particularly true with grocery chains, as they tend to be more regional than discounters," says Kerley.

But JDN is not abandoning its roots - either geographical or philosophical. The company plans to remain active in the Southeast, and its entrance into new markets is marked by the same ethic that helped it grow in the Southeast.

"We think a key component to success is being focused on a particular property type and trying to be better at it than any of your competitors," Nichols says. "So JDN has no plans to explore other types of retail development anytime soon."

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