UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
|
|
|
þ
|
|
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
|
For the quarter ended March 31, 2008
OR
|
|
|
o
|
|
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 1-8122
GRUBB & ELLIS COMPANY
(Exact name of registrant as specified in its charter)
|
|
|
Delaware
|
|
94-1424307
|
(State or other jurisdiction of
Incorporation or organization)
|
|
(IRS Employer
Identification No.)
|
1551 North Tustin Avenue, Suite 300, Santa Ana, California 92705
(Address of principal executive offices) (Zip Code)
(714) 667-8252
(Registrants telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
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
þ
No
o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, or a non-accelerated filer, or a smaller reporting company. See the definitions of large
accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the
Exchange Act. (Check one):
|
|
|
|
|
|
|
Large accelerated filer
o
|
|
Accelerated filer
þ
|
|
Non-accelerated filer
o
(Do not check if a smaller reporting company)
|
|
Smaller reporting company
o
|
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act). Yes
o
No
þ
The number of shares outstanding of the registrants common stock as of May 7, 2008 was
65,368,609 shares.
TABLE OF CONTENTS
Part I FINANCIAL INFORMATION
Item 1. Financial Statements.
GRUBB & ELLIS COMPANY
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(Unaudited)
|
|
|
|
|
ASSETS
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
24,847
|
|
|
$
|
49,072
|
|
Restricted cash
|
|
|
16,676
|
|
|
|
27,325
|
|
Investment in marketable securities
|
|
|
8,022
|
|
|
|
9,052
|
|
Current portion of accounts receivable from related parties net
|
|
|
29,370
|
|
|
|
27,465
|
|
Current portion of advances to related parties net
|
|
|
8,702
|
|
|
|
8,328
|
|
Notes receivable from related party net
|
|
|
|
|
|
|
7,600
|
|
Service fees receivable net
|
|
|
14,424
|
|
|
|
19,522
|
|
Current portion of professional service contracts net
|
|
|
7,129
|
|
|
|
7,235
|
|
Real estate deposits and pre-acquisition costs
|
|
|
9,363
|
|
|
|
15,296
|
|
Properties held for sale
|
|
|
295,784
|
|
|
|
345,576
|
|
Identified intangible assets and other assets held for sale net
|
|
|
64,727
|
|
|
|
85,758
|
|
Prepaid expenses and other assets
|
|
|
21,143
|
|
|
|
16,872
|
|
Deferred tax assets
|
|
|
8,285
|
|
|
|
7,854
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
508,472
|
|
|
|
626,955
|
|
Accounts receivable from related parties net
|
|
|
10,039
|
|
|
|
10,360
|
|
Advances to related parties net
|
|
|
4,121
|
|
|
|
3,751
|
|
Professional service contracts net
|
|
|
12,261
|
|
|
|
13,088
|
|
Investments in unconsolidated entities
|
|
|
18,355
|
|
|
|
16,884
|
|
Properties held for investment net
|
|
|
3,966
|
|
|
|
3,922
|
|
Property, equipment and leasehold improvements net
|
|
|
16,233
|
|
|
|
16,265
|
|
Goodwill
|
|
|
171,552
|
|
|
|
169,317
|
|
Identified intangible assets net
|
|
|
103,631
|
|
|
|
105,589
|
|
Other assets net
|
|
|
3,190
|
|
|
|
3,281
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
851,820
|
|
|
$
|
969,412
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable and accrued expenses
|
|
$
|
60,724
|
|
|
$
|
101,147
|
|
Due to related parties
|
|
|
2,206
|
|
|
|
2,953
|
|
Current portion of notes payable and capital lease obligations
|
|
|
372
|
|
|
|
402
|
|
Mortgage loans payable secured by properties held for sale
|
|
|
272,972
|
|
|
|
348,520
|
|
Liabilities of properties held for sale net
|
|
|
11,579
|
|
|
|
18,711
|
|
Other liabilities
|
|
|
3,590
|
|
|
|
5,308
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
351,443
|
|
|
|
477,041
|
|
Long-term liabilities:
|
|
|
|
|
|
|
|
|
Line of credit
|
|
|
38,000
|
|
|
|
8,000
|
|
Senior notes
|
|
|
16,277
|
|
|
|
16,277
|
|
Notes payable and capital lease obligations
|
|
|
713
|
|
|
|
799
|
|
Other long-term liabilities
|
|
|
6,897
|
|
|
|
7,088
|
|
Deferred tax liabilities
|
|
|
33,300
|
|
|
|
32,837
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
446,630
|
|
|
|
542,042
|
|
Commitment and contingencies (Note 15)
|
|
|
|
|
|
|
|
|
Minority interest
|
|
|
6,179
|
|
|
|
18,725
|
|
Stockholders equity:
|
|
|
|
|
|
|
|
|
Preferred stock: $0.01 par value; 50,000,000 shares authorized
as of March 31, 2008 and December 31, 2007; no shares issued and
outstanding as of March 31, 2008 and December 31, 2007
|
|
|
|
|
|
|
|
|
Common stock: $0.01 par value; 100,000,000 shares authorized;
65,364,965 and 64,824,777 shares issued and outstanding as of
March 31, 2008 and December 31, 2007, respectively
|
|
|
654
|
|
|
|
648
|
|
Additional paid-in capital
|
|
|
396,422
|
|
|
|
393,665
|
|
Retained earnings
|
|
|
2,812
|
|
|
|
15,381
|
|
Accumulated other comprehensive loss
|
|
|
(877
|
)
|
|
|
(1,049
|
)
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
399,011
|
|
|
|
408,645
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
851,820
|
|
|
$
|
969,412
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
2
GRUBB & ELLIS COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2008
|
|
|
2007
|
|
REVENUE
|
|
|
|
|
|
|
|
|
Transaction services
|
|
$
|
59,148
|
|
|
$
|
|
|
Investment management
|
|
|
26,092
|
|
|
|
29,465
|
|
Management services
|
|
|
61,756
|
|
|
|
|
|
Rental related
|
|
|
13,628
|
|
|
|
2,283
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
160,624
|
|
|
|
31,748
|
|
|
|
|
|
|
|
|
OPERATING EXPENSE
|
|
|
|
|
|
|
|
|
Compensation costs
|
|
|
120,334
|
|
|
|
13,591
|
|
General and administrative
|
|
|
21,625
|
|
|
|
9,264
|
|
Depreciation and amortization
|
|
|
5,057
|
|
|
|
514
|
|
Rental related
|
|
|
9,139
|
|
|
|
2,398
|
|
Interest
|
|
|
5,742
|
|
|
|
536
|
|
Merger related costs
|
|
|
2,869
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expense
|
|
|
164,766
|
|
|
|
26,303
|
|
|
|
|
|
|
|
|
OPERATING (LOSS) INCOME
|
|
|
(4,142
|
)
|
|
|
5,445
|
|
|
|
|
|
|
|
|
OTHER (EXPENSE) INCOME
|
|
|
|
|
|
|
|
|
Equity in (losses) earnings of unconsolidated entities
|
|
|
(6,014
|
)
|
|
|
169
|
|
Interest income
|
|
|
237
|
|
|
|
541
|
|
Other
|
|
|
(546
|
)
|
|
|
138
|
|
|
|
|
|
|
|
|
Total other (expense) income
|
|
|
(6,323
|
)
|
|
|
848
|
|
|
|
|
|
|
|
|
(Loss) income from continuing operations before minority
interest and income tax benefit (provision)
|
|
|
(10,465
|
)
|
|
|
6,293
|
|
Minority interest in loss (income) of consolidated entities
|
|
|
502
|
|
|
|
(7
|
)
|
|
|
|
|
|
|
|
(Loss) income from continuing operations before income tax
benefit (provision)
|
|
|
(9,963
|
)
|
|
|
6,286
|
|
Income tax benefit (provision)
|
|
|
4,146
|
|
|
|
(2,489
|
)
|
|
|
|
|
|
|
|
(Loss) income from continuing operations
|
|
|
(5,817
|
)
|
|
|
3,797
|
|
|
|
|
|
|
|
|
Discontinued operations
|
|
|
|
|
|
|
|
|
Loss from discontinued operations net of taxes
|
|
|
(124
|
)
|
|
|
(220
|
)
|
Gain on disposal of discontinued operations net of taxes
|
|
|
73
|
|
|
|
60
|
|
|
|
|
|
|
|
|
Total loss from discontinued operations
|
|
|
(51
|
)
|
|
|
(160
|
)
|
|
|
|
|
|
|
|
NET (LOSS) INCOME
|
|
$
|
(5,868
|
)
|
|
$
|
3,637
|
|
|
|
|
|
|
|
|
Basic earnings per share
|
|
|
|
|
|
|
|
|
(Loss) income from continuing operations
|
|
$
|
(0.09
|
)
|
|
$
|
0.10
|
|
Loss from discontinued operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) earnings per share
|
|
$
|
(0.09
|
)
|
|
$
|
0.10
|
|
|
|
|
|
|
|
|
Diluted earnings per share
|
|
|
|
|
|
|
|
|
(Loss) income from continuing operations
|
|
$
|
(0.09
|
)
|
|
$
|
0.10
|
|
Loss from discontinued operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) earnings per share
|
|
$
|
(0.09
|
)
|
|
$
|
0.10
|
|
|
|
|
|
|
|
|
Shares used in computing basic earnings per share
|
|
|
63,521
|
|
|
|
36,910
|
|
|
|
|
|
|
|
|
Shares used in computing diluted earnings per share
|
|
|
63,521
|
|
|
|
36,949
|
|
|
|
|
|
|
|
|
Dividends declared per share
|
|
$
|
0.1025
|
|
|
$
|
0.0450
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
3
GRUBB & ELLIS COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended
|
|
|
|
March, 31,
|
|
|
|
2008
|
|
|
2007
|
|
CASH FLOWS FROM OPERATING ACTIVITIES
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$
|
(5,868
|
)
|
|
$
|
3,637
|
|
Adjustments to reconcile net (loss) income to net cash used in operating
activities:
|
|
|
|
|
|
|
|
|
Equity in losses (earnings) of unconsolidated entities
|
|
|
6,014
|
|
|
|
(169
|
)
|
Depreciation and amortization
|
|
|
5,057
|
|
|
|
483
|
|
Stock-based compensation
|
|
|
2,531
|
|
|
|
1,443
|
|
Amortization/write-off of intangible contractual rights
|
|
|
423
|
|
|
|
807
|
|
Amortization of deferred financing costs
|
|
|
547
|
|
|
|
76
|
|
Deferred income taxes
|
|
|
(34
|
)
|
|
|
(1,658
|
)
|
Allowance for uncollectible accounts
|
|
|
343
|
|
|
|
248
|
|
Minority interest in (loss) income of consolidated entities
|
|
|
(502
|
)
|
|
|
7
|
|
Other operating activities
|
|
|
(617
|
)
|
|
|
(249
|
)
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts receivable from related parties
|
|
|
(2,365
|
)
|
|
|
(12,522
|
)
|
Prepaid expenses and other assets
|
|
|
2,072
|
|
|
|
(3,196
|
)
|
Accounts payable and accrued expenses
|
|
|
(48,230
|
)
|
|
|
1,900
|
|
Other liabilities
|
|
|
(4,799
|
)
|
|
|
2,314
|
|
|
|
|
|
|
|
|
Net cash used in operating activities
|
|
|
(45,428
|
)
|
|
|
(6,879
|
)
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES
|
|
|
|
|
|
|
|
|
Purchases of properties held for sale
|
|
|
(25,120
|
)
|
|
|
(208,343
|
)
|
Purchases of identified intangible assets and other assets held for sale
|
|
|
(2,368
|
)
|
|
|
(39,175
|
)
|
Real estate deposits and pre-acquisition costs
|
|
|
(1,612
|
)
|
|
|
(5,821
|
)
|
Proceeds from sale of properties held for sale
|
|
|
|
|
|
|
99,721
|
|
Proceeds from collection of real estate deposits and pre-acquisition costs
|
|
|
9,013
|
|
|
|
7,837
|
|
Purchases of property and equipment
|
|
|
(1,472
|
)
|
|
|
(751
|
)
|
Investment in marketable securities
|
|
|
|
|
|
|
(5,338
|
)
|
Advances to related parties
|
|
|
(1,577
|
)
|
|
|
(4,318
|
)
|
Repayments of advances to related parties
|
|
|
951
|
|
|
|
8,230
|
|
Repayment of note receivable from related party
|
|
|
7,600
|
|
|
|
|
|
Investments in unconsolidated entities, net
|
|
|
5,941
|
|
|
|
2,364
|
|
Restricted cash
|
|
|
(212
|
)
|
|
|
(13,132
|
)
|
Other
|
|
|
(805
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(9,661
|
)
|
|
|
(158,726
|
)
|
|
|
|
|
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended
|
|
|
|
March, 31,
|
|
|
|
2008
|
|
|
2007
|
|
CASH FLOWS FROM FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
Advances on lines of credit
|
|
|
30,000
|
|
|
|
|
|
Repayments of mortgage loans payable secured by properties held for sale
|
|
|
(16,001
|
)
|
|
|
(93,990
|
)
|
Proceeds from issuance of mortgage loans payable secured by properties
held for sale
|
|
|
20,370
|
|
|
|
229,820
|
|
Proceeds from issuance of senior notes
|
|
|
|
|
|
|
6,015
|
|
Principal payments on notes payable and capital lease obligations
|
|
|
(32
|
)
|
|
|
(4,430
|
)
|
Repayments to related parties
|
|
|
(747
|
)
|
|
|
(1,997
|
)
|
Rate lock deposits
|
|
|
(1,469
|
)
|
|
|
310
|
|
Deferred financing costs
|
|
|
(6
|
)
|
|
|
(536
|
)
|
Dividends paid to common stockholders
|
|
|
(1,733
|
)
|
|
|
(3,813
|
)
|
Contributions from minority interests
|
|
|
833
|
|
|
|
1,875
|
|
Distributions to minority interests
|
|
|
(544
|
)
|
|
|
|
|
Other financing activities
|
|
|
193
|
|
|
|
(37
|
)
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
|
30,864
|
|
|
|
133,217
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET DECREASE IN CASH AND CASH EQUIVALENTS
|
|
|
(24,225
|
)
|
|
|
(32,388
|
)
|
Cash and cash equivalents Beginning of period
|
|
|
49,072
|
|
|
|
102,226
|
|
|
|
|
|
|
|
|
Cash and cash equivalents End of period
|
|
$
|
24,847
|
|
|
$
|
69,838
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL DISCLOSURE OF NONCASH ACTIVITIES
|
|
|
|
|
|
|
|
|
Dividends accrued
|
|
$
|
6,701
|
|
|
$
|
1,906
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
5
GRUBB & ELLIS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying unaudited consolidated financial statements include the accounts of Grubb &
Ellis Company and its consolidated subsidiaries (collectively, the Company), and are prepared in
accordance with U.S. generally accepted accounting principles for interim financial information,
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 U.S. generally accepted accounting principles for
complete financial statements. These consolidated financial statements should be read in
conjunction with the Companys Annual Report on Form 10-K for the year ended December 31, 2007. In
the opinion of management, all adjustments necessary for a fair presentation of the financial
position and results of operations for the interim periods presented have been included in these
financial statements and are of a normal and recurring nature.
Operating results for the three months ended March 31, 2008 are not necessarily indicative of
the results that may be achieved in future periods.
Use of Estimates
The financial statements have been prepared in conformity with U.S. generally accepted
accounting principles, which require management to make estimates and assumptions that affect the
reported amounts of assets and liabilities (including disclosure of contingent assets and
liabilities) at the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those estimates.
Recently Issued Accounting Pronouncements
In September 2006, the FASB issued Statement No. 157 (SFAS No. 157),
Fair Value
Measurements
. SFAS No. 157 defines fair value, establishes a framework for measuring fair value in
generally accepted accounting principles, and expands disclosures about fair value instruments. In
February 2008, the FASB issued FASB Staff Position No. FAS 157-2, Effective Date of FASB Statement
No. 157 (the FSP). The FSP amends SFAS No. 157 to delay the effective date of SFAS No. 157 for
non-financial assets and non-financial liabilities, except for items that are recognized or
disclosed at fair value in the financial statements on a recurring basis (that is, at least
annually). There was no effect on the Companys consolidated financial statements as a
result of the adoption of SFAS No. 157 as of January 1, 2008 as it relates to financial assets and financial liabilities.
For items within its scope, the FSP defers the effective date of SFAS No. 157 to fiscal
years beginning after November 15, 2008, and interim periods within those fiscal years. The
Company will adopt SFAS No. 157 as it relates to non-financial assets and non-financial liabilities in the first quarter of 2009 and does not believe adoption will
have a material effect on its consolidated financial statements.
In March 2008, the FASB issued SFAS No. 161,
Disclosures about Derivative Instruments and
Hedging Activities
(SFAS No. 161). SFAS No. 161 is intended to improve financial reporting about
derivative instruments and hedging activities by requiring enhanced disclosures to enable investors
to better understand their effects on an entitys financial position, financial performance, and
cash flows. SFAS No. 161 achieves these improvements by requiring disclosure of the fair values of
derivative instruments and their gains and losses in a tabular format. It also provides more
information about an entitys liquidity by requiring disclosure of derivative features that are
credit risk-related. Finally, it requires cross-referencing within footnotes to enable financial
statement users to locate important information about derivative instruments. SFAS No. 161 is
effective for financial statements issued for fiscal years and interim periods beginning after
November 15, 2008, with early application encouraged. The Company will adopt SFAS No. 161 in the
first quarter of 2009 and does not believe the adoption will have a material effect on its
consolidated financial statements.
2. MARKETABLE SECURITIES
The historical cost and estimated fair value of the available-for-sale marketable securities
held by the Company are as follows:
6
GRUBB & ELLIS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Continued
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of March 31, 2008
|
|
|
As of December 31, 2007
|
|
|
|
Historical
|
|
|
Gross Unrealized
|
|
|
Market
|
|
|
Historical
|
|
|
Gross Unrealized
|
|
|
Market
|
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Value
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Value
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities
|
|
$
|
4,350
|
|
|
$
|
|
|
|
$
|
(1,461
|
)
|
|
$
|
2,889
|
|
|
$
|
4,440
|
|
|
$
|
|
|
|
$
|
(1,355
|
)
|
|
$
|
3,085
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
There were no sales of equity securities during the three months ended March 31, 2008. The
Company believed that a decline in the value of a marketable equity security was other than
temporary and recorded realized losses of $90,000 to reflect the fair value of such security as of
March 31, 2008. Sales of equity securities resulted in realized gains of $138,000 for the three
months ended March 31, 2007.
Investments in Limited Partnerships
The Company, through its subsidiary, Grubb & Ellis Alesco Global Advisors, LLC (Alesco),
serves as general partner and investment advisor to five hedge fund limited partnerships, four of
which are required to be consolidated, Grubb & Ellis AGA Realty Income Fund, LP (Income Fund),
AGA Strategic Realty Fund, L.P. (Strategic Realty), AGA Global Realty Fund LP (Global Realty)
and AGA Realty Income Partners LP (Realty Partners).
Alesco allocated the limited partners income or loss to minority interest. For the quarter
ended March 31, 2008, Alesco had investment losses of approximately $457,000 which were allocated
entirely to minority interest. At March 31, 2008, these limited partnerships had assets of
approximately $5.1 million consisting primarily of exchange traded marketable securities, including
equity securities and foreign currencies.
The following table reflects trading securities. The original cost, estimated market value and
gross unrealized appreciation and depreciation of equity securities are presented in the tables
below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of March 31, 2008
|
|
|
As of December 31, 2007
|
|
|
|
Historical
|
|
|
Gross Unrealized
|
|
|
Market
|
|
|
Historical
|
|
|
Gross Unrealized
|
|
|
Market
|
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Value
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Value
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities
|
|
$
|
5,439
|
|
|
$
|
161
|
|
|
$
|
(467
|
)
|
|
$
|
5,133
|
|
|
$
|
7,250
|
|
|
$
|
134
|
|
|
$
|
(1,417
|
)
|
|
$
|
5,967
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended March 31, 2008
|
|
|
|
Investment
|
|
|
Net Gain (Loss)
|
|
|
|
|
|
|
Income
|
|
|
Realized
|
|
|
Unrealized
|
|
|
Total
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities
|
|
$
|
41
|
|
|
$
|
(1,391
|
)
|
|
$
|
961
|
|
|
$
|
(389
|
)
|
Less investment expenses
|
|
|
(68
|
)
|
|
|
|
|
|
|
|
|
|
|
(68
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(27
|
)
|
|
$
|
(1,391
|
)
|
|
$
|
961
|
|
|
$
|
(457
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3. RELATED PARTIES
Related party balances as of March 31, 2008 and December 31, 2007 are summarized below:
Accounts Receivable
Accounts receivable from related parties consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
Accrued property management fees
|
|
$
|
21,388
|
|
|
$
|
20,428
|
|
Accrued lease commissions
|
|
|
9,252
|
|
|
|
9,994
|
|
Accrued asset management fees
|
|
|
1,917
|
|
|
|
1,206
|
|
Accrued real estate acquisition fees
|
|
|
86
|
|
|
|
103
|
|
7
GRUBB & ELLIS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Continued
|
|
|
|
|
|
|
|
|
Other receivables
|
|
|
4,672
|
|
|
|
3,086
|
|
Other accrued fees
|
|
|
3,187
|
|
|
|
4,041
|
|
|
|
|
|
|
|
|
Total
|
|
|
40,502
|
|
|
|
38,858
|
|
Allowance for uncollectible receivables
|
|
|
(1,093
|
)
|
|
|
(1,033
|
)
|
|
|
|
|
|
|
|
Accounts receivable from related parties net
|
|
|
39,409
|
|
|
|
37,825
|
|
Less portion classified as current
|
|
|
(29,370
|
)
|
|
|
(27,465
|
)
|
|
|
|
|
|
|
|
Non-current portion
|
|
$
|
10,039
|
|
|
$
|
10,360
|
|
|
|
|
|
|
|
|
Advances to Related Parties
The Company makes advances to affiliated real estate entities under management in the normal
course of business. Such advances are uncollateralized, have payment terms of one year or less, and
generally bear interest at 6.0% to 12.0% per annum. The advances consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
Advances to properties of related parties
|
|
$
|
11,456
|
|
|
$
|
10,166
|
|
Advances to sponsored REITs
|
|
|
1,249
|
|
|
|
1,318
|
|
Advances to related parties
|
|
|
2,240
|
|
|
|
2,434
|
|
|
|
|
|
|
|
|
Total
|
|
|
14,945
|
|
|
|
13,918
|
|
Allowance for uncollectible receivables
|
|
|
(2,122
|
)
|
|
|
(1,839
|
)
|
|
|
|
|
|
|
|
Advances to related parties net
|
|
|
12,823
|
|
|
|
12,079
|
|
Less portion classified as current
|
|
|
(8,702
|
)
|
|
|
(8,328
|
)
|
|
|
|
|
|
|
|
Non-current portion
|
|
$
|
4,121
|
|
|
$
|
3,751
|
|
|
|
|
|
|
|
|
As of December 31, 2007, advances with accrued interest included $1.0 million to a program
solely managed by the Companys former Chairman, who subsequently resigned in 2008. As of March
31, 2008, the remaining balance was $678,000.
Notes Receivable From Related Party
In December 2007, the Company advanced $10.0 million to Grubb & Ellis Apartment REIT, Inc.
(Apartment REIT). The unsecured note matures on June 20, 2008 and bears interest at a fixed rate
of 7.46% per annum. The unsecured note requires monthly interest only payments beginning on January
1, 2008 and provides for a default interest rate in an event of default equal to 9.46% per annum.
This unsecured note was repaid in full in the first quarter of 2008. The balance owed to the
Company as of December 31, 2007 consisted of $7.6 million in principal.
4. INVESTMENTS IN UNCONSOLIDATED ENTITIES
As of March 31, 2008 the Company had investments in two properties totaling $4.1 million and
$7.3 million, respectively, which represents approximately 25.3% and 46.8% ownership interest in
each property, respectively. As of December 31, 2007 the Company had investments in two properties
totaling $1.7 million and $4.1 million, respectively, which represents approximately 32.0% and
41.0% ownership interest in each property, respectively.
The Company owned approximately 5.7 million shares of common stock of Grubb & Ellis Realty
Advisors, Inc. (GERA), a special purpose acquisition company, or approximately 19% of the
outstanding common stock of GERA. The Company also owned approximately 4.6 million GERA warrants
which were exercisable into additional GERA common stock, subject to certain conditions. The
Company recorded each of these investments at fair value on December 7, 2007, the date they were
acquired, at a total investment of approximately $4.5 million. The market price of the warrants
declined slightly to $0.16 per warrant as of December 31, 2007, resulting in an unrealized loss on
the investment totaling approximately $223,000 (net of taxes) for the year ended December 31, 2007.
This unrealized loss was included in accumulated other comprehensive loss within stockholders
equity as of December 31, 2007.
All of the officers of GERA were also officers or directors of the Company, although such
persons did not receive any compensation from GERA in their capacity as officers of GERA. Due to
the Companys ownership position and influence over the operating and financial decisions of GERA,
the Companys investment in GERA was accounted
8
GRUBB & ELLIS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Continued
for within the Companys consolidated financial statements under the equity method of
accounting. The Companys combined carrying value of these GERA investments as of December 31,
2007, totaled approximately $4.1 million, net of an unrealized loss, and was included in
investments in unconsolidated entities in the Companys consolidated balance sheet as of that date.
On February 28, 2008, at a special meeting of the stockholders of GERA held to vote on, among
other things, a proposed transaction with the Company. GERA failed to obtain the requisite
consents of its stockholders to approve the proposed business transaction and at a subsequent
special meeting in April 2008, its stockholders approved the dissolution and plan of liquidation of
GERA. The Company did not receive any funds or other assets as a result of GERAs liquidation.
As a consequence, the Company wrote off its investment in GERA and other advances to that
entity in the first quarter of 2008 and recognized a loss of approximately $5.8 million, comprised of $4.5 million related
to stock and warrant purchases and $1.3 million related to operating advances and third party
costs, and which included the unrealized loss previously reflected in accumulated other
comprehensive loss. The Company is marketing the three commercial properties that were subject to
the proposed transaction with GERA so as to affect their sale on or before September 30, 2008, as
required under the terms of its credit facility.
5. PROPERTIES HELD FOR INVESTMENT
A summary of the balance sheet information for properties held for investment is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
Useful Life
|
|
2008
|
|
|
2007
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
Building and capital improvement
|
|
39 years
|
|
$
|
3,067
|
|
|
$
|
2,962
|
|
Tenant Improvement
|
|
1-8 years
|
|
|
165
|
|
|
|
165
|
|
Accumulated depreciation
|
|
|
|
|
(466
|
)
|
|
|
(405
|
)
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
2,766
|
|
|
|
2,722
|
|
Land
|
|
|
|
|
1,200
|
|
|
|
1,200
|
|
|
|
|
|
|
|
|
|
|
Properties held for investment net
|
|
|
|
$
|
3,966
|
|
|
$
|
3,922
|
|
|
|
|
|
|
|
|
|
|
The Company recognized $61,000 and $42,000 of depreciation expense related to the properties
held for investment during the three months ended March 31, 2008 and 2007, respectively.
6. BUSINESS COMBINATIONS AND GOODWILL
Merger of Grubb & Ellis Company with NNN Realty Advisors, Inc.
On December 7, 2007, the Company effected a stock merger (the Merger) with NNN Realty
Advisors, Inc. (NNN), a real estate asset management company and sponsor of tax deferred tenant
in common (TIC) 1031 property exchanges as well as a sponsor of two non-traded REITs and other
investment programs.
Under the purchase method of accounting, the Merger consideration of $172.2 million was
determined based on the fair value of the Companys common stock
and vested options outstanding at the merger date.
As part of its merger transition, the Company continues to finalize its personnel
reorganization plan, and recorded a severance liability totaling approximately $1.0 million during
the three months ended March 31, 2008, which increased the goodwill recorded from the acquisition.
These liabilities relate primarily to severance and other benefits to be paid to terminated
employees. Such liabilities, totaling approximately $6.1 million, have been recorded related to
the personnel reorganization plan, of which approximately $1.8 million has been paid to terminated
employees as of March 31, 2008. The Company expects to finalize this reorganization plan during the third quarter of 2008.
The Company also acquired two smaller companies during 2007, NNN/ROC Apartment Holdings, LLC
and Alesco Global Advisors, LLC, for purchase price cash consideration aggregating approximately
$4.7 million.
9
GRUBB & ELLIS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Continued
Supplemental information
Unaudited pro forma results, assuming the above mentioned 2007 acquisitions had occurred as of
January 1, 2007 for purposes of the 2007 pro forma disclosures, are presented below. The unaudited
pro forma results have been prepared for comparative purposes only and do not purport to be
indicative of what operating results would have been had all acquisitions occurred on January 1,
2007, and may not be indicative of future operating results.
|
|
|
|
|
|
|
Unaudited Pro Forma Results
|
|
|
|
Three Months Ended
|
|
|
|
March 31, 2007
|
|
(In thousands, except per share data)
|
|
|
|
|
Revenue
|
|
$
|
150,260
|
|
Income from continuing operations
|
|
$
|
283
|
|
Net loss
|
|
$
|
(28
|
)
|
Basic loss per share
|
|
|
|
|
Weighted average shares outstanding for basic earnings per share
|
|
|
36,910
|
|
Diluted loss per share
|
|
|
|
|
Weighted average shares outstanding for diluted earnings per share
|
|
|
36,910
|
|
7. PROPERTY ACQUISITIONS
During the three months ended March 31, 2008, the Company completed the acquisition of one
office property, which the Company classified as property held for sale upon acquisition. The
aggregate purchase price, including closing costs, of this property was $21.8 million, of which
$14.7 million was financed with mortgage debt. Pro forma data is not presented as the operations of
this property are included in discontinued operations in the Companys consolidated statement of
operations.
8. IDENTIFIED INTANGIBLE ASSETS
Identified intangible assets consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
December 31,
|
|
(In thousands)
|
|
Useful Life
|
|
2008
|
|
|
2007
|
|
Contract rights
|
|
|
|
|
|
|
|
|
|
|
Contract rights, established for the legal
right to future disposition fees of a portfolio of real estate properties under contract
|
|
Amortize per disposition transactions
|
|
$
|
20,538
|
|
|
$
|
20,538
|
|
Accumulated amortization contract rights
|
|
|
|
|
(3,944
|
)
|
|
|
(3,521
|
)
|
|
|
|
|
|
|
|
|
|
Contract rights, net
|
|
|
|
|
16,594
|
|
|
|
17,017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other identified intangible assets
|
|
|
|
|
|
|
|
|
|
|
Trade name
|
|
Indefinite
|
|
|
64,100
|
|
|
|
64,100
|
|
Affiliate agreement
|
|
20 years
|
|
|
10,600
|
|
|
|
10,600
|
|
Customer relationships
|
|
5 to 7 years
|
|
|
5,436
|
|
|
|
5,579
|
|
Internally developed software
|
|
4 years
|
|
|
6,200
|
|
|
|
6,200
|
|
Customer backlog
|
|
1 year
|
|
|
300
|
|
|
|
300
|
|
Other contract rights
|
|
5 to 7 years
|
|
|
1,418
|
|
|
|
1,418
|
|
Non-compete and employment agreements
|
|
3 to 4 years
|
|
|
97
|
|
|
|
597
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
88,151
|
|
|
|
88,794
|
|
Accumulated amortization
|
|
|
|
|
(1,212
|
)
|
|
|
(338
|
)
|
|
|
|
|
|
|
|
|
|
Other identified intangible assets, net
|
|
|
|
|
86,939
|
|
|
|
88,456
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Identified intangible assets properties
|
|
|
|
|
|
|
|
|
|
|
In place leases and tenant relationships
|
|
35 to 95 months
|
|
|
271
|
|
|
|
271
|
|
Above market leases
|
|
35 months
|
|
|
107
|
|
|
|
107
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
378
|
|
|
|
378
|
|
Accumulated amortization properties
|
|
|
|
|
(280
|
)
|
|
|
(262
|
)
|
|
|
|
|
|
|
|
|
|
Identified intangible assets, net properties
|
|
|
|
|
98
|
|
|
|
116
|
|
|
|
|
|
|
|
|
|
|
Total identified intangible assets, net
|
|
|
|
$
|
103,631
|
|
|
$
|
105,589
|
|
|
|
|
|
|
|
|
|
|
10
GRUBB & ELLIS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Continued
Amortization expense recorded for the contract rights was $423,000 and $807,000 for the three
months ended March 31, 2008 and 2007, respectively. Amortization expense was charged as a reduction
to investment management revenue in each respective period. During the period of future real
property sales, the amortization of the contract rights for intangible assets will be applied based
on the net relative value of disposition fees realized.
Amortization expense recorded for the other identified intangible assets was $874,000 and $0
for the three months ended March 31, 2008 and 2007, respectively. Amortization expense was included
as part of operating expense in the accompanying consolidated statement of operations.
Amortization expense recorded for the in-place leases and tenant relationships was $12,000 and
$14,000 for the three months ended March 31, 2008 and 2007, respectively. Amortization expense was
included as part of operating expense in the accompanying consolidated statement of operations.
Amortization expense recorded for the above-market leases was $6,000 and $8,000 for the three
months ended March 31, 2008 and 2007, respectively. Amortization expense was charged as a reduction
to rental related revenue in the accompanying consolidated statement of operations.
9. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
Accrued liabilities
|
|
$
|
14,287
|
|
|
$
|
18,421
|
|
Salaries and related costs
|
|
|
10,996
|
|
|
|
12,575
|
|
Accounts payable
|
|
|
8,619
|
|
|
|
12,702
|
|
Broker commissions
|
|
|
6,905
|
|
|
|
26,517
|
|
Dividends
|
|
|
6,709
|
|
|
|
1,733
|
|
Severance
|
|
|
4,385
|
|
|
|
4,965
|
|
Bonuses
|
|
|
3,171
|
|
|
|
14,933
|
|
Property management fees and commissions due to third parties
|
|
|
2,778
|
|
|
|
4,491
|
|
Organizational marketing expense allowance related costs
|
|
|
264
|
|
|
|
1,219
|
|
Other
|
|
|
2,610
|
|
|
|
3,591
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
60,724
|
|
|
$
|
101,147
|
|
|
|
|
|
|
|
|
10. NOTES PAYABLE AND CAPITAL LEASE OBLIGATIONS
Notes payable and capital lease obligations consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
Unsecured notes payable to third-party
investors with fixed interest at 6.00% per
annum and matures on December 2011.
Principal and interest is due quarterly
beginning March 31, 2006.
|
|
$
|
380
|
|
|
$
|
411
|
|
Capital leases obligations
|
|
|
705
|
|
|
|
790
|
|
|
|
|
|
|
|
|
Total
|
|
|
1,085
|
|
|
|
1,201
|
|
Less portion classified as current
|
|
|
(372
|
)
|
|
|
(402
|
)
|
|
|
|
|
|
|
|
Non-current portion
|
|
$
|
713
|
|
|
$
|
799
|
|
|
|
|
|
|
|
|
Grubb & Ellis Realty Investors, LLC (GERI) historically had entered into several interest
rate lock agreements with commercial banks. All rate locks were cancelled and all deposits in
connection with these agreements were refunded to the Company in April 2008.
11
GRUBB & ELLIS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Continued
11. MORTGAGE LOANS PAYABLE SECURED BY PROPERTIES HELD FOR SALE
Notes payable secured by properties held for sale consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
Mortgage debt payable to various financial
institutions for real estate held for sale.
Fixed interest rates range from 5.95% to
6.32% per annum. The notes mature at various
dates through November 2018. As of March 31,
2008, all notes require monthly
interest-only payments.
|
|
$
|
138,472
|
|
|
$
|
209,230
|
|
Mezzanine debt payable to a financial
institution for real estate held for sale
with an interest rate of 13.0% per annum.
The note matured on April 15, 2008 and was
paid in full. As of March 31, 2008, the note
requires monthly interest-only payments.
|
|
|
14,000
|
|
|
|
18,790
|
|
Mortgage debt payable to various financial
institutions for real estate held for sale,
which bear interest at LIBOR plus 250 basis
points and include an interest rate cap for
LIBOR at 6.00% (approximately 5.20% per
annum as of March 31, 2008).
|
|
|
120,500
|
|
|
|
120,500
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
272,972
|
|
|
$
|
348,520
|
|
|
|
|
|
|
|
|
12. LINES OF CREDIT
The Companys line of credit is secured by substantially all of the Companys assets and
requires the Company to meet certain minimum loan to value, debt service coverage, and performance
covenants, including the timely payment of interest. The outstanding balance on the line of credit
was $38.0 million as of March 31, 2008 and carried an average weighted interest rate of 6.63%. The
Company was in compliance with all debt covenants pertaining to the credit agreement as of March
31, 2008.
13. SEGMENT DISCLOSURE
In conjunction with the Merger, management re-evaluated its reportable segments and determined
that the Companys reportable segments consist of Transaction Services, Investment Management, and
Management Services. The Companys Investment Management segment includes all of NNNs historical
business units and, therefore, all historical data have been conformed to reflect the reportable
segments as a combined company.
Transaction Services
Transaction Services advise buyers, sellers, landlords and tenants on
the sale, leasing and valuation of commercial property and includes the Companys national
accounts group and national affiliate program operations.
Investment Management
Investment Management includes all of NNNs historical business
units, which includes services for acquisition, financing and disposition with respect to the
Companys programs, asset management services related to the Companys programs, and
dealer-manager services by its securities broker-dealer, which facilitates capital raising
transactions for its TIC and REIT programs.
Management Services
Management Services provide property management and related services
for owners of investment properties and facilities management services for corporate owners and
occupiers.
The Company also has certain corporate level activities including interest income from notes
and advances, property rental related operations, legal administration, accounting, finance, and
management information systems which are not considered separate operating segments.
The Company evaluates the performance of its segments based upon operating income. Net
operating income is defined as operating revenue less compensation and operating and administrative
costs and excludes other rental related, rental expense, interest expense, depreciation and
amortization, and corporate general and administrative expenses.
12
GRUBB
& ELLIS COMPANY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) - Continued
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transaction
|
|
|
Investment
|
|
|
Management
|
|
|
|
|
Three Months Ended March 31, 2008
|
|
Services
|
|
|
Management
|
|
|
Services
|
|
|
Total
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
59,148
|
|
|
$
|
26,092
|
|
|
$
|
61,756
|
|
|
$
|
146,996
|
|
Compensation costs
|
|
|
51,477
|
|
|
|
11,146
|
|
|
|
57,711
|
|
|
|
120,334
|
|
General and administrative
|
|
|
11,421
|
|
|
|
7,560
|
|
|
|
2,644
|
|
|
|
21,625
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment operating (loss) income
|
|
$
|
(3,750
|
)
|
|
$
|
7,386
|
|
|
$
|
1,401
|
|
|
$
|
5,037
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transaction
|
|
|
Investment
|
|
|
Management
|
|
|
|
|
Three Months Ended March 31, 2007
|
|
Services
|
|
|
Management
|
|
|
Services
|
|
|
Total
|
|
(In thousands)
|
|
Revenue
|
|
$
|
|
|
|
$
|
29,465
|
|
|
$
|
|
|
|
$
|
29,465
|
|
Compensation costs
|
|
|
|
|
|
|
13,591
|
|
|
|
|
|
|
|
13,591
|
|
General and administrative
|
|
|
|
|
|
|
9,264
|
|
|
|
|
|
|
|
9,264
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment operating income
|
|
$
|
|
|
|
$
|
6,610
|
|
|
$
|
|
|
|
$
|
6,610
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following is a reconciliation between segment operating income to consolidated
net (loss) income:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2008
|
|
|
2007
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
Reconciliation to consolidated net (loss) income:
|
|
|
|
|
|
|
|
|
Total segment operating income
|
|
$
|
5,037
|
|
|
$
|
6,610
|
|
Non-segment:
|
|
|
|
|
|
|
|
|
Rental operations, net
|
|
|
4,489
|
|
|
|
(115
|
)
|
Other operating expenses
|
|
|
(13,668
|
)
|
|
|
(1,050
|
)
|
Other (expense) income
|
|
|
(6,323
|
)
|
|
|
848
|
|
Minority interest in loss (income) of consolidated entities
|
|
|
502
|
|
|
|
(7
|
)
|
Income tax benefit (provision)
|
|
|
4,146
|
|
|
|
(2,489
|
)
|
Loss from discontinued operations
|
|
|
(51
|
)
|
|
|
(160
|
)
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$
|
(5,868
|
)
|
|
$
|
3,637
|
|
|
|
|
|
|
|
|
14. PROPERTIES HELD FOR SALE AND DISCONTINUED OPERATIONS
A summary of the properties held for sale balance sheet information is as follows:
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
Operating properties
|
|
$
|
295,784
|
|
|
$
|
345,576
|
|
Identified intangible assets and other assets
|
|
|
64,727
|
|
|
|
85,758
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
360,511
|
|
|
$
|
431,334
|
|
|
|
|
|
|
|
|
Mortgage loans payable
|
|
$
|
272,972
|
|
|
$
|
348,520
|
|
Liabilities of properties held for sale
|
|
|
11,579
|
|
|
|
18,711
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
$
|
284,551
|
|
|
$
|
367,231
|
|
|
|
|
|
|
|
|
In instances when the Company expects to have significant ongoing cash flows or significant
continuing involvement in the component beyond the date of sale, the income (loss) from certain
properties held for sale continue to be fully recorded within the continuing operations of the
Company through the date of sale.
The net results of discontinued operations and the net gain on dispositions of properties sold
or classified as held for sale as of March 31, 2008, in which the Company has no significant
ongoing cash flows or significant continuing involvement, are reflected in the consolidated
statement of operations as discontinued operations. The Company will
13
GRUBB & ELLIS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Continued
receive certain fee income from these properties on an ongoing basis that is not considered
significant when compared to the operating results of such properties.
The following table summarizes the income and expense components that comprised discontinued
operations, net of taxes, for the three months ended March 31, 2008 and 2007:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2008
|
|
|
2007
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
Rental income
|
|
$
|
1,220
|
|
|
$
|
5,195
|
|
Rental expense
|
|
|
(551
|
)
|
|
|
(2,468
|
)
|
Interest expense (including amortization of deferred financing costs)
|
|
|
(883
|
)
|
|
|
(3,096
|
)
|
Tax benefit
|
|
|
90
|
|
|
|
149
|
|
|
|
|
|
|
|
|
Loss from discontinued operations-net of taxes
|
|
|
(124
|
)
|
|
|
(220
|
)
|
Gain on disposal of discontinued operations-net of taxes
|
|
|
73
|
|
|
|
60
|
|
|
|
|
|
|
|
|
Total loss from discontinued operations
|
|
$
|
(51
|
)
|
|
$
|
(160
|
)
|
|
|
|
|
|
|
|
During the
quarter ended March 31, 2008, the Company contributed certain assets and liabilities related
to properties held for sale to investments in joint ventures. These non-cash transactions resulted
in a reduction of restricted cash of approximately $10.9 million, a reduction of properties
held for sale of approximately $73.6 million, a reduction in mortgage loans payable secured
by properties held for sale of approximately $74.2 million, a decrease in other assets
of approximately $1.5 million and an increase in investments in unconsolidated entities of
approximately $11.8 million.
15. COMMITMENTS AND CONTINGENCIES
Operating Leases
The Company has non-cancelable operating lease obligations for office space
and certain equipment ranging from one to ten years, and sublease agreements under which the
Company acts as sublessor.
The office space leases often times provide for annual rent increases, and typically require
payment of property taxes, insurance and maintenance costs.
Rent expense under these operating leases approximated $5.9 million and $807,000 for the three
months ended March 31, 2008 and 2007, respectively. Rent expense is included in general and
administrative expense in the accompanying consolidated statements of operations.
Operating Leases Other
The Company is a master lessee of seven multi-family residential
properties in various locations under non-cancelable leases. The leases, which commenced in various
months and expire from June 2015 through March 2016, require minimum monthly payments averaging
$795,000 over the 10-year period. Rent expense under these operating leases approximated $2.2
million and $1.2 million for three months ended March 31, 2008 and 2007, respectively.
The Company subleases this residential space to third parties. Rental income from these
subleases was $4.2 million and $2.2 million for the three months ended March 31, 2008 and 2007,
respectively. As residential leases are executed for no more than one year, the Company is unable
to project the future minimum receivable related to these leases.
Capital Lease Obligations
The Company leases computers, copiers, and postage equipment that
are accounted for as capital leases (see Note 10 of Notes to Consolidated Financial Statements for
additional information).
SEC Investigation
On September 16, 2004, Triple Net Properties, which became a subsidiary of
Grubb & Ellis as part of the merger with NNN, learned that the SEC Los Angeles Enforcement Division
(the SEC Staff), is conducting an investigation referred to as
In the matter of Triple Net
Properties, LLC.
The SEC Staff requested information from Triple Net Properties relating to
disclosure in public and private securities offerings sponsored by Triple Net Properties and its
affiliates prior to 2005 ( Triple Net Securities Offerings). The SEC Staff also requested
information from Capital Corp., the dealer-manager for the Triple Net Securities Offerings. Capital
Corp. also became a subsidiary of Grubb & Ellis as part of the merger with NNN. The SEC Staff
requested financial and other information regarding the Triple Net Securities Offerings and the
disclosures included in the related offering documents from each of Triple Net Properties and
Capital Corp. Triple Net Properties and Capital Corp. believe they have cooperated fully with the
SEC Staffs investigation.
14
GRUBB & ELLIS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Continued
Triple Net Properties and Capital Corp. are engaged in settlement negotiations with the SEC
staff regarding this matter. Based on these negotiations, management believes that the conclusion
to this matter will not result in a material adverse affect to its results of operations, financial
condition or ability to conduct its business. NNN accrued a loss contingency of $600,000 at
December 31, 2006 on behalf of Triple Net Properties and Capital Corp. on a consolidated basis. The
$600,000 is being held in escrow pending final approval of the settlement agreement.
To the extent that Triple Net Properties and Capital Corp pay the SEC an amount in excess of
$1.0 million in connection with any settlement or other resolution of this matter, Anthony W.
Thompson, NNNs founder and former Chairman of the Board, has agreed to forfeit to NNN up to
1,064,800 shares of the Companys common stock. In connection with this arrangement, NNN entered
into an escrow agreement with Mr. Thompson and an independent escrow agent, pursuant to which the
escrow agent holds these 1,064,800 shares of common stock that are otherwise issuable to Mr.
Thompson in connection with the NNN formation transactions to secure Mr. Thompsons obligations to
NNN. Mr. Thompsons liability under this arrangement will not exceed the value of the shares in the
escrow.
General
The Company is involved in various claims and lawsuits arising out of the ordinary conduct of
its business, as well as in connection with its participation in various joint ventures and
partnerships, many of which may not be covered by the Companys insurance policies. In the opinion
of management, the eventual outcome of such claims and lawsuits is not expected to have a material
adverse effect on the Companys financial position or results of operations.
Guarantees
From time to time the Company provides guarantees of loans for properties under
management. As of March 31, 2008, there were 146 properties under management with loan guarantees
of approximately $3.5 billion in total principal outstanding with terms ranging from one to 10
years, secured by properties with a total aggregate purchase price of approximately $4.6 billion at
March 31, 2008. As of December 31, 2007, there were 143 properties under management with loan
guarantees of approximately $3.4 billion in total principal outstanding with terms ranging from one
to 10 years, secured by properties with a total aggregate purchase price of approximately $4.6
billion at December 31, 2007.
The Companys guarantees consisted of the following as of March 31, 2008 and December 31,
2007:
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
December 31,
|
|
|
2008
|
|
2007
|
(In thousands)
|
|
|
|
|
|
|
|
|
Non-recourse/carve-out guarantees of debt of properties under management(1)
|
|
$
|
3,290,711
|
|
|
$
|
3,167,447
|
|
Non-recourse/carve-out guarantees of the Companys debt(1)
|
|
|
138,472
|
|
|
|
221,430
|
|
Guarantees of the Companys mezzanine debt
|
|
|
14,000
|
|
|
|
48,790
|
|
Recourse guarantees of debt of properties under management
|
|
|
32,275
|
|
|
|
47,399
|
|
Recourse guarantees of the Companys debt
|
|
|
10,000
|
|
|
|
10,000
|
|
|
|
|
(1)
|
|
A non-recourse/carve-out guarantee imposes liability on the
guarantor in the event the borrower engages in certain acts prohibited
by the loan documents.
|
Management evaluates these guarantees to determine if the guarantee meets the criteria
required to record a liability in accordance with FIN No. 45. The liability was insignificant as of
March 31, 2008 and December 31, 2007.
Environmental Obligations
In the Companys role as property manager, it could incur
liabilities for the investigation or remediation of hazardous or toxic substances or wastes at
properties the Company currently or formerly managed or at off-site locations where wastes were
disposed. Similarly, under debt financing arrangements on properties owned by sponsored programs,
the Company has agreed to indemnify the lenders for environmental liabilities and to remediate any
environmental problems that may arise. The Company is not aware of any environmental liability or
unasserted claim or assessment relating to an environmental liability that the Company believes
would require disclosure or the recording of a loss contingency.
15
GRUBB & ELLIS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Continued
Real Estate Licensing Issues
Although Realty was required to have real estate licenses in
all of the states in which it acted as a broker for NNNs programs and received real estate
commissions prior to 2007, Realty did not hold a license in certain of those states when it earned
fees for those services. In addition, almost all of Triple Net Properties revenue was based on an
arrangement with Realty to share fees from NNNs programs. Triple Net Properties did not hold a
real estate license in any state, although most states in which properties of the NNNs programs
were located may have required Triple Net Properties to hold a license. As a result, Realty and the
Company may be subject to penalties, such as fines (which could be a multiple of the amount
received), restitution payments and termination of management agreements, and to the suspension or
revocation of certain of Realtys real estate broker licenses. To date there have been no claims,
and the Company cannot assess or estimate whether it will incur any losses as a result of the
foregoing.
To the extent that the Company incurs any liability arising from the failure to comply with
real estate broker licensing requirements in certain states, Mr. Thompson, Mr. Rogers and Mr.
Hanson have agreed to forfeit to the Company up to an aggregate of 4,124,120 shares of the
Companys common stock, and each share will be deemed to have a value of $11.36 per share in
satisfying this obligation. Mr. Thompson has agreed to indemnify the Company, to the extent the
liability incurred by the Company for such matters exceeds the deemed $46,865,000 value of these
shares, up to an additional $9,435,000 in cash. In connection with this arrangement, NNN has
entered into an indemnification and escrow agreement with Mr. Thompson, Mr. Rogers, Mr. Hanson, an
independent escrow agent and NNN, pursuant to which the escrow agent will hold 4,124,120 shares of
the Companys common stock that are otherwise issuable to Mr. Thompson and Mr. Rogers in connection
with the NNNs formation transactions (2,885,520 shares for Mr. Thompson and 1,238,600 shares for
Mr. Rogers) to secure Mr. Thompsons and Mr. Rogers obligations to the Company with respect to
these matters. Mr. Thompsons and Mr. Rogers liability under this arrangement will not exceed the
sum of the value of their shares in the escrow except to the extent Mr. Thompson may be obliged to
indemnify the Company for excess liabilities up to an additional $9,435,000 in cash. Since Mr.
Hanson is entitled over time to receive up to 743,160 shares from Messrs. Thompson and Rogers
(557,370 from Mr. Thompson and 185,790 from Mr. Rogers) from the shares held in the indemnification
and escrow agreement, he is a party to it as well and his liability is limited to those shares.
These indemnification agreements remain in place until November 16, 2009. In the event that Mr.
Hansons right to receive his shares vests prior to the expiration of the indemnification
agreements, then to the extent shares attributable to his ownership are available, and not subject
to potential claims, under the indemnification and escrow agreement, he will be permitted to remove
88,000 shares on each of January 1, 2008 and 2009 to pay taxes.
16. EARNINGS PER SHARE
The Company computes earnings per share in accordance with SFAS No. 128,
Earnings Per Share
(SFAS No. 128). Under the provisions of SFAS No. 128, basic net income (loss) per share is
computed using the weighted-average number of common shares outstanding during the period less
unvested restricted shares. Diluted net income (loss) per share is computed using the
weighted-average number of common and common equivalent shares of stock outstanding during the
periods utilizing the treasury stock method for stock options and unvested restricted stock.
On December 7, 2007, pursuant to the Merger Agreement (i) each issued and outstanding share of
common stock of NNN was automatically converted into 0.88 of a share of common stock of the
Company, and (ii) each issued and outstanding stock option of NNN, exercisable for common stock of
NNN, was automatically converted into the right to receive a stock option exercisable for common
stock of the Company based on the same 0.88 share conversion ratio.
Unless otherwise indicated, all pre-merger NNN share data have been adjusted to reflect the
0.88 conversion as a result of the Merger.
16
GRUBB & ELLIS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Continued
The following is a reconciliation between weighted-average shares used in the basic and
diluted earnings per share calculations:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2008
|
|
|
2007
|
|
(In thousands, except per share amounts)
|
|
|
|
|
|
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
(Loss) income from continuing operations, net of tax
|
|
$
|
(5,817
|
)
|
|
$
|
3,797
|
|
Loss from discontinued operations, net of tax
|
|
|
(51
|
)
|
|
|
(160
|
)
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$
|
(5,868
|
)
|
|
$
|
3,637
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
Denominator for basic earnings per share:
|
|
|
|
|
|
|
|
|
Weighted-average number of common shares outstanding
|
|
|
63,521
|
|
|
|
36,910
|
(1)
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
Non-vested restricted stock
|
|
|
|
(2)
|
|
|
39
|
(1)(2)
|
|
|
|
|
|
|
|
Denominator for diluted net income per share:
|
|
|
|
|
|
|
|
|
Weighted-average number of common and common
equivalent shares outstanding
|
|
|
63,521
|
|
|
|
36,949
|
|
|
|
|
|
|
|
|
Basic earnings per share
|
|
|
|
|
|
|
|
|
(Loss) income from continuing operations, net of tax
|
|
$
|
(0.09
|
)
|
|
$
|
0.10
|
|
Loss from discontinued operations, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic (loss) earnings per share
|
|
$
|
(0.09
|
)
|
|
$
|
0.10
|
|
|
|
|
|
|
|
|
Diluted earnings per share
|
|
|
|
|
|
|
|
|
(Loss) income from continuing operations, net of tax
|
|
$
|
(0.09
|
)
|
|
$
|
0.10
|
|
Loss from discontinued operations, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted (loss) earnings per share
|
|
$
|
(0.09
|
)
|
|
$
|
0.10
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Shares of NNNs common stock as of March 31, 2007, are
converted to the Companys common shares outstanding by
applying December 7, 2007 merger exchange ratio for
earnings per share disclosure purposes.
|
|
(2)
|
|
Options outstanding to purchase shares of common stock and
restricted stock, the effect of which would be
anti-dilutive, were approximately 2.3 million and 731,000
at March 31, 2008 and 2007, respectively. These shares
were not included in the computation of diluted earnings
per share because an operating loss was reported or the
option exercise price was greater than the average market
price of the common shares for the respective periods.
|
17. COMPREHENSIVE (LOSS) INCOME
The components of comprehensive income (loss), net of tax, are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2008
|
|
|
2007
|
|
Net (loss) income
|
|
$
|
(5,868
|
)
|
|
$
|
3,637
|
|
Other comprehensive (loss) income:
|
|
|
|
|
|
|
|
|
Net unrealized loss on investments, net of
taxes
|
|
|
(51
|
)
|
|
|
(13
|
)
|
Elimination of net unrealized loss on investment
in GERA warrants
|
|
|
223
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive (loss) income
|
|
$
|
(5,696
|
)
|
|
$
|
3,624
|
|
|
|
|
|
|
|
|
17
GRUBB & ELLIS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Continued
18. OTHER RELATED PARTY TRANSACTIONS
Due to Related Parties
The Company, through its consolidated subsidiaries Grubb & Ellis
Apartment REIT Advisor, LLC, and Grubb & Ellis Healthcare REIT Advisor, LLC, bears certain general
and administrative expenses in its capacity as advisor of Apartment REIT and Healthcare REIT, and
is reimbursed for these expenses. However, Apartment REIT and Healthcare REIT will not reimburse
the Company for any operating expenses that, in any four consecutive fiscal quarters, exceed the
greater of 2.0% of average invested assets (as defined in their respective advisory agreements) or
25.0% of the respective REITs net income for such year, unless the board of directors of the
respective REITs approve such excess as justified based on unusual or nonrecurring factors. All
unreimbursable amounts are expensed by the Company.
Management Fees
The Company provides both transaction and management services to parties
which are related to a principal stockholder and director of the Company, or Kojaian affiliated
entities (collectively, Kojaian Companies). In addition, the Company also paid asset management
fees to the Kojaian Companies related to properties the Company manages on their behalf. Revenue,
including reimbursable expenses related to salaries, wages and benefits, earned by the Company for
services rendered to these affiliates, including joint ventures, officers and directors and their
affiliates, was $1.8 million for the three months ended March 31, 2008. No such services were
rendered in the three months ended March 31, 2007.
Other Related Party
GERI, which is wholly owned by the Company, owns a 50.0% managing
member interest in Grubb & Ellis Apartment REIT Advisor, LLC. Grubb & Ellis Apartment Management,
LLC owns a 25.0% equity interest in Grubb & Ellis Apartment REIT Advisor, LLC and each of Scott D.
Peters, the Companys Chief Executive Officer and President, Louis J Rogers, former President of
GERI and former director of NNN, and Andrea R. Biller, the Companys General Counsel, Executive
Vice President and Secretary, received an equity interest of 18.0% of Grubb & Ellis Apartment
Management, LLC. GERI owns the remaining 64.0% membership interest.
GERI owns a 75.0% managing member interest in Grubb & Ellis Healthcare REIT Advisor, LLC.
Grubb & Ellis Healthcare Management, LLC owns a 25.0% equity interest in Grubb & Ellis Healthcare
REIT Advisor, LLC and each of Mr. Peters, Ms. Biller and Jeffery T. Hanson, the Companys Chief
Investment Officer and GERIs President, received an equity interest of 18.0% of Grubb & Ellis
Healthcare Management, LLC. GERI owns the remaining 46.0% membership interest.
Anthony W. Thompson, former Chairman of the Company and NNN, as a special member, was entitled
to receive up to $175,000 annually in compensation from each of Grubb & Ellis Apartment Management,
LLC and Grubb & Ellis Healthcare Management, LLC. Effective February 8, 2008 upon his resignation
as Chairman, he is no longer a special member. As part of his resignation, the Company has agreed
to continue to pay him up to an aggregate of $569,000, which was accrued as of March 31, 2008,
through the offering periods related to Grubb & Ellis Apartment REIT, Inc. and Grubb & Ellis
Healthcare REIT, Inc.
The grants of these membership interests in Grubb & Ellis Apartment Management, LLC and Grubb
& Ellis Healthcare Management, LLC to certain executives are being accounted for by the Company as
a profit sharing arrangement. Compensation expense is recorded by the Company when the likelihood
of payment is probable and the amount of such payment is estimable, which generally coincides with
Grubb & Ellis Apartment REIT Advisor, LLC and Grubb & Ellis Healthcare REIT Advisor, LLC recording
its revenue. Compensation expense related to this profit sharing arrangement associated with Grubb
& Ellis Apartment Management, LLC includes distributions based on membership interests of $30,000
earned by each of Mr. Peters and Ms. Biller from Grubb & Ellis Apartment Management, LLC for the
three months ended March 31, 2008. Compensation expense related to this profit sharing arrangement
associated with Grubb & Ellis Healthcare Management, LLC includes distributions based on membership
interests of $44,000 earned by Mr. Thompson for the three months ended March 31, 2007 and $107,000
and $42,000 earned by each of Messrs. Peters and Hanson and Ms. Biller for the three months ended
March 31, 2008 and 2007, respectively.
18
GRUBB & ELLIS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Continued
As of March 31, 2008 and December 31, 2007, the remaining 64.0% equity interest in Grubb &
Ellis Apartment Management, LLC and the remaining 46.0% equity interest in Grubb & Ellis Healthcare
Management, LLC was owned by GERI; however, the operating agreements require that any allocable
earnings attributable to GERIs ownership interests be paid to GERI on a quarterly basis to be used
for compensation to its employees or other individuals associated with GERI and its affiliates. As
such, Grubb & Ellis Apartment Management, LLC incurred $42,000 for the three months ended March 31,
2008 and Grubb & Ellis Healthcare Management, LLC incurred $158,000 and $107,000 for the three
months ended March 31, 2008 and 2007, respectively, to other Company employees, which was included
in compensation expense in the consolidated statement of operations.
G REIT, Inc. had agreed to pay Mr. Peters and Ms. Biller, retention bonuses in connection with
its stockholder approved liquidation of $50,000 and $25,000, respectively, upon the filing of each
of G REITs annual and quarterly reports with the SEC during the period of the liquidation process,
beginning with the annual report for the year ending December 31, 2005. These retention bonuses
were agreed to by the independent directors of G REIT and approved by the stockholders of G REIT in
connection with G REITs stockholder approved liquidation. As of March 31, 2008, Mr. Peters and
Ms. Biller have received retention bonuses of $200,000 and $100,000 from G REIT, respectively. On
January 28, 2008, G REITs remaining assets and liabilities were transferred to G REIT Liquidating
Trust. Effective January 30, 2008, and March 4, 2008, respectively, Mr. Peters and Ms. Biller
irrevocably waived their rights to receive all future retention bonuses from G REIT Liquidating
Trust. Additionally, Mr. Peters and Ms. Biller, each received a performance-based bonus of $100,000
upon the receipt by GERI of net commissions aggregating $5,000,000 or more from the sale of G REIT
properties in March 2007.
The Companys directors and officers, as well as officers, managers and employees have
purchased, and may continue to purchase, interests in offerings made by the Companys programs at a
discount. The purchase price for these interests reflects the fact that selling commissions and
marketing allowances will not be paid in connection with these sales. The net proceeds to the
Company from these sales made net of commissions will be substantially the same as the net proceeds
received from other sales.
The Company has outstanding advances totaling $678,000 and $1.0 million as of March 31, 2008
and December 31, 2007, respectively, to Colony Canyon, a property 30.0% owned by Mr. Thompson. The
advances bear interest at 10.0% per annum and are required to be repaid within one year (although
the repayments can and have been extended from time to time).
19. INCOME TAXES
The components of income tax expense (benefit) from continuing operations for the three months
ended March 31, 2008 and 2007 consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
(In thousands)
|
|
2008
|
|
|
2007
|
|
Current:
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
(3,978
|
)
|
|
$
|
3,238
|
|
State
|
|
|
(134
|
)
|
|
|
773
|
|
|
|
|
|
|
|
|
|
|
|
(4,112
|
)
|
|
|
4,011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred:
|
|
|
|
|
|
|
|
|
Federal
|
|
|
73
|
|
|
|
(1,283
|
)
|
State
|
|
|
(107
|
)
|
|
|
(239
|
)
|
|
|
|
|
|
|
|
|
|
|
(34
|
)
|
|
|
(1,522
|
)
|
|
|
|
|
|
|
|
|
|
$
|
(4,146
|
)
|
|
$
|
2,489
|
|
|
|
|
|
|
|
|
The Company recorded prepaid taxes totaling approximately $7.1 million as of March 31, 2008,
comprised primarily of prepaid tax estimates.
Grubb & Ellis Company generated a federal net operating loss (NOL) of approximately $8.2
million for the taxable period of the acquired entity ending on the merger date. This NOL
carryforward is subject to an annual limitation under IRC section 382 because the merger caused a
change of ownership of the Company of greater than
19
GRUBB & ELLIS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Continued
50.0%. The annual limitation is approximately
$7.3 million. At March 31, 2008, federal net operating loss carryforwards were available to the
Company in the amount of approximately $9.1 million which expire from 2008 to 2027.
In evaluating the need for a valuation allowance at March 31, 2008, the Company evaluated both
positive and negative evidence in accordance with the requirements of SFAS No. 109, Accounting for
Income Taxes. Given the historical earnings of the Company, management believes that it is more
likely than not that the entire federal net operating loss of $9.1 million will be used in the
foreseeable near future, and therefore has recorded no valuation allowance against the related
deferred tax asset. As of the date of the merger, Grubb & Ellis Company also had state net
operating loss carryforwards, although a substantial portion of these deferred assets were offset
by a valuation allowance, totaling $3.0 million as the future utilization of these state NOLs is
uncertain.
The differences between the total income tax provision or (benefit) of the Company for
financial statement purposes and the income taxes computed using the applicable federal income tax
rate of 35.0% for the three months ended March 31, 2008 and 2007 were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
(In thousands)
|
|
2008
|
|
|
2007
|
|
Federal income taxes at the statutory rate
|
|
$
|
(3,487
|
)
|
|
$
|
2,138
|
|
State income taxes net of federal benefit
|
|
|
(506
|
)
|
|
|
333
|
|
Credits
|
|
|
38
|
|
|
|
|
|
Non-deductible expenses
|
|
|
(220
|
)
|
|
|
18
|
|
Other
|
|
|
29
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(4,146
|
)
|
|
$
|
2,489
|
|
|
|
|
|
|
|
|
20
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
Forward-Looking Statements
This Interim Report contains statements that are not historical facts and constitute
projections, forecasts or forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. The statements are not guarantees of performance. They involve known
and unknown risks, uncertainties and other factors that may cause the actual results, performance
or achievements of the Company in future periods to be materially different from any future
results, performance or achievements expressed or suggested by these statements. You can identify
such statements by the fact that they do not relate strictly to historical or current facts. These
statements use words such as believe, expect, should, strive, plan, intend, estimate
and anticipate or similar expressions. When we discuss strategy or plans, we are making
projections, forecasts or forward-looking statements. Actual results and stockholders value will
be affected by a variety of risks and factors, including, without limitation, international,
national and local economic conditions and real estate risks and financing risks and acts of terror
or war. Many of the risks and factors that will determine these results and values are beyond the
Companys ability to control or predict. These statements are necessarily based upon various
assumptions involving judgment with respect to the future. All such forward-looking statements
speak only as of the date of this Report. The Company expressly disclaims any obligation or
undertaking to release publicly any updates of revisions to any forward-looking statements
contained herein to reflect any change in the Companys expectations with regard thereto or any
change in events, conditions or circumstances on which any such statement is based. Factors that
could adversely affect the Companys ability to obtain these results and value include, among other
things: (i) the volume of transactions and prices for real estate in the real estate markets
generally, (ii) a general or regional economic downturn that could create a recession in the real
estate markets, (iii) the Companys debt level and its ability to make interest and principal
payments, (iv) an increase in expenses related to new initiatives, investments in people,
technology, and service improvements, (v) the Companys ability to implement, and the success of,
new initiatives and investments, including expansion into new specialty areas and integration of
the Companys business units, (vi) the ability of the Company to consummate acquisitions and
integrate acquired companies and assets, and (vii) other factors described in the Companys Annual
Report on Form 10-K for the fiscal year ended December 31, 2007, filed on March 17, 2008.
Overview and Background
In certain instances throughout this Interim Report phrases such as legacy Grubb & Ellis or
similar descriptions are used to reference, when appropriate, the Company prior to the Merger.
Similarly, in certain instances throughout this Interim Report the term NNN, legacy NNN, or
similar phrases are used to reference, when appropriate, NNN Realty Advisors, Inc. prior to the
Merger.
Grubb & Ellis Company (the Company), is a commercial real estate services and investment
management firm. On December 7, 2007, NNN Realty Advisors, Inc. (NNN) effected a stock merger
(the Merger) with the legacy Grubb & Ellis Company, a 50 year old commercial real estate services
firm. Upon the closing of the Merger, a change of control of the Company occurred, as the former
stockholders of legacy NNN acquired approximately 60% of the Companys issued and outstanding
common stock. Pursuant to the Merger, each issued and outstanding share of legacy NNN automatically
converted into a 0.88 of a share of common stock of the Company. Based on accounting principles
generally accepted in the United States of America (GAAP), the Merger was accounted for using the
purchase method of accounting, and although structured as a reverse merger, legacy NNN is
considered the accounting acquirer of legacy Grubb & Ellis. As a consequence, the operating results
for the three months ended March 31, 2008 reflect the consolidated results of the newly merged
company while the three months ended March 31, 2007 include solely the operating results of legacy
NNN.
Unless otherwise indicated, all pre-merger NNN share data have been adjusted to reflect the
conversion as a result of the Merger.
NNN is a real estate investment management company and sponsor of tax deferred tenant in
common (TIC) 1031 property exchanges as well as a sponsor of public non-traded real estate
investment trusts (REITs) and other investment programs. Pursuant to the merger, the Company now
sponsors real estate investment programs under the Grubb & Ellis brand, Grubb & Ellis Realty
Investors, LLC (GERI) (formerly Triple Net Properties, LLC), to provide investors with the
opportunity to engage in tax-deferred exchanges of real property and to invest in other
21
real estate investment vehicles, and continues to offer full-service real estate asset
management services. GERI raises capital for these programs through an extensive network of
broker-dealer relationships. GERI structures, acquires, manages and disposes of real estate for
these programs, earning fees for each of these services.
Legacy Grubb & Ellis business units provide a full range of real estate services, including
transaction services, which comprises its brokerage operations, and management and consulting services for
both local and multi-location clients, which includes third-party property management, corporate
facilities management, project management, client accounting, business services and engineering
services.
Critical Accounting Policies
A discussion of the Companys critical accounting policies, which include principles of
consolidation, revenue recognition, impairment of goodwill, deferred taxes and insurance and claims
reserves, can be found in the Annual Report on Form 10-K for the year ended December 31, 2007.
There have been no material changes to these policies in 2008.
Recently Issued Accounting Pronouncement
In September 2006, the FASB issued Statement No. 157 (SFAS No. 157),
Fair Value
Measurements
. SFAS No. 157 defines fair value, establishes a framework for measuring fair value in
generally accepted accounting principles, and expands disclosures about fair value instruments. In
February 2008, the FASB issued FASB Staff Position No. FAS 157-2, Effective Date of FASB Statement
No. 157 (the FSP). The FSP amends SFAS No. 157 to delay the effective date of SFAS No. 157 for
non-financial assets and non-financial liabilities, except for items that are recognized or
disclosed at fair value in the financial statements on a recurring basis (that is, at least
annually). There was no affect on the Companys consolidated financial
statements as a result of the adoption of SFAS No. 157 as of January 1, 2008 as it relates
to financial assets and financial liabilities. For items within its scope, the FSP defers the effective date of SFAS No. 157 to fiscal
years beginning after November 15, 2008, and interim periods within those fiscal years. The
Company will adopt SFAS No. 157 as it relates to non-financial
assets and non-financial liabilities in the first quarter of 2009 and does not believe adoption will
have a material effect on its consolidated financial statements.
In March 2008, the FASB issued SFAS No. 161,
Disclosures about Derivative Instruments and
Hedging Activities
(SFAS No. 161). SFAS No. 161 is intended to improve financial reporting about
derivative instruments and hedging activities by requiring enhanced disclosures to enable investors
to better understand their effects on an entitys financial position, financial performance, and
cash flows. SFAS No. 161 achieves these improvements by requiring disclosure of the fair values of
derivative instruments and their gains and losses in a tabular format. It also provides more
information about an entitys liquidity by requiring disclosure of derivative features that are
credit risk-related. Finally, it requires cross-referencing within footnotes to enable financial
statement users to locate important information about derivative instruments. SFAS No. 161 is
effective for financial statements issued for fiscal years and interim periods beginning after
November 15, 2008, with early application encouraged. The Company will adopt SFAS No. 161 in the
first quarter of 2009 and does not believe the adoption will have a
material effect on its consolidated financial statements.
RESULTS OF OPERATIONS
Overview
The Company reported revenue of $160.6 million for the three months ended March 31, 2008,
compared with revenue of $31.7 million for the same period of 2007. Approximately $126.3 million of
the increase was attributed to revenue from legacy Grubb & Ellis Transaction Services and
Management Services businesses and the operations of the assets warehoused for GERA. The remaining
$2.6 million of the increase was attributed to legacy NNNs Investment Management business,
including $6.0 million from increased rental related revenue, offset primarily by a decrease of
$3.2 million in disposition fees resulting from the liquidation of G REIT and the sale of its
properties for the three months ended March 31, 2007. The Company completed a total of 20
acquisitions and two dispositions on behalf of the investment programs it sponsors at values of
$348.9 million and $36.1 million, respectively, during the three months ended March 31, 2008. The
net acquisitions from the Investment Management
business allowed the Company to grow its captive assets under management by more than 6.1%
during 2008. At
22
March 31, 2008, the value of the Companys assets under management was in excess of
$6.1 billion, compared to $5.8 billion at December 31, 2007.
The Company reported an operating loss of $4.1 million for the three months ended March 31,
2008, which was attributable to a number of expense factors, most of which were directly related to
the assets held for sale. These expenses included $2.9 million of merger related costs, $5.0
million of interest expense for the assets held for sale, and $1.5 million of amortization expense
associated with the assets held for sale and merger related intangible assets. These expenses were
partially offset by the operating results of the real estate held for sale.
The Companys net loss of $5.9 million included a $5.8 million net write-off of its investment
in GERA.
As a result of the Merger in December 2007, the newly combined Companys operating segments
were evaluated for reportable segments. As a result, the legacy NNN reportable segments were
realigned into a single operating and reportable segment called Investment Management. This
realignment had no impact on the Companys consolidated balance sheet, results of operations or
cash flows.
The Company reports its revenue by three business segments in accordance with the provisions
of Statement of Financial Accounting Standards No. 131,
Disclosures about Segments of an Enterprise
and Related Information
(SFAS 131). Transaction Services, which comprises its real estate
brokerage operations; Investment Management which includes providing acquisition, financing and
disposition services with respect to its programs, asset management services related to its
programs, and dealer-manager services by its securities broker-dealer, which facilitates capital
raising transactions for its TIC, REIT and other investment programs; and Management Services,
which includes property management, corporate facilities management, project management, client
accounting, business services and engineering services for unrelated third parties and the
properties owned by the programs it sponsors. Additional information on these business segments can
be found in Note 13 of Notes to Consolidated Financial Statements in Item 1 of this Report.
Three Months Ended March 31, 2008 Compared to Three Months Ended March 31, 2007
The following summarizes comparative results of operations for the periods indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
|
|
March 31,
|
|
|
Change
|
|
(In thousands)
|
|
2008
|
|
|
2007(1)
|
|
|
$
|
|
|
%
|
|
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transaction services
|
|
$
|
59,148
|
|
|
$
|
|
|
|
$
|
59,148
|
|
|
|
|
%
|
Investment management
|
|
|
26,092
|
|
|
|
29,465
|
|
|
|
(3,373
|
)
|
|
|
(11.5
|
)
|
Management services
|
|
|
61,756
|
|
|
|
|
|
|
|
61,756
|
|
|
|
|
|
Rental related
|
|
|
13,628
|
|
|
|
2,283
|
|
|
|
11,345
|
|
|
|
496.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
160,624
|
|
|
|
31,748
|
|
|
|
128,876
|
|
|
|
405.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation costs
|
|
|
120,334
|
|
|
|
13,591
|
|
|
|
106,743
|
|
|
|
785.3
|
|
General and administrative
|
|
|
21,625
|
|
|
|
9,264
|
|
|
|
12,361
|
|
|
|
133.5
|
|
Depreciation and amortization
|
|
|
5,057
|
|
|
|
514
|
|
|
|
4,543
|
|
|
|
883.9
|
|
Rental related
|
|
|
9,139
|
|
|
|
2,398
|
|
|
|
6,741
|
|
|
|
281.1
|
|
Interest
|
|
|
5,742
|
|
|
|
536
|
|
|
|
5,206
|
|
|
|
971.3
|
|
Merger related costs
|
|
|
2,869
|
|
|
|
|
|
|
|
2,869
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expense
|
|
|
164,766
|
|
|
|
26,303
|
|
|
|
138,463
|
|
|
|
526.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating (Loss) Income
|
|
|
(4,142
|
)
|
|
|
5,445
|
|
|
|
(9,587
|
)
|
|
|
(176.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other (Expense) Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity in (losses) earnings of unconsolidated entities
|
|
|
(6,014
|
)
|
|
|
169
|
|
|
|
(6,183
|
)
|
|
|
(3,658.6
|
)
|
Interest income
|
|
|
237
|
|
|
|
541
|
|
|
|
(304
|
)
|
|
|
(56.2
|
)
|
Other
|
|
|
(546
|
)
|
|
|
138
|
|
|
|
(684
|
)
|
|
|
(495.7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other (expense) income
|
|
|
(6,323
|
)
|
|
|
848
|
|
|
|
(7,171
|
)
|
|
|
(845.6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income from continuing operations before minority
interest and income tax benefit (provision)
|
|
|
(10,465
|
)
|
|
|
6,293
|
|
|
|
(16,758
|
)
|
|
|
(266.3
|
)
|
23
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
|
|
March 31,
|
|
|
Change
|
|
(In thousands)
|
|
2008
|
|
|
2007(1)
|
|
|
$
|
|
|
%
|
|
Minority interest in loss (income) of consolidated entities
|
|
|
502
|
|
|
|
(7
|
)
|
|
|
509
|
|
|
|
7271.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income from continuing operations before income tax
benefit (provision)
|
|
|
(9,963
|
)
|
|
|
6,286
|
|
|
|
(16,249
|
)
|
|
|
(258.5
|
)
|
Income tax benefit (provision)
|
|
|
4,146
|
|
|
|
(2,489
|
)
|
|
|
6,635
|
|
|
|
266.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income from continuing operations
|
|
|
(5,817
|
)
|
|
|
3,797
|
|
|
|
(9,614
|
)
|
|
|
(253.2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from discontinued operations net of taxes
|
|
|
(124
|
)
|
|
|
(220
|
)
|
|
|
96
|
|
|
|
43.6
|
|
Gain on disposal of discontinued operations net of taxes
|
|
|
73
|
|
|
|
60
|
|
|
|
13
|
|
|
|
21.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loss from discontinued operations
|
|
|
(51
|
)
|
|
|
(160
|
)
|
|
|
109
|
|
|
|
68.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (Loss) Income
|
|
$
|
(5,868
|
)
|
|
$
|
3,637
|
|
|
$
|
(9,505
|
)
|
|
|
(261.3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Based on GAAP, the operating results for the three months ended March
31, 2007 represents legacy NNN business.
|
Revenue
Transaction
and Management Services Revenue
The Company earns revenue from the delivery of transaction and management services to the
commercial real estate industry. Transaction fees include commissions from leasing, acquisition and
disposition, and agency leasing assignments as well as fees from appraisal and consulting services.
Management fees, which include reimbursed salaries, wages and benefits, comprise the remainder of
the Companys services revenue, and include fees related to both property and facilities management
outsourcing as well as project management and business services. Following the close of the merger, Grubb & Ellis Management
Services assumed management of nearly 25.7 million square feet of
NNNs 42.9 million-square-foot captive investment
management portfolio. At March 31, 2008, the Company managed approximately 218 million square feet of property.
Investment Management Revenue
Investment management revenue of $26.1 million for the three months ended March 31, 2008
reflected the revenue generated through the fee structure of the various investment products, which
included transaction related fees of $13.1 million, captive management fees of $10.3 million and
dealer-manager fees of $2.7 million. These fees include acquisition, disposition, financing, asset
management, placement, broker-dealer and other fees. Key drivers of this business are the dollar
value of equity raised, the amount of transactions that are generated in the investment product
platforms and the amount of square footage of assets under management.
In total, $263.7 million in equity was raised for the Companys investment programs for the
three months ended March 31, 2008, compared with $144.4 million in the same period in 2007. The
increase was driven by the Companys new Wealth Management platform, with $137.4 million raised for
high quality real estate investments on behalf of investors, as well as an increase in equity
raised by the Companys non-traded public REITs. During the three months ended March 31, 2008, the
Companys non-traded public REIT programs raised $74.2 million, nearly double the equity raised in
the same period in 2007. The Companys tenant-in-common 1031 exchange programs raised $52.1
million in equity during the first quarter of 2008, compared with $103.8 million in the same period
in 2007. The equity raised for the three months ended March 31, 2008 reflects current
market conditions.
Acquisition fees increased approximately $2.9 million, or 36.3%, to approximately $10.8
million for the three months ended March 31, 2008, compared to approximately $7.9 million for the
same period in 2007. Net fees as a percentage of aggregate acquisition price increased to 3.1% for
the three months ended March 31, 2008, compared to 2.0% for the same period in 2007. The
year-over-year increase in the net acquisition fee percentage was primarily attributed to a $2.8
million net change in deferred fees which positively impacted the first three months of 2008.
During the three months ended March 31, 2008, the Company acquired 20 properties on behalf of its
sponsored programs for an approximate aggregate total of $348.9 million, compared to 17 properties
(including two which were consolidated) for an approximate aggregate total of $397.5 million during
the same period in 2007.
24
Disposition fees decreased approximately $3.2 million, or 90.9%, to approximately $320,000 for
the three months ended March 31, 2008, compared to approximately $3.5 million for the same period
in 2007. The decrease reflects lower sales volume with approximately $743,000 in net fees realized
at a rate of 3.4% of aggregate sales price of $36.1 million for the three months ended March 31,
2008. This compares to $3.5 million in fees realized at a rate of 1.7% of aggregate sales price of
$254.2 million from the disposition of six properties for the same period in 2007, with an average
sales price of $42.4 million per property, which includes $3.2 million of fees from properties sold
in connection with the liquidation of G REIT, Inc. in 2007. Further reducing the disposition fees
during the three months ended March 31, 2008 and 2007 was $422,000 and $807,000, respectively, of
amortization of identified intangible contract rights associated with the acquisition of Realty as
they represent the right to future disposition fees of a portfolio of real properties under
contract.
Organization & marketing (OMEA) fees decreased approximately $1.1 million, or 48.5%, to $1.1
million for the three months ended March 31, 2008, compared to $2.2 million for the same period in
2007. OMEA fees as a percentage of equity raised for the three months ended March 31, 2008 was
2.2%, compared to 2.1% for the same period in 2007. The decrease in OMEA fees earned was primarily
due to lower TIC equity raised in 2008 of $52.1 million, compared to $103.8 million in TIC equity
raised for the same period in 2007.
Captive management fees were relatively flat year-over-year after a shift of approximately
$4.0 million of revenue to the Companys management services segment.
Rental Revenue
Rental revenue includes revenue from the warehousing of properties held for sale primarily to
the Companys Investment Management programs. These line items also include pass-through revenue
for the master lease accommodations related to the Companys TIC programs.
Operating Expense Overview
Included in the Companys operating expense of $164.8 million for the three months ended March
31, 2008 was $2.9 million of merger related costs, $4.8 million of interest expense for five assets
held for sale, and $1.5 million of amortization expense associated with two of the assets held for
sale and merger related intangible assets.
The total increase in operating expense of $138.5 million, or 526.4%, for the three months
ended March 31, 2008, compared to the same period in 2007, included $130.0 million due to the
legacy Grubb & Ellis business and $2.9 million was due to additional merger related costs. The
remaining $5.6 million of the increase was attributed to legacy NNNs Investment Management
business, including $3.6 million in rental related expense, $1.1 million in non-cash stock based
compensation, $929,000 in depreciation and amortization and $3.1 million in interest expense
activity primarily related to two properties held for sale.
Compensation Costs
Compensation costs increased $106.7 million, or 785.3%, to $120.3 million for the three months
ended March 31, 2008, compared to $13.6 million for the same period in 2007 due to approximately
$107.0 million of compensation costs attributed to legacy Grubb & Ellis operations. Compensation
costs related to the investment management business decreased 1.8% to $13.3 million, for the three
months ended March 31, 2008, compared to $13.6 million for the same period in 2007 primarily as a
result of the transfer of certain on-site property management professionals
to the Grubb & Ellis Management business subsequent to the merger. Non-cash stock
compensation expense
25
increased by $1.1 million to $2.5 million for the three months ended March 31,
2008 compared to $1.4 million for the same period in 2007.
General and Administrative
General and administrative expense increased $12.4 million, or 133.5%, to $21.6 million for
the three months ended March 31, 2008, compared to $9.3 million for the same period in 2007 due to
approximately $14.0 million of general and administration expenses attributed to legacy Grubb &
Ellis operations, partially offset by a $1.7 million decrease related to the investment management
business, primarily due to a $1.0 million decrease in legal fees.
General and administrative expense was 13.4% of total revenue for the three months ended March
31, 2008, compared with 29.2% for the same period in 2007.
Depreciation and Amortization
Depreciation and amortization increased $4.5 million, or 883.9%, to $5.1 million for the three
months ended March 31, 2008, compared to $514,000 for the same period in 2007. Approximately $3.6
million was attributed to depreciation and amortization expense from the legacy Grubb & Ellis
operations. The remaining $929,000 of the increase was related to the investment management
business, which increased to $1.4 million for the three months ended March 31, 2008, compared to
$514,000 for the same period in 2007, primarily related to two properties held for sale that were
previously held for investment on the balance sheet.
Rental Expense
Rental expense includes the related expense from the warehousing of properties held for sale
primarily to the Companys Investment Management programs. These line items also include
pass-through expenses for master lease accommodations related to the Companys TIC programs.
Interest Expense
Interest expense increased $5.2 million, or 971.3%, to $5.7 million for the three months ended
March 31, 2008, compared to $536,000 for the same period in 2007. Approximately $2.1 million was
attributed to interest expense from the legacy Grubb & Ellis operations, which included $1.7
million primarily related to three assets held for sale. The remaining $3.1 million of the increase
was related to the investment management business which increased to $3.6 million for the three
months ended March 31, 2008, compared to $536,000 for the same period in 2007. The increase in
activity was primarily related to two properties held for sale on the balance sheet.
Equity in Earnings (Losses) of Unconsolidated Entities
In the first quarter of 2008, the Company wrote off its investment in GERA, which resulted in
a net impact of $5.8 million, including $4.5 million related to stock and warrant purchases and
$1.3 million related to operating advances and third party costs.
Income Tax
The Company recognized a tax benefit of $4.1 million for the three months ended March 31,
2008, compared to a tax provision of $2.5 million for the same period in 2007. The net $6.6 million
decrease in tax expense was primarily a result of the nonrecurring tax benefit primarily due to the
write-off of the GERA investment. In addition, the Company is subject to the highest federal income
tax rate of 35% for the three months ended 2008, compared to a 34% statutory tax rate for the three
months ended March 31, 2007. (See Note 19 of Notes to Consolidated Financial Statements in Item 1
of this Report for additional information.)
Net
(Loss) Income
As a result of the above items, the Company recognized a net loss of $5.9 million, or $0.09
per fully diluted share, which included a $5.8 million net write-off of the GERA investment, $2.9
million of merger related costs,
26
$4.8 million of interest expense for five assets held for sale,
and $1.5 million of amortization expense associated with two of the assets held for sale and merger
related intangible assets, for the three months ended March 31, 2008, compared to net income of
$3.6 million, or $0.10 per fully diluted share, for the same period in 2007.
Liquidity and Capital Resources
As of March 31, 2008, cash and cash equivalents decreased by $24.2 million, from a cash
balance of $49.1 million as of December 31, 2007. The Companys operating activities used net cash
of $45.4 million, as the Company repaid net liabilities totaling $53.0 million related primarily to
incentive compensation and deferred commission payable balances which attained peak levels during
the quarter ended December 31, 2007. Other operating activities included cash totaling $7.9
million generated from the Companys net income, excluding non-cash items. The Company used $9.7
million for net investing activities, primarily due to the Companys real estate investment
activities which used net cash of $14.1 million. The Company also spent $1.5 million on purchases
of property and equipment and received $7.0 million of net collections on note and advance
receivables. Net financing activities provided cash of $30.9 million, primarily due to borrowings
totaling $30.0 million under the Companys line of credit. Financing activities for the three
months ended March 31, 2008 also included net proceeds totaling $4.4 million on mortgage loans
related to its real estate investment activities and dividend payments of $1.7 million related to
the dividend declared by the Company in December 2007.
The Company believes that it will have sufficient capital resources to satisfy its liquidity
needs over the next twelve-month period. The Company expects to meet its short-term liquidity
needs, which may include principal repayments of debt obligations, capital expenditures and
dividends to stockholders, through current and retained earnings, borrowings under its $75.0
million line of credit with Deutsche Bank Trust Company and the sale of real estate held for sale.
As of March 31, 2008, the Company had $38.0 million outstanding under the credit facility.
The Company expects to meet its long-term liquidity requirements, which may include
investments in various real estate investor programs and institutional funds, through retained cash
flow, borrowings under its line of credit, additional long-term secured and unsecured borrowings
and proceeds from the potential issuance of debt or equity securities.
As part of the Companys strategic plan, management has targeted approximately $16.5 million
of expense synergies, of which $12.5 million are expected to be realized during the twelve months
of 2008.
In connection with its recent merger, the Company has announced its intention to pay a $0.41
per share dividend per annum, which equates to approximately $26.5 million on an annual basis. The
Company declared and paid such dividends for holders of records at the end of each of the fourth
calendar quarter of 2007 and the first calendar quarter of 2008.
These dividend payments as well as
any future dividend payments are subject to quarterly review by the Board of Directors and are
limited to 50% of the Companys
trailing twelve months Consolidated Net Income plus certain
non-cash and other expense items, as defined in the
Companys current line of credit agreement.
The Company owns properties held for sale totaling approximately
$295.8 million at March 31, 2008
in which the Company has in excess of $83.0 million of its equity invested. The assets consist of
five properties that were originally purchased for re-sale to an investment company or
institutional fund sponsored by the Company. Upon the sale of these assets to a joint venture,
third party or other sponsored investment program, the Company expects to recoup a significant
amount of this equity and as a result replenish the Companys cash and cash equivalents.
Commitments, Contingencies and Other Contractual Obligations
Contractual Obligations
The Company leases office space throughout the country through non-cancelable operating
leases, which expire at various dates through February 28, 2017.
There have been no significant changes in the Companys contractual obligations since December
31, 2007.
27
Off-Balance Sheet Arrangements.
From time to time the Company provides guarantees of loans
for properties under management. As of March 31, 2008, there were 146 properties under management
with loan guarantees of approximately $3.5 billion in total principal outstanding with terms
ranging from one to 10 years, secured by properties with a total aggregate purchase price of
approximately $4.6 billion at March 31, 2008. As of December 31, 2007, there were 143 properties
under management with loan guarantees of approximately $3.4 billion in total principal outstanding
with terms ranging from one to 10 years, secured by properties with a total aggregate purchase
price of approximately $4.6 billion at December 31, 2007.
The Companys guarantees consisted of the following as of March 31, 2008 and December 31,
2007:
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
December 31,
|
(In thousands)
|
|
2008
|
|
2007
|
Non-recourse/carve-out guarantees of debt of properties
under management(1)
|
|
$
|
3,290,711
|
|
|
$
|
3,167,447
|
|
Non-recourse/carve-out guarantees of the Companys debt(1)
|
|
|
138,472
|
|
|
|
221,430
|
|
Guarantees of the Companys mezzanine debt
|
|
|
14,000
|
|
|
|
48,790
|
|
Recourse guarantees of debt of properties under management
|
|
|
32,275
|
|
|
|
47,399
|
|
Recourse guarantees of the Companys debt
|
|
|
10,000
|
|
|
|
10,000
|
|
|
|
|
(1)
|
|
A non-recourse/carve-out guaranty imposes liability on the guarantor
in the event the borrower engages in certain acts prohibited by the
loan documents.
|
28
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Interest Rate Risk
Derivatives
The Companys credit facility debt obligations and mortgage loan obligations are
floating rate obligations whose interest rate and related monthly interest payments vary with the
movement in LIBOR and/or prime lending rates. As of March 31, 2008, the outstanding principal
balances on the credit facility totaled $38.0 million and on the mortgage loan debt obligations
totaled $273.0 million. Since interest payments on any future obligation will increase if interest
rate markets rise, or decrease if interest rate markets decline, the Company will be subject to
cash flow risk related to these debt instruments. In order to mitigate this risk, the terms of the
Companys amended credit agreement required the Company to maintain interest rate hedge agreements
against 50 percent of all variable interest debt obligations. To fulfill this requirement, the
Company holds two interest rate cap agreements with Deutsche Bank AG, which provide for quarterly
payments to the Company equal to the variable interest amount paid by the Company in excess of 6.0%
of the underlying notional amounts. In addition, the terms of certain mortgage loan agreements
required the Company to purchase two-year interest rate caps on 30-day LIBOR with a LIBOR strike
price of 6.0%, thereby locking the maximum interest rate on borrowings under the mortgage loans at
7.70% for the initial two year term of the mortgage loans.
The Companys earnings are affected by changes in short-term interest rates as a result of the
variable interest rates incurred on its line of credit. The Companys line of credit debt
obligation is secured by its assets, bears interest at the banks prime rate or LIBOR plus
applicable margins based on the Companys financial performance and matures in December 2010. Since
interest payments on this obligation will increase if interest rate markets rise, or decrease if
interest rate markets decline, the Company is subject to cash flow risk related to this debt
instrument as amounts are drawn under the line of credit.
Additionally, the Companys earnings are affected by changes in short-term interest rates as a
result of the variable interest rate incurred on the mezzanine portion of the outstanding mortgages
on its real estate held for sale. As of March 31, 2008, the outstanding
principal balance on these debt obligations was $120.5 million, with a weighted average interest
rate of 6.10% per annum. Since interest payments on these obligations will increase if interest
rates rise, or decrease if interest rates decline, the Company is subject to cash flow risk related
to these debt instruments. As of March 31, 2008, for example, a 0.8% increase in interest rates
would have increased the Companys overall annual interest expense by approximately $964,000, or
13.11%. This sensitivity analysis contains certain simplifying assumptions, for example, it does
not consider the impact of changes in prepayment risk.
During the fourth quarter of 2006, GERI entered into several interest rate lock agreements
with commercial banks aggregating to approximately $400.0 million, with interest rates ranging from
6.15% to 6.19% per annum. All rate locks were cancelled and all deposits in connection with these
agreements were refunded to the Company in April 2008.
Except for the acquisition of Grubb & Ellis Alesco Global Advisors, LLC, as previously
described, the Company does not utilize financial instruments for trading or other speculative
purposes, nor does it utilize leveraged financial instruments.
Item 4. Controls and Procedures
The Company has established controls and procedures to ensure that material information
relating to the Company is made known to the officers who certify the Companys financial reports
and to the members of senior management and the Board of Directors.
Based on managements evaluation as of March 31, 2008, the Principal Executive Officer and the
Principal Financial Officer have concluded that the Companys disclosure controls and procedures
(as defined in Rules 13a-15(c) and 15d-15(e) under the Exchange Act) are effective to ensure that
information required to be disclosed by the Company is recorded, processed, summarized, and
reported within the time periods specified in the SECs rules and forms.
29
Changes in Internal Controls over Financial Reporting
There were no changes to the Companys controls over financial reporting during the first
quarter ended March 31, 2008 that have materially affected, or are reasonably likely to materially
affect, the Companys internal controls over financial reporting.
30
PART II
OTHER INFORMATION
1
Item 1. Legal Proceedings.
The disclosure called for by this item is incorporated by reference to Note 15 of Notes to
Consolidated Financial Statements.
Item 1A. Risk Factors.
There were no material changes from risk factors previously disclosed in our 2007 Annual
Report on Form 10-K, as filed with the SEC.
Item 6. Exhibits.
The exhibits listed on the Exhibit Index (following the signatures section of this report) are
included, or incorporated by reference, in this quarterly report.
|
|
|
1
|
|
Items 2, 3, 4 and 5 are not applicable for the quarter ended March 31, 2008.
|
31
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.
|
|
|
|
|
|
GRUBB & ELLIS
COMPANY
(Registrant)
|
|
Date: May 9, 2007
|
/s/ Richard W. Pehlke
|
|
|
Richard W. Pehlke
|
|
|
Chief Financial Officer
(Principal Financial and Accounting Officer)
|
|
32
Grubb & Ellis Company
EXHIBIT INDEX
for the quarter ended March 31, 2008
Exhibit
(31) Section 302 Certifications
(32) Section 906 Certification
33
Grubb & Ellis Company Common Stock (NYSE:GBE)
Historical Stock Chart
From Sep 2024 to Oct 2024
Grubb & Ellis Company Common Stock (NYSE:GBE)
Historical Stock Chart
From Oct 2023 to Oct 2024