UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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|
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þ
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the quarter ended September 30, 2009
OR
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|
o
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the transition period from
to
Commission file number 1-8122
GRUBB & ELLIS COMPANY
(Exact name of registrant as specified in its charter)
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|
Delaware
(State or other jurisdiction of
incorporation or organization)
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94-1424307
(IRS Employer
Identification No.)
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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 has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter
period that the registrant was required to submit and post such files). Yes
o
No
o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, 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):
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Large accelerated filer
o
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Accelerated filer
þ
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Non-accelerated filer
o
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Smaller reporting company
o
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(Do not check if a smaller reporting company)
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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 October 31, 2009
was 65,180,830 shares.
Part I FINANCIAL INFORMATION
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Item 1.
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Financial Statements.
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GRUBB & ELLIS COMPANY
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
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September 30,
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December 31,
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2009
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2008
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(Unaudited)
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ASSETS
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Current assets:
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Cash and cash equivalents
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$
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9,444
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$
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32,985
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Restricted cash
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12,476
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36,047
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Investment in marketable securities
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|
631
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1,510
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Current portion of accounts receivable from related parties net
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7,756
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22,630
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Current portion of advances to related parties net
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26
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2,982
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Notes receivable from related party net
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9,100
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9,100
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Service fees receivable net
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22,208
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|
26,987
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Current portion of professional service contracts net
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3,372
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4,326
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Real estate deposits and pre-acquisition costs
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4,127
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5,961
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Properties held for sale net
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22,468
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78,708
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Identified intangible assets and other assets held for sale net
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4,823
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25,751
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Prepaid expenses and other assets
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14,115
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23,620
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|
|
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Total current assets
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110,546
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270,607
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Accounts receivable from related parties net
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13,819
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11,072
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Advances to related parties net
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6,897
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11,499
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Professional service contracts net
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8,613
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10,320
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Investments in unconsolidated entities
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3,341
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8,733
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Property held for investment net
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82,808
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88,699
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Property, equipment and leasehold improvements net
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14,078
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14,016
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Identified intangible assets net
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96,455
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100,631
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Other assets net
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5,621
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4,700
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Total assets
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$
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342,178
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$
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520,277
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|
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LIABILITIES AND STOCKHOLDERS (DEFICIT) EQUITY
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Current liabilities:
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|
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|
|
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Accounts payable and accrued expenses
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$
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61,179
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|
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$
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70,222
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Due to related parties
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1,992
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|
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2,447
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Current portion of line of credit
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62,709
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63,000
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Current portion of capital lease obligations
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|
984
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|
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|
333
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Notes payable of properties held for sale
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31,613
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108,959
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Liabilities of properties held for sale net
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2,376
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|
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9,257
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Other liabilities
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41,117
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37,550
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Deferred tax liability
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4,822
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2,080
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Total current liabilities
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206,792
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293,848
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Long-term liabilities:
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Senior notes
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16,277
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16,277
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Notes payable and capital lease obligations
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107,953
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107,203
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Other long-term liabilities
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11,262
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11,875
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Deferred tax liabilities
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15,664
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17,298
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|
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|
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Total liabilities
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357,948
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446,501
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Commitments and contingencies (See Note 14)
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Stockholders (deficit) equity:
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Preferred stock: $0.01 par value; 10,000,000 shares authorized
as of September 30, 2009 and December 31, 2008; no shares issued
and outstanding as of September 30, 2009 and December 31, 2008
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Common stock: $0.01 par value; 100,000,000 shares authorized;
65,180,830 and 65,382,601 shares issued and outstanding as of
September 30, 2009 and December 31, 2008, respectively
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651
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654
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|
Additional paid-in capital
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411,913
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402,780
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|
Accumulated deficit
|
|
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(428,931
|
)
|
|
|
(333,263
|
)
|
Other comprehensive loss
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|
|
(43
|
)
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|
|
|
|
|
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|
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Total Grubb & Ellis Company stockholders (deficit) equity
|
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(16,410
|
)
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70,171
|
|
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|
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Noncontrolling interests
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|
640
|
|
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|
3,605
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|
|
|
|
|
|
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Total (deficit) equity
|
|
|
(15,770
|
)
|
|
|
73,776
|
|
|
|
|
|
|
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|
Total liabilities and stockholders (deficit) equity
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|
$
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342,178
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|
|
$
|
520,277
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|
|
|
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See accompanying notes to consolidated financial statements.
2
GRUBB & ELLIS COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)
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For the Three Months
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For the Nine Months
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Ended September 30,
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Ended September 30,
|
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|
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2009
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|
2008
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|
2009
|
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|
2008
|
|
REVENUE
|
|
|
|
|
|
|
|
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|
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|
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Management services
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$
|
67,456
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$
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63,479
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|
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$
|
199,636
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|
|
$
|
185,855
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|
Transaction services
|
|
|
46,321
|
|
|
|
57,502
|
|
|
|
118,793
|
|
|
|
173,191
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|
Investment management
|
|
|
14,829
|
|
|
|
24,116
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|
|
|
43,912
|
|
|
|
84,480
|
|
Rental related
|
|
|
7,498
|
|
|
|
8,119
|
|
|
|
22,754
|
|
|
|
25,302
|
|
|
|
|
|
|
|
|
|
|
|
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Total revenue
|
|
|
136,104
|
|
|
|
153,216
|
|
|
|
385,095
|
|
|
|
468,828
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
OPERATING EXPENSE
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation costs
|
|
|
116,339
|
|
|
|
120,765
|
|
|
|
342,072
|
|
|
|
365,488
|
|
General and administrative
|
|
|
25,464
|
|
|
|
40,258
|
|
|
|
83,801
|
|
|
|
84,387
|
|
Depreciation and amortization
|
|
|
3,504
|
|
|
|
4,884
|
|
|
|
8,368
|
|
|
|
13,692
|
|
Rental related
|
|
|
4,961
|
|
|
|
4,337
|
|
|
|
16,159
|
|
|
|
15,384
|
|
Interest
|
|
|
3,741
|
|
|
|
2,947
|
|
|
|
12,490
|
|
|
|
9,928
|
|
Merger related costs
|
|
|
|
|
|
|
2,657
|
|
|
|
|
|
|
|
10,217
|
|
Real estate related impairments
|
|
|
2,393
|
|
|
|
34,778
|
|
|
|
16,615
|
|
|
|
34,778
|
|
Goodwill and intangible assets impairment
|
|
|
583
|
|
|
|
|
|
|
|
583
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expense
|
|
|
156,985
|
|
|
|
210,626
|
|
|
|
480,088
|
|
|
|
533,874
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING LOSS
|
|
|
(20,881
|
)
|
|
|
(57,410
|
)
|
|
|
(94,993
|
)
|
|
|
(65,046
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER INCOME (EXPENSE)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity in losses of unconsolidated entities
|
|
|
(224
|
)
|
|
|
(5,859
|
)
|
|
|
(1,635
|
)
|
|
|
(10,602
|
)
|
Interest income
|
|
|
188
|
|
|
|
234
|
|
|
|
472
|
|
|
|
757
|
|
Other income (loss)
|
|
|
272
|
|
|
|
(508
|
)
|
|
|
394
|
|
|
|
(3,801
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income (expense)
|
|
|
236
|
|
|
|
(6,133
|
)
|
|
|
(769
|
)
|
|
|
(13,646
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations before income tax (provision)
benefit
|
|
|
(20,645
|
)
|
|
|
(63,543
|
)
|
|
|
(95,762
|
)
|
|
|
(78,692
|
)
|
Income tax (provision) benefit
|
|
|
(277
|
)
|
|
|
15,943
|
|
|
|
(587
|
)
|
|
|
23,124
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations
|
|
|
(20,922
|
)
|
|
|
(47,600
|
)
|
|
|
(96,349
|
)
|
|
|
(55,568
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from discontinued operations net of taxes
|
|
|
(535
|
)
|
|
|
(14,941
|
)
|
|
|
(379
|
)
|
|
|
(18,871
|
)
|
Gain (loss) on disposal of discontinued operations net of taxes
|
|
|
|
|
|
|
(185
|
)
|
|
|
(626
|
)
|
|
|
181
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loss from discontinued operations
|
|
|
(535
|
)
|
|
|
(15,126
|
)
|
|
|
(1,005
|
)
|
|
|
(18,690
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
(21,457
|
)
|
|
|
(62,726
|
)
|
|
|
(97,354
|
)
|
|
|
(74,258
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to noncontrolling interests
|
|
|
(98
|
)
|
|
|
(6,444
|
)
|
|
|
(1,686
|
)
|
|
|
(6,298
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to Grubb & Ellis Company
|
|
$
|
(21,359
|
)
|
|
$
|
(56,282
|
)
|
|
$
|
(95,668
|
)
|
|
$
|
(67,960
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic loss per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations attributable to Grubb &
Ellis Company
|
|
$
|
(0.33
|
)
|
|
$
|
(0.65
|
)
|
|
$
|
(1.49
|
)
|
|
$
|
(0.79
|
)
|
Loss from discontinued operations attributable to Grubb &
Ellis Company
|
|
|
(0.01
|
)
|
|
|
(0.23
|
)
|
|
|
(0.02
|
)
|
|
|
(0.28
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per share
|
|
$
|
(0.34
|
)
|
|
$
|
(0.88
|
)
|
|
$
|
(1.51
|
)
|
|
$
|
(1.07
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted loss per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations attributable to Grubb &
Ellis Company
|
|
$
|
(0.33
|
)
|
|
$
|
(0.65
|
)
|
|
$
|
(1.49
|
)
|
|
$
|
(0.79
|
)
|
Loss from discontinued operations attributable to Grubb &
Ellis Company
|
|
|
(0.01
|
)
|
|
|
(0.23
|
)
|
|
|
(0.02
|
)
|
|
|
(0.28
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per share
|
|
$
|
(0.34
|
)
|
|
$
|
(0.88
|
)
|
|
$
|
(1.51
|
)
|
|
$
|
(1.07
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic weighted average shares outstanding
|
|
|
63,628
|
|
|
|
63,601
|
|
|
|
63,618
|
|
|
|
63,574
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted weighted average shares outstanding
|
|
|
63,628
|
|
|
|
63,601
|
|
|
|
63,618
|
|
|
|
63,574
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends declared per share
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
0.2050
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
3
GRUBB & ELLIS COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
For the Nine Months
|
|
|
|
Ended September 30,
|
|
|
|
2009
|
|
|
2008
|
|
CASH FLOWS FROM OPERATING ACTIVITIES
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(97,354
|
)
|
|
$
|
(74,258
|
)
|
Adjustments to reconcile net loss to net cash used in operating activities:
|
|
|
|
|
|
|
|
|
Loss on sale of real estate
|
|
|
1,031
|
|
|
|
|
|
Equity in losses of unconsolidated entities
|
|
|
1,635
|
|
|
|
10,602
|
|
Depreciation and amortization (including amortization of signing bonuses)
|
|
|
12,770
|
|
|
|
28,017
|
|
Loss on disposal of property, equipment and leasehold improvements
|
|
|
449
|
|
|
|
312
|
|
Impairment of real estate
|
|
|
16,365
|
|
|
|
45,767
|
|
Impairment of goodwill and intangibles
|
|
|
583
|
|
|
|
|
|
Stock-based compensation
|
|
|
8,734
|
|
|
|
8,484
|
|
Compensation expense on profit sharing arrangements
|
|
|
102
|
|
|
|
1,716
|
|
Amortization/write-off of intangible contractual rights
|
|
|
776
|
|
|
|
1,179
|
|
Amortization of deferred financing costs
|
|
|
1,501
|
|
|
|
342
|
|
(Gain) loss on marketable equity securities
|
|
|
(449
|
)
|
|
|
3,344
|
|
Deferred income taxes
|
|
|
1,108
|
|
|
|
(28,849
|
)
|
Allowance for uncollectible accounts
|
|
|
12,824
|
|
|
|
10,861
|
|
Loss on write-off of real estate deposit and pre-acquisition costs
|
|
|
122
|
|
|
|
|
|
Other operating noncash gains
|
|
|
|
|
|
|
612
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts receivable from related parties
|
|
|
9,750
|
|
|
|
4,635
|
|
Prepaid expenses and other assets
|
|
|
7,463
|
|
|
|
(24,395
|
)
|
Accounts payable and accrued expenses
|
|
|
(7,167
|
)
|
|
|
(31,103
|
)
|
Other liabilities
|
|
|
704
|
|
|
|
8,614
|
|
|
|
|
|
|
|
|
Net cash used in operating activities
|
|
|
(29,053
|
)
|
|
|
(34,120
|
)
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES
|
|
|
|
|
|
|
|
|
Purchases of property and equipment
|
|
|
(2,332
|
)
|
|
|
(3,359
|
)
|
Tenant improvements and capital expenditures
|
|
|
(2,571
|
)
|
|
|
(2,958
|
)
|
Purchases of marketable equity securities
|
|
|
(4,231
|
)
|
|
|
(505
|
)
|
Proceeds from sale of marketable equity securities
|
|
|
|
|
|
|
2,653
|
|
Advances to related parties
|
|
|
(3,808
|
)
|
|
|
(10,169
|
)
|
Proceeds from repayment of advances to related parties
|
|
|
1,934
|
|
|
|
22,543
|
|
Payments to related parties
|
|
|
(455
|
)
|
|
|
(2,217
|
)
|
Origination of notes receivable to related parties
|
|
|
|
|
|
|
(15,100
|
)
|
Repayment of notes receivable from related parties
|
|
|
|
|
|
|
13,600
|
|
Investments in unconsolidated entities
|
|
|
(3,963
|
)
|
|
|
(673
|
)
|
Distributions of capital from unconsolidated entities
|
|
|
91
|
|
|
|
603
|
|
Acquisition of properties
|
|
|
|
|
|
|
(111,690
|
)
|
Proceeds from sale of properties
|
|
|
93,471
|
|
|
|
|
|
Real estate deposits and pre-acquisition costs
|
|
|
(2,565
|
)
|
|
|
(56,568
|
)
|
Proceeds from collection of real estate deposits and pre-acquisition costs
|
|
|
4,277
|
|
|
|
81,851
|
|
Restricted cash
|
|
|
1,337
|
|
|
|
15,270
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities
|
|
|
81,185
|
|
|
|
(66,719
|
)
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
Advances on line of credit
|
|
|
11,389
|
|
|
|
55,000
|
|
Repayments on line of credit
|
|
|
(11,389
|
)
|
|
|
|
|
Borrowings on notes payable
|
|
|
936
|
|
|
|
94,149
|
|
Repayments of notes payable and capital lease obligations
|
|
|
(79,154
|
)
|
|
|
(56,219
|
)
|
Other financing costs
|
|
|
(137
|
)
|
|
|
52
|
|
Deferred financing costs
|
|
|
(1,456
|
)
|
|
|
(2,693
|
)
|
Net proceeds from the issuance of common stock
|
|
|
|
|
|
|
314
|
|
Repurchase of common stock
|
|
|
|
|
|
|
(1,840
|
)
|
Dividends paid to common stockholders
|
|
|
|
|
|
|
(15,129
|
)
|
Contributions from noncontrolling interests
|
|
|
5,827
|
|
|
|
15,323
|
|
Distributions to noncontrolling interests
|
|
|
(1,689
|
)
|
|
|
(3,020
|
)
|
|
|
|
|
|
|
|
Net cash (used in) provided by financing activities
|
|
|
(75,673
|
)
|
|
|
85,937
|
|
|
|
|
|
|
|
|
NET DECREASE IN CASH AND CASH EQUIVALENTS
|
|
|
(23,541
|
)
|
|
|
(14,902
|
)
|
Cash and cash equivalents Beginning of period
|
|
|
32,985
|
|
|
|
49,328
|
|
|
|
|
|
|
|
|
Cash and cash equivalents End of period
|
|
$
|
9,444
|
|
|
$
|
34,426
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL DISCLOSURE OF NONCASH ACTIVITIES
|
|
|
|
|
|
|
|
|
Issuance of warrants
|
|
$
|
534
|
|
|
$
|
|
|
|
|
|
|
|
|
|
Capital lease obligations
|
|
$
|
2,274
|
|
|
$
|
|
|
|
|
|
|
|
|
|
Deconsolidation of assets held by variable interest entities
|
|
$
|
|
|
|
$
|
243,398
|
|
|
|
|
|
|
|
|
Deconsolidation of liabilities held by variable interest entities
|
|
$
|
|
|
|
$
|
198,409
|
|
|
|
|
|
|
|
|
Deconsolidation of sponsored mutual fund
|
|
$
|
5,517
|
|
|
$
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
4
GRUBB & ELLIS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Overview
Grubb & Ellis Company (the Company or Grubb & Ellis), a Delaware corporation founded
over 50 years ago in Northern California, is a commercial real estate services and investment
management firm. 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 public
non-traded real estate investment trusts (REITs), as well as a sponsor of tax deferred
tenant-in-common (TIC) 1031 property exchanges and other investment programs. Upon the closing
of the Merger, a change of control occurred. The former stockholders of NNN acquired
approximately 60% of the Companys issued and outstanding common stock.
The Company offers property owners, corporate occupants and program investors comprehensive
integrated real estate solutions, including transactions, management, consulting and investment
advisory services supported by market research and local market expertise.
In certain instances throughout these Financial Statements phrases such as legacy Grubb &
Ellis or similar descriptions are used to reference, when appropriate, Grubb & Ellis prior to
the Merger. Similarly, in certain instances throughout these Financial Statements the term NNN,
legacy NNN, or similar phrases are used to reference, when appropriate, NNN Realty Advisors,
Inc. prior to the Merger.
Basis of Presentation
The consolidated financial statements include the accounts of the Company and its wholly
owned and majority-owned controlled subsidiaries, variable interest entities (VIEs) in which
the Company is the primary beneficiary, and partnerships/limited liability companies (LLCs) in
which the Company is the managing member or general partner and the other partners/members lack
substantive rights (hereinafter collectively referred to as the Company), and are prepared in
accordance with generally accepted accounting principles (GAAP) 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 GAAP for complete financial
statements. These consolidated financial statements should be read in conjunction with the
Companys Annual Report on Form 10-K/A for the year ended December 31, 2008. 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.
The Company consolidates entities that are VIEs when the Company is deemed to be the
primary beneficiary of the VIE. For entities in which (i) the Company is not deemed to be the
primary beneficiary, (ii) the Companys ownership is 50.0% or less and (iii) the Company has the
ability to exercise significant influence, the Company uses the equity accounting method (i.e.
at cost, increased or decreased by the Companys share of earnings or losses, plus contributions
less distributions). The Company also uses the equity method of accounting for
jointly-controlled tenant-in-common interests. As reconsideration events occur, the Company will
reconsider its determination of whether an entity is a VIE and who the primary beneficiary is to
determine if there is a change in the original determinations and will report such changes on a
quarterly basis.
As of September 30, 2009, the Company has classified two of its remaining four properties
as properties held for sale in its consolidated balance sheets and has included the operations
of such properties in discontinued operations in the consolidated statements of operations for
all periods presented as required by the Property, Plant and Equipment Topic of the Financial
Accounting Standards Board (FASB) Accounting Standards Codification (Codification). All four
remaining properties had been previously classified as held for sale in the Annual Report on
Form 10-K/A for the year ended December 31, 2008 and the Quarterly Report on Form 10-Q for the
period ended March 31, 2009. However, as of June 30, 2009, one of these properties, and as of
September 30, 2009 a second of these properties, no longer met the held for sale criteria under
the requirements of the Property, Plant and Equipment Topic of the FASB Codification and,
accordingly, each was reclassified to properties held for investment in the consolidated balance
sheets with the operations of such property included in continuing operations in the
consolidated statements of operations for all periods presented.
Use of Estimates
The financial statements have been prepared in conformity with GAAP, which require
management to make estimates and assumptions that affect the reported amounts of assets and
liabilities (including disclosure of contingent assets and liabilities) as of 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.
5
GRUBB & ELLIS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (continued)
Reclassifications
Certain reclassifications have been made to prior year and prior period amounts in order to
conform to the current period presentation. These reclassifications have no effect on reported
net loss and are of a normal recurring nature.
Restricted Cash
Restricted cash is comprised primarily of cash and loan impound reserve accounts for
property taxes, insurance, capital improvements, and tenant improvements related to consolidated
properties.
Fair Value Measurements
In September 2006, the FASB issued the requirements of the Fair Value Measurements and
Disclosures Topic of the FASB Codification. The Topic 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 amended the Topic to delay
the effective date of the Fair Value Measurements and Disclosures 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 the Topic as
of January 1, 2008 as it relates to financial assets and financial liabilities. For items within
its scope, the amended Fair Value Measurements and Disclosures Topic deferred the effective date
of Fair Value Measurements and Disclosures to fiscal years beginning after November 15, 2008,
and interim periods within those fiscal years. The Company adopted the requirements of the Topic
as it relates to non-financial assets and non-financial liabilities in the first quarter of
2009, which did not have a material impact on the consolidated financial statements.
The Fair Value Measurements and Disclosures Topic establishes a three-tiered fair value
hierarchy that prioritizes inputs to valuation techniques used in fair value calculations. Level
1 inputs are the highest priority and are quoted prices in active markets for identical assets
or liabilities. Level 2 inputs reflect other than quoted prices included in Level 1 that are
either observable directly or through corroboration with observable market data. Level 3 inputs
are unobservable inputs, due to little or no market activity for the asset or liability, such as
internally-developed valuation models.
The following table presents changes in financial and nonfinancial assets
measured at fair value on either a recurring or nonrecurring basis for the nine months ended
September 30, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quoted Prices in
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Active Markets
|
|
|
Significant Other
|
|
|
Significant
|
|
|
|
|
|
|
|
|
|
|
for Identical
|
|
|
Observable
|
|
|
Unobservable
|
|
|
Total
|
|
|
|
September 30,
|
|
|
Assets
|
|
|
Inputs
|
|
|
Inputs
|
|
|
Impairment
|
|
Assets (in thousands)
|
|
2009
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Losses
|
|
Investments in
marketable equity
securities
|
|
$
|
631
|
|
|
$
|
631
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Properties held for sale
|
|
$
|
22,468
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
22,468
|
|
|
$
|
250
|
|
Property held for
investment
|
|
$
|
82,808
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
82,808
|
|
|
$
|
(7,050
|
)
|
Investments in
unconsolidated entities
|
|
$
|
3,341
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
3,341
|
|
|
$
|
(9,565
|
)
|
Fair Value of Financial Instruments
The Financial Instruments Topic, requires disclosure of fair value of financial
instruments, whether or not recognized on the face of the balance sheet, for which it is
practical to estimate that value. The Topic defines fair value as the quoted market prices for
those instruments that are actively traded in financial markets. In cases where quoted market
prices are not available, fair values are estimated using present value or other valuation
techniques. The fair value estimates are made at the end of each quarter based on available
market information and judgments about the financial instrument, such as estimates of timing and
amount of expected future cash flows. Such estimates do not reflect any premium or discount
that could result from offering for sale at one time the Companys entire holdings of a
particular financial instrument, nor do they consider that tax impact of the realization of
unrealized gains or losses. In many cases, the fair value estimates cannot be substantiated by
comparison to independent markets, nor can the disclosed value be realized in immediate
settlement of the instrument.
6
GRUBB & ELLIS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (continued)
As of September 30, 2009, the fair values of the Companys notes payable, senior notes and
line of credit were calculated to be approximately $120.3 million, $15.8 million and $42.6
million, respectively, compared to the carrying values of $138.6 million, $16.3 million and
$63.0 million, respectively. The calculation was based on assumed discount rates ranging from
8.25% to 10.25%. In addition, the First Credit Facility Letter Amendment (as defined and
discussed in Note 11) granted the Company a one-time right, exercisable by November 30, 2009, to
prepay the Credit Facility (as defined in Note 11) in full for a reduced principal amount equal
to 65% of the aggregate principal amount of the Credit Facility then outstanding. Calculation of
the fair value of the line of credit assumed a high probability the Credit Facility would be
prepaid at the reduced principal amount.
As of December 31, 2008, the fair values of the Companys notes payable, senior notes and
lines of credit, which were calculated based on assumed discount rates ranging from 8.4% to
10.4%, were approximately $195.4 million, $15.5 million and $60.0 million, respectively,
compared to the carrying values of $216.0 million, $16.3 million and $63.0 million,
respectively. The amounts recorded for accounts receivable, notes receivable, advances and
accounts payable and accrued liabilities approximate fair value due to their short-term nature.
Noncontrolling Interests
In December 2007, the FASB issued an amendment to the requirements of the Consolidation
Topic. The Consolidation Topic established new accounting and reporting standards for the
non-controlling interest in a subsidiary and for the deconsolidation of a subsidiary. The Topic
requires that noncontrolling interests be presented as a component of consolidated stockholders
equity, eliminates minority interest accounting such that the amount of net income attributable
to the noncontrolling interests is presented as part of consolidated net income in the
accompanying consolidated statements of operations and not as a separate component of income and
expense, and requires that upon any changes in ownership that result in the loss of control of
the subsidiary, the noncontrolling interest be re-measured at fair value with the resultant gain
or loss recorded in net income. The requirements of the Topic became effective for fiscal years
beginning on or after December 15, 2008. The Company adopted the requirements of the Topic on a
retrospective basis on January 1, 2009. The adoption of the requirements of the Topic had an
impact on the presentation and disclosure of noncontrolling (minority) interests in the
consolidated financial statements. As a result of the retrospective presentation and disclosure
requirements of the Topic, the Company is required to reflect the change in presentation and
disclosure for all periods presented. Principal effect on the consolidated balance sheet as of
December 31, 2008 related to the adoption of the requirements of the Topic was the change in
presentation of minority interest from mezzanine to redeemable noncontrolling interest, as
reported herein. Additionally, the adoption of the requirements of the Topic had the effect of
reclassifying (income) loss attributable to noncontrolling interest in the consolidated
statements of operations from minority interest to separate line items. The Topic also requires
that net income (loss) be adjusted to include the net (income) loss attributable to the
noncontrolling interest, and a new line item for net income (loss) attributable to controlling
interest be presented in the consolidated statements of operations.
A noncontrolling interest relates to the interest in the consolidated entities that are not
wholly owned by the Company. As a result of adopting the requirements of the Consolidation Topic
on January 1, 2009, the Company has restated the December 31, 2008 consolidated balance sheet,
as well as the statement of operations for the three and nine months ended September 30, 2008 as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As Previously
|
|
|
|
|
|
|
|
As of December 31, 2008
|
|
Reported
|
|
|
Adjustment
|
|
|
As Adjusted
|
|
Minority interests
|
|
$
|
3,605
|
|
|
$
|
(3,605
|
)
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noncontrolling interest equity
|
|
$
|
|
|
|
$
|
3,605
|
|
|
$
|
3,605
|
|
|
|
|
|
|
|
|
|
|
|
|
Total equity
|
|
$
|
70,171
|
|
|
$
|
3,605
|
|
|
$
|
73,776
|
|
|
|
|
|
|
|
|
|
|
|
|
7
GRUBB & ELLIS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As Previously
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2008
|
|
Reported
|
|
|
Adjustment
|
|
|
As Adjusted
|
|
Minority interest in loss
|
|
$
|
6,444
|
|
|
$
|
(6,444
|
)
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(56,282
|
)
|
|
$
|
(6,444
|
)
|
|
$
|
(62,726
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Loss attributable to noncontrolling interests
|
|
$
|
|
|
|
$
|
(6,444
|
)
|
|
$
|
(6,444
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As Previously
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2008
|
|
Reported
|
|
|
Adjustment
|
|
|
As Adjusted
|
|
Minority interest in income
|
|
$
|
6,298
|
|
|
$
|
(6,298
|
)
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(67,960
|
)
|
|
$
|
(6,298
|
)
|
|
$
|
(74,258
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Income attributable to noncontrolling interests
|
|
$
|
|
|
|
$
|
(6,298
|
)
|
|
$
|
(6,298
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Recently Issued Accounting Pronouncements
The Company follows the requirements of the Fair Value Measurements and Disclosures Topic
of the FASB Accounting Standards Codification. The Topic 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 amended the Topic to delay
the effective date of the Fair Value Measurements and Disclosures 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 the Topic as
of January 1, 2008 as it relates to financial assets and financial liabilities. For items within
its scope, the amended Fair Value Measurements and Disclosures Topic defered the effective date
of Fair Value Measurements and Disclosures to fiscal years beginning after November 15, 2008,
and interim periods within those fiscal years. The Company adopted the requirements of the Topic
as it relates to non-financial assets and non-financial liabilities in the first quarter of
2009, which did not have a material impact on the consolidated financial statements.
In December 2007, the FASB issued an amendment to the requirements of the Business
Combinations Topic. The amended Topic requires an acquiring entity to recognize all the assets
acquired and liabilities assumed in a transaction at the acquisition-date fair value with
limited exceptions. The Topic changed the accounting treatment and disclosure for certain
specific items in a business combination. The Topic applies prospectively to business
combinations for which the acquisition date is on or after the beginning of the first annual
reporting period beginning on or after December 15, 2008. The Company adopted the requirements
of the Topic on a prospective basis on January 1, 2009. The adoption of the requirements of the
Topic will materially affect the accounting for any future business combinations.
In March 2008, the FASB issued an amendment to the requirements of the Derivatives and
Hedging Topic. The requirements of the amended Topic are intended to improve financial reporting
of 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. The requirements of the amended Topic achieve 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. The requirements of the amended Topic became effective
for financial statements issued for fiscal years and interim periods beginning after November
15, 2008, with early application encouraged. The Company adopted the requirements of the amended
Topic in the first quarter of 2009. The adoption of the requirements of the amended Topic did
not have a material impact on the consolidated financial statements.
In April 2008, the FASB issued an amendment to the requirements of Intangibles-Goodwill and
Other Topic. The requirements of the amended Topic are intended to improve the consistency
between the useful life of recognized intangible assets and the period of expected cash flows
used to measure the fair value of the assets. The amendment changes the factors an entity should
consider in developing renewal or extension assumptions in determining the useful life of
recognized intangible assets. In addition the amended Topic requires disclosure of the entitys
accounting policy regarding costs incurred to renew or extend the term of recognized intangible
assets, the weighted average period to the next renewal or extension, and the total amount of
capitalized costs incurred to renew or extend the term of recognized intangible assets. The
requirements of the amended Topic are effective for financial statements issued for fiscal years
and interim periods beginning after December 15, 2008. The Company adopted the requirements of
the amended Topic on January 1, 2009. The adoption of the requirements of the amended Topic did
not have a material impact on the consolidated financial statements.
8
GRUBB & ELLIS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (continued)
In June 2008, the FASB issued an amendment to the requirements of the Earnings Per Share
Topic
,
which addresses whether instruments granted in share-based payment transactions are
participating securities prior to vesting and, therefore, need to be included in the computation of earnings per share under the two-class method which
apply to the Company because it grants instruments to employees in share-based payment
transactions that meet the definition of participating securities, is effective retrospectively
for financial statements issued for fiscal years and interim periods beginning after December
15, 2008. The Company adopted the requirements of the amended Topic in the first quarter of
2009. The adoption of the requirements of the amended Topic did not have a material impact on
the consolidated financial statements.
In April 2009, the FASB issued an amendment to the requirements of the Financial
Instruments Topic. The amended Topic relates to fair value disclosures for any financial
instruments that are not currently reflected on the balance sheet at fair value. Prior to
issuing the requirements of the amended Topic, fair values for these assets and liabilities were
only disclosed once a year. The amended Topic now requires these disclosures on a quarterly
basis, providing qualitative and quantitative information about fair value estimates for all
those financial instruments not measured on the balance sheet at fair value. The adoption of the
requirements of the amended Topic did not have a material impact on the consolidated financial
statements.
The requirements of the Investments-Debt and Equity Securities Topic, is intended to bring
greater consistency to the timing of impairment recognition, and provide greater clarity to
investors about the credit and noncredit components of impaired debt securities that are not
expected to be sold. The Topic also requires increased and more timely disclosures regarding
expected cash flows, credit losses, and an aging of securities with unrealized losses. The
adoption of the requirements of the Topic did not have a material impact on the consolidated
financial statements.
In April 2009, the FASB issued an amendment to the requirements of the Fair Value
Measurements and Disclosures Topic. The Topic relates to determining fair values when there is
no active market or where the price inputs being used represent distressed sales. It states that
the objective of fair value measurement is to reflect how much an asset would be sold for in an
orderly transaction (as opposed to a distressed or forced transaction) at the date of the
financial statements under current market conditions. Specifically, the requirements of the
Topic reaffirms the need to use judgment to ascertain if a formerly active market has become
inactive and in determining fair values when markets have become inactive. The adoption of the
amended Topic did not have a material impact on the consolidated financial statements.
In April 2009, the FASB issued an amendment to the requirements of the Business
Combinations Topic. The requirements of the Business Topic clarifies to address application
issues on the accounting for contingencies in a business combination. The requirements of the
amended Topic is effective for assets or liabilities arising from contingencies in business
combinations acquired on or after January 1, 2009. The adoption of the requirements of the
amended Topic did not have a material impact on the consolidated financial statements.
9
GRUBB & ELLIS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (continued)
In June 2009, the FASB issued an amendment to the requirements of the Transfers and
Servicing Topic, which addresses the effects of eliminating the qualifying SPE concept and
redefines who the primary beneficiary is for purposes of determining which variable interest
holder should consolidated the variable interest entity. The requirements of the amended Topic
become effective for annual periods beginning after November 15, 2009. The Company is reviewing
any impact this may have on the consolidated financial statements.
In June 2009, the FASB issued SFAS No. 168,
The FASB Accounting Standards Codification and
the Hierarchy of Generally Accepted Accounting Principles a Replacement of FASB Statement No.
162
(SFAS No. 168). SFAS No. 168 established that the
FASB Accounting Standards Codification
(the Codification) became the single official source of authoritative U.S. GAAP, other than
guidance issued by the SEC. Following this statement, the FASB will not issue new standards in
the form of Statements, Staff Positions or Emerging Issues Task Force Abstracts. Instead, the
FASB will issue Accounting Standards Updates. All guidance contained in the Codification carries
an equal level of authority. The GAAP hierarchy was modified to include only two levels of GAAP:
authoritative and non-authoritative. All non-grandfathered, non-SEC accounting literature not
included in the Codification became non-authoritative. The Codification, which changes the
referencing of financial standards, became effective for interim and annual periods ending on or
after September 15, 2009. The adoption of SFAS No. 168 did have a material impact on the
consolidated financial statements.
The Company has adopted the requirements of the Subsequent Events Topic effective beginning
with the quarter ended September 30, 2009 and has evaluated for disclosure subsequent events
that have occurred up through November 13, 2009, the date of issuance of these 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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2009
|
|
|
As of December 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair
|
|
|
|
Historical
|
|
|
Gross Unrealized
|
|
|
Market
|
|
|
Historical
|
|
|
Gross Unrealized
|
|
|
Market
|
|
(In thousands)
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Value
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Value
|
|
|
|
(Unaudited)
|
|
|
|
|
Equity securities
|
|
$
|
532
|
|
|
$
|
|
|
|
$
|
(43
|
)
|
|
$
|
489
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
There were no sales of marketable equity securities during the three and nine month
periods ended September 30, 2009. Sales of marketable equity securities resulted in realized
losses of approximately $200,000 and $1.8 million during the three and nine months ended
September 30, 2008, respectively. The Company recognized $1.6 million of these losses during the
six months ended June 30, 2008, prior to the sale of the securities, as the Company believed
that the decline in value of these securities was other than temporary.
Investments in Limited Partnerships
The Company acquired Grubb & Ellis Alesco Global Advisors, LLC (Alesco) in 2007 and
through this subsidiary the Company serves as general partner and investment advisor to one
hedge fund limited partnership and as investment advisor to three mutual funds as of September
30, 2009. The limited partnership is required to be consolidated in accordance with the
requirements of the Consolidation Topic. As of December 31, 2008, Alesco served as general
partner and investment advisor to five hedge fund limited partnerships and as investment advisor
to one mutual fund. During the nine months ended September 30, 2009, four of the hedge fund
limited partnerships were liquidated.
For the three and nine months ended September 30, 2009, Alesco had investment income of
approximately $274,000 and $629,000, respectively, which is reflected in other income (expense)
and offset in noncontrolling interest in loss of consolidated entities on the statements of
operations. For the three and nine months ended September 30, 2008, Alesco had investment losses
of approximately $325,000 and $1.6 million, respectively, which are reflected in other expense
and offset in noncontrolling interest in loss of consolidated entities on the statements of
operations. Alesco earned approximately $25,000 and $99,000 of management fees based on
ownership interest under the agreements for the nine months ended September 30, 2009 and 2008,
respectively. As of September 30, 2009 and December 31, 2008, these limited partnerships had
assets of approximately $142,000 and $1.5 million, respectively, primarily consisting of
exchange traded marketable securities, including equity securities and foreign currencies.
10
GRUBB & ELLIS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (continued)
The following table reflects trading securities and their original cost, gross unrealized
appreciation and depreciation, and estimated market value:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2009
|
|
|
As of December 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair
|
|
|
|
Historical
|
|
|
Gross Unrealized
|
|
|
Market
|
|
|
Historical
|
|
|
Gross Unrealized
|
|
|
Market
|
|
(In thousands)
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Value
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Value
|
|
|
|
(Unaudited)
|
|
|
|
|
Equity securities
|
|
$
|
170
|
|
|
$
|
|
|
|
$
|
(28
|
)
|
|
$
|
142
|
|
|
$
|
1,933
|
|
|
$
|
12
|
|
|
$
|
(435
|
)
|
|
$
|
1,510
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended September 30, 2009
|
|
|
For the Three Months Ended September 30, 2008
|
|
|
|
Investment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
Income
|
|
|
Realized
|
|
|
Unrealized
|
|
|
Total
|
|
|
Income
|
|
|
Realized
|
|
|
Unrealized
|
|
|
Total
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
Equity securities
|
|
$
|
15
|
|
|
$
|
45
|
|
|
$
|
220
|
|
|
$
|
280
|
|
|
$
|
108
|
|
|
$
|
(568
|
)
|
|
$
|
212
|
|
|
$
|
(248
|
)
|
Less investment
expenses
|
|
|
(6
|
)
|
|
|
|
|
|
|
|
|
|
|
(6
|
)
|
|
|
(77
|
)
|
|
|
|
|
|
|
|
|
|
|
(77
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
9
|
|
|
$
|
45
|
|
|
$
|
220
|
|
|
$
|
274
|
|
|
$
|
31
|
|
|
$
|
(568
|
)
|
|
$
|
212
|
|
|
$
|
(325
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Nine Months Ended September 30, 2009
|
|
|
For the Nine Months Ended September 30, 2008
|
|
|
|
Investment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
Income
|
|
|
Realized
|
|
|
Unrealized
|
|
|
Total
|
|
|
Income
|
|
|
Realized
|
|
|
Unrealized
|
|
|
Total
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
Equity securities
|
|
$
|
206
|
|
|
$
|
(191
|
)
|
|
$
|
640
|
|
|
$
|
655
|
|
|
$
|
237
|
|
|
$
|
(2,172
|
)
|
|
$
|
622
|
|
|
$
|
(1,313
|
)
|
Less investment
expenses
|
|
|
(26
|
)
|
|
|
|
|
|
|
|
|
|
|
(26
|
)
|
|
|
(244
|
)
|
|
|
|
|
|
|
|
|
|
|
(244
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
180
|
|
|
$
|
(191
|
)
|
|
$
|
640
|
|
|
$
|
629
|
|
|
$
|
(7
|
)
|
|
$
|
(2,172
|
)
|
|
$
|
622
|
|
|
$
|
(1,557
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3. RELATED PARTIES
Related party balances are summarized below:
Accounts Receivable
Accounts receivable from related parties consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
December 31,
|
|
(In thousands)
|
|
2009
|
|
|
2008
|
|
Accrued property management fees
|
|
$
|
16,492
|
|
|
$
|
23,298
|
|
Accrued lease commissions
|
|
|
8,755
|
|
|
|
7,720
|
|
Accounts receivable from sponsored REITs
|
|
|
4,545
|
|
|
|
4,768
|
|
Accrued asset management fees
|
|
|
2,048
|
|
|
|
1,725
|
|
Other accrued fees
|
|
|
1,997
|
|
|
|
3,372
|
|
Accrued real estate acquisition fees
|
|
|
698
|
|
|
|
1,834
|
|
Other receivables
|
|
|
178
|
|
|
|
647
|
|
|
|
|
|
|
|
|
Total
|
|
|
34,713
|
|
|
|
43,364
|
|
Allowance for uncollectible receivables
|
|
|
(13,138
|
)
|
|
|
(9,662
|
)
|
|
|
|
|
|
|
|
Accounts receivable from related parties net
|
|
|
21,575
|
|
|
|
33,702
|
|
Less portion classified as current
|
|
|
(7,756
|
)
|
|
|
(22,630
|
)
|
|
|
|
|
|
|
|
Non-current portion
|
|
$
|
13,819
|
|
|
$
|
11,072
|
|
|
|
|
|
|
|
|
11
GRUBB & ELLIS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (continued)
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 unless extended by the Company, and generally bear interest at a range of 6.0% to 12.0% per
annum. The advances consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
December 31,
|
|
(In thousands)
|
|
2009
|
|
|
2008
|
|
Advances to properties of related parties
|
|
$
|
15,663
|
|
|
$
|
14,714
|
|
Advances to related parties
|
|
|
3,281
|
|
|
|
2,937
|
|
|
|
|
|
|
|
|
Total
|
|
|
18,944
|
|
|
|
17,651
|
|
Allowance for uncollectible advances
|
|
|
(12,021
|
)
|
|
|
(3,170
|
)
|
|
|
|
|
|
|
|
Advances to related parties net
|
|
|
6,923
|
|
|
|
14,481
|
|
Less portion classified as current
|
|
|
(26
|
)
|
|
|
(2,982
|
)
|
|
|
|
|
|
|
|
Non-current portion
|
|
$
|
6,897
|
|
|
$
|
11,499
|
|
|
|
|
|
|
|
|
As of September 30, 2009, accounts receivable totaling $310,000 is due from a program
30.0% owned and managed by Anthony W. Thompson, the Companys former Chairman who subsequently
resigned in February 2008. The receivable of $310,000 has been fully reserved for and is
included in the allowance for uncollectible advances. On November 4, 2008, the Company made a
formal written demand to Mr. Thompson for these monies.
As of December 31, 2008, advances to a program 40.0% owned and, as of April 1, 2008,
managed by Mr. Thompson, totaled $983,000, which includes $61,000 in accrued interest. As of
September 30, 2009, the total outstanding balance of $983,000, inclusive of $61,000 in accrued
interest, was past due. The total amount of $983,000 million has been reserved for and is
included in the allowance for uncollectible advances. On November 4, 2008 and April 3, 2009, the
Company made formal written demands to Mr. Thompson for these monies.
Notes Receivable From Related Party
In
December 2007, the Company advanced funds to Grubb & Ellis Apartment REIT, Inc.
(Apartment REIT) on an unsecured basis. The unsecured note required monthly interest-only
payments which began on January 1, 2008. The balance owed to the Company as of December 31, 2007
which consisted of $7.6 million in principal was repaid in full in the first quarter of 2008.
In June 2008, the Company advanced $3.7 million to Apartment REIT on an unsecured basis.
The unsecured note originally had a maturity date of December 27, 2008 and bore interest at a
fixed rate of 4.95% per annum. On November 10, 2008, the Company extended the maturity date to
May 10, 2009 and adjusted the interest rate to a fixed rate of 5.26% per annum. The note
required monthly interest-only payments beginning on August 1, 2008 and provided for a default
interest rate in an event of default equal to 2.00% per annum in excess of the stated interest
rate. Effective May 10, 2009 the Company entered into a second extension agreement with
Apartment REIT, extending the maturity date to November 10, 2009. The new terms of the extension
continue to require monthly interest-only payments beginning May 1, 2009 and bears interest at a
fixed rate of 8.43% with the original default rate.
In September 2008, the Company advanced an additional $5.4 million to Apartment REIT on an
unsecured basis. The unsecured note originally had a maturity date of March 15, 2009 and bore
interest at a fixed rate of 4.99% per annum. Effective March 9, 2009, the Company extended the
maturity date to September 15, 2009 and adjusted the interest rate to a fixed rate of 5.00% per
annum. The note requires monthly interest-only payments beginning on October 1, 2008 and
provides for a default interest rate in an event of default equal to 2.00% per annum in excess
of the stated interest rate.
There were no advances to or repayments made by Apartment REIT during the nine months
ending September 30, 2009. As of September 30, 2009, the balance owed by Apartment REIT to the
Company on the two unsecured notes totaled $9.1 million in principal with no interest
outstanding.
On November 10, 2009, the Company consolidated the aforementioned $3.7 million and 5.4
million unsecured notes into the Consolidated Promissory Note with Apartment REIT whereby the
two unsecured promissory notes receivable were cancelled and consolidated the outstanding
principal amounts of the promissory notes into the Consolidated Promissory Note. The
Consolidated Promissory Note has an outstanding principal amount of $9,100,000, an interest rate
of 4.5% per annum, a default interest rate of 2.0% in excess of the interest rate then in
effect, and a maturity date of January 1, 2011. The interest rate payable under the Consolidated
Promissory Note is subject to a one-time adjustment to a maximum rate of 6.0% per annum, which
will be evaluated and may be adjusted by the Company, in its sole discretion, on July 1, 2010.
12
GRUBB & ELLIS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (continued)
4. VARIABLE INTEREST ENTITIES
The determination of the appropriate accounting method with respect to the Companys
variable interest entities (VIEs), including joint ventures, is based on the requirements of
the Consolidation Topic. The Company consolidates any VIE for which it is the primary
beneficiary.
The Company determines if an entity is a VIE under the requirements of the Consolidation
Topic based on several factors, including whether the entitys total equity investment at risk
upon inception is sufficient to finance the entitys activities without additional subordinated
financial support. The Company makes judgments regarding the sufficiency of the equity at risk
based first on a qualitative analysis, then a quantitative analysis, if necessary. In a
quantitative analysis, the Company incorporates various estimates, including estimated future
cash flows, asset hold periods and discount rates, as well as estimates of the probabilities of
various scenarios occurring. If the entity is a VIE, the Company then determines whether to
consolidate the entity as the primary beneficiary. The Company is deemed to be the primary
beneficiary of the VIE and consolidates the entity if the Company will absorb a majority of the
entitys expected losses, receive a majority of the entitys expected residual returns or both.
As reconsideration events occur, the Company will reconsider its determination of whether an
entity is a VIE and who the primary beneficiary is to determine if there is a change in the
original determinations and will report such changes on a quarterly basis.
The Companys Investment Management segment is a sponsor of TIC Programs and related
formation LLCs. As of September 30, 2009 and December 31, 2008, the Company had investments in
seven LLCs that are VIEs in which the Company is the primary beneficiary. These seven LLCs hold
interests in the Companys TIC investments. The carrying value of the assets and liabilities for
these consolidated VIEs as of September 30, 2009 was $2.3 million and $17,000, respectively. The
carrying value of the assets and liabilities for these consolidated VIEs as of December 31, 2008
was $3.7 million and $309,000, respectively. In addition, each consolidated VIE is joint and
severally liable, along with the other investors in each respective TIC, on the non-recourse
mortgage debt related to the VIEs interests in the respective TIC investment. This non-recourse
mortgage debt totaled $277.2 million and $277.8 million as of September 30, 2009 and December
31, 2008, respectively. This non-recourse mortgage debt is not consolidated as the LLCs account
for the interests in the Companys TIC investments under the equity method and the non recourse
mortgage debt does not meet the criteria under the requirements of the Transfers and Servicing
Topic for recognizing the share of the debt assumed by the other TIC interest holders for
consolidation. The Company does consider the third party TIC holders ability and intent to
repay their share of the joint and several liability in evaluating the recovery.
If the interest in the entity is determined to not be a VIE under the requirements of the
Consolidation Topic, then the entity is evaluated for consolidation under the requirements of
the Investments-Equity Method and Joint Ventures Topic, as amended by the requirements of the
Consolidation Topic.
As of September 30, 2009 and December 31, 2008 the Company had certain entities that were
determined to be VIEs that did not meet the consolidation requirements of the Consolidation
Topic. The unconsolidated VIEs are accounted for under the equity method. The aggregate
investment carrying value of the unconsolidated VIEs was $1.0 million and $5.0 million as of
September 30, 2009 and December 31, 2008, respectively, and was classified under Investments in
Unconsolidated Entities in the consolidated balance sheet. The Companys maximum exposure to
loss as a result of its investments in unconsolidated VIEs is typically limited to the aggregate
of the carrying value of the investment and future funding commitments. During the nine months
ended September 30, 2009, the Company funded a total of $2.6 million related to TIC Program
reserves. Future funding commitments as of September 30, 2009 for the unconsolidated VIEs
totaled $1.5 million to fund TIC Program reserves. In addition, as of September 30, 2009 and
December 31, 2008, these unconsolidated VIEs are joint and severally liable on non-recourse
mortgage debt totaling $395.1 million and $385.3 million, respectively. Although the mortgage
debt is non-recourse to the VIE that holds the TIC interest, the Company has full recourse
guarantees on a portion of such mortgage debt totaling $3.5 million as of September 30, 2009 and
December 31, 2008, respectively, for which the Company has recorded no liability as of September
30, 2009 and December 31, 2008, respectively. This mortgage debt is not consolidated as the LLCs
account for the interests in the Companys TIC investments under the equity method and the non
recourse mortgage debt does not meet the requirements of Transfers and Servicing Topic for
recognizing the share of the debt assumed by the other TIC interest holders for consolidation.
The Company considers the third party TIC holders ability and intent to repay their share of
the joint and several liability in evaluating the recovery. In evaluating the recovery of the
TIC investment, the Company evaluated the likelihood that the lender would foreclose on the
VIEs interest in the TIC to satisfy the obligation. See Note 5 Investments in Unconsolidated
Entities for additional information.
13
GRUBB & ELLIS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (continued)
5. INVESTMENTS IN UNCONSOLIDATED ENTITIES
As of September 30, 2009 and December 31, 2008, the Company held investments in five joint
ventures totaling $0.5 million and $3.8 million, which represent a range of 5.0% to 10.0%
ownership interest in each property. In addition, pursuant to the requirements of the
Consolidation Topic, the Company has consolidated seven LLCs which have investments in
unconsolidated entities totaling $2.3 million and $3.7 million as of September 30, 2009 and
December 31, 2008, respectively. The remaining amounts within investments in unconsolidated
entities are related to various LLCs, which represent ownership interests of less than 1.0%.
At December 31, 2007, Legacy Grubb & Ellis owned approximately 5.9 million shares of common
stock of Grubb & Ellis Realty Advisors, Inc. (GERA), which was a publicly traded special
purpose acquisition company, which represented approximately 19% of the outstanding common
stock. Legacy Grubb & Ellis also owned approximately 4.6 million GERA warrants which were
exercisable into additional GERA common stock, subject to certain conditions. As part of the
Merger, 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.
All of the officers of GERA were also officers or directors of Legacy Grubb & Ellis,
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 for within the Companys
consolidated financial statements under the equity method of accounting.
On February 28, 2008, a special meeting of the stockholders of GERA was 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 of the stockholders of GERA held on April 14, 2008, the stockholders of GERA
approved the dissolution and plan of liquidation of GERA. The Company did not receive any funds
or other assets as a result of GERAs dissolution and 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 which is
recorded in equity in losses on the consolidated statement of operations and is comprised of
$4.5 million related to stock and warrant purchases and $1.3 million related to operating
advances and third party costs, which included an unrealized loss previously reflected in
accumulated other comprehensive loss.
6. PROPERTY HELD FOR INVESTMENT
Property held for investment consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
December 31,
|
|
(In thousands)
|
|
Useful Life
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
Building and capital improvement
|
|
39 years
|
|
$
|
73,712
|
|
|
$
|
79,315
|
|
|
|
|
|
|
|
|
|
|
|
|
Tenant improvement
|
|
112 years
|
|
|
6,653
|
|
|
|
5,612
|
|
Accumulated depreciation
|
|
|
|
|
(7,037
|
)
|
|
|
(6,519
|
)
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
73,328
|
|
|
|
78,408
|
|
Land
|
|
|
|
|
9,480
|
|
|
|
10,291
|
|
|
|
|
|
|
|
|
|
|
Property held for investment net
|
|
|
|
$
|
82,808
|
|
|
$
|
88,699
|
|
|
|
|
|
|
|
|
|
|
The Company recognized $576,000 of depreciation expense related to the properties held
for investment for the three and nine months ended September 30, 2009. The Company holds two
properties for investment. Both of these properties were previously held for sale and one was
reclassified as held for investment as of June 30, 2009 and the other was reclassified as held
for investment as of September 30, 2009. During the periods each property was held for sale,
the Company did not record any depreciation expense related to the property. In accordance with
the provisions of the Property, Plant, and Equipment Topic, management determined that, for
properties held for investment, the carrying value of each property before the property was
classified as held for sale adjusted for any depreciation and amortization expense and
impairment losses that would have been recognized had the asset been continuously classified as
held for investment was greater than the carrying value of the property at the date of the
subsequent decision not to sell. As such, the Company made no additional adjustments to the
carrying value of either asset as of September 30, 2009.
14
GRUBB & ELLIS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (continued)
7. IDENTIFIED INTANGIBLE ASSETS
Identified intangible assets consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
December 31,
|
|
(In thousands)
|
|
Useful Life
|
|
2009
|
|
|
2008
|
|
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
|
|
$
|
11,342
|
|
|
$
|
11,924
|
|
Accumulated amortization
|
|
|
|
|
(4,700
|
)
|
|
|
(4,700
|
)
|
|
|
|
|
|
|
|
|
|
Contract rights, net
|
|
|
|
|
6,642
|
|
|
|
7,224
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
5,400
|
|
|
|
5,436
|
|
Internally developed software
|
|
4 years
|
|
|
6,200
|
|
|
|
6,200
|
|
Other contract rights
|
|
5 to 7 years
|
|
|
1,163
|
|
|
|
1,418
|
|
Non-compete and employment agreements
|
|
3 to 4 years
|
|
|
97
|
|
|
|
97
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
87,560
|
|
|
|
87,851
|
|
Accumulated amortization
|
|
|
|
|
(5,890
|
)
|
|
|
(3,548
|
)
|
|
|
|
|
|
|
|
|
|
Other identified intangible assets, net
|
|
|
|
|
81,670
|
|
|
|
84,303
|
|
|
|
|
|
|
|
|
|
|
Identified intangible assets property
|
|
|
|
|
|
|
|
|
|
|
In place leases and tenant relationships
|
|
1 to 104 months
|
|
|
11,510
|
|
|
|
11,807
|
|
Above market leases
|
|
1 to 92 months
|
|
|
2,364
|
|
|
|
2,364
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13,874
|
|
|
|
14,171
|
|
|
|
|
|
|
|
|
|
|
Accumulated amortization
|
|
|
|
|
(5,731
|
)
|
|
|
(5,067
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Identified intangible assets, net property
|
|
|
|
|
8,143
|
|
|
|
9,104
|
|
|
|
|
|
|
|
|
|
|
Total identified intangible assets, net
|
|
|
|
$
|
96,455
|
|
|
$
|
100,631
|
|
|
|
|
|
|
|
|
|
|
Amortization expense recorded for contract rights was approximately $193,000 and $1.2
million for the three and nine months ended September 30, 2008. No amortization expense was
recognized during the three and nine months ended September 30, 2009 related to the contract
rights. Amortization expense is charged as a reduction to investment management revenue in the
applicable 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. The intangible contract rights represent the legal right to future
disposition fees of a portfolio of real estate properties under contract. As a result of the
current economic environment, a portion of these disposition fees may not be recoverable. Based
on our analysis for the current and projected property values, condition of the properties and
status of mortgage loans payable associated with these contract rights, the Company determined
that there are certain properties for which receipt of disposition fees was improbable. As a
result, the Company recorded an impairment charge of approximately $583,000 related to the
impaired intangible contract rights as of September 30, 2009.
Amortization expense recorded for the other identified intangible assets was approximately
$796,000 and $869,000 for the three months ended September 30, 2009 and 2008, respectively, and
approximately $2.4 million and $2.6 million for the nine months ended September 30, 2009 and
2008, respectively. Amortization expense is 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
approximately $343,000 and $1.1 million for the three and nine months ended September 30, 2008,
respectively. The Company recorded approximately $280,000 of amortization expense for the three
and nine months ended September 30, 2009 related to in place leases and tenant relationships.
Amortization expense is included as part of operating expense in the accompanying consolidated
statement of operations.
15
GRUBB & ELLIS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (continued)
Amortization expense recorded for the above market leases was approximately $119,000 and
$136,000 for the three months ended September 30, 2009 and 2008, respectively, and approximately
$384,000 and $416,000 for the nine months ended September 30, 2009 and 2008, respectively.
Amortization expense is charged as a reduction to rental related revenue in the accompanying
consolidated statement of operations.
8. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
December 31,
|
|
(In thousands)
|
|
2009
|
|
|
2008
|
|
Accounts payable
|
|
$
|
15,256
|
|
|
$
|
14,323
|
|
Salaries and related costs
|
|
|
13,977
|
|
|
|
13,643
|
|
Accrued liabilities
|
|
|
11,922
|
|
|
|
11,502
|
|
Bonuses
|
|
|
9,131
|
|
|
|
9,741
|
|
Broker commissions
|
|
|
7,489
|
|
|
|
14,002
|
|
Property management fees and commissions due to third parties
|
|
|
2,699
|
|
|
|
2,940
|
|
Severance
|
|
|
207
|
|
|
|
2,957
|
|
Interest
|
|
|
468
|
|
|
|
651
|
|
Other
|
|
|
30
|
|
|
|
463
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
61,179
|
|
|
$
|
70,222
|
|
|
|
|
|
|
|
|
|
|
|
9.
|
|
NOTES PAYABLE AND CAPITAL LEASE OBLIGATIONS
|
Notes payable and capital lease obligations consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
December 31,
|
|
(In thousands)
|
|
2009
|
|
|
2008
|
|
Mortgage debt payable to a
financial institution
collateralized by real estate
held for investment. Fixed
interest rate of 6.29% per annum
as of September 30, 2009. The
note is non-recourse up to $60
million with a $10 million
recourse guarantee and matures in
February 2017. As of September
30, 2009, note requires monthly
interest-only payments
|
|
$
|
70,000
|
|
|
$
|
70,000
|
|
Mortgage debt payable to
financial institution
collateralized by real estate
held for investment. Fixed
interest rate of 6.32% per annum
as of September 30, 2009. The
non-recourse note matures in July
2014. As of September 30, 2009,
note requires monthly
interest-only payments
|
|
|
37,000
|
|
|
|
37,000
|
|
|
|
|
|
|
|
|
|
|
Capital lease obligations
|
|
|
1,937
|
|
|
|
536
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
108,937
|
|
|
|
107,536
|
|
|
|
|
|
|
|
|
|
|
Less portion classified as current
|
|
|
(984
|
)
|
|
|
(333
|
)
|
|
|
|
|
|
|
|
|
Non-current portion
|
|
$
|
107,953
|
|
|
$
|
107,203
|
|
|
|
|
|
|
|
|
16
GRUBB & ELLIS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (continued)
10. NOTES PAYABLE OF PROPERTIES HELD FOR SALE
Notes payable of properties held for sale consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
December 31,
|
|
(In thousands)
|
|
2009
|
|
|
2008
|
|
Mortgage debt payable to a financial
institution collateralized by real estate
held for sale. The non-recourse mortgage
note charges variable interest rate based
on the higher of LIBOR plus 3.00% or
6.00%. The applicable interest rate was
6.00% per annum as of September 30, 2009.
The notes require monthly interest-only
payments and matured on July 9, 2009
|
|
$
|
31,613
|
|
|
$
|
30,677
|
|
Mortgage debt payable to a financial
institution collateralized by real estate
held for sale. The non-recourse mortgage
note charges variable interest rate based
on the London Interbank Offered Rate
(LIBOR) plus 2.50%
|
|
|
|
|
|
|
78,000
|
|
Unsecured notes payable to third-party
investors with fixed interest at 6.00% per
annum and matures on December 2011.
Principal and interest payments are due
quarterly
|
|
|
|
|
|
|
282
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
31,613
|
|
|
$
|
108,959
|
|
|
|
|
|
|
|
|
The
mortgage note payable of $31.6 million related to properties held for sale at September
30, 2009 million matured on July 9, 2009. There is no assurance that the loan will be extended.
However, the Company does not expect any significant impact to the financial condition or cash
flows of the Company should the loan not be renewed due to the non-recourse nature of the loan.
11. LINE OF CREDIT
On December 7, 2007, the Company entered into a $75.0 million credit agreement by and among
the Company, the guarantors named therein, and the financial institutions defined therein as
lender parties, with Deutsche Bank Trust Company Americas, as lender and administrative agent
(the Credit Facility). The Company was restricted to solely use the line of credit for
investments, acquisitions, working capital, equity interest repurchase or exchange, and other
general corporate purposes. The line bore interest at either the prime rate or LIBOR based
rates, as the Company may choose on each of its borrowings, plus an applicable margin ranging
from 1.50% to 2.50% based on the Companys Debt/Earnings Before Interest, Taxes, Depreciation
and Amortization (EBITDA) ratio as defined in the credit agreement.
On August 5, 2008, the Company entered into the First Letter Amendment to its Credit
Facility. The First Letter Amendment, among other things, provided the Company with an extension
from September 30, 2008 to March 31, 2009 to dispose of the three real estate assets that the
Company had previously acquired on behalf of GERA. Additionally, the First Letter Amendment
also, among other things, modified select debt and financial covenants in order to provide
greater flexibility to facilitate the Companys TIC Programs.
On November 4, 2008, the Company amended its Credit Agreement (the Second Letter
Amendment). The effective date of the Second Letter Amendment is September 30, 2008. (Certain
capitalized terms set forth below that are not otherwise defined herein have the meaning
ascribed to them in the Credit Facility, as amended.
The Second Letter Amendment, among other things, a) reduced the amount available under the
Credit Facility from $75.0 million to $50.0 million by providing that no advances or letters of
credit shall be made available to the Company after September 30, 2008 until such time as
borrowings have been reduced to less than $50.0 million; b) provided that 100% of any net cash
proceeds from the sale of certain real estate assets required to be sold by the Company shall
permanently reduce the Revolving Credit Commitments, provided that the Revolving Credit
Commitments shall not be reduced to less than $50.0 million by reason of the operation of such
asset sales; and c) modified the interest rate incurred on borrowings by increasing the
applicable margins by 100 basis points and by providing for an interest rate floor for any prime
rate related borrowings.
Additionally, the Second Letter Amendment, among other things, modified restrictions
on guarantees of primary obligations from $125.0 million to $50.0 million, modified select
financial covenants to reflect the impact of the current economic environment on the Companys
financial performance, amended certain restrictions on payments by deleting any dividend/share
repurchase limitations and modified the reporting requirements of the Company with respect to
real property owned or held.
As of September 30, 2008, the Company was not in compliance with certain of its financial
covenants related to EBITDA. As a result, part of the Second Letter Amendment included a
provision to modify selected covenants. The Company was not in compliance with certain debt
covenants as of March 31, 2009, all of which were effectively cured as of such date by the Third
Amendment to the Credit Facility described below. As a consequence of the foregoing, and certain
provisions of the Third Amendment, the $63.0 million outstanding under the Credit Facility has been classified as a
current liability as of September 30, 2009.
17
GRUBB & ELLIS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (continued)
On May 20, 2009, the Company further amended its Credit Facility by entering into the Third
Amendment. The Third Amendment, among other things, bifurcated the existing credit facility into
two revolving credit facilities, (i) a $38,000,000 Revolving Credit A Facility which was deemed
fully funded as of the date of the Third Amendment, and (ii) a $29,289,245 Revolving Credit B
Facility, comprised of revolving credit advances in the aggregate of $25,000,000 which were
deemed fully funded as of the date of the Third Amendment and letters of credit advances in the
aggregate amount of $4,289,245 which are issued and outstanding as of the date of the Third
Amendment. The Third Amendment required the Company to draw down $4,289,245 under the Revolving
Credit B Facility on the date of the Third Amendment and deposit such funds in a cash collateral
account to cash collateralize outstanding letters of credit under the Credit Facility and
eliminated the swingline features of the Credit Facility and the Companys ability to cause the
lenders to issue any additional letters of credit. In addition, the Third Amendment also changes
the termination date of the Credit Facility from December 7, 2010 to March 31, 2010 and modified
the interest rate incurred on borrowings by initially increasing the applicable margin by 450
basis points (or to 7.00% on prime rate loans and 8.00% on LIBOR based loans).
The Third Amendment also eliminated specific financial covenants, and in its place, the
Company was required to comply with the approved budget, that has been agreed to by the Company
and the lenders, subject to agreed upon variances. The approved budget related solely to the
2009 fiscal year (the Budget). The Budget was the Companys operating cash flow budget, and
encompassed all aspects of typical operating cash flows including revenues, fees and expenses,
and such working capital components as receivables and accounts payables, taxes, debt service
and any other identifiable cash flow items. Pursuant to the Budget, the Company was required to
stay within certain variance parameters with respect to cumulative cash flow for the remainder
of the 2009 year to remain in compliance with the Credit Facility. The Company was also required
under the Third Amendment to effect the Recapitalization Plan, on or before September 30, 2009
and in connection therewith to effect the Partial Prepayment of the Revolving A Credit Facility.
In the event the Company failed to effect the Recapitalization Plan and in connection therewith
to reduce the Revolving Credit A Credit Facility by the Partial Prepayment amount, the (i)
lenders would have had the right commencing on October 1, 2009, to exercise the Warrants, for
nominal consideration, to purchase common stock of the Company equal to 15% of the common stock
of the Company on a fully diluted basis as of such date, subject to adjustment, (ii) the
applicable margin automatically increased to 11% on prime rate loans and increased to 12% on
LIBOR based loans, (iii) the Company was required to amortize an aggregate of $10 million of the
Revolving Credit A Facility in three (3) equal installments on the first business day of each of
the last three (3) months of 2009, (iv) the Company was obligated to submit a revised budget by
October 1, 2009, (v) the Credit Facility would have terminated on January 15, 2010, and (vi) no
further advances were available to be drawn under the Credit Facility.
In the event the Company effected the Recapitalization Plan and the Partial Prepayment
amount on or prior to September 30, 2009, the Warrants would have automatically expired and not
become exercisable, the applicable margin would have automatically been reduced to 3% on prime
rate loans and 4% on LIBOR based loans and the Company had the right, subject to the requisite
approval of the lenders, to seek an extension to extend the term of the Credit Facility to
January 5, 2011, provided the Company also paid a fee of .25% of the then outstanding
commitments under the Credit Facility. The Company calculated the initial fair value of the
Warrants to be $534,000 and has recorded such amount in stockholders equity with a
corresponding debt discount to the line of credit balance. Such debt discount amount will be
amortized into interest expense over the remaining term of the Credit Facility. As of September
30, 2009, the net debt discount balance was $291,000 and is included in the current portion of
line of credit in the accompanying consolidated balance sheet.
As a result of the Third Amendment the Company was required to prepay Revolving Credit A
Advances (and to the extent the Revolving Credit A Facility shall be reduced to zero, prepay
outstanding Revolving Credit B Advances) in an amount equal to 100% (or, after the Revolving
Credit A Advances are reduced by at least the Partial Prepayment amount, in an amount equal to
50%) of Net Cash Proceeds (as defined in the Credit Agreement) from:
|
|
|
assets sales,
|
|
|
|
|
conversions of Investments (as defined in the Credit Agreement),
|
|
|
|
|
the refund of any taxes or the sale of equity interests by the Company or its
subsidiaries,
|
|
|
|
|
the issuance of debt securities, or
|
|
|
|
|
any other transaction or event occurring outside the ordinary course of
business of the Company or its subsidiaries;
|
provided, however, that (a) the Net Cash Proceeds received from the sale of the certain real
property assets shall be used to prepay outstanding Revolving Credit B Advances and to the
extent Revolving Credit B Advances shall be reduced to zero, to
prepay outstanding Revolving Credit A Advances, (b) the Company shall prepay outstanding
Revolving Credit B Advances in an amount equal to 100% of the Net Cash Proceeds from the sale of
the Danbury Property unless the Company is then not in compliance with the Recapitalization Plan
in which event Revolving Credit A Advances shall be prepaid first and (c) the Companys 2008 tax
refund was used to prepay outstanding Revolving Credit B Advances upon the closing of the Third
Amendment.
18
GRUBB & ELLIS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (continued)
The Third Amendment required the Company to use its commercially reasonable best efforts to
sell four other commercial properties, including the two remaining GERA Properties, by September
30, 2009. The Companys Line of Credit is secured by substantially all of the assets of the
Company.
On September 30, 2009, the Company further amended its Credit Facility by entering into the
First Credit Facility Letter Amendment. The First Credit Facility Letter Amendment, among other
things, modified and provided the Company an extension from September 30, 2009 to November 30,
2009 (the Extension) to (i) effect its Recapitalization Plan and in connection therewith to
effect a prepayment of at least seventy two (72%) percent of the Revolving Credit A Advances (as
defined in the Credit Facility), and (ii) sell four commercial properties, including the two
real estate assets the Company had previously acquired on behalf of Grubb & Ellis Realty
Advisors, Inc.
The First Credit Facility Letter Amendment also granted the Company a one-time right,
exercisable by November 30, 2009, to prepay the Credit Facility in full for a reduced principal
amount equal to approximately 65% of the aggregate principal amount of the Credit Facility then
outstanding (the Discount Prepayment Option).
In connection with the Extension, the warrant agreement was also amended to extend from
October 1, 2009 to December 1, 2009, the time when the Warrants are first exercisable by its
holders.
The First Credit Facility Letter Amendment also granted a one-time waiver from the covenant
requiring all proceeds of sales of equity or debt securities to be applied to pay down the
Credit Facility to facilitate the sale by the Company to an affiliate of the Companys largest
stockholder and Chairman of the Board of Directors of the Company, $5.0 million of subordinated
debt or equity securities of the Company (the Permitted Placement) so long as (i) the
Permitted Placement is junior, subject and subordinate to the Credit Facility, (ii) the net
proceeds of the Permitted Placement are placed into an account with the lender, (iii) the
disbursement of the funds in such account is in accordance with the approved budget that has
been agreed to by the Company and the ledners, (iv) that the lenders be granted a security
interest in the net proceeds of the Permitted Placement, and (v) the Permitted Placement is
otherwise satisfactory to the Lenders. In addition, if the Permitted Placement is in the form of
subordinated debt, the Company and the entity making the $5.0 million loan are required to enter
into a subordination agreement with the lenders.
Finally, the First Credit Facility Letter Amendment also provided that $4.3 million that
was deposited in a cash collateral account to cash collateralize outstanding letters of credit
under the Credit Facility would instead be used to pay down the Credit Facility.
The Companys Credit Facility is secured by substantially all of the Companys assets. The
outstanding balance on the Credit Facility was $63.0 million as of September 30, 2009 and
December 31, 2008 and carried a weighted average interest rate of 8.37% and 4.51%, respectively.
On November 6, 2009, a portion of proceeds from the offering of preferred stock (see Note
20) were used to pay in full borrowings under the Credit Facility then outstanding of $66.8
million for a reduced amount equal to $43.4 million and the Credit Facility was terminated.
12. SEGMENT DISCLOSURE
Management has determined the reportable segments identified below according to the types
of services offered and the manner in which operations and decisions are made. The Company
operates in the following reportable segments:
Management Services
Management Services provides property management and related services
for owners of investment properties and facilities management services for corporate owners and
occupiers.
Transaction Services
Transaction Services advises 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.
19
GRUBB & ELLIS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (continued)
Investment Management
Investment Management includes services for acquisition, financing
and disposition with respect to the Companys investment 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 investment programs.
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 (loss).
Operating income (loss) is defined as operating revenue less compensation and general and
administrative costs and excludes other rental related, rental expense, interest expense,
depreciation and amortization, allocation of overhead and other operating and non-operating
expenses.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
(In thousands)
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
Management Services
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
67,456
|
|
|
$
|
63,479
|
|
|
$
|
199,636
|
|
|
$
|
185,855
|
|
Compensation costs
|
|
|
9,315
|
|
|
|
8,118
|
|
|
|
27,702
|
|
|
|
28,550
|
|
Transaction commissions and
related costs
|
|
|
2,192
|
|
|
|
2,062
|
|
|
|
7,346
|
|
|
|
6,625
|
|
Reimbursable salaries, wages,
and benefits
|
|
|
48,333
|
|
|
|
44,391
|
|
|
|
142,601
|
|
|
|
131,084
|
|
General and administrative
|
|
|
2,357
|
|
|
|
2,033
|
|
|
|
8,043
|
|
|
|
6,356
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment operating income (loss)
|
|
|
5,259
|
|
|
|
6,875
|
|
|
|
13,944
|
|
|
|
13,240
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transaction Services
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
|
46,321
|
|
|
|
57,502
|
|
|
|
118,793
|
|
|
|
173,191
|
|
Compensation costs
|
|
|
11,216
|
|
|
|
11,743
|
|
|
|
32,986
|
|
|
|
36,423
|
|
Transaction commissions and
related costs
|
|
|
29,376
|
|
|
|
37,103
|
|
|
|
77,981
|
|
|
|
111,337
|
|
Reimbursable salaries, wages,
and benefits
|
|
|
1
|
|
|
|
|
|
|
|
1
|
|
|
|
|
|
General and administrative
|
|
|
7,705
|
|
|
|
8,466
|
|
|
|
25,459
|
|
|
|
26,975
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment operating income (loss)
|
|
|
(1,977
|
)
|
|
|
190
|
|
|
|
(17,634
|
)
|
|
|
(1,544
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment Management
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
|
14,829
|
|
|
|
24,116
|
|
|
|
43,912
|
|
|
|
84,480
|
|
Compensation costs
|
|
|
6,229
|
|
|
|
7,289
|
|
|
|
20,888
|
|
|
|
22,944
|
|
Transaction commissions and
related costs
|
|
|
6
|
|
|
|
18
|
|
|
|
31
|
|
|
|
18
|
|
Reimbursable salaries, wages,
and benefits
|
|
|
2,376
|
|
|
|
1,946
|
|
|
|
7,077
|
|
|
|
4,372
|
|
General and administrative
|
|
|
10,250
|
|
|
|
22,103
|
|
|
|
32,593
|
|
|
|
31,524
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment operating income (loss)
|
|
|
(4,032
|
)
|
|
|
(7,240
|
)
|
|
|
(16,677
|
)
|
|
|
25,622
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reconciliation to net loss
attributable to Grubb & Ellis
Company:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total segment operating (loss) income
|
|
|
(750
|
)
|
|
|
(175
|
)
|
|
|
(20,367
|
)
|
|
|
37,318
|
|
Non-segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rental operations, net of
rental related expenses
|
|
|
2,537
|
|
|
|
3,782
|
|
|
|
6,595
|
|
|
|
9,918
|
|
Corporate overhead
(compensation, general and
administrative costs)
|
|
|
(12,447
|
)
|
|
|
(15,751
|
)
|
|
|
(43,165
|
)
|
|
|
(43,667
|
)
|
Other operating expenses
|
|
|
(10,221
|
)
|
|
|
(45,266
|
)
|
|
|
(38,056
|
)
|
|
|
(68,615
|
)
|
Other income (expense)
|
|
|
236
|
|
|
|
(6,133
|
)
|
|
|
(769
|
)
|
|
|
(13,646
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations
before income tax (provision)
benefit
|
|
|
(20,645
|
)
|
|
|
(63,543
|
)
|
|
|
(95,762
|
)
|
|
|
(78,692
|
)
|
Income tax (provision) benefit
|
|
|
(277
|
)
|
|
|
15,943
|
|
|
|
(587
|
)
|
|
|
23,124
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations
|
|
|
(20,922
|
)
|
|
|
(47,600
|
)
|
|
|
(96,349
|
)
|
|
|
(55,568
|
)
|
Loss from discontinued
operations, net of taxes
|
|
|
(535
|
)
|
|
|
(15,126
|
)
|
|
|
(1,005
|
)
|
|
|
(18,690
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(21,457
|
)
|
|
$
|
(62,726
|
)
|
|
$
|
(97,354
|
)
|
|
$
|
(74,258
|
)
|
Less: Net (loss) income from
noncontrolling interests
|
|
|
(98
|
)
|
|
|
(6,444
|
)
|
|
|
(1,686
|
)
|
|
|
(6,298
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to Grubb &
Ellis Company
|
|
$
|
(21,359
|
)
|
|
$
|
(56,282
|
)
|
|
$
|
(95,668
|
)
|
|
$
|
(67,960
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20
GRUBB & ELLIS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (continued)
13. PROPERTIES HELD FOR SALE
A summary of the properties and related LLCs held for sale balance sheet information is as
follows:
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
December 31,
|
|
(In thousands)
|
|
2009
|
|
|
2008
|
|
Restricted cash
|
|
|
828
|
|
|
|
23,459
|
|
Properties held for sale net
|
|
|
22,468
|
|
|
|
78,708
|
|
Identified intangible assets and other assets held for sale net
|
|
|
4,823
|
|
|
|
25,751
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
28,119
|
|
|
$
|
127,918
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes payable of properties held for sale
|
|
$
|
31,613
|
|
|
$
|
108,959
|
|
Liabilities of properties held for sale net
|
|
|
2,376
|
|
|
|
9,257
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
$
|
33,989
|
|
|
$
|
118,216
|
|
|
|
|
|
|
|
|
During 2008, the Company initiated a plan to sell the properties it classified as real
estate held for investment in its financial statements. As of September 30, 2009, the Company
has a covenant within its Credit Facility which requires the Company to use its commercially
reasonable best efforts to sell four commercial properties. The recent downturn in the global
capital markets significantly lessened the probability that the Company would be able to achieve
relief from this covenant through amendment or other financial resolutions. Pursuant to the
requirements of the Property, Plant, and Equipment Topic
,
the Company assessed the value of the
assets. In addition, the Company reviewed the valuation of its other owned properties and real
estate investments. The Company generally uses a discounted cash flow model to estimate the fair
value of its properties held for sale unless better market comparable data is available.
Management uses its best estimate in determining the key assumptions, including the expected
holding period (between 5 and 7 years), capitalization rates (between 9.0% and 9.2%), discount
rates (between 10.1% and 10.5%), rental rates, future occupancy levels, lease-up periods and
capital expenditure requirements. The estimated fair value is further adjusted for anticipated
selling expenses. Generally, if a property is under contract, the contract price adjusted for
selling expenses is used to estimate the fair value of the property. This valuation review
resulted in the Company recognizing no impairment charges against the carrying value of the
properties and real estate investments held for sale for the nine months ending September 30,
2009. Although the Company is using its commercially reasonable best efforts to sell the four
remaining commercial properties, at the current time it appears that it is unlikely that two of
the remaining properties will be sold. Accordingly, and in light of the foregoing, these
properties no longer meet the held for sale criteria under the requirements of the Topic as of
September 30, 2009 and the properties were reclassified to properties held for investment in the
consolidated balance sheet with the operations of these properties included in continuing
operations in the consolidated statements of operations for all periods presented.
On October 31, 2008, the Company entered into that certain Agreement for the Purchase and
Sale of Real Property and Escrow Instructions to effect the sale of the Corporate Center located
at 39 Old Ridgebury Road, Danbury, Connecticut, to an unaffiliated entity for a purchase price
of $76.0 million. This agreement was amended and restated in its entirety by that certain
Danbury Merger Agreement dated as of January 23, 2009, as amended by the First Amendment to
Danbury Merger Agreement dated as of January 23, 2009 which reduced the purchase price to $73.5
million. On June 3, 2009, the Company completed the sale of the Danbury Property for $72.4
million.
21
GRUBB & ELLIS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (continued)
The investments in unconsolidated entities held for sale represent the Companys interest
in certain real estate properties that it holds through various limited liability companies. In accordance with the
requirements of the Real Estate-Retail Land Topic, and the requirements of the Property, Plant,
and Equipment Topic, the Company treats the disposition of these interests similar to the
disposition of real estate it holds directly. In addition, pursuant to the requirements of the
Consolidation Topic, when the Company is no longer the primary beneficiary of the LLC, the
Company deconsolidates the LLC.
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 September 30, 2009, in which the Company
has no significant ongoing cash flows or significant continuing involvement, are reflected in
the consolidated statements of operations as discontinued operations. The Company will 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 and nine months ended September 30, 2009
and 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
(In thousands)
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
Rental income
|
|
$
|
1,299
|
|
|
$
|
5,101
|
|
|
$
|
8,983
|
|
|
$
|
15,844
|
|
Rental expense
|
|
|
(1,695
|
)
|
|
|
(3,511
|
)
|
|
|
(7,469
|
)
|
|
|
(11,489
|
)
|
Interest expense (including
amortization of deferred
financing costs)
|
|
|
(484
|
)
|
|
|
(1,463
|
)
|
|
|
(2,387
|
)
|
|
|
(4,606
|
)
|
Real estate related impairments
|
|
|
|
|
|
|
(22,703
|
)
|
|
|
250
|
|
|
|
(22,703
|
)
|
Depreciation and amortization
|
|
|
|
|
|
|
(2,134
|
)
|
|
|
|
|
|
|
(8,057
|
)
|
Tax (provision) benefit
|
|
|
345
|
|
|
|
9,769
|
|
|
|
244
|
|
|
|
12,140
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) from discontinued
operations-net of taxes
|
|
|
(535
|
)
|
|
|
(14,941
|
)
|
|
|
(379
|
)
|
|
|
(18,871
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain (loss) on disposal
of discontinued operations
net of taxes
|
|
|
|
|
|
|
(185
|
)
|
|
|
(626
|
)
|
|
|
181
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total income (loss) from
discontinued operations
|
|
$
|
(535
|
)
|
|
$
|
(15,126
|
)
|
|
$
|
(1,005
|
)
|
|
$
|
(18,690
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14. 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 a 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 was approximately $6.0 million and $5.8 million
for the three months ended September 30, 2009 and 2008, respectively, and approximately $18.5
million and $17.4 million for the nine months ended September 30, 2009 and 2008, 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 multifamily 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 was approximately
$2.3 million and $2.4 million for three months ended September 30, 2009 and 2008, respectively,
and approximately $6.9 million and $7.0 million for nine months ended September 30, 2009 and
2008, respectively.
The Company subleases these multifamily spaces to third parties. Rental income from these
subleases was approximately $3.8 million and $4.2 million for the three months ended September
30, 2009 and 2008, respectively, and approximately $11.3 million and $12.4 million for the nine
months ended September 30, 2009 and 2008, respectively. As multifamily leases are executed for
no more than one year, the Company is unable to project the future minimum rental receipts
related to these leases.
22
GRUBB & ELLIS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (continued)
As of September 30, 2009, the Company had recorded liabilities totaling $8.4 million
related to such master lease arrangements, consisting of $4.6 million of cumulative deferred
revenues relating to acquisition fees and loan fees received from
2004 through 2006 and $3.8
million of additional loss reserves which were recorded in 2008.
The Company is also a 50% joint venture partner of four multifamily residential properties
in various locations under non-cancelable leases. The leases, which commenced in various months
and expire from November 2014 through January 2015, require minimum monthly payments averaging
$372,000 over the 10-year period. Rent expense under these operating leases was approximately
$1.1 million, for both the three months ended September 30, 2009 and 2008, and approximately
$3.4 million, for both the nine months ended September 30, 2009 and 2008.
The Company subleases these multifamily spaces to third parties. Rental income from these
subleases was approximately $2.2 million and $2.3 million for the three months ended September
30, 2009 and 2008, respectively, and approximately $6.7 million and $6.8 million for the nine
months ended September 30, 2009 and 2008, respectively. As multifamily leases are executed for
no more than one year, the Company is unable to project the future minimum rental receipts
related to these leases.
TIC Program Exchange Provision
Prior to the Merger, NNN entered into agreements in which
NNN agreed to provide certain investors with a right to exchange their investment in certain TIC
Programs for an investment in a different TIC program. NNN also entered into an agreement with
another investor that provided the investor with certain repurchase rights under certain
circumstances with respect to their investment. The agreements containing such rights of
exchange and repurchase rights pertain to initial investments in TIC programs totaling $31.6
million. In July 2009 the Company received notice from an investor of their intent to exercise
such rights of exchange and repurchase with respect to an initial investment totaling $4.5
million. The Company is currently evaluating such notice to determine the nature and extent of
the right of such exchange and repurchase, if any.
The Company deferred revenues relating to these agreements of $86,000 and $246,000 for the
three months ended September 30, 2009 and 2008, respectively. The Company deferred revenues
relating to these agreements of $281,000 and $492,000 for the nine months ended September 30,
2009 and 2008, respectively. Additional losses of $14.3 million and $4.5 million related to
these agreements were recorded during the quarter ended December 31, 2008 and during the nine
months ended September 30, 2009, respectively, to reflect the decline in value of properties
underlying the agreements with investors. As of September 30, 2009, the Company had recorded
liabilities totaling $22.6 million related to such agreements, consisting of $3.8 million of
cumulative deferred revenues and $18.8 million of additional losses related to these agreements.
Capital Lease Obligations
The Company leases computers, copiers and postage equipment
that are accounted for as capital leases (see Note 9 of the Notes to Consolidated Financial
Statements for additional information).
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 September 30, 2009, there were 147 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
$4.8 billion. As of December 31, 2008, there were 151 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
$4.8 billion. In addition, each consolidated VIE is joint and severally liable, along with the
other investors in each relative TIC, on the non-recourse mortgage debt related to the VIEs
interests in the relative TIC investment. This non-recourse mortgage debt totaled $277.2 million
and $277.8 million as of September 30, 2009 and December 31, 2008, respectively.
The Companys guarantees consisted of the following as of September 30, 2009 and December
31, 2008:
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
December 31,
|
|
(In thousands)
|
|
2009
|
|
|
2008
|
|
Non-recourse/carve-out guarantees of debt of properties
under management(1)
|
|
$
|
3,438,375
|
|
|
$
|
3,414,433
|
|
Non-recourse/carve-out guarantees of the Companys debt(1)
|
|
$
|
107,000
|
|
|
$
|
107,000
|
|
Recourse guarantees of debt of properties under management
|
|
$
|
39,717
|
|
|
$
|
42,426
|
|
Recourse guarantees of the Companys debt
|
|
$
|
10,000
|
|
|
$
|
10,000
|
|
23
GRUBB & ELLIS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (continued)
|
|
|
(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. Each non-recourse carve-out guarantee is an individual document
entered into with the mortgage lender in connection with the purchase or refinance of an individual property. While
there is not a standard document evidencing these guarantees, liability under the non-recourse carve-out guarantees
generally may be triggered by, among other things, any or all of the following:
|
|
|
|
a voluntary bankruptcy or similar insolvency proceeding of any borrower;
|
|
|
|
|
a transfer of the property or any interest therein in violation of the loan documents;
|
|
|
|
|
a violation by any borrower of the special purpose entity requirements set forth in the loan documents;
|
|
|
|
|
any fraud or material misrepresentation by any borrower or any guarantor in connection with the loan;
|
|
|
|
|
the gross negligence or willful misconduct by any borrower in connection with the property, the loan or any
obligation under the loan documents;
|
|
|
|
|
the misapplication, misappropriation or conversion of (i) any rents, security deposits, proceeds or other
funds, (ii) any insurance proceeds paid by reason of any loss, damage or destruction to the property, and (iii) any
awards or other amounts received in connection with the condemnation of all or a portion of the property;
|
|
|
|
|
any waste of the property caused by acts or omissions of borrower of the removal or disposal of any portion
of the property after an event of default under the loan documents; and
|
|
|
|
|
the breach of any obligations set forth in an environmental or hazardous substances indemnification
agreement from borrower.
|
Certain violations (typically the first three listed above) render the entire debt balance recourse to the
guarantor regardless of the actual damage incurred by lender, while the liability for other violations is limited
to the damages incurred by the lender. Notice and cure provisions vary between guarantees. Generally the guarantor
irrevocably and unconditionally guarantees to the lender the payment and performance of the guaranteed obligations
as and when the same shall be due and payable, whether by lapse of time, by acceleration or maturity or otherwise,
and the guarantor covenants and agrees that it is liable for the guaranteed obligations as a primary obligor. As of
September 30, 2009, to the best of the Companys knowledge, there is no amount of debt owed by the Company as a
result of the borrowers engaging in prohibited acts.
Management initially evaluates these guarantees to determine if the guarantee meets the
criteria required to record a liability in accordance with the requirements of the Guarantees
Topic. Any such liabilities were insignificant as of September 30, 2009 and December 31, 2008.
In addition, on an ongoing basis, the Company evaluates the need to record additional liability
in accordance with the requirements of the Contingencies Topic. As of September 30, 2009 and
December 31, 2008, the Company had recourse guarantees of $39.7 million and $42.4 million,
respectively, relating to debt of properties under management. As of September 30, 2009,
approximately $21.3 million of these recourse guarantees relate to debt that has matured or is
not currently in compliance with certain loan covenants. In evaluating the potential liability
relating to such guarantees, the Company considers factors such as the value of the properties
secured by the debt, the likelihood that the lender will call the guarantee in light of the
current debt service and other factors. As of September 30, 2009 and December 31, 2008, the
Company recorded a liability of $5.2 million and $9.1 million, respectively, related to its
estimate of probable loss related to recourse guarantees of debt of properties under management
which matured in January and April 2009.
Investment Program Commitments
During June and July 2009, the Company revised the
offering terms related to certain investment programs which it sponsors, including the
commitment to fund additional property reserves and the waiver or reduction of future management
fees and disposition fees. The company recorded a liability for future funding commitments as of
September 30, 2009 for these unconsolidated VIEs totaling $1.5 million to fund TIC Program
reserves.
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 of. 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.
24
GRUBB & ELLIS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (continued)
Real Estate Licensing Issues
Although Triple Net Properties Realty, Inc. (Realty),
which became a subsidiary of the Company as part of the merger with NNN, 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 GERIs revenue was based on an arrangement with
Realty to share fees from NNNs programs. GERI 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
GERI 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, Louis J. Rogers,
former President of GERI, and Jeffrey T. Hanson, the Companys Chief Investment Officer, 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. These obligations terminate on November 16, 2009.
Alesco Seed Capital
On November 16, 2007, the Company completed the acquisition of a 51%
membership interest in Grubb & Ellis Alesco Global Advisors, LLC (Alesco). Pursuant to the
Intercompany Agreement between the Company and Alesco, dated as of November 16, 2007, the
Company committed to invest $20.0 million in seed capital into the open and closed end real
estate funds that Alesco expects to launch. Additionally, upon achievement of certain earn-out
targets, the Company is required to purchase up to an additional 27% interest in Alesco for
$15.0 million. The Company is allowed to use $15.0 million of seed capital to fund the earn-out
payments. As of September 30, 2009, the Company has invested $500,000 in seed capital into the
open and closed end real estate funds that Alesco launched during 2008.
Deferred Compensation Plan
During 2008, the Company implemented a deferred compensation
plan that permits employees and independent contractors to defer portions of their compensation,
subject to annual deferral limits, and have it credited to one or more investment options in the
plan. As of September 30, 2009 and December 31, 2008, $2.6 million and $1.7 million,
respectively, reflecting the non-stock liability under this plan were included in Accounts
payable and accrued expenses. The Company has purchased whole-life insurance contracts on
certain employee participants to recover distributions made or to be made under this plan and as
of September 30, 2009 and December 31, 2008 have recorded the cash surrender value of the
policies of $1.0 million and $1.1 million, respectively, in Prepaid expenses and other assets.
Grants of phantom shares are accounted for as equity awards in accordance with the
requirements of the Equity Topic, with the award value of the shares on the grant date being
amortized on a straight-line basis over the requisite service period. In addition, the Company
awards phantom shares of Company stock to participants under the deferred compensation plan.
As of September 30, 2009 and December 31, 2008, the Company awarded an aggregate of 6.0 million
and 5.4 million phantom shares, respectively, to certain employees with an aggregate value on
the various grant dates of $23.3 million and $22.5 million, respectively. As of September 30,
2009, an aggregate of 5.7 million phantom share grants were outstanding. Generally, upon
vesting, recipients of the grants are entitled to receive the number of phantom shares granted,
regardless of the value of the shares upon the date of vesting; provided, however, grants with
respect to 900,000 phantom shares had a guaranteed minimum share price ($3.1 million in the
aggregate) that will result in the Company paying additional compensation to the participants
should the value of the shares upon vesting be less than the grant date value of the shares. The
Company accounts for additional compensation relating to the guarantee portion of the awards
by measuring at each reporting date the additional payment that would be due to the participant
based on the difference between the then current value of the shares awarded and the guaranteed
value. This award is then amortized on a straight-line basis as compensation expense over the
requisite service (vesting) period, with an offset to deferred compensation liability.
15. EARNINGS (LOSS) PER SHARE
The Company computes earnings (loss) per share in accordance with the requirements of the
Earnings Per Share Topic. Under the provisions of the Topic, basic earnings (loss) per share is
computed using the weighted-average number of common shares outstanding during the period less
unvested restricted shares. Diluted earnings (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.
25
GRUBB & ELLIS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (continued)
Basic earnings per share is computed using the weighted-average number of common shares
outstanding. The dilutive effect of potential common shares outstanding is included in diluted
earnings per share. The computations of basic and diluted earnings per share from continuing
operations are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
(In thousands, except per share amounts)
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations
attributable to Grubb & Ellis
Company, net of tax
|
|
$
|
(20,824
|
)
|
|
$
|
(41,156
|
)
|
|
$
|
(94,663
|
)
|
|
$
|
(49,270
|
)
|
Loss from discontinued operations
attributable to Grubb & Ellis
Company, net of tax
|
|
|
(535
|
)
|
|
|
(15,126
|
)
|
|
|
(1,005
|
)
|
|
|
(18,690
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to Grubb
& Ellis Company
|
|
$
|
(21,359
|
)
|
|
$
|
(56,282
|
)
|
|
$
|
(95,668
|
)
|
|
$
|
(67,960
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for basic loss per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average number of common
shares outstanding
|
|
|
63,628
|
(1)
|
|
|
63,601
|
(1)
|
|
|
63,618
|
(1)
|
|
|
63,574
|
(1)
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-vested restricted stock and
stock options
|
|
|
|
(1)
|
|
|
|
(1)
|
|
|
|
(1)
|
|
|
|
(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for diluted loss
per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average number of common
and common equivalent shares
outstanding
|
|
|
63,628
|
|
|
|
63,601
|
|
|
|
63,618
|
|
|
|
63,574
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic loss per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations
attributable to Grubb & Ellis
Company, net of tax
|
|
$
|
(0.33
|
)
|
|
$
|
(0.65
|
)
|
|
$
|
(1.49
|
)
|
|
$
|
(0.79
|
)
|
Loss from discontinued operations
attributable to Grubb & Ellis
Company, net of tax
|
|
|
(0.01
|
)
|
|
|
(0.23
|
)
|
|
|
(0.02
|
)
|
|
|
(0.28
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic loss per share
|
|
$
|
(0.34
|
)
|
|
$
|
(0.88
|
)
|
|
$
|
(1.51
|
)
|
|
$
|
(1.07
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted loss per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations
attributable to Grubb & Ellis
Company, net of tax
|
|
$
|
(0.33
|
)
|
|
$
|
(0.65
|
)
|
|
$
|
(1.49
|
)
|
|
$
|
(0.79
|
)
|
Loss from discontinued operations
attributable to Grubb & Ellis
Company, net of tax
|
|
|
(0.01
|
)
|
|
|
(0.23
|
)
|
|
|
(0.02
|
)
|
|
|
(0.28
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted loss per share
|
|
$
|
(0.34
|
)
|
|
$
|
(0.88
|
)
|
|
$
|
(1.51
|
)
|
|
$
|
(1.07
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Outstanding non-vested restricted stock and options to purchase
shares of common stock and restricted stock, the effect of which
would be anti-dilutive, were approximately 2.6 million and 2.5
million shares as of September 30, 2009 and 2008, 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. In addition,
excluded from the calculation of diluted weighted-average common
shares as of September 30, 2009 and 2008 were approximately 6.0
million and 4.8 million phantom shares, respectively, that may be
awarded to employees related to the deferred compensation plan.
As of September 30, 2009, 12.7 million shares that may be awarded
to the lenders related to the potential exercise of the Warrants
were also excluded from the calculation of diluted
weighted-average common shares.
|
26
GRUBB & ELLIS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (continued)
16. COMPREHENSIVE LOSS
The components of comprehensive loss, net of tax, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
(In thousands)
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
Net loss
|
|
$
|
(21,457
|
)
|
|
$
|
(62,726
|
)
|
|
$
|
(97,354
|
)
|
|
$
|
(74,258
|
)
|
Other comprehensive (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net unrealized (loss) gain
on investments, net of taxes
|
|
|
92
|
|
|
|
66
|
|
|
|
(43
|
)
|
|
|
706
|
|
Elimination of net
unrealized loss on
investments, net of taxes
|
|
|
|
|
|
|
120
|
|
|
|
|
|
|
|
120
|
|
Elimination of net
unrealized loss on
investment in GERA warrants
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
223
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive loss
|
|
|
(21,365
|
)
|
|
|
(62,540
|
)
|
|
|
(97,397
|
)
|
|
|
(73,209
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
(loss) attributable to
noncontrolling interests
|
|
|
(98
|
)
|
|
|
(6,444
|
)
|
|
|
(1,686
|
)
|
|
|
(6,298
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss
attributable to Grubb &
Ellis Company
|
|
$
|
(21,267
|
)
|
|
$
|
(56,096
|
)
|
|
$
|
(95,711
|
)
|
|
$
|
(66,911
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17. CHANGES IN EQUITY
The following is a reconciliation of total equity, equity attributable to Grubb & Ellis
Company and equity attributable to noncontrolling interests from December 31, 2008 to September
30, 2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
(Accumulated
|
|
|
Grubb & Ellis
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
Other
|
|
|
Deficit)
|
|
|
Company
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
|
Paid-In
|
|
|
Comprehensive
|
|
|
Retained
|
|
|
Stockholders
|
|
|
Noncontrolling
|
|
|
Total
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Loss
|
|
|
Earnings
|
|
|
Equity
|
|
|
Interests
|
|
|
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of
December 31,
2008
|
|
|
65,383
|
|
|
$
|
654
|
|
|
$
|
402,780
|
|
|
$
|
|
|
|
$
|
(333,263
|
)
|
|
$
|
70,171
|
|
|
$
|
3,605
|
|
|
$
|
73,776
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vesting of
share-based
compensation
|
|
|
|
|
|
|
|
|
|
|
8,736
|
|
|
|
|
|
|
|
|
|
|
|
8,736
|
|
|
|
|
|
|
|
8,736
|
|
Issuance of
warrants
|
|
|
|
|
|
|
|
|
|
|
534
|
|
|
|
|
|
|
|
|
|
|
|
534
|
|
|
|
|
|
|
|
534
|
|
Issuance of
restricted shares
to directors,
officers and
employees
|
|
|
486
|
|
|
|
4
|
|
|
|
(4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeiture of
non-vested
restricted shares
|
|
|
(686
|
)
|
|
|
(7
|
)
|
|
|
(133
|
)
|
|
|
|
|
|
|
|
|
|
|
(140
|
)
|
|
|
|
|
|
|
(140
|
)
|
Contributions from
noncontrolling
interests
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,827
|
|
|
|
5,827
|
|
Distributions to
noncontrolling
interests
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,689
|
)
|
|
|
(1,689
|
)
|
Deconsolidation of
sponsored mutual
fund
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5,519
|
)
|
|
|
(5,519
|
)
|
Compensation
expense on profit
sharing
arrangements
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
102
|
|
|
|
102
|
|
Change in
unrealized loss on
marketable
securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(43
|
)
|
|
|
|
|
|
|
(43
|
)
|
|
|
|
|
|
|
(43
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(95,668
|
)
|
|
|
(95,668
|
)
|
|
|
(1,686
|
)
|
|
|
(97,354
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(95,711
|
)
|
|
|
(1,686
|
)
|
|
|
(97,397
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of
September 30, 2009
|
|
|
65,183
|
|
|
$
|
651
|
|
|
$
|
411,913
|
|
|
$
|
(43
|
)
|
|
$
|
(428,931
|
)
|
|
$
|
(16,410
|
)
|
|
$
|
640
|
|
|
$
|
(15,770
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
27
During the nine months ended September 30, 2009, the Company granted 486,000
restricted shares of common stock. During the year ended December 31, 2008, the Company granted
1.6 million restricted shares of common stock and 77,000 shares of common stock were issued as a
result of the exercise of stock options.
18. OTHER RELATED PARTY TRANSACTIONS
Offering Costs and Other Expenses Related to Public Non-Traded REITs
The Company, through
its consolidated subsidiaries Grubb & Ellis Apartment REIT Advisor, LLC, Grubb & Ellis
Healthcare REIT Advisor, LLC, and Grubb & Ellis Healthcare REIT II Advisor, LLC, bears certain
general and administrative expenses in its capacity as advisor of Apartment REIT, Healthcare
REIT and Healthcare REIT II, respectively, and is reimbursed for these expenses. However,
Apartment REIT, Healthcare REIT and Healthcare REIT II 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.
The Company also paid for the organizational, offering and related expenses on behalf of
Apartment REIT for its initial offering that ended July 17, 2009 and Healthcare REIT for its
initial offering through August 28, 2009. These organizational, offering and related expenses
include all expenses (other than selling commissions and the marketing support fee which
generally represent 7.0% and 2.5% of the gross offering proceeds, respectively) to be paid by
Apartment REIT and Healthcare REIT in connection with their initial offerings. These expenses
only become the liability of Apartment REIT and Healthcare REIT to the extent other
organizational and offering expenses do not exceed 1.5% of the gross proceeds of the initial
offerings. As of September 30, 2009 and December 31, 2008, the Company has incurred expenses of
$4.3 million and $3.8 million, respectively, in excess of 1.5% of the gross proceeds of the
Apartment REIT offering. As of September 30, 2009 and December 31, 2008, the Company has
recorded an allowance for bad debt of approximately $4.3 million and $3.8 million, respectively,
related to the Apartment REIT offering costs incurred as the Company believes that such amounts
will not be reimbursed.
The Company also pays for the organizational, offering and related expenses on behalf of
Apartment REITs follow-on offering and Healthcare REIT IIs initial offering. These
organizational and offering expenses include all expenses (other than selling commissions and a
dealer manager fee which represent 7.0% and 3.0% of the gross offering proceeds, respectively)
to be paid by Apartment REIT and Healthcare REIT II in connection with these offerings. These
expenses only become a liability of Apartment REIT and Healthcare REIT II to the extent other
organizational and offering expenses do not exceed 1.0% of the gross proceeds of the offerings.
As of September 30, 2009 and December 31, 2008, the Company has incurred expenses of $1.3
million and $0, respectively, in excess of 1.0% of the gross proceeds of the Apartment REIT
follow-on offering. As of September 30, 2009 and December 31, 2008, the Company has incurred
expenses of $1.8 million and $97,000, respectively, in excess of 1.0% of the gross proceeds of
the Healthcare REIT II initial offering. The Company anticipates that such amount will be
reimbursed in the future from the offering proceeds of Apartment REIT and Healthcare REIT II.
28
GRUBB & ELLIS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (continued)
Management Fees
The Company provides both transaction and management services to parties
which are related to an affiliate of a principal stockholder and director of the Company
(collectively, Kojaian Companies). In addition, the Company also pays 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 Kojaian Companies, including joint
ventures, officers and directors and their affiliates, was $2.0 million and $2.1 million for the
three months ended September 30, 2009 and 2008, respectively, and $5.4 million and $5.6 million
for the nine months ended September 30, 2009 and 2008, respectively. In August 2009, the Kojaian
Management Corporation prepaid $600,000 of property management fees to the company which was
repaid in September 2009 upon collection of management fees from parties related to the Kojaian
Companies to which the company provides management services.
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 and each of Grubb & Ellis Apartment
Management, LLC and ROC REIT Advisors, LLC own a 25.0% equity interest in Grubb & Ellis
Apartment REIT Advisor, LLC. As of September 30, 2009 and December 31, 2008, Andrea R. Biller,
the Companys General Counsel, Executive Vice President and Secretary, owned an equity interest
of 18.0% of Grubb & Ellis Apartment Management, LLC. On August 8, 2008, in accordance with the
terms of the operating agreement of Grubb & Ellis Apartment Management, LLC, Grubb & Ellis
Apartment Management LLC tendered settlement for the purchase of the 18.0% equity interest in
Grubb & Ellis Apartment Management LLC that was previously owned by Mr. Scott D. Peters, former
chief executive officer of the Company. As a consequence, through a wholly owned subsidiary, the
Companys equity interest in Grubb & Ellis Apartment Management, LLC increased from 64.0% to
82.0% after giving effect to this purchase from Mr. Peters. As of September 30, 2009 and
December 31, 2008, Stanley J. Olander, the Companys Executive Vice President Multifamily,
owned an equity interest of 33.3% of ROC REIT Advisors, LLC.
GERI owns a 75.0% managing member interest in Grubb & Ellis Healthcare REIT Advisor, LLC
and, therefore, consolidates Grubb & Ellis Healthcare REIT Advisor, LLC. Grubb & Ellis
Healthcare Management, LLC owns a 25.0% equity interest in Grubb & Ellis Healthcare REIT
Advisor, LLC. As of September 30, 2009 and December 31, 2008, each of Ms. Biller and Mr. Hanson,
the Companys Chief Investment Officer and GERIs President, owned an equity interest of 18.0%
of Grubb & Ellis Healthcare Management, LLC. On August 8, 2008, in accordance with the terms of
the operating agreement of Grubb & Ellis Healthcare Management, LLC, Grubb & Ellis Healthcare
Management, LLC tendered settlement for the purchase of 18.0% equity interest in Grubb & Ellis
Healthcare Management, LLC that was previously owned by Mr. Peters. As a consequence, through a
wholly owned subsidiary, the Companys equity interest in Grubb & Ellis Healthcare Management,
LLC increased from 46.0% to 64.0% after giving effect to this purchase from Mr. Peters.
The grants of 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 of
$131,000, $85,000 and $122,000, to Mr. Thompson, Mr. Peters and Ms. Biller for the nine months
ended September 30, 2008, respectively. There was no compensation expense related to the profit
sharing arrangement with Grubb & Ellis Apartment Management, LLC, and therefore no distributions
to any members, for the nine months ended September 30, 2009. Compensation expense related to
this profit sharing arrangement associated with Grubb & Ellis Healthcare Management, LLC
includes distributions of $44,000 and $131,000, respectively, to Mr. Thompson, $0 and $387,000,
respectively, to Mr. Peters, $203,000 and $491,000, respectively, to Ms. Biller, and $203,000
and $491,000, respectively, to Mr. Hanson for the nine months ended September 30, 2009 and 2008,
respectively.
As of September 30, 2009 and December 31, 2008, respectively, the remaining 82.0% equity
interest in Grubb & Ellis Apartment Management, LLC and the remaining 64.0% equity interest in
Grubb & Ellis Healthcare Management, LLC were owned by GERI. Any allocable earnings attributable
to GERIs ownership interests are paid to GERI on a quarterly basis.
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.
Mr. Thompson has routinely provided personal guarantees to various lending institutions
that provided financing for the acquisition of many properties by our programs. These guarantees
cover certain covenant payments, environmental and hazardous substance indemnification and any
indemnification for any liability arising from the SEC investigation of Triple Net Properties.
In connection with the formation transactions, the Company indemnified Mr. Thompson for amounts
he may be required to pay under all of these guarantees to which Triple Net Properties, Realty
or NNN Capital Corp. is an obligor to the extent such indemnification would not require the
Company to book additional liabilities on the Companys balance sheet. On
June 2, 2008, the Company was notified by the SEC staff that the SEC closed the
investigation without any enforcement action against the Company or its subsidiaries.
29
GRUBB & ELLIS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (continued)
See
issuance of a 5.0 million senior secured convertible note to, and
purchase of 5.0 million of preferred stock by a
related party in Subsequent Events (Note 20) below.
19. INCOME TAXES
The components of income tax (benefit) provision from continuing operations for the three
and nine months ended September 30, 2009 and 2008 consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
(In thousands)
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
(69
|
)
|
|
$
|
1,496
|
|
|
$
|
(69
|
)
|
|
$
|
(4,224
|
)
|
State
|
|
|
1
|
|
|
|
(282
|
)
|
|
|
7
|
|
|
|
(958
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(68
|
)
|
|
|
1,214
|
|
|
|
(62
|
)
|
|
|
(5,182
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
289
|
|
|
|
(13,372
|
)
|
|
|
549
|
|
|
|
(13,628
|
)
|
State
|
|
|
56
|
|
|
|
(3,785
|
)
|
|
|
100
|
|
|
|
(4,314
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
345
|
|
|
|
(17,157
|
)
|
|
|
649
|
|
|
|
(17,942
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
277
|
|
|
$
|
(15,943
|
)
|
|
$
|
587
|
|
|
$
|
(23,124
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company recorded net prepaid taxes totaling approximately $529,000 as of September
30, 2009, comprised primarily of state tax refund receivables and state prepaid tax estimates.
As of December 31, 2008, federal net operating loss carryforwards were available to the
Company in the amount of approximately $2.2 million, translating to a deferred tax asset before
valuation allowance of $797,000 which will begin to expire in 2027. The Company also had state
net operating loss carryforwards from previous periods totaling $74.5 million, translating to a
deferred tax asset of $6.1 million before valuation allowances.
In evaluating the need for a valuation allowance as of September 30, 2009, the Company
evaluated both positive and negative evidence in accordance with the requirements of SFAS No.
109,
Accounting for Income Taxes
. Management determined that $36.4 million of deferred tax
assets recorded during the nine months ended September 30, 2009 do not satisfy the recognition
criteria set forth in SFAS No. 109. Accordingly, a valuation allowance has been recorded for
this amount. If released, the entire amount would result in a benefit to continuing operations.
The differences between the total income tax (benefit) provision of the Company for
financial statement purposes and the income taxes computed using the applicable federal income
tax rate of 35% for the three and nine months ended September 30, 2009 and 2008 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
(In thousands)
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
Federal income taxes at the statutory rate
|
|
$
|
(7,126
|
)
|
|
$
|
(15,914
|
)
|
|
$
|
(32,862
|
)
|
|
$
|
(21,236
|
)
|
State income taxes net of federal benefit
|
|
|
(845
|
)
|
|
|
(2,199
|
)
|
|
|
(3,852
|
)
|
|
|
(2,989
|
)
|
Credits
|
|
|
53
|
|
|
|
(401
|
)
|
|
|
(143
|
)
|
|
|
(177
|
)
|
Non-deductible expenses
|
|
|
10
|
|
|
|
2,490
|
|
|
|
1,029
|
|
|
|
1,346
|
|
Change in valuation allowance
|
|
|
8,253
|
|
|
|
|
|
|
|
36,477
|
|
|
|
|
|
Other
|
|
|
(68
|
)
|
|
|
81
|
|
|
|
(62
|
)
|
|
|
(68
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Benefit) provision for income taxes
|
|
$
|
277
|
|
|
$
|
(15,943
|
)
|
|
$
|
587
|
|
|
$
|
(23,124
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30
GRUBB & ELLIS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (continued)
20. SUBSEQUENT EVENTS
Departure of Directors or Certain Officers; Election of Directors; Appointment of Certain
Officers
On November 9, 2009, the Company announced that Thomas P. DArcy will join the Company as
president, chief executive officer and a member of the board of directors, effective November 16, 2009.
Sale of Unregistered Securities
On October 2, 2009, the Company effected the Permitted Placement (see Note 11) and issued a
$5.0 million senior subordinated convertible note (the Note) to Kojaian Management
Corporation. The Note (i) bears interest at twelve percent (12%) per annum, (ii) is co-terminus
with the term of the Credit Facility (including if the Credit Facility is terminated pursuant to
the Discount Prepayment Option), (iii) is unsecured and fully subordinate to the Credit
Facility, and (iv) in the event the Company issues or sells equity securities in connection with
or pursuant to a transaction with a non-affiliate of the Company while the Note is outstanding,
at the option of the holder of the Note, the principal amount of the Note then outstanding is
convertible into those equity securities of the Company issued or sold in such non-affiliate
transaction. In connection with the issuance of the Note, Kojaian Management Corporation, the
lenders to the Credit Facility and the Company entered into a subordination agreement (the
Subordination Agreement). The Permitted Placement was a transaction by the Company not
involving a public offering in accordance with Section 4(2) of the Securities Act of 1933, as
amended (the Securities Act).
On November 6, 2009, the Company completed the private placement of 900,000 shares of 12%
cumulative participating perpetual convertible preferred stock, par value $0.01 per share
(Preferred Stock), to qualified institutional buyers and other accredited investors. In
conjunction with the offering, the entire $5.0 million principal balance of the Note was
converted into the Preferred Stock at the offering price and the holder of the Note received
accrued interest of approximately $57,000. In addition, the holder of the Note also purchased
an additional $5.0 million of preferred stock at the offering price. The Company also granted the
initial purchaser a 45-day option to purchase up to an additional 100,000 shares of Preferred
Stock.
As
previously disclosed, among other things with respect to
the Preferred Stock offering, in the Current Report on
Form 8-K
filed by the
company on October 26, 2009, the Preferred Stock was offered in reliance on exemptions from the registration
requirements of the Securities Act that apply to offers and sales of securities that do not
involve a public offering. As such, the Preferred Stock was offered and will be sold only to
(i) qualified institutional buyers (as defined in Rule 144A under the Securities Act), (ii) to
a limited number of institutional accredited investors (as defined in Rule 501(a)(1), (2), (3)
or (7) of the Securities Act), and (iii) to a limited number of individual accredited
investors (as defined in Rule 501(a)(4), (5) or (6) of the Securities Act).
As
previously disclosed, among other things with respect to the
Preferred Stock offering, in the Current Report on
Form 8-K
filed by
the company on November 11, 2009, upon the closing of the sale of the $90 million of Preferred Stock, the Company received
cash proceeds of approximately $85.0 million after giving effect to the conversion of the Note
and after deducting the initial purchasers discounts and certain offering expenses and giving
effect to the conversion of the subordinated note. A portion of proceeds were used to pay in
full borrowings under the Credit Facility then outstanding of $66.8 million for a reduced amount
equal to $43.4 million, with the balance of the proceeds to be used for working capital
purposes.
The Certificate of Designations with respect to the Preferred Stock provides, among other
things, that upon the closing of the Offering, each share of Preferred Stock is initially
convertible, at the holders option, into the Companys common stock, par value $.01 per share
(the Common Stock) at a conversion rate of 31.322 shares of Common Stock for each share of
Preferred Stock. If the Companys Certificate of Incorporation is amended to increase the number
of authorized shares (as more fully discussed in the immediately following paragraph), the
Preferred Stock will be convertible, at the holders option, into Common Stock at a conversion
rate of 60.606 shares of Common Stock for each share of Preferred Stock, which represents a
conversion price of approximately $1.65 per share of Common Stock, and a 10.0% premium to the
closing price of the Common Stock on October 22, 2009.
The Company has agreed to seek as soon as practicable the approval of the stockholders
holding at least a majority of the shares of the Common Stock voting separately as a class, and
a majority of all shares of the Companys Common Stock entitled to vote as a single class, which
includes the Common Stock issuable upon the conversion of the Preferred Stock, to amend the
Companys Certificate of Incorporation to increase the Companys authorized capital stock to
220,000,000 shares of capital stock, 200,000,000 of which shall be Common Stock and 20,000,000
of which shall be preferred stock issuable in one or more series or classes, and to permit the
election by the holders of the Preferred Stock of two (2) directors in the event that the
Company is in arrears with respect to the Companys Preferred Stock for six or more quarters. If
such amendment is not effective prior to 120 days after the date the Company first issues the
Preferred Stock, (i) holders of Preferred Stock may require the Company to repurchase all, or a
specified whole number, of their Preferred Stock at a repurchase price equal to 110% of the sum
of the initial liquidation preference plus accumulated but unpaid dividends, and (ii) the
annual dividend rate with respect to the Preferred Stock will increase by two percent (2%);
provided, however, holders of Preferred Stock who do not vote in favor of the amendment will not
be able to exercise such repurchase right, or be entitled to such two percent (2%) dividend
increase.
31
GRUBB & ELLIS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (continued)
The terms of the Preferred Stock provide for cumulative dividends from and including the
date of original issuance in the amount of $12.00 per share each year. Dividends on the
Preferred Stock will be payable when, as and if declared, quarterly in arrears, on March 31,
June 30, September 30 and December 31, beginning on December 31, 2009. In addition, in the event
of any cash distribution to holders of the Common Stock, holders of Preferred Stock will be
entitled to participate in such distribution as if such holders had converted their shares of
Preferred Stock into Common Stock.
If the Company fails to pay the quarterly Preferred Stock dividend in full for two
consecutive quarters, the dividend rate will automatically be increased by .50% of the initial
liquidation preference per share per quarter (up to a maximum amount of increase of 2% of the
initial liquidation preference per share) until cumulative dividends have been paid in full. In
addition, subject to certain limitations, in the event the dividends on the Preferred Stock are
in arrears for six or more quarters, whether or not consecutive, subject to the passage of the
amendment to the Companys Certificate of Incorporation discussed above, holders representing a
majority of the shares of Preferred Stock voting together as a class with holders of any other
class or series of preferred stock upon which like voting rights have been conferred and are
exercisable will be entitled to nominate and vote for the election of two additional directors
to serve on the board of directors until all unpaid dividends with respect to the Preferred
Stock and any other class or series of preferred stock upon which like voting rights have been
conferred or are exercisable have been paid or declared and a sum sufficient for payment has
been set aside therefore.
During the six month period following the closing of the Offering, if the Company issues
any securities, other than certain permitted issuances, and the price per share of the Common
Stock (or the equivalent for securities convertible into or exchangeable for Common Stock) is
less than the then current conversion price of the Preferred Stock, the conversion price will be
reduced pursuant to a weighted average anti-dilution formula.
Holders of Preferred Stock may require the Company to repurchase all, or a specified whole
number, of their Preferred Stock upon the occurrence of a Fundamental Change (as defined in
the Certificate of Designations) with respect to any Fundamental Change that occurs (i) prior to
November 15, 2014, at a repurchase price equal to 110% of the sum of the initial liquidation
preference plus accumulated but unpaid dividends, and (ii) from November 15, 2014 until prior to
November 15, 2019, at a repurchase price equal to 100% of the sum of the initial liquidation
preference plus accumulated but unpaid dividends. On or after November 15, 2014, the Company
may, at its option, redeem the Preferred Stock, in whole or in part, by paying an amount equal
to 110% of the sum of the initial liquidation preference per share plus any accrued and unpaid
dividends to and including the date of redemption.
In the event of certain events that constitute a Change in Control (as defined in the
Certificate of Designations) prior to November 15, 2014, the conversion rate of the Preferred
Stock will be subject to increase. The amount of the increase in the applicable conversion rate,
if any, will be based on the date in which the Change in Control becomes effective, the price to
be paid per share with respect to the Common Stock and the transaction constituting the Change
in Control.
The Company has entered into a registration rights agreement (the Registration Rights
Agreement) with one of the lead investors (and its affiliates) with respect to the shares of
Preferred Stock, and the Common Stock issuable upon the conversion of such Preferred Stock, that
was acquired by such lead investor (and affiliates) in the Offering. No other purchasers of the
Preferred Stock in the Offering will have the right to have their shares of Preferred Stock, or shares of Common Stock issuable upon conversion of such Preferred Stock, registered. In
addition, subject to certain limitations, the lead investor who acquired the registration rights
also has certain preemptive rights in the event the Company issues for cash consideration any
Common Stock or any securities convertible into or exchangeable for Common Stock (or any rights,
warrants or options to purchase any such Common Stock) during the six-month period subsequent to
the closing of the Offering. Such preemptive right is intended to permit such lead investor to
maintain its pro rata ownership of the Preferred Stock acquired in the Offering.
32
GRUBB & ELLIS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (continued)
Holders of the Preferred Stock are entitled to voting rights equal to the number of shares
of Common Stock into which the Preferred Stock is convertible, on an as if converted basis,
except as otherwise provided by law. The holders of the Preferred Stock vote together with the
holders of Common Stock as one class on all matters on which holders of Common Stock vote, and
vote as a separate class with respect to certain matters.
Upon any liquidation, dissolution or winding up of the Company, holders of the Preferred
Stock will be entitled, prior to any distribution to holders of any securities ranking junior to
the Preferred Stock, including but not limited to the Common Stock, and on a pro rata basis with
other preferred stock of equal ranking, a cash liquidation preference equal to the greater of
(i) 110% of the sum of the initial liquidation preference per share plus accrued and unpaid
dividends thereon, if any, from November 6, 2009, the date of the closing of the Offering, and
(ii) an amount equal to the distribution amount each holder of Preferred Stock would have
received had all shares of Preferred Stock been converted to Common Stock.
Pursuant to the overallotment option of up to 100,000 shares of Preferred Stock granted to
the initial purchaser in the Companys $90 million offering of Preferred Stock to various
qualified institutional buyers and accredited investors, the Company
effected the sale of a portion of the overallotment option on November 13, 2009 of an aggregate
of 14,350 shares of Preferred Stock for net proceeds of approximately $1.4 million.
This Form 10-Q shall not constitute an offer to sell or the solicitation of an offer to
buy, nor shall there be any sale of the Preferred Stock in any state in which the offer,
solicitation or sale would be unlawful prior to the registration or qualification under the
securities laws of any such state.
33
|
|
|
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 (as defined below) 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
slowdown in the volume and the decline in the transaction values of sales and leasing
transactions, (ii) the general economic downturn and recessionary pressures on business in
general, (iii) a prolonged and pronounced recession in real estate markets and values, (iv) the
unavailability of credit to finance real estate transactions in general, and the Companys
tenant-in-common programs in particular, (v) the reduction in borrowing capacity under the
Companys current credit facility, and the additional limitations with respect thereto, (vi) the
continuing ability to make interest and principal payments with respect to the Companys credit
facility, (vii) an increase in expenses related to new initiatives, investments in people,
technology, and service improvements, (viii) the success of current and new investment programs,
(ix) the success of new initiatives and investments, (x) the inability to attain expected levels
of revenue, performance, brand equity and expense synergies resulting from the merger of Grubb &
Ellis Company and NNN Realty Advisors in general, and in the current macroeconomic and credit
environment in particular, and (xi) other factors described in the Companys Annual Report on
Form 10-K/A
for the fiscal year ended December 31, 2008, filed on June 1, 2009.
Overview and Background
The Company reports its revenue by three business segments in accordance with the
provisions of the Segment Reporting Topic of the Financial Accounting Standards Board (FASB)
Accounting Standards Codification (Codification). Transaction Services, which comprises its
real estate brokerage operations; Investment Management, which includes providing acquisition,
financing and disposition services with respect to its investment 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 12 of Notes to Consolidated Financial Statements in
Item 1 of this Report.
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 its Annual Report on Form 10-K/A for the year ended December
31, 2008. There have been no material changes to these policies in 2009.
34
Recently Issued Accounting Pronouncements
The Company follows the requirements of the Fair Value Measurements and Disclosures Topic
of the FASB Accounting Standards Codification. The Topic 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 amended the Topic to delay
the effective date of the Fair Value Measurements and Disclosures 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 the Topic as
of January 1, 2008 as it relates to financial assets and financial liabilities. For items within
its scope, the amended Fair Value Measurements and Disclosures Topic deferred the effective date
of Fair Value Measurements and Disclosures to fiscal years beginning after November 15, 2008,
and interim periods within those fiscal years. The Company adopted the requirements of the Topic
as it relates to non-financial assets and non-financial liabilities in the first quarter of
2009, which did not have a material impact on the consolidated financial statements.
In December 2007, the FASB issued an amendment to the requirements of the Business
Combinations Topic. The amended Topic requires an acquiring entity to recognize all the assets
acquired and liabilities assumed in a transaction at the acquisition-date fair value with
limited exceptions. The Topic changed the accounting treatment and disclosure for certain
specific items in a business combination. The Topic applies prospectively to business
combinations for which the acquisition date is on or after the beginning of the first annual
reporting period beginning on or after December 15, 2008. The Company adopted the requirements
of the Topic on a prospective basis on January 1, 2009. The adoption of the requirements of the
Topic will materially affect the accounting for any future business combinations.
In March 2008, the FASB issued an amendment to the requirements of the Derivatives and
Hedging Topic. The requirements of the amended Topic are intended to improve financial reporting
of 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. The requirements of the amended Topic achieve 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. The requirements of the amended Topic became effective
for financial statements issued for fiscal years and interim periods beginning after November
15, 2008, with early application encouraged. The Company adopted the requirements of the amended
Topic in the first quarter of 2009. The adoption of the requirements of the amended Topic did
not have a material impact on the consolidated financial statements.
In April 2008, the FASB issued an amendment to the requirements of Intangibles-Goodwill and
Other Topic. The requirements of the amended Topic are intended to improve the consistency
between the useful life of recognized intangible assets and the period of expected cash flows
used to measure the fair value of the assets. The amendment changes the factors an entity should
consider in developing renewal or extension assumptions in determining the useful life of
recognized intangible assets. In addition the amended Topic requires disclosure of the entitys
accounting policy regarding costs incurred to renew or extend the term of recognized intangible
assets, the weighted average period to the next renewal or extension, and the total amount of
capitalized costs incurred to renew or extend the term of recognized intangible assets. The
requirements of the amended Topic are effective for financial statements issued for fiscal years
and interim periods beginning after December 15, 2008. The Company adopted the requirements of
the amended Topic on January 1, 2009. The adoption of the requirements of the amended Topic did
not have a material impact on the consolidated financial statements.
In June 2008, the FASB issued an amendment to the requirements of the Earnings Per Share
Topic
,
which addresses whether instruments granted in share-based payment transactions are
participating securities prior to vesting and, therefore, need to be included in the computation
of earnings per share under the two-class method which apply to the Company because it grants
instruments to employees in share-based payment transactions that meet the definition of
participating securities, is effective retrospectively for financial statements issued for
fiscal years and interim periods beginning after December 15, 2008. The Company adopted the
requirements of the amended Topic in the first quarter of 2009. The adoption of the requirements
of the amended Topic did not have a material impact on the consolidated financial statements.
35
In April 2009, the FASB issued an amendment to the requirements of the Financial
Instruments Topic. The amended Topic relates to fair value disclosures for any financial
instruments that are not currently reflected on the balance sheet at fair value.
Prior to issuing the requirements of the amended Topic, fair values for these assets and
liabilities were only disclosed once a year. The amended Topic now requires these disclosures on
a quarterly basis, providing qualitative and quantitative information about fair value estimates
for all those financial instruments not measured on the balance sheet at fair value. The
adoption of the requirements of the amended Topic did not have a material impact on the
consolidated financial statements.
The requirements of the Investments-Debt and Equity Securities Topic, is intended to bring
greater consistency to the timing of impairment recognition, and provide greater clarity to
investors about the credit and noncredit components of impaired debt securities that are not
expected to be sold. The Topic also requires increased and more timely disclosures regarding
expected cash flows, credit losses, and an aging of securities with unrealized losses. The
adoption of the requirements of the Topic did not have a material impact on the consolidated
financial statements.
In April 2009, the FASB issued an amendment to the requirements of the Fair Value
Measurements and Disclosures Topic. The Topic relates to determining fair values when there is
no active market or where the price inputs being used represent distressed sales. It states that
the objective of fair value measurement is to reflect how much an asset would be sold for in an
orderly transaction (as opposed to a distressed or forced transaction) at the date of the
financial statements under current market conditions. Specifically, the requirements of the
Topic reaffirms the need to use judgment to ascertain if a formerly active market has become
inactive and in determining fair values when markets have become inactive. The adoption of the
amended Topic did not have a material impact on the consolidated financial statements.
In April 2009, the FASB issued an amendment to the requirements of the Business
Combinations Topic. The requirements of the Business Topic clarifies to address application
issues on the accounting for contingencies in a business combination. The requirements of the
amended Topic is effective for assets or liabilities arising from contingencies in business
combinations acquired on or after January 1, 2009. The adoption of the requirements of the
amended Topic did not have a material impact on the consolidated financial statements.
36
In June 2009, the FASB issued an amendment to the requirements of the Transfers and
Servicing Topic, which addresses the effects of eliminating the qualifying SPE concept and
redefines who the primary beneficiary is for purposes of determining which variable interest
holder should consolidated the variable interest entity. The requirements of the amended Topic
become effective for annual periods beginning after November 15, 2009. The Company is reviewing
any impact this may have on the consolidated financial statements.
In June 2009, the FASB issued SFAS No. 168,
The FASB Accounting Standards Codification and
the Hierarchy of Generally Accepted Accounting Principles a Replacement of FASB Statement No.
162
(SFAS No. 168). SFAS No. 168 established that the
FASB Accounting Standards Codification
(the Codification) became the single official source of authoritative U.S. GAAP, other than
guidance issued by the SEC. Following this statement, the FASB will not issue new standards in
the form of Statements, Staff Positions or Emerging Issues Task Force Abstracts. Instead, the
FASB will issue Accounting Standards Updates. All guidance contained in the Codification carries
an equal level of authority. The GAAP hierarchy was modified to include only two levels of GAAP:
authoritative and non-authoritative. All non-grandfathered, non-SEC accounting literature not
included in the Codification became non-authoritative. The Codification, which changes the
referencing of financial standards, became effective for interim and annual periods ending on or
after September 15, 2009. The adoption of SFAS No. 168 did have a material impact on the
consolidated financial statements.
The Company has adopted the requirements of the Subsequent Events Topic effective beginning
with the quarter ended September 30, 2009 and has evaluated for disclosure subsequent events
that have occurred up through November 13, 2009, the date of issuance of these financial
statements.
RESULTS OF OPERATIONS
Overview
The Company reported revenue of approximately $136.1 million for the three months ended
September 30, 2009, compared with revenue of $153.2 million for the same period in 2008. The
decrease was primarily the result of decreases in Transaction Services and Investment Management
revenue of $11.2 million and $9.3 million, respectively, partially offset by increases in
Management Services revenue of $4.0 million.
The net loss attributable to Grubb & Ellis Company for the third quarter of 2009 was $21.4
million, or $0.34 per diluted share, and includes a non-cash charge of $2.4 million for real
estate related impairments and a $7.2 million charge, which includes an allowance for bad debt
and write-offs of related party receivables and advances. In addition, the three month results
included approximately $2.6 million of stock-based compensation and $1.9 million for
amortization of other identified intangible assets.
The Company reported revenue of approximately $385.1 million for the nine months ended
September 30, 2009, compared with revenue of $468.8 million for the same period in 2008. The
decrease was primarily the result of decreases in Transaction Services and Investment Management
revenue of $54.4 million and $40.6 million, respectively, partially offset by increases in
Management Services revenue of $13.8 million.
The net loss attributable to Grubb & Ellis Company for the first nine months of 2009 was
$95.7 million, or $1.51 per diluted share, and includes a non-cash charge of $16.6 million for
real estate related impairments and a $21.6 million charge, which includes an allowance for bad
debt and write-offs of related party receivables and advances. In addition, the nine month
results included approximately $8.7 million of stock-based compensation and $5.7 million for
amortization of other identified intangible assets.
37
Three Months Ended September 30, 2009 Compared to Three Months Ended September 30,
2008
The following summarizes comparative results of operations for the periods indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
|
|
September 30,
|
|
|
Change
|
|
(In thousands)
|
|
2009
|
|
|
2008
|
|
|
$
|
|
|
%
|
|
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Management services
|
|
$
|
67,456
|
|
|
$
|
63,479
|
|
|
$
|
3,977
|
|
|
|
6.3
|
%
|
Transaction services
|
|
|
46,321
|
|
|
|
57,502
|
|
|
|
(11,181
|
)
|
|
|
(19.4
|
)
|
Investment management
|
|
|
14,829
|
|
|
|
24,116
|
|
|
|
(9,287
|
)
|
|
|
(38.5
|
)
|
Rental related
|
|
|
7,498
|
|
|
|
8,119
|
|
|
|
(621
|
)
|
|
|
(7.6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
136,104
|
|
|
|
153,216
|
|
|
|
(17,112
|
)
|
|
|
(11.2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation costs
|
|
|
116,339
|
|
|
|
120,765
|
|
|
|
(4,426
|
)
|
|
|
(3.7
|
)
|
General and administrative
|
|
|
24,531
|
|
|
|
40,258
|
|
|
|
(15,727
|
)
|
|
|
(39.1
|
)
|
Depreciation and amortization
|
|
|
3,504
|
|
|
|
4,884
|
|
|
|
(1,380
|
)
|
|
|
(28.3
|
)
|
Rental related
|
|
|
4,961
|
|
|
|
4,337
|
|
|
|
624
|
|
|
|
14.4
|
|
Interest
|
|
|
3,741
|
|
|
|
2,947
|
|
|
|
794
|
|
|
|
26.9
|
|
Merger related costs
|
|
|
933
|
|
|
|
2,657
|
|
|
|
(1,724
|
)
|
|
|
(64.9
|
)
|
Real estate related impairments
|
|
|
2,393
|
|
|
|
34,778
|
|
|
|
(32,385
|
)
|
|
|
(93.1
|
)
|
Goodwill and intangible assets impairment
|
|
|
583
|
|
|
|
|
|
|
|
583
|
|
|
|
100.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expense
|
|
|
156,985
|
|
|
|
210,626
|
|
|
|
(53,641
|
)
|
|
|
(25.5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Loss
|
|
|
(20,881
|
)
|
|
|
(57,410
|
)
|
|
|
36,529
|
|
|
|
63.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other (Expense) Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity in losses of unconsolidated entities
|
|
|
(224
|
)
|
|
|
(5,859
|
)
|
|
|
5,635
|
|
|
|
96.2
|
|
Interest income
|
|
|
188
|
|
|
|
234
|
|
|
|
(46
|
)
|
|
|
(19.7
|
)
|
Other income (loss)
|
|
|
272
|
|
|
|
(508
|
)
|
|
|
780
|
|
|
|
153.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income (expense)
|
|
|
236
|
|
|
|
(6,133
|
)
|
|
|
6,369
|
|
|
|
103.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations before
income tax (provision) benefit
|
|
|
(20,645
|
)
|
|
|
(63,543
|
)
|
|
|
42,898
|
|
|
|
67.5
|
|
Income tax (provision) benefit
|
|
|
(277
|
)
|
|
|
15,943
|
|
|
|
(16,220
|
)
|
|
|
(101.7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations
|
|
|
(20,922
|
)
|
|
|
(47,600
|
)
|
|
|
26,678
|
|
|
|
56.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain (loss) from discontinued operations,
net of taxes
|
|
|
(535
|
)
|
|
|
(14,941
|
)
|
|
|
14,406
|
|
|
|
96.4
|
|
(Loss) gain on disposal of discontinued
operations, net of taxes
|
|
|
|
|
|
|
(185
|
)
|
|
|
185
|
|
|
|
100.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loss from discontinued operations
|
|
|
(535
|
)
|
|
|
(15,126
|
)
|
|
|
14,591
|
|
|
|
96.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
(21,457
|
)
|
|
|
(62,726
|
)
|
|
|
41,269
|
|
|
|
65.8
|
|
Net (loss) income from noncontrolling
interests
|
|
|
(98
|
)
|
|
|
(6,444
|
)
|
|
|
6,346
|
|
|
|
98.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to Grubb & Ellis
Company
|
|
$
|
(21,359
|
)
|
|
$
|
(56,282
|
)
|
|
$
|
34,923
|
|
|
|
62.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
38
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. The
Company has typically experienced its lowest quarterly revenue from transaction services in the
quarter ending March 31 of each year with higher and more consistent revenue in the quarters
ending June 30 and September 30. The quarter ending December 31 has historically provided the
highest quarterly level of revenue due to increased activity caused by the desire of clients to
complete transactions by calendar year-end. As of September 30, 2009, the Company managed
approximately 242.9 million square feet of property compared to 226.5 million square feet for
the same period in 2008.
Management Services revenue increased $4.0 million or 6.3% to $67.5 million for the
three months ended September 30, 2009 which reflects an increase in square feet under management
of 15.3 million or 7.4% to 221.2 million total square feet under management as of September 30, 2009. Management
Services revenue, which is primarily property management fees and reimbursable salaries, also
includes property management fee revenue of approximately $1.6 million and $1.9 million for the
three months ended September 30, 2009 and 2008, respectively, from the management of a
significant portion of GERIs captive property portfolio by Grubb & Ellis Managements Services.
Transaction Services revenue decreased $11.2 million or 19.4% to $46.3 million for the
three months ended September 30, 2009. Transaction Services revenue primarily includes brokerage
commission, valuation and consulting revenue. The Companys Transaction Services business was
negatively impacted by the current economic environment, which has reduced commercial real
estate transaction velocity, particularly investment sales.
Investment Management Revenue
Investment Management revenue decreased $9.3 million or 38.5% to $14.8 million for the
three months ended September 30, 2009. Investment Management revenue reflects revenue generated
through the fee structure of the various investment products which included acquisition, loan
and disposition fees of approximately $4.5 million and captive management fees of $7.9 million.
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 assets under
management.
In total, $112.0 million in equity was raised for the Companys investment programs for the
three months ended September 30, 2009, compared with $245.0 million in the same period in 2008.
The decrease was driven by a decrease in TIC equity raised and by a decrease in equity raised by
the Companys public non-traded REITs. During the three months ended September 30, 2009, the
Companys public non-traded REIT programs raised $111.5 million, a decrease of 39.2% from the
$183.3 million equity raised in the same period in 2008. The Companys TIC 1031 exchange
programs raised $500,000 in equity during the third quarter of 2009, compared with $46.2 million
in the same period in 2008. The decrease in TIC equity raised for the three months ended
September 30, 2009 reflects the continued decline in current market conditions. The decrease in
equity raised by the Companys public non-traded REITs is a result of the transition to the
Companys Healthcare REIT II program which commenced September 21, 2009.
Acquisition and loan fees decreased approximately $1.8 million, or 28.9%, to approximately
$4.5 million for the three months ended September 30, 2009, compared to approximately $6.3
million for the same period in 2008. The quarter-over-quarter decrease in acquisition fees was
primarily attributed a decrease of $2.3 million in fees from the TIC programs partially offset
by a small increase in fees earned from the Companys non-traded REIT programs. During the three
months ended September 30, 2009, the Company acquired one property on behalf of its sponsored
programs for an approximate aggregate total of $162.8 million, compared to six properties for an
approximate aggregate total of $240.3 million during the same period in 2008.
Disposition fees decreased approximately $502,000, or 100%, to zero for the three months
ended September 30, 2009, compared to approximately $502,000 for the same period in 2008.
Offsetting the disposition fees during the three months ended September 30, 2008 was
approximately $193,000 of amortization of identified intangible contract rights associated with
the acquisition of Triple Net Properties Realty, Inc. (Realty) as they represent the right to
future disposition fees of a portfolio of real properties under contract. No amortization of identified intangible contract rights
was recorded for the three months ended September 30, 2009 because no disposition fees were
recorded.
Captive management decreased approximately $2.0 million or 19.8% to $7.9 million for the
three months ended September 30, 2009 which primarily reflects an increase in the deferral of
fees.
39
Rental Revenue
Rental revenue includes pass-through revenue for the master lease accommodations related to
the Companys TIC programs. Rental revenue also includes revenue from two properties held for
investment.
Operating Expense Overview
The Companys operating expenses decreased approximately $53.6 million, or 25.5%, to $157.0
million for the three months ended September 30, 2009, compared to approximately $210.6 million
for the same period in 2008. This decrease reflects decreases in compensation costs from lower
commissions paid and synergies created as a result of the Merger of $4.4 million and decreases
of merger related costs of $1.7 million and general and administrative expense of $15.7 million.
The Company recognized real estate impairments of $2.4 million during the three months ended
September 30, 2009, a decrease of $32.4 million over the same period last year. Partially
offsetting the overall decrease was an increase in interest expense of $794,000 for the three
months ended September 30, 2009.
Compensation Costs
Compensation costs decreased approximately $4.4 million, or 3.7%, to $116.3 million for the
three months ended September 30, 2009, compared to approximately $120.8 million for the same
period in 2008 due to a decrease in commissions paid of approximately $7.6 million related to
the Transactions Services portfolio as a result of decrease in activity and a decrease of
approximately $1.3 million primarily related to the Investment Management business as a result
of a reduction in headcount and decreases in salaries partially offset by an increase of $4.5
million as a result of an increase in reimbursable salaries, wages and benefits due to the
growth in the Management Services portfolio.
General and Administrative
General and administrative expense decreased approximately $15.7 million, or 39.1%, to
$24.5 million for the three months ended September 30, 2009, compared to approximately $40.3
million for the same period in 2008 due to a decrease of approximately $10.2 million in bad debt
and related charges along with various decreases related to managements cost saving efforts.
General and administrative expense was 18.0% of total revenue for the three months ended
September 30, 2009, compared with 26.3% for the same period in 2008.
Depreciation and Amortization
Depreciation and amortization expense decreased approximately $1.4 million, or 28.3%, to
$3.5 million for the three months ended September 30, 2009, compared to approximately $4.9
million for the same period in 2008 due to a decrease in depreciation and amortization of
approximately $1.5 million related to one of the two properties held for investment as of
September 30, 2009. Included in depreciation and amortization expense was $796,000 for
amortization of other identified intangible assets.
Rental Expense
Rental expense includes pass-through expenses for master lease accommodations related to
the Companys TIC programs. Rental expense also includes expense from two properties held for
investment.
Interest Expense
Interest expense increased approximately $794,000, or 26.9%, to $3.7 million for the three
months ended September 30, 2009, compared to $2.9 million for the same period in 2008. The
increase in interest expense is primarily due to an increase in the interest rate on the Credit
Facility as a result of the 3
rd
amendment to the Credit Facility whereby
the rate increased to LIBOR plus 800 basis points from LIBOR plus 300 basis points.
40
Real Estate Related Impairments
The Company recognized impairment charges of approximately $2.4 million during the three
months ended September 30, 2009 related to certain unconsolidated real estate investments. These
impairment charges were recognized as an other contingent liability related to commitments
associated with certain of the Companys TIC programs. The Company recognized an impairment
charge of approximately $34.8 million during the three months ended September 30, 2008. The
impairment charge was recognized against the carrying value of the investments as of September
30, 2008.
Discontinued Operations
In accordance with the requirements of the Property, Plant, and Equipment Topic, for the
three months ended September 30, 2009 and 2008, discontinued operations included the results of
operations of two properties and one limited liability company (LLC) entity classified as held
for sale as of September 30, 2009.
Income Tax
The Company recognized a tax expense of approximately $277,000, net of an $8.3 million
valuation allowance for the three months ended September 30, 2009, compared to a tax benefit of
$15.9 million for the same period in 2008. The net $16.2 million increase in tax expense
reflects the valuation allowance recorded in the current year period compared to tax benefits
from the impairment of real estate held for investment recorded in the prior year period, three
months ended September 30, 2008.
Net Loss Attributable to Grubb & Ellis Company
As a result of the above items, the Company recognized a net loss of $21.4 million, or
$0.34 per diluted share for the three months ended September 30, 2009, compared to a net loss of
$56.3 million, or $0.88 per diluted share, for the same period in 2008.
41
Nine Months Ended September 30, 2009 Compared to Nine Months Ended September 30, 2008
The following summarizes comparative results of operations for the periods indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
|
|
|
September 30,
|
|
|
Change
|
|
(In thousands)
|
|
2009
|
|
|
2008
|
|
|
$
|
|
|
%
|
|
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Management services
|
|
$
|
199,636
|
|
|
$
|
185,855
|
|
|
$
|
13,781
|
|
|
|
7.4
|
%
|
Transaction services
|
|
|
118,793
|
|
|
|
173,191
|
|
|
|
(54,398
|
)
|
|
|
(31.4
|
)
|
Investment management
|
|
|
43,912
|
|
|
|
84,480
|
|
|
|
(40,568
|
)
|
|
|
(48.0
|
)
|
Rental related
|
|
|
22,754
|
|
|
|
25,302
|
|
|
|
(2,548
|
)
|
|
|
(10.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
385,095
|
|
|
|
468,828
|
|
|
|
(83,733
|
)
|
|
|
(17.9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation costs
|
|
|
342,072
|
|
|
|
365,488
|
|
|
|
(23,416
|
)
|
|
|
(6.4
|
)
|
General and administrative
|
|
|
82,868
|
|
|
|
84,387
|
|
|
|
(1,519
|
)
|
|
|
(1.8
|
)
|
Depreciation and amortization
|
|
|
8,368
|
|
|
|
13,692
|
|
|
|
(5,324
|
)
|
|
|
(38.9
|
)
|
Rental related
|
|
|
16,159
|
|
|
|
15,384
|
|
|
|
775
|
|
|
|
5.0
|
|
Interest
|
|
|
12,490
|
|
|
|
9,928
|
|
|
|
2,562
|
|
|
|
25.8
|
|
Merger related costs
|
|
|
933
|
|
|
|
10,217
|
|
|
|
(9,284
|
)
|
|
|
(90.9
|
)
|
Real estate related impairments
|
|
|
16,615
|
|
|
|
34,778
|
|
|
|
(18,163
|
)
|
|
|
(52.2
|
)
|
Goodwill and intangible assets impairment
|
|
|
583
|
|
|
|
|
|
|
|
583
|
|
|
|
100.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expense
|
|
|
480,088
|
|
|
|
533,874
|
|
|
|
(53,786
|
)
|
|
|
(10.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Loss
|
|
|
(94,993
|
)
|
|
|
(65,046
|
)
|
|
|
(29,947
|
)
|
|
|
(46.0
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other (Expense) Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity in losses of unconsolidated entities
|
|
|
(1,635
|
)
|
|
|
(10,602
|
)
|
|
|
8,967
|
|
|
|
84.6
|
|
Interest income
|
|
|
472
|
|
|
|
757
|
|
|
|
(285
|
)
|
|
|
(37.6
|
)
|
Other income (loss)
|
|
|
394
|
|
|
|
(3,801
|
)
|
|
|
4,195
|
|
|
|
110.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income (expense)
|
|
|
(769
|
)
|
|
|
(13,646
|
)
|
|
|
12,877
|
|
|
|
94.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations before
income tax (provision) benefit
|
|
|
(95,762
|
)
|
|
|
(78,692
|
)
|
|
|
(17,070
|
)
|
|
|
(21.7
|
)
|
Income tax (provision) benefit
|
|
|
(587
|
)
|
|
|
23,124
|
|
|
|
(23,711
|
)
|
|
|
(102.5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations
|
|
|
(96,349
|
)
|
|
|
(55,568
|
)
|
|
|
(40,781
|
)
|
|
|
(73.4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain (loss) from discontinued operations,
net of taxes
|
|
|
(379
|
)
|
|
|
(18,871
|
)
|
|
|
18,492
|
|
|
|
98.0
|
|
(Loss) gain on disposal of discontinued
operations, net of taxes
|
|
|
(626
|
)
|
|
|
181
|
|
|
|
(807
|
)
|
|
|
(445.9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loss from discontinued operations
|
|
|
(1,005
|
)
|
|
|
(18,690
|
)
|
|
|
17,685
|
|
|
|
94.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
(97,354
|
)
|
|
|
(74,258
|
)
|
|
|
(23,096
|
)
|
|
|
(31.1
|
)
|
Net (loss) income from noncontrolling
interests
|
|
|
(1,686
|
)
|
|
|
(6,298
|
)
|
|
|
4,612
|
|
|
|
73.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to Grubb & Ellis
Company
|
|
$
|
(95,668
|
)
|
|
$
|
(67,960
|
)
|
|
$
|
(27,708
|
)
|
|
|
(40.8
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
Transaction and Management Services Revenue
Management Services revenue increased$13.8 million or 7.4% to $199.6 million for the nine
months ended September 30, 2009 which reflects an increase in square feet under management of
15.3 million or 7.4% to 221.2 million total square feet under management as of September 30, 2009. Management
Services revenue, which is primarily property management fees and reimbursable salaries, also
includes property management fee revenue of approximately $5.2 million and $5.6 million for the
nine months ended September 30, 2009 and 2008, respectively, from the management of a
significant portion of GERIs captive property portfolio by Grubb & Ellis Managements Services.
42
Transaction Services revenue decreased $54.4 million or 31.4% to $118.8 million for the
nine months ended September 30, 2009. Transaction Services revenue primarily includes brokerage
commission, valuation and consulting revenue. The Companys Transaction Services business was
negatively impacted by the current economic environment, which has reduced commercial real
estate transaction velocity, particularly investment sales.
Investment Management Revenue
Investment Management revenue decreased $40.6 million or 48.0% to $43.9 million for the
nine months ended September 30, 2009. Investment Management revenue reflects revenue generated
through the fee structure of the various investment products which included acquisition, loan
and disposition fees of approximately $7.5 million and captive management fees of $24.9 million.
These fees include acquisition, disposition, financing, and property and asset management. 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 assets under management.
In total, $533.0 million in equity was raised for the Companys investment programs for the
nine months ended September 30, 2009, compared with $760.5 million in the same period in 2008.
The decrease was driven by a decrease in TIC equity raised and private client wealth management,
partially offset by an increase in equity raised by the Companys public non-traded REITs.
During the nine months ended September 30, 2009, the Companys public non-traded REIT programs
raised $518.0 million, an increase of 30.8% from the $396.1 million equity raised in the same
period in 2008. The Companys TIC 1031 exchange programs raised $13.0 million in equity during
the nine months ended September 30, 2009, compared with $152.9 million in the same period in
2008. The decrease in TIC equity raised for the nine months ended September 30, 2009 reflects
the continued decline in current market conditions.
Acquisition and loan fees decreased approximately $23.1 million, or 75.5%, to approximately
$7.5 million for the nine months ended September 30, 2009, compared to approximately $30.5
million for the same period in 2008. The decrease in acquisition fees was primarily attributed
to a decrease of $12.2 million in fees earned from the Companys non-traded REIT programs, a
decrease in fees from the Private Client Management platform, formerly known as Wealth
Management, of $4.4 million, and a decrease of $6.5 million in fees from the TIC programs.
During the nine months ended September 30, 2009, the Company acquired 6 properties on behalf of
its sponsored programs for an approximate aggregate total of $240.3 million, compared to 46
properties for an approximate aggregate total of $1.0 billion during the same period in 2008.
Disposition fees decreased approximately $4.6 million, or 100%, to zero for the nine months
ended September 30, 2009, compared to approximately $4.6 million for the same period in 2008.
Offsetting the disposition fees during the nine months ended September 30, 2008 was
approximately $1.2 million 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. No amortization of identified intangible contract
rights was recorded for the nine months ended September 30, 2009 because no disposition fees
were recorded.
Captive management decreased approximately $3.5 million or 12.4% to $24.9 million for the
nine months ended September 30, 2009 which primarily reflects an increase in the deferral of
fees.
Rental Revenue
Rental revenue includes pass-through revenue for the master lease accommodations related to
the Companys TIC programs. Rental revenue also includes revenue from two properties held for
investment.
Operating Expense Overview
The Companys operating expense of $480.1 million for the nine months ended September 30,
2009 a decrease of $53.8 million compared to the same period in 2008. The Company recognized
real estate impairments of $16.6 million during the nine months ended September 30, 2009, a
decrease of $18.2 million compared to real estate impairments of $34.8 million in the same
period of 2008. In addition, compensation costs decreased $23.4 million due to lower commissions
paid and synergies created as a result of the Merger and merger related costs decreased $9.3
million. Depreciation and amortization expense decreased $5.3 million when compared to the prior
period primarily due to depreciation charges related to two properties held for investment in
2008 and 2009. Partially offsetting the overall decrease was an increase in interest expense of
$2.6 million for the nine months ended September 30, 2009.
43
Compensation Costs
Compensation costs decreased approximately $23.4 million, or 6.4%, to $342.1 million for
the nine months ended September 30, 2009, compared to approximately $365.5 million for the same
period in 2008 due to a decrease in commissions paid of approximately $32.6 million related to
the Transactions Services portfolio as a result of decrease in activity and a decrease of
approximately $5.1 million primarily related to the Investment Management business as a result
of a reduction in headcount and decreases in salaries partially offset by an increase of $14.3
million as a result of an increase in reimbursable salaries, wages and benefits due to the
growth in the Management Services portfolio.
General and Administrative
General and administrative expense decreased approximately $1.5 million, or 1.8%, to $82.9
million for the nine months ended September 30, 2009, compared to approximately $84.4 million
for the same period in 2008. The decrease reflects an increase of approximately $5.1 million in
bad debt expense which is offset by decreases in items related to managements cost saving
efforts.
General and administrative expense was 21.5% of total revenue for the nine months ended
September 30, 2009, compared with 18.0% for the same period in 2008.
Depreciation and Amortization
Depreciation and amortization expense decreased approximately $5.3 million, or 38.9%, to
$8.4 million for the nine months ended September 30, 2009, compared to approximately $13.7
million for the same period in 2008. The decrease is primarily due to two properties the Company
held for investment as of September 30, 2009. One of these properties was held for sale through
June 30, 2009 and the other was held for sale through September 30, 2009. In accordance with the
provisions of Property, Plant, and Equipment Topic
,
management determined that the carrying
value of each property, before each property was classified as held for investment (adjusted for
any depreciation and amortization expense and impairment losses that would have been recognized
had the asset been continuously classified as held for investment) was greater than the carrying
value net of selling costs, of the property at the date of the subsequent decision not to sell.
Therefore, the Company made no additional adjustments to the carrying value of the asset as of
September 30, 2009 and no depreciation expense was recorded during the period each property was
held for sale. Included in depreciation and amortization expense was $2.4 million for
amortization of other identified intangible assets.
Rental Expense
Rental expense includes pass-through expenses for master lease accommodations related to
the Companys TIC programs. Rental expense also includes expense from two properties held for
investment.
Interest Expense
Interest expense increased approximately $2.6 million, or 25.8%, to $12.5 million for the
nine months ended September 30, 2009, compared to $9.9 million for the same period in 2008. The
increase in interest expense includes $1.5 million related to the reimbursement of mezzanine
interest costs on certain TIC programs. In addition, interest costs related to the Credit
Facility reflect an increase of $483,000 due to additional borrowings, an increase in the
interest rate to LIBOR plus 800 basis points from LIBOR plus 300 basis points as a result of the
3
rd
amendment to the Credit Facility and an increase of $368,000 related to
the write off of loan fees related to the Credit Facility.
Real Estate Related Impairments
The Company recognized impairment charges of approximately $16.6 million during the nine
months ended September 30, 2009, which includes $9.8 million related to certain unconsolidated
real estate investments and $6.8 million related to property held for investment as of September
30, 2009. Impairment charges of $10.2 million were recognized against the carrying value of the
investments and charges of $6.4 million were recorded as an other contingent liability related
to commitments associated with certain of the Companys TIC programs during the nine months
ended September 30, 2009. In addition, the Company recognized approximately $1.8 million related
to two properties sold during the nine months ended September 30, 2009, for which the net income
(loss) of the properties are classified as discontinued operations. See
Discontinued Operations
discussion below. The Company recognized an impairment charge of approximately $34.8 million
during the nine months ended September 30, 2008.
The impairment charge was recognized against the carrying value of the investments as of
September 30, 2008.
44
Discontinued Operations
In accordance with the requirements of the Property, Plant, and Equipment Topic, for the
nine months ended September 30, 2009 and 2008, discontinued operations included the results of
operations of four properties and one limited liability company (LLC) entity classified as
held for sale during the period. The net loss of $1.0 million during the nine months ended
September 30, 2009 includes approximately $626,000 in loss on sale, net of taxes, related to the
sale of the Danbury Property on June 3, 2009 and
$1.8 million of real estate related impairments.
Income Tax
The Company recognized a tax expense of approximately $587,000 for the nine months ended
September 30, 2009, compared to a tax benefit of $23.1 million for the same period in 2008. The
net $23.7 million increase in tax expense was primarily a result of the $36.4 million valuation
allowance recorded against continuing operations to offset tax benefits from the impairment of
real estate held for sale recorded in discontinued operations during the nine months ended
September 30, 2009 as compared to the same period in 2008. For the nine months ended September
30, 2009 and September 30, 2008, the reported effective income tax rates were (0.613%) and
29.39%, respectively. The change in the effective tax rate is primarily due to the impact of the
$36.4 million valuation allowance. (See Note 19 of Notes to Consolidated Financial Statements in Item 1 of
this Report for additional information.)
Net Loss Attributable to Grubb & Ellis Company
As a result of the above items, the Company recognized a net loss of $95.7 million, or
$1.51 per diluted share, for the nine months ended September 30, 2009, compared to a net loss of
$68.0 million, or $1.07 per diluted share, for the same period in 2008.
Liquidity and Capital Resources
As of September 30, 2009, cash and cash equivalents decreased by approximately $23.5
million, from a cash balance of $33.0 million as of December 31, 2008. The Companys operating
activities used net cash of $29.1 million, reflecting decreased in accounts receivable and
prepaid assets of $17.2 million and payments of net operating liabilities totaling $6.5 million.
Other operating activities used net cash totaling $39.8 million. Investing activities provided
net cash of $81.2 million primarily as a result of the sale of two properties during the nine
months ended September 30, 2009. Financing activities used net cash of $75.7 million primarily
from principal repayments on notes payable of $79.2 million primarily related to two properties
sold during the nine months ended September 30, 2009 offset by net contributions from
noncontrolling interests of $4.1 million. 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 long-term liquidity needs, which may include principal repayments of debt
obligations, investments in various real estate investor programs and institutional funds and
capital expenditures, through current and retained cash flow earnings, the sale of real estate
properties, additional long-term secured and unsecured borrowings and proceeds from the
potential issuance of debt or equity securities and the potential sale of other assets. As of
September 30, 2009, the Company had $63.0 million outstanding under the Credit Facility.
On December 7, 2007, the Company entered into a $75.0 million credit agreement by and among
the Company, the guarantors named therein, and the financial institutions defined therein as
lender parties, with Deutsche Bank Trust Company Americas, as lender and administrative agent
(the Credit Facility). The Company was restricted to solely use the line of credit for
investments, acquisitions, working capital, equity interest repurchase or exchange, and other
general corporate purposes. The line bore interest at either the prime rate or LIBOR based
rates, as the Company may choose on each of its borrowings, plus an applicable margin ranging
from 1.50% to 2.50% based on the Companys Debt/Earnings Before Interest, Taxes, Depreciation
and Amortization (EBITDA) ratio as defined in the credit agreement.
On August 5, 2008, the Company entered into the First Letter Amendment to its Credit
Facility. The First Letter Amendment, among other things, provided the Company with an extension
from September 30, 2008 to March 31, 2009 to dispose of the three real estate assets that the
Company had previously acquired on behalf of GERA. Additionally, the First Letter Amendment
also, among other things, modified select debt and financial covenants in order to provide
greater flexibility to facilitate the Companys TIC Programs.
45
On November 4, 2008, the Company amended its Credit Agreement (the Second Letter
Amendment). The effective date of the Second Letter Amendment is September 30, 2008. (Certain
capitalized terms set forth below that are not otherwise defined herein have the meaning
ascribed to them in the Credit Facility, as amended.
The Second Letter Amendment, among other things, a) reduced the amount available under the
Credit Facility from $75.0 million to $50.0 million by providing that no advances or letters of
credit shall be made available to the Company after September 30, 2008 until such time as
borrowings have been reduced to less than $50.0 million; b) provided that 100% of any net cash
proceeds from the sale of certain real estate assets required to be sold by the Company shall
permanently reduce the Revolving Credit Commitments, provided that the Revolving Credit
Commitments shall not be reduced to less than $50.0 million by reason of the operation of such
asset sales; and c) modified the interest rate incurred on borrowings by increasing the
applicable margins by 100 basis points and by providing for an interest rate floor for any prime
rate related borrowings.
Additionally, the Second Letter Amendment, among other things, modified restrictions
on guarantees of primary obligations from $125.0 million to $50.0 million, modified select
financial covenants to reflect the impact of the current economic environment on the Companys
financial performance, amended certain restrictions on payments by deleting any dividend/share
repurchase limitations and modified the reporting requirements of the Company with respect to
real property owned or held.
As of September 30, 2008, the Company was not in compliance with certain of its financial
covenants related to EBITDA. As a result, part of the Second Letter Amendment included a
provision to modify selected covenants. The Company was not in compliance with certain debt
covenants as of March 31, 2009, all of which were effectively cured as of such date by the Third
Amendment to the Credit Facility described below. As a consequence of the foregoing, and certain
provisions of the Third Amendment, the $63.0 million outstanding under the Credit Facility has
been classified as a current liability as of September 30, 2009.
On May 20, 2009, the Company further amended its Credit Facility by entering into the Third
Amendment. The Third Amendment, among other things, bifurcated the existing credit facility into
two revolving credit facilities, (i) a $38,000,000 Revolving Credit A Facility which was deemed
fully funded as of the date of the Third Amendment, and (ii) a $29,289,245 Revolving Credit B
Facility, comprised of revolving credit advances in the aggregate of $25,000,000 which were
deemed fully funded as of the date of the Third Amendment and letters of credit advances in the
aggregate amount of $4,289,245 which are issued and outstanding as of the date of the Third
Amendment. The Third Amendment required the Company to draw down $4,289,245 under the Revolving
Credit B Facility on the date of the Third Amendment and deposit such funds in a cash collateral
account to cash collateralize outstanding letters of credit under the Credit Facility and
eliminated the swingline features of the Credit Facility and the Companys ability to cause the
lenders to issue any additional letters of credit. In addition, the Third Amendment also changes
the termination date of the Credit Facility from December 7, 2010 to March 31, 2010 and modified
the interest rate incurred on borrowings by initially increasing the applicable margin by 450
basis points (or to 7.00% on prime rate loans and 8.00% on LIBOR based loans).
The Third Amendment also eliminated specific financial covenants, and in its place, the
Company was required to comply with the approved budget, that has been agreed to by the Company
and the lenders, subject to agreed upon variances. The approved budget related solely to the
2009 fiscal year (the Budget). The Budget was the Companys operating cash flow budget, and
encompassed all aspects of typical operating cash flows including revenues, fees and expenses,
and such working capital components as receivables and accounts payables, taxes, debt service
and any other identifiable cash flow items. Pursuant to the Budget, the Company was required to
stay within certain variance parameters with respect to cumulative cash flow for the remainder
of the 2009 year to remain in compliance with the Credit Facility. The Company was also required
under the Third Amendment to effect the Recapitalization Plan, on or before September 30, 2009
and in connection therewith to effect the Partial Prepayment of the Revolving A Credit Facility.
In the event the Company failed to effect the Recapitalization Plan and in connection therewith
to reduce the Revolving Credit A Credit Facility by the Partial Prepayment amount, the (i)
lenders would have had the right commencing on October 1, 2009, to exercise the Warrants, for
nominal consideration, to purchase common stock of the Company equal to 15% of the common stock
of the Company on a fully diluted basis as of such date, subject to adjustment, (ii) the
applicable margin automatically increased to 11% on prime rate loans and increased to 12% on
LIBOR based loans, (iii) the Company was required to amortize an aggregate of $10 million of the
Revolving Credit A Facility in three (3) equal installments on the first business day of each of
the last three (3) months of 2009, (iv) the Company was obligated to submit a revised budget by
October 1, 2009, (v) the Credit Facility would have terminated on January 15, 2010, and (vi) no
further advances were available to be drawn under the Credit Facility.
46
In the event the Company effected the Recapitalization Plan and the Partial Prepayment
amount on or prior to September 30, 2009, the Warrants would have automatically expired and not become exercisable, the
applicable margin would have automatically been reduced to 3% on prime rate loans and 4% on
LIBOR based loans and the Company had the right, subject to the requisite approval of the
lenders, to seek an extension to extend the term of the Credit Facility to January 5, 2011,
provided the Company also paid a fee of .25% of the then outstanding commitments under the
Credit Facility. The Company calculated the initial fair value of the Warrants to be $534,000
and has recorded such amount in stockholders equity with a corresponding debt discount to the
line of credit balance. Such debt discount amount will be amortized into interest expense over
the remaining term of the Credit Facility. As of September 30, 2009, the net debt discount
balance was $291,000 and is included in the current portion of line of credit in the
accompanying consolidated balance sheet.
As a result of the Third Amendment the Company was required to prepay Revolving Credit A
Advances (and to the extent the Revolving Credit A Facility shall be reduced to zero, prepay
outstanding Revolving Credit B Advances) in an amount equal to 100% (or, after the Revolving
Credit A Advances are reduced by at least the Partial Prepayment amount, in an amount equal to
50%) of Net Cash Proceeds (as defined in the Credit Agreement) from:
|
|
|
assets sales,
|
|
|
|
|
conversions of Investments (as defined in the Credit Agreement),
|
|
|
|
|
the refund of any taxes or the sale of equity interests by the Company or its
subsidiaries,
|
|
|
|
|
the issuance of debt securities, or
|
|
|
|
|
any other transaction or event occurring outside the ordinary course of
business of the Company or its subsidiaries;
|
provided, however, that (a) the Net Cash Proceeds received from the sale of the certain real
property assets shall be used to prepay outstanding Revolving Credit B Advances and to the
extent Revolving Credit B Advances shall be reduced to zero, to prepay outstanding Revolving
Credit A Advances, (b) the Company shall prepay outstanding Revolving Credit B Advances in an
amount equal to 100% of the Net Cash Proceeds from the sale of the Danbury Property unless the
Company is then not in compliance with the Recapitalization Plan in which event Revolving Credit
A Advances shall be prepaid first and (c) the Companys 2008 tax refund was used to prepay
outstanding Revolving Credit B Advances upon the closing of the Third Amendment.
The Third Amendment required the Company to use its commercially reasonable best efforts to
sell four other commercial properties, including the two remaining GERA Properties, by September
30, 2009. The Companys Line of Credit is secured by substantially all of the assets of the
Company.
On September 30, 2009, the Company further amended its Credit Facility by entering into the
First Credit Facility Letter Amendment. The First Credit Facility Letter Amendment, among other
things, modified and provided the Company an extension from September 30, 2009 to November 30,
2009 (the Extension) to (i) effect its Recapitalization Plan and in connection therewith to
effect a prepayment of at least seventy two (72%) percent of the Revolving Credit A Advances (as
defined in the Credit Facility), and (ii) sell four commercial properties, including the two
real estate assets the Company had previously acquired on behalf of Grubb & Ellis Realty
Advisors, Inc.
The First Credit Facility Letter Amendment also granted the Company a one-time right,
exercisable by November 30, 2009, to prepay the Credit Facility in full for a reduced principal
amount equal to approximately 65% of the aggregate principal amount of the Credit Facility then
outstanding (the Discount Prepayment Option).
In connection with the Extension, the warrant agreement was also amended to extend from
October 1, 2009 to December 1, 2009, the time when the Warrants are first exercisable by its
holders.
The First Credit Facility Letter Amendment also granted a one-time waiver from the covenant
requiring all proceeds of sales of equity or debt securities to be applied to pay down the
Credit Facility to facilitate the sale by the Company to an affiliate of the Companys largest
stockholder and Chairman of the Board of Directors of the Company, $5.0 million of subordinated
debt or equity securities of the Company (the Permitted Placement) so long as (i) the
Permitted Placement is junior, subject and subordinate to the Credit Facility, (ii) the net
proceeds of the Permitted Placement are placed into an account with the lender, (iii) the
disbursement of the funds in such account is in accordance with the approved budget that has
been agreed to by the Company and the ledners, (iv) that the lenders be granted a security
interest in the net proceeds of the Permitted Placement, and (v) the Permitted Placement is
otherwise satisfactory to the Lenders. In addition, if the Permitted Placement is in the form of
subordinated debt, the Company and the entity making the $5.0 million loan are required to enter
into a subordination agreement with the lenders.
47
Finally, the First Credit Facility Letter Amendment also provided that $4.3 million that
was deposited in a cash collateral account to cash collateralize outstanding letters of credit
under the Credit Facility would instead be used to pay down the Credit Facility.
The Companys Credit Facility is secured by substantially all of the Companys assets. The
outstanding balance on the Credit Facility was $63.0 million as of September 30, 2009 and
December 31, 2008 and carried a weighted average interest rate of 8.37% and 4.51%, respectively.
On November 6, 2009, a portion of proceeds from the offering of preferred stock (see Note
20) were used to pay in full borrowings under the Credit Facility then outstanding of $66.8
million for a reduced amount equal to $43.4 million and the Credit Facility was terminated.
In connection with the Merger, the Company 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 first and
second calendar quarters of 2008. On July 11, 2008, the Companys Board of Directors approved
the suspension of future dividend payments. In addition, the Board of Directors approved a share
repurchase program under which the Company may repurchase up to $25 million of its common stock
through the end of 2009. The Company did not repurchase any shares of its common stock during
the nine months ended September 30, 2009.
The Credit Facility restricted our ability to operate outside of the approved budget
without the permission of the requisite majority of lenders, and the failure to operate within
the approved budget by more than the greater of $1,500,000 or 15% on a cumulative basis for more
than three consecutive weeks would, absent the requisite approval, result in an event of default
of the Credit Facility and make the entire balance due and payable. In addition, we were
required to remit Net Cash Proceeds from the sale of assets including real estate assets to
repay advances under the Credit Facility and pursue additional sources of capital in accordance
with the Recapitalization Plan. The Companys Credit Facility required the Company to implement
the Recapitalization Plan and complete each step provided in the Recapitalization Plan by the
dates set for such completion. In the event the Company was unable to effect the Partial
Prepayment in connection with the Recapitalization Plan by September 30, 2009, the Company was
required to amortize $10 million of the Revolving Credit A Facility in three equal installments
on the first business day of each of the last three months of 2009 and the entire Credit
Facility would become due and payable on January 15, 2010. In addition, the Company would not
have access to any further advances under the Revolving Credit B Facility which would greatly
reduce the Companys liquidity. All of these demands put the Companys liquidity and financial
resources at risk.
On October 2, 2009, the Company effected the Permitted Placement (see Note 11) and issued a
$5.0 million senior subordinated convertible note (the Note) to Kojaian Management
Corporation. The Note (i) bears interest at twelve percent (12%) per annum, (ii) is co-terminous
with the term of the Credit Facility (including if the Credit Facility is terminated pursuant to
the Discount Prepayment Option), (iii) is unsecured and fully subordinate to the Credit
Facility, and (iv) in the event the Company issues or sells equity securities in connection with
or pursuant to a transaction with a non-affiliate of the Company while the Note is outstanding,
at the option of the holder of the Note, the principal amount of the Note then outstanding is
convertible into those equity securities of the Company issued or sold in such non-affiliate
transaction. In connection with the issuance of the Note, Kojaian Management Corporation, the
lenders to the Credit Facility and the Company entered into a subordination agreement (the
Subordination Agreement). The Permitted Placement was a transaction by the Company not
involving a public offering in accordance with Section 4(2) of the Securities Act of 1933, as
amended (the Securities Act).
On November 6, 2009, the Company completed the private placement of 900,000 shares of 12%
cumulative participating perpetual convertible preferred stock, par value $0.01 per share
(Preferred Stock), to qualified institutional buyers and other accredited investors. In
conjunction with the offering, the entire $5.0 million principal balance of the Note was
converted into the Preferred Stock at the offering price and the holder of the Note received
accrued interest if approximately $57,000. In addition, the holder of the Note also purchased
an additional $5 million of preferred stock at the offering price. The Company also granted the
initial purchaser a 45-day option to purchase up to an additional 100,000 shares of Preferred
Stock.
As
previously disclosed, among other things with respect to the
Preferred Stock offering, in the Current Report on Form 8-K
filed by the Company on October 26, 2009, the Preferred Stock was offered in reliance on exemptions from the registration
requirements of the Securities Act that apply to offers and sales of securities that do not
involve a public offering. As such, the Preferred Stock was offered and will be sold only to
(i) qualified institutional buyers (as defined in Rule 144A under the Securities Act), (ii) to
a limited number of institutional accredited investors (as defined in Rule 501(a)(1), (2), (3)
or (7) of the Securities Act), and (iii) to a limited number of individual accredited
investors (as defined in Rule 501(a)(4), (5) or (6) of the Securities Act).
48
As
previously disclosed, among other things with respect to the
Preferred Stock offering, in the Current Report on Form 8-K
filed by the Company on November 11, 2009, upon the closing of the sale of the $90 million of Preferred Stock, the Company received
cash proceeds of approximately $85.0 million after giving effect to the conversion of the Note
and after deducting the initial purchasers discounts and certain offering expenses and giving
effect to the conversion of the subordinated note. A portion of proceeds were used to pay in
full borrowings under the Credit Facility then outstanding of $66.8 million for a reduced amount
equal to $43.4 million, with the balance of the proceeds to be used for working capital
purposes.
The Certificate of Designations with respect to the Preferred Stock provides, among other
things, that upon the closing of the Offering, each share of Preferred Stock is initially
convertible, at the holders option, into the Companys common stock, par value $.01 per share
(the Common Stock) at a conversion rate of 31.322 shares of Common Stock for each share of
Preferred Stock. If the Companys Certificate of Incorporation is amended to increase the number
of authorized shares (as more fully discussed in the immediately following paragraph), the
Preferred Stock will be convertible, at the holders option, into Common Stock at a conversion
rate of 60.606 shares of Common Stock for each share of Preferred Stock, which represents a
conversion price of approximately $1.65 per share of Common Stock, and a 10.0% premium to the
closing price of the Common Stock on October 22, 2009.
The Company has agreed to seek as soon as practicable the approval of the stockholders
holding at least a majority of the shares of the Common Stock voting separately as a class, and
a majority of all shares of the Companys Common Stock entitled to vote as a single class, which
includes the Common Stock issuable upon the conversion of the Preferred Stock, to amend the
Companys Certificate of Incorporation to increase the Companys authorized capital stock to
220,000,000 shares of capital stock, 200,000,000 of which shall be Common Stock and 20,000,000
of which shall be preferred stock issuable in one or more series or classes, and to permit the
election by the holders of the Preferred Stock of two (2) directors in the event that the
Company is in arrears with respect to the Companys Preferred Stock for six or more quarters. If
such amendment is not effective prior to 120 days after the date the Company first issues the
Preferred Stock, (i) holders of Preferred Stock may require the Company to repurchase all, or a
specified whole number, of their Preferred Stock at a repurchase price equal to 110% of the sum
of the initial liquidation preference plus accumulated but unpaid dividends, and (ii) the annual
dividend rate with respect to the Preferred Stock will increase by two percent (2%); provided,
however, holders of Preferred Stock who do not vote in favor of the amendment will not be able
to exercise such repurchase right, or be entitled to such two percent (2%) dividend increase.
The terms of the Preferred Stock provide for cumulative dividends from and including the
date of original issuance in the amount of $12.00 per share each year. Dividends on the
Preferred Stock will be payable when, as and if declared, quarterly in arrears, on March 31,
June 30, September 30 and December 31, beginning on December 31, 2009. In addition, in the event
of any cash distribution to holders of the Common Stock, holders of Preferred Stock will be
entitled to participate in such distribution as if such holders had converted their shares of
Preferred Stock into Common Stock.
If the Company fails to pay the quarterly Preferred Stock dividend in full for two
consecutive quarters, the dividend rate will automatically be increased by .50% of the initial
liquidation preference per share per quarter (up to a maximum amount of increase of 2% of the
initial liquidation preference per share) until cumulative dividends have been paid in full. In
addition, subject to certain limitations, in the event the dividends on the Preferred Stock are
in arrears for six or more quarters, whether or not consecutive, subject to the passage of the
amendment to the Companys Certificate of Incorporation discussed above, holders representing a
majority of the shares of Preferred Stock voting together as a class with holders of any other
class or series of preferred stock upon which like voting rights have been conferred and are
exercisable will be entitled to nominate and vote for the election of two additional directors
to serve on the board of directors until all unpaid dividends with respect to the Preferred
Stock and any other class or series of preferred stock upon which like voting rights have been
conferred or are exercisable have been paid or declared and a sum sufficient for payment has
been set aside therefore.
During the six month period following the closing of the Offering, if the Company issues
any securities, other than certain permitted issuances, and the price per share of the Common
Stock (or the equivalent for securities convertible into or exchangeable for Common Stock) is
less than the then current conversion price of the Preferred Stock, the conversion price will be
reduced pursuant to a weighted average anti-dilution formula.
Holders of Preferred Stock may require the Company to repurchase all, or a specified whole
number, of their Preferred Stock upon the occurrence of a Fundamental Change (as defined in
the Certificate of Designations) with respect to any Fundamental Change that occurs (i) prior to
November 15, 2014, at a repurchase price equal to 110% of the sum of the initial liquidation
preference plus accumulated but unpaid dividends, and (ii) from November 15, 2014 until prior to
November 15, 2019, at a repurchase price equal to 100% of the sum of the initial liquidation
preference plus accumulated but unpaid dividends. On or after November 15, 2014, the Company
may, at its option, redeem the Preferred Stock, in whole or in part, by paying an amount equal
to 110% of the sum of the initial liquidation preference per share plus any accrued and unpaid
dividends to and including the date of redemption.
49
In the event of certain events that constitute a Change in Control (as defined in the
Certificate of Designations) prior to November 15, 2014, the conversion rate of the Preferred
Stock will be subject to increase. The amount of the increase in the applicable conversion rate,
if any, will be based on the date in which the Change in Control becomes effective, the price to
be paid per share with respect to the Common Stock and the transaction constituting the Change
in Control.
The Company has entered into a registration rights agreement (the Registration Rights
Agreement) with one of the lead investors (and its affiliates) with respect to the shares of
Preferred Stock, and the Common Stock issuable upon the conversion of such Preferred Stock, that
was acquired by such lead investor (and affiliates) in the Offering. No other purchasers of the
Preferred Stock in the Offering will have the right to have their shares of Preferred Stock, or shares of Common Stock issuable upon conversion of such Preferred Stock, registered. In
addition, subject to certain limitations, the lead investor who acquired the registration rights
also has certain preemptive rights in the event the Company issues for cash consideration any
Common Stock or any securities convertible into or exchangeable for Common Stock (or any rights,
warrants or options to purchase any such Common Stock) during the six-month period subsequent to
the closing of the Offering. Such preemptive right is intended to permit such lead investor to
maintain its pro rata ownership of the Preferred Stock acquired in the Offering.
Holders of the Preferred Stock are entitled to voting rights equal to the number of shares
of Common Stock into which the Preferred Stock is convertible, on an as if converted basis,
except as otherwise provided by law. The holders of the Preferred Stock vote together with the
holders of Common Stock as one class on all matters on which holders of Common Stock vote, and
vote as a separate class with respect to certain matters.
Upon any liquidation, dissolution or winding up of the Company, holders of the Preferred
Stock will be entitled, prior to any distribution to holders of any securities ranking junior to
the Preferred Stock, including but not limited to the Common Stock, and on a pro rata basis with
other preferred stock of equal ranking, a cash liquidation preference equal to the greater of
(i) 110% of the sum of the initial liquidation preference per share plus accrued and unpaid
dividends thereon, if any, from November 6, 2009, the date of the closing of the Offering, and
(ii) an amount equal to the distribution amount each holder of Preferred Stock would have
received had all shares of Preferred Stock been converted to Common Stock.
Pursuant to the overallotment option of up to 100,000 shares of Preferred Stock granted to
the initial purchaser in the Companys $90 million offering of Preferred Stock to various
qualified institutional buyers and accredited investors, as previously disclosed in a Current
Report on Form 8-K, as filed on each of October 26, 2009 and November 11, 2009, the Company
effected the sale of a portion of the overallotment option on November 13, 2009 of an aggregate
of 14,350 shares of Preferred Stock for net proceeds of approximately $1.4 million.
This Form 10-Q shall not constitute an offer to sell or the solicitation of an offer to
buy, nor shall there be any sale of the Preferred Stock in any state in which the offer,
solicitation or sale would be unlawful prior to the registration or qualification under the
securities laws of any such state.
Commitments, Contingencies and Other Contractual Obligations
Contractual Obligations
The Company leases office space throughout the United States
through non-cancelable operating leases, which expire at various dates through 2016.
There have been no significant changes in the Companys contractual obligations since
December 31, 2008.
TIC Program Exchange Provision
Prior to the Merger, NNN entered into agreements in which
NNN agreed to provide certain investors with a right to exchange their investment in certain TIC
Programs for an investment in a different TIC program. NNN also entered into an agreement with
another investor that provided the investor with certain repurchase rights under certain
circumstances with respect to their investment. The agreements containing such rights of
exchange and repurchase rights pertain to initial investments in TIC programs totaling $31.6
million. In July 2009 the Company received notice from an investor of their intent to exercise
such rights of exchange and repurchase with respect to an initial investment totaling $4.5
million. The Company is currently evaluating such notice to determine the nature and extent of
the right of such exchange and repurchase, if any.
The Company deferred revenues relating to these agreements of $86,000 and $246,000 for the
three months ended September 30, 2009 and 2008, respectively. The Company deferred revenues
relating to these agreements of $281,000 and $492,000 for the nine months ended September 30,
2009 and 2008, respectively. Additional losses of $14.3 million and $4.5 million related to
these agreements were recorded during the quarter ended December 31, 2008 and during the nine
months ended September 30, 2009, respectively, to reflect the impairment in value of properties
underlying the agreements with investors. As of September 30, 2009, the Company had recorded liabilities totaling $22.6 million related to
such agreements, consisting of $3.8 million of cumulative deferred revenues and $18.8 million of
additional losses related to these agreements.
50
Guarantees
From time to time the Company provides guarantees of loans for properties
under management. As of September 30, 2009, there were 147 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
$4.8 billion. As of December 31, 2008, there were 151 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
$4.8 billion. In addition, each consolidated VIE is joint and severally liable, along with the
other investors in each relative TIC, on the non-recourse mortgage debt related to the VIEs
interests in the relative TIC investment. This non-recourse mortgage debt totaled $277.2 million
and $277.8 million as of September 30, 2009 and December 31, 2008, respectively.
The Companys guarantees consisted of the following as of September 30, 2009 and December
31, 2008:
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September 30,
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|
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December 31,
|
|
(In thousands)
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|
2009
|
|
|
2008
|
|
Non-recourse/carve-out guarantees of debt of properties
under management(1)
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$
|
3,438,375
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|
|
$
|
3,414,433
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Non-recourse/carve-out guarantees of the Companys debt(1)
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$
|
107,000
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|
|
$
|
107,000
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|
Recourse guarantees of debt of properties under management
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$
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39,717
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|
|
$
|
42,426
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|
Recourse guarantees of the Companys debt
|
|
$
|
10,000
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|
|
$
|
10,000
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|
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(1)
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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. Each non-recourse carve-out guarantee is an individual document
entered into with the mortgage lender in connection with the purchase or refinance of an individual property. While
there is not a standard document evidencing these guarantees, liability under the non-recourse carve-out guarantees
generally may be triggered by, among other things, any or all of the following:
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a voluntary bankruptcy or similar insolvency proceeding of any borrower;
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a transfer of the property or any interest therein in violation of the loan documents;
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a violation by any borrower of the special purpose entity requirements set forth in the loan documents;
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any fraud or material misrepresentation by any borrower or any guarantor in connection with the loan;
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the gross negligence or willful misconduct by any borrower in connection with the property, the loan or any
obligation under the loan documents;
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the misapplication, misappropriation or conversion of (i) any rents, security deposits, proceeds or other
funds, (ii) any insurance proceeds paid by reason of any loss, damage or destruction to the property, and (iii) any
awards or other amounts received in connection with the condemnation of all or a portion of the property;
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any waste of the property caused by acts or omissions of borrower of the removal or disposal of any portion
of the property after an event of default under the loan documents; and
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the breach of any obligations set forth in an environmental or hazardous substances indemnification
agreement from borrower.
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Certain violations (typically the first three listed above) render the entire debt balance recourse to the
guarantor regardless of the actual damage incurred by lender, while the liability for other violations is limited
to the damages incurred by the lender. Notice and cure provisions vary between guarantees. Generally the guarantor
irrevocably and unconditionally guarantees to the lender the payment and performance of the guaranteed obligations
as and when the same shall be due and payable, whether by lapse of time, by acceleration or maturity or otherwise,
and the guarantor covenants and agrees that it is liable for the guaranteed obligations as a primary obligor. As of
September 30, 2009, to the best of the Companys knowledge, there is no amount of debt owed by the Company as a
result of the borrowers engaging in prohibited acts.
51
Management initially evaluates these guarantees to determine if the guarantee meets the
criteria required to record a liability in accordance with the requirements of the Guarantees
Topic. Any such liabilities were insignificant as of September 30, 2009 and December 31, 2008.
In addition, on an ongoing basis, the Company evaluates the need to record additional liability
in accordance with the requirements of the Contingencies Topic. As of September 30, 2009 and
December 31, 2008, the Company had recourse guarantees of $39.7 million and $42.4 million, respectively, relating to debt
of properties under management. As of September 30, 2009,
approximately $21.3 million of these
recourse guarantees relate to debt that has matured or is not currently in compliance with
certain loan covenants. In evaluating the potential liability relating to such guarantees, the
Company considers factors such as the value of the properties secured by the debt, the
likelihood that the lender will call the guarantee in light of the current debt service and
other factors. As of September 30, 2009 and December 31, 2008, the Company recorded a liability
of $5.2 million and $9.1 million, respectively, related to its estimate of probable loss related
to recourse guarantees of debt of properties under management which matured in January and April
2009.
Investment Program Commitments
During June and July 2009, the Company revised the
offering terms related to certain investment programs which it sponsors, including the
commitment to fund additional property reserves and the waiver or reduction of future management
fees and disposition fees. The company recorded a liability for future funding commitments as of
September 30, 2009 for these unconsolidated VIEs totaling $1.4 million to fund TIC Program
reserves.
Deferred Compensation Plan
During 2008, the Company implemented a deferred compensation
plan that permits employees and independent contractors to defer portions of their compensation,
subject to annual deferral limits, and have it credited to one or more investment options in the
plan. As of September 30, 2009 and December 31, 2008, $2.6 million and $1.7 million,
respectively, reflecting the non-stock liability under this plan were included in Accounts
payable and accrued expenses. The Company has purchased whole-life insurance contracts on
certain employee participants to recover distributions made or to be made under this plan and as
of September 30, 2009 and December 31, 2008 have recorded the cash surrender value of the
policies of $1.0 million and $1.1 million, respectively, in Prepaid expenses and other assets.
In addition, the Company awards phantom shares of Company stock to participants under the
deferred compensation plan. As of September 30, 2009 and December 31, 2008, the Company awarded
an aggregate of 6.0 million and 5.4 million phantom shares, respectively, to certain employees
with an aggregate value on the various grant dates of $23.3 million and $22.5 million,
respectively. As of September 30, 2009, an aggregate of 5.7 million phantom share grants were
outstanding. Generally, upon vesting, recipients of the grants are entitled to receive the
number of phantom shares granted, regardless of the value of the shares upon the date of
vesting; provided, however, grants with respect to 900,000 phantom shares had a guaranteed
minimum share price ($3.1 million in the aggregate) that will result in the Company paying
additional compensation to the participants should the value of the shares upon vesting be less
than the grant date value of the shares. The Company accounts for additional compensation
relating to the guarantee portion of the awards by measuring at each reporting date the
additional payment that would be due to the participant based on the difference between the then
current value of the shares awarded and the guaranteed value. This award is then amortized on a
straight-line basis as compensation expense over the requisite service (vesting) period, with an
offset to deferred compensation liability.
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Item 3.
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Quantitative and Qualitative Disclosures About Market Risk.
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Interest Rate Risk
Derivatives
The Companys credit facility debt 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 September 30, 2009 and December 31, 2008, the outstanding principal
balance on the credit facility totaled $63.0 million and on the mortgage loan debt obligations
totaled $138.6 million and $216.0 million, respectively. 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 require the
Company to maintain interest rate hedge agreements against 50 percent of all variable interest
rate debt obligations. To fulfill this requirement, the Company held 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 6.00% of the underlying notional
amounts. These rate cap agreements expired in April 2009. In addition, the terms of certain
mortgage loan agreements require the Company to purchase two-year interest rate caps on 30-day
LIBOR with a LIBOR strike price of 6.00%, 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 mature 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 Credit Facility.
52
Additionally, the Companys earnings are affected by changes in short-term interest rates
as a result of the variable interest rate incurred on the portion of the outstanding mortgages on its real estate held for sale.
As of September 30, 2009 and December 31, 2008, the outstanding principal balance on these
variable rate debt obligations was $31.6 million and $108.7 million, respectively, with a
weighted average interest rate of 6.00% and 3.78% per annum, respectively. 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
September 30, 2009, a 0.50% increase in interest rates would not have increased the Companys
overall annual interest expense since the Companys variable rate mortgage debt has a minimum
interest rate of 6.00% and is based on LIBOR plus an applicable margin and a 0.50% increase in
LIBOR plus the applicable margin would not have exceeded the minimum interest rate of 6.00% in
effect as of September 30, 2009. As of December 31, 2008, for example, a 0.50% increase in
interest rates would have increased the Companys overall annual interest expense by
approximately $390,000, or 3.67%. 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 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.
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Item 4.
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Controls and Procedures.
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Material Weakness Previously
Disclosed
During the first nine months of 2009, there has been an ongoing
focus on the remediation activities to address the material weaknesses in
disclosure and financial reporting controls reported in the 2008 Form 10-K/A.
As previously reported, because many of the remedial actions undertaken were
very recent and related, in part, to the hiring of additional personnel and
many of the controls in our system of internal controls rely extensively on
manual review and approval, the successful operation of these remedial actions
for, at least, several fiscal quarters may be required prior to management
being able to conclude that the material weaknesses have been eliminated.
The Principal
Executive Officer and the Principal Financial Officer anticipate that the
remedial actions and resulting improvement in controls will generally
strengthen our disclosure controls and procedures, as well as our internal
control over financial reporting (as defined in Rules 13a-15(c) and
15d-15(e) under the Exchange Act), and will, over time, address the material
weaknesses identified in the 2008 Form 10-K/A.
Evaluation of Disclosure Controls
and Procedures
As of September 30, 2008, we
carried out an evaluation, under the supervision of our interim principal
executive officer (Interim CEO) and principal financial officer (CFO), of the
effectiveness of the design and operation of our disclosure controls and
procedures pursuant to Exchange Act Rule 13a-15. In light of the material
weakness discussed above, which has not been fully remediated as of the end of
the period covered by this Quarterly Report, our Interim CEO and CFO concluded,
after the evaluation described above, that our disclosure controls were not
effective. As a result of this conclusion, the financial statements for the
period covered by this report were prepared with particular attention to the
material weakness previously disclosed. Accordingly, management believes that
the condensed consolidated financial statements included in this Quarterly
Report fairly present, in all material respects, our financial condition,
results of operations and cash flows as of and for the periods presented.
Changes in Internal
Controls over Financial Reporting
Other
than the remediation activities noted above, there were no changes to the
Company’s controls over financial reporting during the quarter ended
September 30, 2009 that have materially affected, or are reasonably likely
to materially affect, the Company’s internal controls over financial
reporting.
PART II
OTHER INFORMATION
1
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Item 1.
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Legal Proceedings.
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None.
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Item 2.
|
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Unregistered Sales of Equity Securities and Use of Proceeds.
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Deferred Compensation Plan
During 2008, the Company implemented a deferred compensation
plan that permits employees and independent contractors to defer portions of their compensation,
subject to annual deferral limits, and have it credited to one or more investment options in the
plan. As of September 30, 2009 and December 31, 2008, $2.6 million and $1.7 million,
respectively, reflecting the non-stock liability under this plan were included in Accounts
payable and accrued expenses. The Company has purchased whole-life insurance contracts on
certain employee participants to recover distributions made or to be made under this plan and as
of September 30, 2009 and December 31, 2008 have recorded the cash surrender value of the
policies of $1.0 million and $1.1 million, respectively, in Prepaid expenses and other
assets.
53
In addition, the Company awards phantom shares of Company stock to participants under the
deferred compensation plan. As of September 30, 2009 and December 31, 2008, the Company awarded
an aggregate of 6.0 million and 5.4 million phantom shares, respectively, to certain employees
with an aggregate value on the various grant dates of $23.3 million and $22.5 million,
respectively. On September 30, 2009, an aggregate of 5.7 million phantom share grants were
outstanding. Generally, upon vesting, recipients of the grants are entitled to receive the
number of phantom shares granted, regardless of the value of the shares upon the date of
vesting; provided, however, grants with respect to 900,000 phantom shares had a guaranteed
minimum share price ($3.1 million in the aggregate) that will result in the Company paying
additional compensation to the participants should the value of the shares upon vesting be less
than the grant date value of the shares.
On June 3, 2009, pursuant to the Companys 2006 Omnibus Equity Plan, the Company granted to
certain of its executive officers an aggregate of 150,000 restricted shares of the Companys
common stock which vest in equal one-third installments on each of the next three anniversaries
of the date of grant and had an aggregate fair market value of $104,000 on the date of grant.
The issuances by the Company of restricted shares in the transactions described above were
exempt from the registration requirements of Section 5 of the Securities Act pursuant to Section
4(2) of the Securities Act, as amended, as such transactions did not involve a public offering
by the Company.
Pursuant to the overallotment option of up to 100,000 shares of
Preferred Stock granted to the initial purchaser in connection with the Companys 90,000,000
Preferred Stock offering, on November 13, 2009 the Company
effected the sale of a portion of the overallotment option and sold an aggregate of 14,350 shares of Preferred Stock for
net proceeds of approximately $1.4 million. The Company will use the net proceeds for working
capital purposes.
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Item 5.
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Other Information.
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Departure of Directors or Certain Officers; Election of Directors; Appointment of Certain
Officers
On November 9, 2009, the Company announced that Thomas P. DArcy will join the Company as
president, chief executive officer and a member of the board of directors, effective November
16, 2009 (the Effective Date).
The Company and Mr. DArcy entered into a three-year Employment Agreement, commencing on
the Effective Date (the Employment Agreement), pursuant to which Mr. DArcy will serve as the
Companys President and Chief Executive Officer. The term of the Employment Agreement is
subject to successive one (1) year extensions unless either party advises the other to the
contrary at least ninety (90) days prior to the then expiration of the then current term.
Pursuant to the Employment Agreement, Mr. DArcy will be appointed to serve on the Companys
Board of Directors as a Class C Director until the 2010 annual meeting of stockholders, unless
prior to such meeting, the Company eliminates its staggered Board, in which event Mr. DArcys
appointment to the Board shall be voted on at the next annual meeting of stockholders. Mr.
DArcy will be a nominee for election to the Companys Board of Directors at each subsequent
annual meeting of the stockholders for so long as the Employment Agreement remains in effect.
Mr. DArcy will receive a base salary of $650,000 per annum. Mr. DArcy is entitled to
receive target bonus cash compensation of up to 200% of his base salary based upon annual
performance goals to be established by the Compensation Committee of the Company. Mr. DArcy is
guaranteed a cash bonus with respect to the 2010 calendar year of 200% of base salary, but there
is no guaranteed bonus with respect to any subsequent year. In addition, there is no cash bonus
compensation with respect to the period commencing on the Effective Date and continuing up to
and through December 31, 2009.
Commencing with calendar year 2010, at the discretion of the Board, Mr. DArcy is also
eligible to participate in a performance-based long term incentive plan, consisting of an annual
award payable either in cash, restricted shares of Common Stock, or stock options exercisable
for shares of Common Stock, as determined by the Compensation Committee. The target for any such
long-term incentive award will be $1.2 million per year, subject to ratable, annual vesting over
three years. Subject to the provisions of Mr. DArcys Employment Agreement, an initial
long-term incentive award with respect to calendar year 2010 will be granted in the first
quarter of 2011 and will vest in equal tranches of 1/3 each commencing on December 31, 2011.
In connection with the entering into of the Employment Agreement, Mr. DArcy agreed to
purchase $500,000 of the Companys 12% Cumulative Participating Preferred Convertible Perpetual
Preferred Stock (the Preferred Stock) which Mr. DArcy purchased on November 13, 2009.
54
On the Effective Date, Mr. DArcy will receive a restricted stock award of 2,000,000
restricted shares (the Restricted Shares) of the Companys common stock, par value $.01 per
share (the Common Stock). One Million (1,000,000) of the Restricted Shares are subject to
vesting over three (3) years in equal annual increments of one-third (1/3) each, commencing on
the day immediately preceding the one (1) year anniversary of the Effective Date. The other One
Million (1,000,000) Restricted Shares are subject to the vesting based upon the market price of
the Companys Common Stock during the initial three (3) year term of the Employment Agreement.
Specifically, (i) in the event that for any thirty (30) consecutive trading days the volume
weighted average closing price per share of the Common Stock on the exchange or market on which
the Companys shares are publically listed or quoted for trading is at least Three Dollars and
Fifty Cents ($3.50), then fifty percent (50%) of such Restricted Shares shall vest, and (ii) in
the event that for any thirty (30) consecutive trading days the volume weighted average closing
price per share of the Companys Common Stock on the exchange or market on which the Companys shares of Common Stock are publically listed or quoted for trading is at least Six Dollars
($6.00), then the remaining fifty (50%) percent of such Restricted Shares shall vest. Vesting
with respect to all Restricted Shares is subject to Mr. DArcys continued employment by the
Company, subject to the terms of a Restricted Share Agreement to be entered into by Mr. DArcy
and the Company on the Effective Date, and other terms and conditions set forth in the
Employment Agreement.
Mr. DArcy will receive from the Company a one-time cash payment of $35,000 as
reimbursement for all of his out-of-pocket transitory relocation expenses. Mr. DArcy is also
entitled to reimbursement expenses of $100,000 incurred in relocating to the Companys principal
executive offices.
Mr. DArcy is also entitled to a professional fee reimbursement of up to $15,000 incurred
by Mr. DArcy for legal and tax advice in connection with the negotiation and entering into the
Employment Agreement.
Mr. DArcy is entitled to participate in the Companys health and other benefit plans
generally afforded to executive employees and is reimbursed for reasonable travel, entertainment
and other reasonable expenses incurred in connection with his duties. The Employment Agreement
contains confidentiality, non-competition, no raid, non-solicitation, non-disparagement and
indemnification provisions.
The Employment Agreement is terminable by the Company upon Mr. DArcys death or incapacity
or for Cause (as defined in the Employment Agreement), without any additional compensation other
than what has accrued to Mr. DArcy as of the date of any such termination, except that in the
case of death or incapacity.
In the event that Mr. DArcy is terminated without Cause, or if Mr. DArcy terminates the
agreement for Good Reason (as defined in the Employment Agreement), Mr. DArcy is entitled to
receive: (i) all monies due to him which right to payment or reimbursement accrued prior to such
discharge; (ii) his annual base salary, payable in accordance with the Companys customary
payroll practices for 24 months; (iii) in lieu of any bonus cash compensation for the calendar
year of termination, an amount equal to two times Mr. DArcys bonus cash compensation earned in
the calendar year prior to termination, subject to Mr. DArcys right to receive the guaranteed
bonus with respect to the 2010 calendar year regardless when the termination without Cause
occurs; (iv) an amount payable monthly, equal to the amount Mr. DArcy paid for continuation of
health insurance coverage for such month under the Consolidated Omnibus Budget Reconciliation
Act of 1986 (COBRA)until the earlier of 18 months from the termination date or when Mr. DArcy
obtains replacement health coverage from another source; (v) the number of shares of Common
Stock or unvested options with respect to any long-term incentive awards granted prior to
termination shall immediately vest; and (vi) all Restricted Shares shall automatically vest.
In the event that Mr. DArcy is terminated without Cause or resigns for Good Reason (i)
within one year after a Change of Control (as defined in the Employment Agreement) or (ii)
within three months prior to a Change of Control, in contemplation thereof, Mr. DArcy is
entitled to receive (a) all monies due to him which right to payment or reimbursement accrued
prior to such discharge, (b) two times his base salary payable in accordance with the Companys
customary payroll practices, over a 24-month period, (c) in lieu of any bonus cash compensation
for the calendar year of termination, an amount equal to two times his target annual cash bonus
earned in the calendar year prior to termination, subject to Mr. DArcys right to receive the
guaranteed bonus with respect to the 2010 calendar year regardless when the termination in
connection with a Change of Control occurs, (d) an amount payable monthly, equal to the amount
Mr. DArcy paid for continuation of health insurance coverage for such month under the COBRA
until the earlier of 18 months from the termination date or when Mr. DArcy obtains replacement
health coverage from another source; (e) the number of shares of Common Stock or unvested
options with respect to any long-term incentive awards granted prior to termination shall
immediately vest; and (f) the Restricted Shares will automatically vest.
The Companys payment of any amounts to Mr. DArcy upon his termination without Cause, for
Good Reason or upon a Change of Control is contingent upon Mr. DArcy executing the Companys
then standard form of release.
55
Mr. D’Arcy,
49, has been since April 2008 and is currently the non-executive chairman
of the board of directors of Inland Real Estate Corporation (NYSE: IRC), where
he has also been an independent director since 2005. Mr. D’Arcy has
over 20 years of experience acquiring, developing and financing all forms
of commercial and residential real estate. He is currently a principal in
Bayside Realty Partners, a private real estate company focused on acquiring,
renovating and developing land and income producing real estate primarily in
the New England area. From 2001 to 2003, Mr. D’Arcy was president
and chief executive officer of Equity Investment Group, a private real estate
company owned by an investor group which included The Government of Singapore,
The Carlyle Group and Northwestern Mutual Life Insurance Company. Prior to his
tenure with Equity Investment Group, Mr. D’Arcy was the chairman of
the board, president and chief executive officer of Bradley Real Estate, Inc.,
a Boston-based real estate investment trust traded on the NYSE, from 1989 to
2000. Mr. D’Arcy is a graduate of Bates College. There are no family
relationships between Mr. D’Arcy and the Company.
The foregoing summary of Mr. DArcys Employment Agreement does not purport to be complete
and is qualified in its entirety by the Employment Agreement, which is attached hereto as
Exhibit 10.1 and incorporated herein by reference.
The exhibits listed on the Exhibit Index (following the signatures section of this report)
are included, or incorporated by reference, in this quarterly report.
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1
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Items 1A, 3 and 4 are not applicable for the nine months ended September 30, 2009.
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56
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.
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GRUBB & ELLIS COMPANY
(Registrant)
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/s/ Richard W. Pehlke
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Richard W. Pehlke
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Chief Financial Officer
(Principal Financial and Accounting Officer)
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Date: November 13, 2009
57
Grubb & Ellis Company
EXHIBIT INDEX
For the quarter ended September 30, 2009
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Exhibit
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(31)
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Section 302 Certifications
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(32)
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Section 906 Certification
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58