Form 10-Q/A
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
10-Q/A
(Amendment
No. 1)
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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 |
For the quarter ended June 30, 2011
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 |
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
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94-1424307 |
(State or other jurisdiction of
incorporation or organization)
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(IRS Employer
Identification No.) |
1551 North Tustin Avenue, Suite 300, Santa Ana, California 92705
(Address of principal executive offices) (Zip Code)
(714) 667-8252
(Registrants telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Indicate by check mark whether the registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant 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 o
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Non-accelerated filer þ
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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 August 10, 2011 was
69,818,327 shares.
EXPLANATORY NOTE
This Amendment
No. 1 to our Quarterly Report on Form 10-Q for the quarter ended
June 30, 2011 (the “Amended 10-Q”), amends our Quarterly
Report on Form 10-Q for the quarter ended June 30, 2011, filed with
the Securities and Exchange Commission on August 15, 2011 (the
“Original 10-Q”). This Amended 10-Q amends the Original 10-Q solely
for the purpose of correcting typographical errors with regards to Grubb &
Ellis Company recourse guarantees that has matured, is in default, or is not
currently in compliance with certain loan documents found in Note 11 of Notes
to Consolidated Financial Statements in Item 1 and in Commitments,
Contingencies and Other Contractual Obligations in Item 2.
This Amended 10-Q does
not reflect events occurring after the filing of the Original 10-Q and does not
modify or update the disclosure in the Original 10-Q, other than the amendment
noted above and the filing of certifications of our principal executive officer
and principal financial officer pursuant to Rule 13a-14 of the Securities
Exchange Act of 1934 and Section 906 of the Sarbanes-Oxley Act of 2002.
This Amended 10-Q replaces the Original 10-Q in its entirety.
GRUBB & ELLIS COMPANY
TABLE OF CONTENTS
2
Part I FINANCIAL INFORMATION
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Item 1. |
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Financial Statements. |
GRUBB & ELLIS COMPANY
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
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June 30, |
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December 31, |
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2011 |
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2010 |
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(Unaudited) |
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ASSETS
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Current assets: |
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Cash and cash equivalents (including $244 and $307 from VIEs, respectively) |
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$ |
14,722 |
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$ |
30,919 |
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Restricted cash |
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4,267 |
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3,836 |
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Investment in marketable equity securities |
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2,034 |
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1,948 |
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Accounts receivable from related parties net |
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5,976 |
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3,460 |
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Service fees receivable net (including $555 and $915 from VIEs, respectively) |
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32,302 |
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31,048 |
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Professional service contracts net |
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3,040 |
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3,468 |
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Prepaid expenses and other assets |
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12,851 |
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11,842 |
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Assets held for sale (including $15,923 and $14,943 from VIEs, respectively, and
$24,055 and $24,992 from related parties, respectively) |
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90,930 |
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100,314 |
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Total current assets |
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166,122 |
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186,835 |
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Professional service contracts net |
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3,892 |
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5,750 |
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Property, equipment and leasehold improvements net |
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10,796 |
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10,110 |
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Identified intangible assets net |
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78,680 |
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80,698 |
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Other assets net (including $21 and $7 from VIEs, respectively) |
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2,494 |
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2,030 |
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Goodwill |
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1,521 |
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1,521 |
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Total assets |
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$ |
263,505 |
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$ |
286,944 |
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LIABILITIES AND SHAREOWNERS DEFICIT
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Current liabilities: |
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Accounts payable and accrued expenses (including $727 and $916 from VIEs, respectively) |
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$ |
63,951 |
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$ |
69,470 |
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Credit
facility (includes accrued interest) |
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17,747 |
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Notes payable and capital lease obligations |
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584 |
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1,041 |
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Liabilities held for sale (including $837 and $822 from VIEs, respectively, and $1,617
and $2,178 from related parties, respectively) |
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116,884 |
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122,478 |
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Total current liabilities |
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199,166 |
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192,989 |
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Long-term liabilities: |
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Convertible notes |
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30,291 |
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30,133 |
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Notes payable and capital lease obligations |
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452 |
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566 |
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Other long-term liabilities |
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9,339 |
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7,065 |
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Deferred tax liabilities |
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25,234 |
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25,070 |
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Total liabilities |
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264,482 |
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255,823 |
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Commitment and contingencies (Note 11) |
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Preferred stock: 12% cumulative participating perpetual convertible; $0.01 par value;
1,000,000 shares authorized as of June 30, 2011 and December 31, 2010; 965,700 shares
issued and outstanding as of June 30, 2011 and December 31, 2010 |
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95,874 |
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90,080 |
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Shareowners deficit: |
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Preferred stock: $0.01 par value; 19,000,000 shares authorized as of June 30, 2011 and
December 31, 2010; no shares issued and outstanding as of June 30, 2011 and December
31, 2010 |
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Common stock: $0.01 par value; 200,000,000 shares authorized as of June 30, 2011 and
December 31, 2010; 69,853,467 and 70,076,451 shares issued and outstanding as of June
30, 2011 and December 31, 2010, respectively |
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698 |
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701 |
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Additional paid-in capital |
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406,347 |
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409,943 |
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Accumulated deficit |
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(511,503 |
) |
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(478,881 |
) |
Other comprehensive income |
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240 |
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148 |
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Total Grubb & Ellis Company shareowners deficit |
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(104,218 |
) |
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(68,089 |
) |
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Noncontrolling interests (including $7,367 and $9,130 from VIEs, respectively) |
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7,367 |
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9,130 |
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Total deficit |
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(96,851 |
) |
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(58,959 |
) |
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Total liabilities and shareowners deficit |
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$ |
263,505 |
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$ |
286,944 |
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The abbreviation VIEs above means Variable Interest Entities.
See accompanying notes to consolidated financial statements.
3
GRUBB & ELLIS COMPANY
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
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Three Months Ended |
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Six Months Ended |
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June 30, |
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June 30, |
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2011 |
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2010 |
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2011 |
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2010 |
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REVENUE |
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Management services |
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$ |
57,913 |
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$ |
70,110 |
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$ |
116,958 |
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$ |
142,558 |
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Transaction services |
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72,814 |
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54,684 |
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123,266 |
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96,917 |
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Investment management |
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7,228 |
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2,265 |
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9,989 |
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3,893 |
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Total revenue |
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137,955 |
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127,059 |
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250,213 |
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243,368 |
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OPERATING EXPENSE |
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Compensation costs |
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121,215 |
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119,495 |
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230,641 |
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237,736 |
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General and administrative |
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18,333 |
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15,515 |
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36,480 |
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31,741 |
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Provision for doubtful accounts |
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2,569 |
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673 |
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3,807 |
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1,802 |
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Depreciation and amortization |
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1,980 |
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1,709 |
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4,062 |
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3,314 |
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Interest |
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915 |
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458 |
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1,688 |
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504 |
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Total operating expense |
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145,012 |
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137,850 |
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276,678 |
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275,097 |
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OPERATING LOSS |
|
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(7,057 |
) |
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(10,791 |
) |
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(26,465 |
) |
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(31,729 |
) |
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OTHER INCOME (EXPENSE) |
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Equity in earnings (losses) of unconsolidated entities |
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235 |
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(190 |
) |
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71 |
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(383 |
) |
Interest income |
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28 |
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85 |
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66 |
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110 |
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Total other income (expense) |
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263 |
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(105 |
) |
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137 |
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(273 |
) |
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Loss from continuing operations before income tax benefit (provision) |
|
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(6,794 |
) |
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(10,896 |
) |
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(26,328 |
) |
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(32,002 |
) |
Income tax benefit (provision) |
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23 |
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(80 |
) |
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23 |
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(218 |
) |
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Loss from continuing operations |
|
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(6,771 |
) |
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|
(10,976 |
) |
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(26,305 |
) |
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(32,220 |
) |
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Discontinued operations |
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Loss from discontinued operations net of taxes |
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(7,946 |
) |
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(8,219 |
) |
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(7,096 |
) |
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(11,027 |
) |
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Total loss from discontinued operations |
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(7,946 |
) |
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(8,219 |
) |
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(7,096 |
) |
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(11,027 |
) |
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NET LOSS |
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(14,717 |
) |
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(19,195 |
) |
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(33,401 |
) |
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|
(43,247 |
) |
Net loss attributable to noncontrolling interests |
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|
(384 |
) |
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|
(1,736 |
) |
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|
(779 |
) |
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(2,007 |
) |
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NET LOSS ATTRIBUTABLE TO GRUBB & ELLIS COMPANY |
|
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(14,333 |
) |
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(17,459 |
) |
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(32,622 |
) |
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(41,240 |
) |
Preferred stock dividends |
|
|
(2,897 |
) |
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|
(2,897 |
) |
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(5,794 |
) |
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(5,794 |
) |
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NET LOSS ATTRIBUTABLE TO GRUBB & ELLIS COMPANY COMMON SHAREOWNERS |
|
$ |
(17,230 |
) |
|
$ |
(20,356 |
) |
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$ |
(38,416 |
) |
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$ |
(47,034 |
) |
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Basic loss per share |
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Loss from continuing operations attributable to Grubb & Ellis
Company common shareowners |
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$ |
(0.14 |
) |
|
$ |
(0.18 |
) |
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$ |
(0.47 |
) |
|
$ |
(0.56 |
) |
Loss from discontinued operations attributable to Grubb & Ellis
Company common shareowners |
|
|
(0.12 |
) |
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|
(0.13 |
) |
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(0.11 |
) |
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(0.17 |
) |
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Net loss per share attributable to Grubb & Ellis Company common
shareowners |
|
$ |
(0.26 |
) |
|
$ |
(0.31 |
) |
|
$ |
(0.58 |
) |
|
$ |
(0.73 |
) |
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Diluted loss per share |
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Loss from continuing operations attributable to Grubb & Ellis
Company common shareowners |
|
$ |
(0.14 |
) |
|
$ |
(0.18 |
) |
|
$ |
(0.47 |
) |
|
$ |
(0.56 |
) |
Loss from discontinued operations attributable to Grubb & Ellis
Company common shareowners |
|
|
(0.12 |
) |
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|
(0.13 |
) |
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(0.11 |
) |
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(0.17 |
) |
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Net loss per share attributable to Grubb & Ellis Company common
shareowners |
|
$ |
(0.26 |
) |
|
$ |
(0.31 |
) |
|
$ |
(0.58 |
) |
|
$ |
(0.73 |
) |
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Basic weighted average shares outstanding |
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65,928 |
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|
64,644 |
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|
65,798 |
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64,503 |
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Diluted weighted average shares outstanding |
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65,928 |
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|
64,644 |
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|
65,798 |
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|
|
64,503 |
|
|
|
|
|
|
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|
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See accompanying notes to consolidated financial statements.
4
GRUBB & ELLIS COMPANY
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
|
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Six Months Ended |
|
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|
June 30, |
|
|
|
2011 |
|
|
2010 |
|
CASH FLOWS FROM OPERATING ACTIVITIES |
|
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Net loss |
|
$ |
(33,401 |
) |
|
$ |
(43,247 |
) |
Adjustments to reconcile net loss to net cash used in operating activities: |
|
|
|
|
|
|
|
|
Equity in losses of unconsolidated entities |
|
|
(327 |
) |
|
|
606 |
|
Depreciation and amortization (including amortization of signing bonuses) |
|
|
9,753 |
|
|
|
9,557 |
|
(Recovery) impairment of real estate |
|
|
(9,858 |
) |
|
|
1,823 |
|
Impairment of intangible assets |
|
|
480 |
|
|
|
1,639 |
|
Share-based compensation |
|
|
2,378 |
|
|
|
5,797 |
|
Allowance for uncollectible accounts |
|
|
6,052 |
|
|
|
3,301 |
|
Other |
|
|
1,211 |
|
|
|
1,255 |
|
Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
|
Accounts receivable from related parties |
|
|
(5,542 |
) |
|
|
867 |
|
Prepaid expenses and other assets |
|
|
(6,993 |
) |
|
|
5,873 |
|
Accounts payable and accrued expenses |
|
|
(85 |
) |
|
|
(5,021 |
) |
Other liabilities |
|
|
1,012 |
|
|
|
(2,491 |
) |
Restricted cash |
|
|
384 |
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in operating activities |
|
|
(34,936 |
) |
|
|
(20,041 |
) |
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES |
|
|
|
|
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|
|
Cash effect from deconsolidation of VIE |
|
|
|
|
|
|
(184 |
) |
Purchases of property and equipment |
|
|
(3,036 |
) |
|
|
(1,297 |
) |
Tenant improvements and capital expenditures |
|
|
(513 |
) |
|
|
(517 |
) |
Purchases of marketable equity securities, net |
|
|
44 |
|
|
|
(936 |
) |
Notes and advances to related parties |
|
|
(291 |
) |
|
|
(365 |
) |
Proceeds from repayment of notes and advances to related parties |
|
|
739 |
|
|
|
4,610 |
|
Proceeds from sale of note receivable |
|
|
6,126 |
|
|
|
|
|
Investments in unconsolidated entities, net |
|
|
(27 |
) |
|
|
(243 |
) |
Sale of tenant-in-common interest in unconsolidated entities |
|
|
|
|
|
|
391 |
|
Payments of real estate deposits and pre-acquisition costs, net |
|
|
|
|
|
|
(422 |
) |
Acquisition of business |
|
|
(100 |
) |
|
|
(200 |
) |
Restricted cash |
|
|
1,308 |
|
|
|
2,002 |
|
|
|
|
|
|
|
|
Net cash provided by investing activities |
|
|
4,250 |
|
|
|
2,839 |
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES |
|
|
|
|
|
|
|
|
Borrowing on credit facility |
|
|
18,000 |
|
|
|
|
|
Repayments of mortgage notes and capital lease obligations, net |
|
|
(581 |
) |
|
|
(514 |
) |
Other financing costs |
|
|
(946 |
) |
|
|
(489 |
) |
Proceeds from the issuance of convertible notes, net |
|
|
|
|
|
|
29,925 |
|
Dividends paid to preferred stockholders |
|
|
|
|
|
|
(5,794 |
) |
Contributions from noncontrolling interests |
|
|
14 |
|
|
|
321 |
|
Distributions to noncontrolling interests |
|
|
(998 |
) |
|
|
(3,244 |
) |
Restricted cash |
|
|
(1,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities |
|
|
14,489 |
|
|
|
20,205 |
|
|
|
|
|
|
|
|
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS |
|
|
(16,197 |
) |
|
|
3,003 |
|
Cash and cash equivalents Beginning of period |
|
|
30,919 |
|
|
|
39,101 |
|
|
|
|
|
|
|
|
Cash and cash equivalents End of period |
|
$ |
14,722 |
|
|
$ |
42,104 |
|
|
|
|
|
|
|
|
SUPPLEMENTAL DISCLOSURE OF NONCASH ACTIVITIES |
|
|
|
|
|
|
|
|
Accrued preferred stock dividends |
|
$ |
5,794 |
|
|
$ |
|
|
|
|
|
|
|
|
|
Issuance of warrants |
|
$ |
741 |
|
|
$ |
|
|
|
|
|
|
|
|
|
Consolidation of assets held by VIEs |
|
$ |
|
|
|
$ |
15,389 |
|
|
|
|
|
|
|
|
Consolidation of liabilities held by VIEs |
|
$ |
|
|
|
$ |
651 |
|
|
|
|
|
|
|
|
Consolidation of noncontrolling interests held by VIEs |
|
$ |
|
|
|
$ |
14,740 |
|
|
|
|
|
|
|
|
Deconsolidation of assets held by VIEs |
|
$ |
|
|
|
$ |
338 |
|
|
|
|
|
|
|
|
Deconsolidation of liabilities held by VIEs |
|
$ |
|
|
|
$ |
411 |
|
|
|
|
|
|
|
|
Deconsolidation of noncontrolling interests held by VIEs |
|
$ |
|
|
|
$ |
73 |
|
|
|
|
|
|
|
|
Consolidation of assets related to sponsored mutual fund |
|
$ |
|
|
|
$ |
823 |
|
|
|
|
|
|
|
|
Consolidation of noncontrolling interests related to sponsored mutual fund |
|
$ |
|
|
|
$ |
823 |
|
|
|
|
|
|
|
|
Acquisition of business |
|
$ |
|
|
|
$ |
1,009 |
|
|
|
|
|
|
|
|
The abbreviation VIEs above means Variable Interest Entities.
See accompanying notes to consolidated financial statements.
5
GRUBB & ELLIS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Overview
Grubb & Ellis Company and its consolidated subsidiaries are referred to herein as the
Company, Grubb & Ellis, we, us, and our. Grubb & Ellis, a Delaware corporation founded
over 50 years ago, is a commercial real estate services and
investment company. With over 5,000
professionals in more than 100 company-owned and affiliate offices throughout the United States
(U.S.), our professionals draw from a platform of real estate services, practice groups and
investment products to deliver comprehensive, integrated solutions to real estate owners, tenants,
investors, lenders and corporate occupiers. Our range of services includes tenant representation,
property and agency leasing, commercial property and corporate facilities management, property
sales, appraisal and valuation and commercial mortgage brokerage and investment management. Our
transaction, management, consulting and investment services are supported by proprietary market
research and extensive local expertise. Through our investment management business, we are a
sponsor of real estate investment programs, including public non-traded real estate investment
trusts (REITs).
Recent Strategic and Financing Initiatives
Credit Facility
On March 21, 2011, we announced that we had retained JMP Securities LLC as an advisor to
explore strategic alternatives for the Company, including a potential merger or sale transaction.
On March 30, 2011, we entered into a commitment letter and exclusivity agreement with Colony
Capital Acquisitions, LLC, pursuant to which, as discussed more fully below, (i) Colony Capital
Acquisitions, LLC and one or more of its affiliates (collectively, Colony) agreed to provide an
$18.0 million senior secured multiple draw term loan credit facility, and (ii) Colony obtained the
exclusive right for 60 days, commencing on March 30, 2011, to evaluate the possibility of making a
larger strategic transaction with the Company. See Note 6 for further information on the credit
facility.
Sale of Daymark
On February 10, 2011, we announced the creation of Daymark Realty Advisors, Inc. (Daymark),
a wholly owned and separately managed subsidiary that is responsible for the management of our
tenant-in-common portfolio. Subsequent thereto we announced that we had retained FBR Capital
Markets & Co. to explore strategic alternatives with respect to Daymark and its portfolio, which
includes over 8,700 multi-family units and approximately 30.0 million square feet of real estate.
Daymark provides specialized services to our tenant-in-common (TIC) portfolio, which we believe
requires unique expertise and client focus, especially as the commercial real estate industry
begins to recover from the significant downturn of the past few years. Daymark will provide
strategic asset management, property management, structured finance, accounting and loan advisory
services to our existing TIC portfolio.
On August 10, 2011, we entered into a Stock Purchase Agreement
(the Purchase Agreement) by and between us and IUC-SOV, LLC (the Purchaser), an entity
affiliated with Sovereign Capital Management and Infinity Real Estate. Pursuant to the Purchase
Agreement, we sold to Purchaser all of the shares of common stock of Daymark. The closing (the Closing) of the
transactions contemplated by the Purchase Agreement (the Transactions) was completed on August
10, 2011.
Pursuant to the Purchase Agreement, we sold to Purchaser all of the outstanding shares of
Daymark in exchange for (1) a cash payment of $0.5 million (the Estimated Closing Cash Payment)
from Purchaser and (2) the assumption by Purchaser of $10.7 million of the net intercompany balance
payable from us to NNN Realty Advisors, Inc. (NNNRA), a wholly-owned subsidiary of Daymark.
We expect to record a gain on sale related to the disposition of Daymark in the third quarter
of 2011, after writing off all of the net assets and liabilities associated with Daymark and
recognizing the transactions costs related to such transaction.
Pursuant to the Purchase Agreement, immediately after the completion of the sale of the
Daymark shares (and after NNNRA had become a wholly-owned subsidiary of the Purchaser), the Company
(1) paid NNNRA a $0.5 million cash payment and (2) issued to NNNRA a $5.0 million promissory note
(the Promissory Note) in full satisfaction of the remaining portion of the Companys net
intercompany balance payable to NNNRA that was not assumed by Purchaser.
Pursuant to the Purchase Agreement, we have agreed to indemnify, subject to various
limitations, Purchaser and its affiliates against any losses incurred or suffered by them as a
result of (1) the breach of any representation or warranty made by us in the
Purchase Agreement (subject to applicable survival limitations); (2) the breach of any
covenant or agreement made by us in the Agreement; (3) any claim for brokerage or finders fees
payable by Daymark or any of its subsidiaries in connection with the Transactions; (4) any
liabilities or claims to the extent arising from the actions or omissions of (A) the Seller and its
subsidiaries (other than Daymark and its subsidiaries) and (B) Daymark and its subsidiaries prior
to the Closing, in each case, related to the office building at 7551 Metro Center Drive in Austin
Texas (Met Center 10) (provided that indemnification for Met Center 10 (x) shall not cover any
legal fees and expenses that were paid prior to Closing and (y) shall not cover any legal fees and
expenses that have not been paid prior to the Closing except to the extent (and only to the extent)
that they exceed $0.65 million); (5) certain liabilities under various employment agreements, plans
and policies; or (6) fraud by Seller or any of its subsidiaries (other than Daymark or any of its
subsidiaries).
6
GRUBB & ELLIS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
Pursuant to the Purchase Agreement, the Purchaser has agreed to indemnify, subject to
limitations, us and our affiliates against any losses incurred or suffered by them as a result of
(1) the breach of any representation or warranty made by Purchaser in the Purchase Agreement
(subject to applicable survival limitations); (2) the breach of any covenant or agreement made by
Purchaser in the Purchase Agreement; (3) any liabilities of, obligations of or claims against us or any of
our subsidiaries related to or arising from the business or operations of Daymark or any of its
subsidiaries (whether relating to matters that occurred, arose or were asserted prior to the
Closing or relating to matters that occur, arise or are asserted after the Closing), including
existing and future litigation and claims, non-recourse carve-out guarantees and other guaranty
obligations of us and our subsidiaries (provided that Purchaser shall not be obligated to indemnify
Seller or its affiliates for losses of Seller or its affiliates that are the result of (x) a
certain litigation matter or (y) fraud by Seller); (4) the first $0.65 million of legal fees and
expenses relating to Met Center 10 that have not been paid prior to the Closing; and (5) fraud by
Purchaser or any of its subsidiaries. Among other indemnification limitations, the liability of
Purchaser for indemnifying us and our affiliates for liabilities, obligations or claims related to
or arising from the business or operations of Daymark or its subsidiaries as described in clause
(3) above (if related solely to any fact, event or circumstances prior to the Closing) shall not
exceed $7.5 million in the aggregate.
The $5.0 million principal amount of the Promissory Note issued by us to NNNRA becomes due and
payable on August 10, 2016 (the Maturity Date). Interest accrues on the unpaid principal of the
Promissory Note at a rate equal to 7.95% per annum. Accrued and unpaid interest on the Promissory
Note is payable on the last day of each calendar quarter (commencing on September 30, 2011) and on
the Maturity Date. We may prepay all or any portion of the Promissory Note at any time without
premium or penalty.
Upon a change of control of the Company or certain Company recapitalization events, we will be
obligated to prepay, within 10 business days following the date of such event, an amount equal to
the sum of (A) an amount of principal (the Mandatory Principal Prepayment Amount) equal to the
lesser of (i) $3.0 million and (ii) the then-outstanding principal amount of the Promissory Note
plus (B) all accrued and unpaid interest on the Mandatory Principal Prepayment Amount.
Events of default under the Promissory Note include (i) a default by us in the payment of any
interest or principal on the Promissory Note when due and such default continues for a period of 10
days after written notice from the holder and (ii) we become subject to any final and
non-appealable writ, judgment, warrant of attachment, execution or similar process that would cause
a material adverse effect on the financial condition of us and our subsidiaries, taken as a whole.
Upon the occurrence of an event of default, the holder of the Promissory Note may declare and
demand the Promissory Note immediately due and payable.
In connection with the closing of the Transactions, we, Daymark and each of Daymarks
subsidiaries entered into an Intercompany Balance Settlement and Release Agreement dated August 10,
2011 (the IBSRA). Pursuant to the IBSRA, Daymark and its subsidiaries released us from any and
all claims, obligations, contracts, agreements, debts and liabilities that Daymark and its
subsidiaries now have, have ever had or may in the future have against us arising at the time of or
prior to the Closing or on account of or arising out of any matter, fact or event occurring at the
time of or prior to the Closing, including (1) all rights and obligations under that certain
Services Agreement dated as of January 1, 2011 by and among us, Daymark and other parties thereto
(the Services Agreement), (2) all other contracts and arrangements between Daymark or any of its
subsidiaries and us, (3) all intercompany payables and any other financial obligations or amounts
owed to Daymark or any of its subsidiaries by us and (4) rights to indemnification or reimbursement
from us, subject to various exceptions. Daymark and its subsidiaries also waived rights to coverage
under D&O insurance policies maintained by us.
Pursuant to the IBSRA, we released Daymark and each of its subsidiaries from any and all
claims, obligations, contracts, agreements, debts and liabilities that we now have, have ever had
or may in the future have against Daymark or any of its subsidiaries arising at the time of or
prior to the Closing or on account of or arising out of any matter, fact or event occurring at the
time of or prior to the Closing, including (1) all rights and obligations under the Services
Agreement, (2) all other contracts and arrangements between us and Daymark or any of its
subsidiaries, (3) all intercompany payables and any other financial obligations or amounts owed to
us by Daymark or any of its subsidiaries and (4) rights to indemnification or reimbursement from
Daymark or any of its subsidiaries, subject to various exceptions.
7
GRUBB & ELLIS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
Sale of Alesco
On June 1, 2011, we entered into a definitive agreement for the sale of substantially all of
the assets of our real estate investment fund business, Alesco Global Advisors (Alesco), to
Lazard Asset Management LLC. Closing of the transaction is subject to customary approvals and is
expected to occur in the third quarter of 2011. We anticipate
recognizing a loss on the sale of Alesco
of approximately $3.0 million in the third quarter of 2011 due
to the deficit balance in noncontrolling interests.
Basis of Presentation
Our accompanying financial statements have been prepared assuming that we will continue
as a going concern, which contemplates realization of assets and the satisfaction of liabilities in
the normal course of business for the twelve month period following the date of these financial
statements.
On March 21, 2011, the Company announced that it had engaged an external advisor to explore
strategic alternatives, including the potential sale or merger of the Company. During this period,
the board of directors also determined, as permitted, not to declare the March 31, 2011 or June 30,
2011 quarterly dividends to holders of its 12% Cumulative Participating Perpetual Convertible
Preferred Stock.
On April 15, 2011, we entered into an $18.0 million credit facility with ColFin GNE Loan
Funding, LLC, an affiliate of Colony Capital LLC (Colony), as further described in Commitments,
Contingencies and Other Contractual Obligations below. The Colony credit facility, which addressed
the Companys liquidity needs resulting from operating losses relating to the seasonal nature of
the real estate services businesses, investments made in growth initiatives and increased legal
expenses related to its Daymark subsidiary, matures on March 1, 2012.
On August 10, 2011 we completed the sale of our Daymark subsidiary. Due in part to operating
losses prior to the sale of Daymark and expenses incurred to complete the sale, we may seek
additional financing prior to the completion of our review of strategic alternatives. It is
anticipated that any strategic alternative would include provisions to retire or refinance the
Colony credit facility at or prior to maturity. If the Company is unable to retire or refinance the
Colony credit facility prior to maturity, it could create substantial doubt about the Companys
ability to continue as a going concern for the twelve month period following the date of these
financial statements. We believe that upon completion of our strategic alternative process we will
have sufficient liquidity to operate in the normal course over the next twelve month period.
The consolidated financial statements include our accounts and those of our wholly owned and
majority-owned controlled subsidiaries, variable interest entities (VIEs) in which we are the
primary beneficiary, and partnerships/limited liability companies (LLCs) in which we are the
managing member or general partner and the other partners/members lack substantive rights. All
significant intercompany accounts and transactions are eliminated in consolidation.
Pursuant to the requirements of Accounting Standards Codification (ASC) Topic 810,
Consolidation, (Consolidation Topic), we consolidate entities that are VIEs when we are deemed to
be the primary beneficiary of the VIE. We are deemed to be the primary beneficiary of the VIE if we
have a significant variable interest in the VIE that provides us with a controlling financial
interest in the VIE. Our variable interest provides us with a controlling financial interest if we
have both (i) the power to direct the activities of the VIE that most significantly impact the
entitys economic performance and (ii) the obligation to absorb losses of the entity that could
potentially be significant to the VIE or the right to receive benefits from the entity that could
potentially be significant to the VIE. There is subjectivity around the determination of power and
which activities of the VIE most significantly impact the entitys economic performance. As
reconsideration events occur, we will reconsider our 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. In addition, we will continuously evaluate our
VIEs primary beneficiary as facts and circumstances change to determine if such changes warrant a
change in an enterprises status as primary beneficiary of the VIEs. For entities in which (i) we
are not deemed to be the primary beneficiary, (ii) our ownership is 50.0% or less and (iii) we have
the ability to exercise significant influence, we use the equity method of accounting (i.e. at
cost, increased or decreased by our share of earnings or losses, plus contributions less
distributions). We also use the equity method of accounting for jointly controlled tenant-in-common
interests.
Interim Unaudited Financial Data
Our accompanying consolidated financial statements have been prepared by us in accordance with
generally accepted accounting principles (GAAP) in conjunction with the rules and regulations of
the SEC. Certain information and footnote disclosures required for annual financial statements have
been condensed or excluded pursuant to SEC rules and regulations. Accordingly, our accompanying
consolidated financial statements do not include all of the information and footnotes required by
GAAP for complete financial statements. Our accompanying consolidated financial statements reflect
all adjustments, which are, in our view, of a normal recurring nature and necessary for a fair
presentation of our financial position, results of operations and cash flows for the interim
period. Interim results of operations are not necessarily indicative of the results to be expected
for the full year; such full year results may be less favorable.
In preparing our accompanying consolidated financial statements, management has evaluated
subsequent events through the financial statement issuance date.
We believe that although the disclosures contained herein are adequate to prevent the
information presented from being misleading, our accompanying consolidated financial statements
should be read in conjunction with our audited consolidated financial statements and the notes
thereto included in our 2010 Annual Report on Form 10-K, as filed with the SEC on March 31, 2011.
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.
8
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.
Restricted Cash
Restricted cash is comprised primarily of cash reserve accounts held for the benefit of
various insurance providers and lenders. As of June 30, 2011 and December 31, 2010, the restricted
cash balance was $4.3 million and $3.8 million, respectively.
Fair Value Measurements
ASC Topic 820, Fair Value Measurements and Disclosures, (Fair Value Measurements and
Disclosures Topic) defines fair value, establishes a framework for measuring fair value, and
expands disclosures about fair value measurements. The Fair Value Measurements and Disclosures
Topic applies to reported balances that are required or permitted to be measured at fair value
under existing accounting pronouncements; accordingly, the standard does not require any new fair
value measurements of reported balances.
The Fair Value Measurements and Disclosures Topic emphasizes that fair value is a market-based
measurement, not an entity-specific measurement. Therefore, a fair value measurement should be
determined based on the assumptions that market participants would use in pricing the asset or
liability. As a basis for considering market participant assumptions in fair value measurements,
the Fair Value Measurements and Disclosures Topic establishes a fair value hierarchy that
distinguishes between market participant assumptions based on market data obtained from sources
independent of the reporting entity (observable inputs that are classified within Levels 1 and 2 of
the hierarchy) and the reporting entitys own assumptions about market participant assumptions
(unobservable inputs classified within Level 3 of the hierarchy).
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
observable directly or through corroboration with observable market data. Level 2 inputs may
include quoted prices for similar assets and liabilities in active markets, as well as inputs that
are observable for the asset or liability (other than quoted prices), such as interest rates,
foreign exchange rates, and yield curves that are observable at commonly quoted intervals. Level 3
inputs are unobservable inputs, due to little or no market activity for the asset or liability,
such as internally-developed valuation models. If quoted market prices or inputs are not available,
fair value measurements are based upon valuation models that utilize current market or
independently sourced market inputs, such as interest rates, option volatilities, credit spreads
and market capitalization rates. Items valued using such internally-generated valuation techniques
are classified according to the lowest level input that is significant to the fair value
measurement. As a result, the asset or liability could be classified in either Level 2 or 3 even
though there may be some significant inputs that are readily observable. In instances where the
determination of the fair value measurement is based on inputs from different levels of the fair
value hierarchy, the level in the fair value hierarchy within which the entire fair value
measurement falls is based on the lowest level input that is significant to the fair value
measurement in its entirety. Our assessment of the significance of a particular input to the fair
value measurement in its entirety requires judgment, and considers factors specific to the asset or
liability.
We generally use a discounted cash flow model to estimate the fair value of our consolidated
real estate investments, unless better market comparable data is available. Management uses its
best estimate in determining the key assumptions, including the expected holding period, future
occupancy levels, capitalization rates, discount rates, rental rates, 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.
9
GRUBB & ELLIS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
The following table presents financial and nonfinancial assets and liabilities measured at
fair value on either a recurring or nonrecurring basis for the six months ended June 30, 2011:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impairment |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recoveries |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Losses) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Incurred |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During the |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months |
|
(In thousands) |
|
June 30, |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ended June 30, |
|
Assets |
|
2011 |
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
2011 |
|
Investments in marketable equity securities |
|
$ |
2,034 |
|
|
$ |
2,034 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Assets under management |
|
$ |
848 |
|
|
$ |
848 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Life insurance contracts |
|
$ |
371 |
|
|
$ |
|
|
|
$ |
371 |
|
|
$ |
|
|
|
$ |
|
|
Contingent liability TIC program exchange |
|
$ |
(10,861 |
) |
|
$ |
|
|
|
$ |
|
|
|
$ |
(10,861 |
) |
|
$ |
9,024 |
|
Warrant derivative liability |
|
$ |
(239 |
) |
|
$ |
|
|
|
$ |
(239 |
) |
|
$ |
|
|
|
$ |
|
|
The following table presents financial and nonfinancial assets measured at fair value on
either a recurring or nonrecurring basis for the year ended December 31, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impairment |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Losses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Incurred |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During the |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended |
|
(In thousands) |
|
December 31, |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
Assets |
|
2010 |
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
2010 |
|
Investments in marketable equity securities |
|
$ |
1,948 |
|
|
$ |
1,948 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Assets under management |
|
$ |
901 |
|
|
$ |
901 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Property held for sale |
|
$ |
45,572 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
45,572 |
|
|
$ |
|
|
Investments in unconsolidated entities |
|
$ |
5,178 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
5,178 |
|
|
$ |
(646 |
) |
Life insurance contracts |
|
$ |
1,062 |
|
|
$ |
|
|
|
$ |
1,062 |
|
|
$ |
|
|
|
$ |
|
|
Fair Value of Financial Instruments
ASC Topic 825, Financial Instruments, (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 Financial Instruments 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 the
reporting period based on unobservable assumptions categorized in Level 3 of the hierarchy,
including 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 our entire holdings of a
particular financial instrument, nor do they consider the 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.
The fair value of our mortgage notes, notes payable, senior notes, convertible notes and
preferred stock is estimated using borrowing rates available to us for debt instruments with
similar terms and maturities. The amounts recorded for accounts receivable, notes receivable,
advances, accounts payable and accrued liabilities and capital lease obligations approximate fair
value due to their short-term nature.
The following table presents the fair value and carrying value of our mortgage notes, notes
payable, NNN senior notes, credit facility, convertible notes and preferred stock as of June 30,
2011 and December 31, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2011 |
|
|
December 31, 2010 |
|
(In thousands) |
|
Fair Value |
|
|
Carrying Value |
|
|
Fair Value |
|
|
Carrying Value |
|
Mortgage notes held for sale |
|
$ |
59,803 |
|
|
$ |
70,000 |
|
|
$ |
59,624 |
|
|
$ |
70,000 |
|
Notes payable |
|
$ |
620 |
|
|
$ |
711 |
|
|
$ |
747 |
|
|
$ |
884 |
|
NNN senior notes held for sale |
|
$ |
16,235 |
|
|
$ |
16,277 |
|
|
$ |
16,054 |
|
|
$ |
16,277 |
|
Credit facility(1) |
|
$ |
17,747 |
|
|
$ |
17,747 |
|
|
$ |
|
|
|
$ |
|
|
Convertible notes(2) |
|
$ |
27,515 |
|
|
$ |
30,291 |
|
|
$ |
28,832 |
|
|
$ |
30,133 |
|
Preferred stock(3) |
|
$ |
49,917 |
|
|
$ |
95,874 |
|
|
$ |
91,828 |
|
|
$ |
90,080 |
|
|
|
|
(1) |
|
Carrying value includes an unamortized debt discount of $0.6 million and accrued
interest of $0.3 million as of June 30, 2011. |
10
GRUBB & ELLIS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
|
|
|
(2) |
|
Carrying value includes an unamortized debt discount of $1.2 million and $1.4 million
as of June 30, 2011 and December 31, 2010, respectively. |
|
(3) |
|
Carrying value includes cumulative unpaid dividends of $5.8 million as of June 30, 2011. |
Litigation
We routinely assess the likelihood of any adverse judgments or outcomes related to legal
matters, as well as ranges of probable losses. A determination of the amount of the reserves
required, if any, for these contingencies is made after analysis of each known issue and an
analysis of historical experience. Therefore, we have recorded reserves related to certain legal
matters for which we believe it is probable that a loss will be incurred and the range of such loss
can be estimated. With respect to other matters, we have concluded that a loss is only reasonably
possible or remote, or is not estimable and, therefore, no liability is recorded. Assessing the
likely outcome of pending litigation, including the amount of potential loss, if any, is highly
subjective. Our judgments regarding likelihood of loss and our estimates of probable loss amounts
may differ from actual results due to difficulties in predicting the outcome of jury trials,
arbitration hearings, settlement discussions and related activity, and various other uncertainties.
Due to the number of claims which are periodically asserted against us, and the magnitude of
damages sought in those claims, actual losses in the future could significantly exceed our current
estimates.
2. MARKETABLE SECURITIES
We apply the provisions of the Fair Value Measurements and Disclosures Topic to our financial
assets recorded at fair value, which consists of available-for-sale marketable securities. Level 1
inputs, the highest priority, are quoted prices in active markets for identical assets are used by
us to estimate the fair value of our available-for-sale marketable securities.
The historical cost and estimated fair value of the available-for-sale marketable securities
held by us are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2011 |
|
|
As of December 31, 2010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair |
|
|
|
Historical |
|
|
Gross Unrealized |
|
|
Market |
|
|
Historical |
|
|
Gross Unrealized |
|
|
Market |
|
(In thousands) |
|
Cost |
|
|
Gains |
|
|
Losses |
|
|
Value |
|
|
Cost |
|
|
Gains |
|
|
Losses |
|
|
Value |
|
|
|
(Unaudited) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities |
|
$ |
1,793 |
|
|
$ |
241 |
|
|
$ |
|
|
|
$ |
2,034 |
|
|
$ |
1,800 |
|
|
$ |
148 |
|
|
$ |
|
|
|
$ |
1,948 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
There were no sales of marketable equity securities, or other than temporary impairments
recorded, during the three and six month periods ended June 30, 2011 or 2010.
3. RELATED PARTIES
Accounts Receivable
Accounts receivable from related parties consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
December 31, |
|
(In thousands) |
|
2011 |
|
|
2010 |
|
Accrued property and asset management fees |
|
$ |
313 |
|
|
$ |
156 |
|
Accrued real estate acquisition fees |
|
|
2,063 |
|
|
|
|
|
Other accrued fees |
|
|
607 |
|
|
|
563 |
|
Organizational, offering and operating costs from sponsored REIT |
|
|
2,993 |
|
|
|
2,741 |
|
|
|
|
|
|
|
|
Total |
|
$ |
5,976 |
|
|
$ |
3,460 |
|
|
|
|
|
|
|
|
11
GRUBB & ELLIS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
4. IDENTIFIED INTANGIBLE ASSETS
Identified intangible assets consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
December 31, |
|
(In thousands) |
|
Useful Life |
|
2011 |
|
|
2010 |
|
Non-amortizing intangible assets: |
|
|
|
|
|
|
|
|
|
|
Trade name |
|
Indefinite |
|
$ |
64,100 |
|
|
$ |
64,100 |
|
Amortizing intangible assets: |
|
|
|
|
|
|
|
|
|
|
Identified intangible assets |
|
|
|
|
|
|
|
|
|
|
Affiliate agreements |
|
20 years |
|
|
10,600 |
|
|
|
10,600 |
|
Customer relationships |
|
5 to 7 years |
|
|
8,725 |
|
|
|
8,725 |
|
Internally developed software |
|
4 years |
|
|
6,200 |
|
|
|
6,200 |
|
Customer backlog |
|
1 year |
|
|
746 |
|
|
|
746 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
26,271 |
|
|
|
26,271 |
|
Accumulated amortization |
|
|
|
|
(11,691 |
) |
|
|
(9,673 |
) |
|
|
|
|
|
|
|
|
|
Total identified intangible assets, net |
|
|
|
$ |
78,680 |
|
|
$ |
80,698 |
|
|
|
|
|
|
|
|
|
|
Amortization expense recorded for the identified intangible assets was approximately $1.0
million and $2.0 million for the three and six months ended June 30, 2011, respectively.
Amortization expense recorded for the identified intangible assets was approximately $0.8 million
and $1.6 million for the three and six months ended June 30, 2010, respectively. Amortization
expense is included as part of operating expense in the accompanying consolidated statement of
operations.
5. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
December 31, |
|
(In thousands) |
|
2011 |
|
|
2010 |
|
Accrued liabilities |
|
$ |
12,952 |
|
|
$ |
9,353 |
|
Salaries and related costs |
|
|
20,757 |
|
|
|
23,321 |
|
Accounts payable |
|
|
10,036 |
|
|
|
15,332 |
|
Broker commissions |
|
|
13,229 |
|
|
|
10,519 |
|
Bonuses |
|
|
4,721 |
|
|
|
8,701 |
|
Property management fees and commissions due to third parties |
|
|
2,256 |
|
|
|
2,244 |
|
|
|
|
|
|
|
|
Total |
|
$ |
63,951 |
|
|
$ |
69,470 |
|
|
|
|
|
|
|
|
6. CREDIT FACILITY
On April 15, 2011, we entered into a credit agreement (the Credit Agreement), by and among
us, Grubb & Ellis Management Services, Inc. (GEMS) and Colony, for an $18.0 million secured
credit facility (the Credit Facility). The terms of the Credit Facility included a payment to
Colony of (i) a closing fee equal to 1.00% of the Credit Facility amount and (ii) warrants (the
Warrants) exercisable to purchase 6,712,000 shares of our common stock, valued at $0.7 million.
The Credit Facility was fully drawn upon as of May 16, 2011.
The Credit Facility matures on March 1, 2012 and has an initial interest rate of 11.00% per
annum, increasing by an additional 0.50% at the end of each three-month period subsequent to the
closing date of the Credit Facility for so long as any loans are outstanding. In lieu of making a
cash interest payment, we have the option to accrue any due and payable interest under the Credit
Facility and issue additional warrants (the Additional Warrants) based on a formula calculation.
The loan is not subject to any required principal amortization payments during the term. As of June
30, 2011, we have issued 62,120 Additional Warrants.
The Credit Agreement contains customary representations and warranties, as well as customary
events of default, in certain cases subject to negotiated periods to cure and exceptions, including
but not limited to: failure to make certain payments when due, breach of covenants, breach of
representations and warranties, certain insolvency proceedings, judgments and attachments and any
change of control.
The Credit Agreement also contains various customary covenants that, in certain instances,
restrict the ability of us and our subsidiaries to: (i) incur indebtedness; (ii) create liens on
assets; (iii) engage in mergers or consolidations; (iv) engage in dispositions of assets; (v) make
investments, loans, guarantees or advances; (vi) pay dividends and distributions with respect to,
or repurchase, its outstanding capital stock; (vii) enter into sale and leaseback transactions;
(viii) engage in transactions with affiliates; and (ix) change the nature of our business. In
addition, the Credit Agreement requires (i) GEMS and its subsidiaries to maintain, as on the last
day of each fiscal quarter, a minimum net worth as defined in the agreement of $20.0 million and
(ii) the outstanding loan to remain in compliance with the defined borrowing base at the end of
each fiscal month (subject to periods to cure). As of June 30, 2011, we were in compliance with all
covenants, as amended.
12
GRUBB & ELLIS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
As a condition to the entering into of the Credit Agreement, we, GEMS and certain of our other
subsidiaries simultaneously entered into a Guarantee and Collateral Agreement, dated as of April
15, 2011 with Colony, in its capacity as administrative agent (the Guarantee and Collateral
Agreement), pursuant to which each of our subsidiaries party thereto (other than GEMS) guaranteed
the obligations of us and GEMS under the Credit Agreement and each of us and our subsidiaries party
thereto granted a first priority security interest in substantially all of our assets.
The Warrants have an exercise price equal to $0.01 per share and a maturity date of three
years from the date of issuance (the Expiration Date), but are exercisable prior to the
Expiration Date upon the satisfaction of certain events as set forth in the Warrants, including,
but not limited to, if the volume weighted average price of our common stock equals or exceeds
$1.10 for any consecutive 30 calendar day period prior to the date of exercise or upon the
occurrence of a fundamental change in which the consideration received for each share of our common
stock equals or exceeds $1.10. The Warrants are exercisable, at the option of the holder of such
Warrant, (a) by paying the exercise price in cash, (b) pursuant to a cashless exercise of the
Warrant or (iii) by reduction of the principal amount of loans under the Credit Facility payable to
the holder of such Warrant, or by a combination of the foregoing methods. The number of shares of
our common stock issuable upon exercise of the Warrants or Additional Warrants is subject to
adjustment in certain cases. All Additional Warrants issued pursuant to the Credit Agreement shall
contain the same terms as the Warrants. We accounted for the Warrants in accordance with the
requirements of ASC 815, Derivatives and Hedging, (Derivatives and Hedging Topic) and ASC Topic
480, Distinguishing Liabilities from Equity, (Distinguishing Liabilities from Equity Topic).
Pursuant to those topics, we determined that the Warrants should be accounted for as a derivative
liability as the Warrant Agreement allows for the number of warrants issuable upon exercise of the
warrant to be adjusted under certain scenarios including an adjustment if we issue shares of common
stock without consideration or for consideration per share less than either: (i) the per share
market value or (ii) the trigger price. The Warrants were recorded as a discount to the Credit
Facility at fair market value as of April 15, 2011 with a corresponding derivative liability. The
derivative liability is adjusted to fair market value at each period end date and the debt discount
is amortized over the term of the Credit Facility.
On July 22, 2011, each of us and our wholly-owned subsidiary, GEMS, entered into an amendment
and consent agreement (the Credit Facility Amendment) with respect to our Credit
Facility, an amendment to the commitment letter for the Credit Facility, between Colony and the
Company (the Credit Facility Commitment Letter Amendment) and amendments to the outstanding
common stock purchase warrants issued to Colony pursuant to the terms of the Credit Agreement (the
Warrant Agreement Amendments, and together with the Credit Facility Amendment and the Commitment
Letter Amendment, collectively, the Amendment Documents).
Pursuant to the Amendment Documents, among other things, Colony expressly acknowledged and
consented to our currently anticipated sale of Daymark, our
wholly-owned subsidiary, and each of its wholly-owned (direct and indirect) subsidiaries and the
restructuring of the outstanding intercompany debt obligations owing by us to Daymark.
The Amendment Documents also clarified the definition of net worth to include any loans
included in such net worth calculation.
The
Amendment Documents also permanently eliminated Colonys right of first offer to provide us with
debt financing prior to it consummating or endeavoring to consummate any similar financing with a
third-party. Additionally, the Amendment Documents amended the price at which any common stock
purchase warrants issuable to Colony in lieu of cash interest from time to time payable under the
Credit Agreement and the common stock purchase warrants previously issued to Colony pursuant to the
Credit Agreement, become exercisable from $1.10 per share to $0.71 per share. In addition, if in
connection with any financing arrangement, we issue any options, or other equity linked securities
to purchase our common stock, with an exercise condition that is based on a share price that is
lower than $0.71 per share (Trigger Price), then the Trigger Price shall be adjusted downward
(but not upward) to such lower price without any further action on the part of any party.
We also entered into a Registration Rights Agreement (Registration Rights Agreement) with
the holder of the Warrants, pursuant to which holders of the Warrants have the right to require us,
subject to certain limitations, to effect the registration under the Securities Act of 1933, as
amended (the Securities Act), of all or any portion of the shares of our common stock issued as a
result of the exercise of all or a portion of the Warrants or the Additional Warrants. The
Registration Rights Agreement contains piggy-back registration rights and demand registration
rights with respect to the shares underlying the Warrants and the Additional Warrants.
13
GRUBB & ELLIS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
7. NOTES PAYABLE AND CAPITAL LEASE OBLIGATIONS
Notes payable and capital lease obligations consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
December 31, |
|
(In thousands) |
|
2011 |
|
|
2010 |
|
Note payable in connection with
business acquisition in November 2010. The
note requires monthly principal and
interest payments, has a fixed interest
rate of 4.0% per annum and matures in
November 2012. |
|
$ |
344 |
|
|
$ |
459 |
|
Note payable in connection with business
acquisition in December 2010. The note
requires monthly principal and interest
payments, has a fixed interest rate of
2.0% per annum and matures in December
2013. |
|
|
367 |
|
|
|
425 |
|
Capital lease obligations |
|
|
325 |
|
|
|
723 |
|
|
|
|
|
|
|
|
Total |
|
|
1,036 |
|
|
|
1,607 |
|
Less portion classified as current |
|
|
(584 |
) |
|
|
(1,041 |
) |
|
|
|
|
|
|
|
Non-current portion |
|
$ |
452 |
|
|
$ |
566 |
|
|
|
|
|
|
|
|
8. CONVERTIBLE NOTES
During the second quarter of 2010, we completed our offering (Offering) of $31.5 million of
unsecured convertible notes (Convertible Notes) to qualified institutional buyers pursuant to
Section 144A of the Securities Act of 1933, as amended. The Convertible Notes pay interest at a
rate of 7.95% per year semi-annually in arrears on May 1 and November 1 of each year, beginning
November 1, 2010. The Convertible Notes mature on May 1, 2015.
We received net proceeds from the Offering of approximately $29.4 million after deducting all
estimated offering expenses. We used the net proceeds from the Offering to fund growth initiatives,
short-term working capital and for general corporate purposes.
Holders of the Notes may convert notes into shares of our common stock at the initial
conversion rate of 445.583 shares per $1,000 principal amount of the Notes (equal to a conversion
price of approximately $2.24 per share of our common stock), subject to adjustment in certain
events (but not for accrued interest) at any time prior to the close of business on the scheduled
trading day before the stated maturity date. In addition, following certain corporate transactions,
we will increase the conversion rate for a holder who elects to convert in connection with such
corporate transaction by a number of additional shares of our common stock as set forth in the
Indenture. As of June 30, 2011, the maximum number of shares of common stock that could be required
to be issued upon conversion of the Convertible Notes was 14,035,865 shares of common stock.
No holder of the Notes will be entitled to acquire shares of common stock delivered upon
conversion to the extent (but only to the extent) such receipt would cause such converting holder
to become, directly or indirectly, a beneficial owner (within the meaning of Section 13(d) of the
Exchange Act of 1934, as amended, and the rules and regulations promulgated thereunder) of more
than 14.99% of the shares of our common stock outstanding at such time.
We may not redeem the Convertible Notes prior to May 6, 2013. On or after May 6, 2013 and
prior to the maturity date, we may redeem for cash all or part of the Convertible Notes at 100% of
the principal amount of the Convertible Notes to be redeemed, plus accrued and unpaid interest,
including any additional interest, up to but excluding the redemption date.
Under certain circumstances following a fundamental change, which is substantially similar to
a fundamental change with respect to our preferred stock, we will be required to make an offer to
purchase all of the Convertible Notes at a purchase price of 100% of their principal amount, plus
accrued and unpaid interest, if any, to the date of repurchase.
The Convertible Notes are our unsecured senior obligations that:
|
|
|
rank equally with all of our other unsecured senior indebtedness; |
|
|
|
effectively rank junior to any of our existing and future secured indebtedness to
the extent of the assets securing such indebtedness; and |
|
|
|
will be structurally subordinated to any indebtedness and other liabilities of our
subsidiaries. |
The Indenture provides for customary events of default, including our failure to pay any
indebtedness for borrowed money, other than non-recourse mortgage debt, when due in excess of $1.0
million.
14
GRUBB & ELLIS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
Registration Rights Agreement
In connection with the Offering, we entered into a registration rights agreement pursuant to
which we agreed to file with the SEC a shelf registration statement registering the resale of the
notes and the shares of common stock issuable upon conversion of the Convertible Notes no later
than June 30, 2010, and to use commercially reasonable efforts to cause the shelf registration
statement to become effective within 85 days of May 7, 2010, or within 115 days of the closing date
of the Offering if the registration statement is reviewed by the SEC. The shelf registration
statement was filed on June 25, 2010 and became effective on July 19, 2010.
We have an obligation to continue to keep the shelf registration statement effective for a
certain period of time, subject to certain suspension periods under certain circumstances. In the
event that we fail to keep the registration statement effective in excess of such permissible
suspension periods, we will be obligated to pay additional interest to holders of the Convertible
Notes in an amount equal to 0.25% of the principal amount of the outstanding Convertible Notes to
and including the 90th day following any such registration default and 0.50% of the principal
amount of the outstanding Convertible Notes from and after the 91st day following any such
registration default. Such additional interest will accrue until the date prior to the day the
default is cured, or until the Convertible Notes are converted.
9. 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. We operate 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, financing and valuation of commercial property and includes our national
accounts group and national affiliate program operations.
Investment Management Investment Management includes services for acquisition, financing
and disposition with respect to our REITs, asset management services related to our REITs, and
dealer-manager services by our securities broker-dealer, which facilitates capital raising
transactions for our REITs.
We also have certain corporate-level activities including legal administration, accounting,
finance, human resources and management information systems which are not considered separate
operating segments.
As a result of reclassifying our Daymark subsidiary to discontinued operations in the second
quarter of 2011, our segment disclosure no longer includes a Daymark segment as all of the Daymark
segment is included in discontinued operations. In addition, our Daymark subsidiary historically
provided some Investment Management services. Accordingly, all revenues and expenses related to our
Investment Management segment that were provided by Daymark are also included in discontinued
operations.
We evaluate the performance of our segments based upon operating (loss) income. Operating
(loss) income is defined as operating revenue less compensation and general and administrative
costs and excludes other rental related, rental expense, interest expense, depreciation and
amortization and certain other operating and non-operating expenses. The accounting policies of the
reportable segments are the same as those described in our summary of significant accounting
policies (See Note 1).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
June 30, |
|
(In thousands) |
|
2011 |
|
|
2010 |
|
|
2011 |
|
|
2010 |
|
Management Services |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue |
|
$ |
57,913 |
|
|
$ |
70,110 |
|
|
$ |
116,958 |
|
|
$ |
142,558 |
|
Compensation costs |
|
|
10,192 |
|
|
|
9,756 |
|
|
|
18,872 |
|
|
|
19,310 |
|
Transaction commissions and related costs |
|
|
2,846 |
|
|
|
4,212 |
|
|
|
6,624 |
|
|
|
10,395 |
|
Reimbursable salaries, wages and benefits |
|
|
38,289 |
|
|
|
49,021 |
|
|
|
77,843 |
|
|
|
99,379 |
|
General and administrative |
|
|
2,758 |
|
|
|
2,543 |
|
|
|
5,949 |
|
|
|
4,790 |
|
Provision for doubtful accounts |
|
|
859 |
|
|
|
448 |
|
|
|
1,330 |
|
|
|
789 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment operating income |
|
|
2,969 |
|
|
|
4,130 |
|
|
|
6,340 |
|
|
|
7,895 |
|
Transaction Services |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue |
|
|
72,814 |
|
|
|
54,684 |
|
|
|
123,266 |
|
|
|
96,917 |
|
Compensation costs |
|
|
15,024 |
|
|
|
11,210 |
|
|
|
30,492 |
|
|
|
22,175 |
|
Transaction commissions and related costs |
|
|
48,715 |
|
|
|
35,399 |
|
|
|
81,953 |
|
|
|
62,398 |
|
General and administrative |
|
|
10,794 |
|
|
|
8,667 |
|
|
|
20,690 |
|
|
|
17,515 |
|
Provision for doubtful accounts |
|
|
1,209 |
|
|
|
224 |
|
|
|
1,968 |
|
|
|
1,029 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment operating loss |
|
|
(2,928 |
) |
|
|
(816 |
) |
|
|
(11,837 |
) |
|
|
(6,200 |
) |
15
GRUBB & ELLIS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
June 30, |
|
(In thousands) |
|
2011 |
|
|
2010 |
|
|
2011 |
|
|
2010 |
|
Investment Management |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue |
|
|
7,228 |
|
|
|
2,265 |
|
|
|
9,989 |
|
|
|
3,893 |
|
Compensation costs |
|
|
2,030 |
|
|
|
2,514 |
|
|
|
4,164 |
|
|
|
5,130 |
|
Transaction commissions and related costs |
|
|
892 |
|
|
|
867 |
|
|
|
1,755 |
|
|
|
1,351 |
|
General and administrative |
|
|
1,753 |
|
|
|
1,441 |
|
|
|
3,578 |
|
|
|
2,729 |
|
Provision for doubtful accounts |
|
|
(22 |
) |
|
|
|
|
|
|
(14 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment operating income (loss) |
|
|
2,575 |
|
|
|
(2,557 |
) |
|
|
506 |
|
|
|
(5,317 |
) |
Reconciliation to net loss attributable to Grubb & Ellis Company: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total segment operating income (loss) |
|
|
2,616 |
|
|
|
757 |
|
|
|
(4,991 |
) |
|
|
(3,622 |
) |
Non-segment: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate overhead (compensation, general and administrative costs) |
|
|
(5,953 |
) |
|
|
(6,484 |
) |
|
|
(12,390 |
) |
|
|
(15,723 |
) |
Stock based compensation |
|
|
(686 |
) |
|
|
(2,778 |
) |
|
|
(2,378 |
) |
|
|
(5,797 |
) |
Severance and other charges |
|
|
(139 |
) |
|
|
(119 |
) |
|
|
(956 |
) |
|
|
(2,769 |
) |
Depreciation and amortization |
|
|
(1,980 |
) |
|
|
(1,709 |
) |
|
|
(4,062 |
) |
|
|
(3,314 |
) |
Interest |
|
|
(915 |
) |
|
|
(458 |
) |
|
|
(1,688 |
) |
|
|
(504 |
) |
Other income (expense) |
|
|
263 |
|
|
|
(105 |
) |
|
|
137 |
|
|
|
(273 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations before income tax benefit (provision) |
|
|
(6,794 |
) |
|
|
(10,896 |
) |
|
|
(26,328 |
) |
|
|
(32,002 |
) |
Income tax benefit (provision) |
|
|
23 |
|
|
|
(80 |
) |
|
|
23 |
|
|
|
(218 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations |
|
|
(6,771 |
) |
|
|
(10,976 |
) |
|
|
(26,305 |
) |
|
|
(32,220 |
) |
Loss from discontinued operations |
|
|
(7,946 |
) |
|
|
(8,219 |
) |
|
|
(7,096 |
) |
|
|
(11,027 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
|
(14,717 |
) |
|
|
(19,195 |
) |
|
|
(33,401 |
) |
|
|
(43,247 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to noncontrolling interests |
|
|
(384 |
) |
|
|
(1,736 |
) |
|
|
(779 |
) |
|
|
(2,007 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to Grubb & Ellis Company |
|
$ |
(14,333 |
) |
|
$ |
(17,459 |
) |
|
$ |
(32,622 |
) |
|
$ |
(41,240 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
10. DISCONTINUED OPERATIONS
On December 30, 2010, we completed the sale of NNN/SOF Avallon LLC (Avallon), a commercial
office property located in Austin, Texas, for $37.0 million. We recognized a gain on sale of $1.3
million.
On June 1, 2011, we entered into a definitive agreement for the sale of substantially all of
the assets of our real estate investment fund business, Alesco, to Lazard Asset Management LLC.
Closing of the transaction is subject to customary approvals and is expected to occur in the third
quarter of 2011. We anticipate recognizing a loss on the sale of
Alesco of approximately $3.0 million
in the third quarter of 2011
due to the deficit balance in noncontrolling interests.
On August 10, 2011, we completed the sale of Daymark for (1) a cash payment of $0.5 million,
(2) a $5.0 million promissory note provided to NNNRA, and (3)
the assumption by the purchaser of $10.7 million of the net intercompany balance payable from us to
NNNRA. We expect to record a gain on sale related to the disposition of Daymark in the third
quarter of 2011, after writing off all of the net assets and liabilities associated with Daymark
(included in summarized balance sheet below) and recognizing the transactions costs related to such
transaction.
In instances when we expect to have significant ongoing cash flows or significant continuing
involvement in the component beyond the date of sale, the income (loss) from certain properties and
businesses held for sale continue to be fully recorded within continuing operations through the
date of sale.
The net results of discontinued operations of Daymark and Alesco
(which includes the net results
of the Avallon property sold during the year ended December 31, 2010), in which we
have no significant ongoing cash flows or significant continuing involvement, are reflected in the
consolidated statements of operations as discontinued operations. We will receive certain fee
income from Daymark on an ongoing basis that is not considered significant when compared to the
operating results of Daymark.
16
GRUBB & ELLIS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
The following table summarizes the assets held for sale and liabilities held for sale as of
June 30, 2011 and December 31, 2010:
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
December 31, |
|
(In thousands) |
|
2011 |
|
|
2010 |
|
Restricted cash |
|
$ |
3,528 |
|
|
$ |
4,652 |
|
Assets under management |
|
|
848 |
|
|
|
901 |
|
Accounts receivable from related parties net |
|
|
13,395 |
|
|
|
12,718 |
|
Notes receivable net |
|
|
|
|
|
|
6,126 |
|
Notes and advances to related parties net |
|
|
10,660 |
|
|
|
12,275 |
|
Prepaid expenses and other assets |
|
|
767 |
|
|
|
682 |
|
Investments in unconsolidated entities |
|
|
5,224 |
|
|
|
5,178 |
|
Property held for sale |
|
|
45,159 |
|
|
|
45,858 |
|
Property, equipment and leasehold improvements net |
|
|
906 |
|
|
|
1,096 |
|
Identified intangible assets net |
|
|
6,127 |
|
|
|
7,398 |
|
Other assets net |
|
|
4,316 |
|
|
|
3,430 |
|
|
|
|
|
|
|
|
Total assets |
|
$ |
90,930 |
|
|
$ |
100,314 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable and accrued expenses |
|
$ |
13,518 |
|
|
$ |
8,098 |
|
Due to related parties |
|
|
1,617 |
|
|
|
2,178 |
|
Other liabilities |
|
|
15,423 |
|
|
|
25,704 |
|
NNN senior notes |
|
|
16,277 |
|
|
|
16,277 |
|
Mortgage notes |
|
|
70,000 |
|
|
|
70,000 |
|
Capital lease obligations |
|
|
13 |
|
|
|
22 |
|
Deferred tax liabilities |
|
|
36 |
|
|
|
199 |
|
|
|
|
|
|
|
|
Total liabilities |
|
$ |
116,884 |
|
|
$ |
122,478 |
|
|
|
|
|
|
|
|
From August 1, 2006 to January 2007, NNN Collateralized Senior Notes, LLC (the NNN Senior
Notes Program), a wholly owned subsidiary of Daymark, issued $16.3 million of notes which mature
on August 29, 2011 and bear interest at a rate of 8.75% per annum. Interest on the notes is payable
monthly in arrears on the first day of each month, commencing on the first day of the month
occurring after issuance. The notes mature five years from the date of first issuance of any of
such notes, with two one-year options to extend the maturity date of the notes at the Senior Notes
Programs option. The interest rate will increase to 9.25% per annum during any extension. The
Senior Notes Program has the right to redeem the notes, in whole or in part, at par value. The
notes are the NNN Senior Notes Programs senior obligations, ranking pari passu in right of payment
with all other senior debt incurred and ranking senior to any subordinated debt it may incur. The
notes are effectively subordinated to all present or future debt secured by real or personal
property to the extent of the value of the collateral securing such debt. The notes are secured by
a pledge of the NNN Senior Notes Programs membership interest in NNN Series A Holdings, LLC, which
is the Senior Notes Programs wholly owned subsidiary for the sole purpose of making the
investments. Each note is guaranteed by Grubb & Ellis Realty Investors, LLC (GERI). The guarantee
is secured by a pledge of GERI membership interest in the NNN Senior Notes Program. The guarantee
requires GERI to maintain at all times during the term the notes are outstanding a net worth of at
least $0.5 million. As of June 30, 2011, GERI met the net worth requirement.
On May 13, 2011, pursuant to the terms of the indenture underlying the NNN Senior Notes, the
NNN Senior Notes Program notified the trustee and holders of the NNN Senior Notes that the maturity
date of the NNN Senior Notes shall be extended by one year, effective as of August 29, 2011 (the
Extension Effective Date). Accordingly, the maturity date of the NNN Senior Notes is August 29,
2012. In accordance with the terms and provisions of the indenture, the NNN Senior Notes shall bear
interest at 8.75% per annum until the Extension Effective Date, and thereafter at 9.25% per annum
until the maturity date. The NNN Senior Notes Program may extend the maturity date for an
additional year, through August 29, 2013, in accordance with the terms and provisions of the
indenture and the NNN Senior Notes.
The following table summarizes the income (loss) and (expense) components net of taxes that
comprised discontinued operations for the three and six months ended June 30, 2011 and 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
June 30, |
|
(In thousands) |
|
2011 |
|
|
2010 |
|
|
2011 |
|
|
2010 |
|
Revenue |
|
$ |
7,088 |
|
|
$ |
6,101 |
|
|
$ |
11,058 |
|
|
$ |
14,544 |
|
Rental related revenue |
|
|
3,346 |
|
|
|
7,585 |
|
|
|
7,206 |
|
|
|
15,299 |
|
Compensation costs |
|
|
(6,762 |
) |
|
|
(5,807 |
) |
|
|
(11,645 |
) |
|
|
(12,311 |
) |
General and administrative |
|
|
(6,709 |
) |
|
|
(2,731 |
) |
|
|
(11,409 |
) |
|
|
(4,509 |
) |
Provision for doubtful accounts |
|
|
(1,158 |
) |
|
|
(962 |
) |
|
|
(2,245 |
) |
|
|
(1,500 |
) |
Depreciation and amortization |
|
|
(900 |
) |
|
|
(1,661 |
) |
|
|
(2,287 |
) |
|
|
(3,314 |
) |
Rental related |
|
|
(2,263 |
) |
|
|
(5,463 |
) |
|
|
(4,607 |
) |
|
|
(10,851 |
) |
Interest |
|
|
(1,599 |
) |
|
|
(2,272 |
) |
|
|
(3,143 |
) |
|
|
(4,544 |
) |
Real estate related recoveries (impairments) |
|
|
834 |
|
|
|
(1,553 |
) |
|
|
9,858 |
|
|
|
(1,823 |
) |
Intangible asset impairment |
|
|
|
|
|
|
(1,025 |
) |
|
|
(480 |
) |
|
|
(1,639 |
) |
Equity in earnings (losses) of unconsolidated entities |
|
|
163 |
|
|
|
(202 |
) |
|
|
256 |
|
|
|
(223 |
) |
Interest income |
|
|
37 |
|
|
|
31 |
|
|
|
78 |
|
|
|
51 |
|
Other income (expense) |
|
|
28 |
|
|
|
(283 |
) |
|
|
315 |
|
|
|
(238 |
) |
Income tax benefit (provision) |
|
|
(51 |
) |
|
|
23 |
|
|
|
(51 |
) |
|
|
31 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from discontinued operations net of taxes |
|
$ |
(7,946 |
) |
|
$ |
(8,219 |
) |
|
$ |
(7,096 |
) |
|
$ |
(11,027 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
17
GRUBB & ELLIS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
11. COMMITMENTS AND CONTINGENCIES
Operating Leases We have non-cancelable operating lease obligations for office space and
certain equipment ranging from one to ten years, and sublease agreements under which we act 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 $5.8 million and $5.4 million for
the three months ended June 30, 2011 and 2010, respectively, and approximately $11.9 million and
$11.6 million for the six months ended June 30, 2011 and 2010, respectively. Rent expense is
included in general and administrative expense in the accompanying consolidated statements of
operations.
TIC Program Exchange Provision Prior to the merger, Triple Net Properties, LLC (now known
as GERI), a subsidiary of Daymark, entered into agreements providing certain investors the right to
exchange their investments in certain TIC programs for investments in a different TIC program or in
substitute replacement properties. The agreements containing such rights of exchange and repurchase
rights pertain to initial investments in TIC programs totaling $31.6 million. In the fourth quarter
of 2010, GERI was released from certain obligations relating to $6.2 million in initial
investments. In addition, we were released from certain obligations totaling $2.0 million as a
result of the sale of a TIC programs property during the year ended December 31, 2010. In July
2009, we received notice on behalf of certain investors stating their intent to exercise rights
under one of those agreements with respect to an initial investment totaling $4.5 million.
Subsequently, in February 2011, an action was filed in the Superior Court of Orange County,
California on behalf of those same investors against GERI alleging breach of contract and breach of
the implied covenant of good faith and fair dealing, and seeking damages of $26.5 million with
respect to initial cash investments totaling $22.3 million, which is inclusive of the $4.5 million
for which we received the notice in July 2009. While the outcome of that action is uncertain, GERI
will vigorously defend those claims. See TIC Program Exchange Litigation disclosure under Claims
and Lawsuits below for further information.
We deferred revenues relating to these agreements of $0 and $0.1 million for the three months
ended June 30, 2011 and 2010, respectively. We deferred revenues relating to these agreements of $0
and $0.1 million for the six months ended June 30, 2011 and 2010, respectively. During the six
months ended June 30, 2011, pursuant to the Real Estate General Topic, we reduced an obligation
by $9.0 million related to the re-measurement of our maximum exposure to loss related to certain
obligations at the time the February 2011 action was filed. No additional potential losses related
to these agreements were incurred during the three months ended June 30, 2011 and 2010, and
additional potential losses of $0 and $0.2 million related to these agreements were incurred during
the six months ended June 30, 2011 and 2010, respectively, to record a liability underlying the
agreements with investors. As of June 30, 2011, we had recorded liabilities totaling $10.9 million
related to such agreements, which is included in other current liabilities, consisting of $3.6
million of cumulative deferred revenues and $7.3 million of additional potential losses related to
these agreements as a result of estimated declines in the value of the properties. In addition, we
are joint and severally liable on the non-recourse mortgage debt related to these TIC programs with
exchange provisions totaling $276.1 million as of June 30, 2011 and December 31, 2010. This
mortgage debt is not consolidated as the LLCs account for the interests in our TIC investments
under the equity method and the non-recourse mortgage debt does not meet the criteria under the
Transfers and Servicing Topic for recognizing the share of the debt assumed by the other TIC
interest holders for consolidation. We consider the third-party TIC holders ability and intent to
repay their share of the joint and several liability in evaluating the recoverability of our
investment in the TIC program.
Capital Lease Obligations We lease computers, copiers and postage equipment that are
accounted for as capital leases.
Claims and Lawsuits We and our Daymark affiliate have been named as defendants in multiple
lawsuits relating to certain of its investment management offerings,
in particular, its
TIC programs. These lawsuits allege a variety of claims in connection with these
offerings, including mismanagement, breach of contract, negligence, fraud, breach of fiduciary duty
and violations of state and federal securities laws, among other claims. Plaintiffs in these suits
seek a variety of remedies, including rescission, actual and punitive damages, injunctive relief,
and attorneys fees and costs. In many instances, the damages being sought are unspecified and to
be determined at trial. It is difficult to predict the ultimate disposition of these lawsuits and
our ultimate liability with respect to such claims and lawsuits. It is also difficult to predict
the cost of defending these matters and to what extent claims will
be covered by our existing insurance policies. In the event of an unfavorable outcome, the
amounts we may be required to pay in the discharge of liabilities or settlements could have a
material adverse effect on our cash flows, financial position and results of operations.
18
GRUBB & ELLIS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
Met
Center 10 One such matter relates to a TIC property known as Met Center
10, located in Austin, Texas. The Company and its subsidiaries have been involved in multiple legal
proceedings relating to Met Center 10, including three actions pending in state court in Austin,
Texas and an arbitration proceeding being conducted in California. The arbitration proceeding
involves Grubb & Ellis Realty Investors, LLC (GERI), a subsidiary of Daymark, and is pending
before the American Arbitration Association in Orange County, California captioned NNN Met Center
10 1, LLC, et al. v. Grubb & Ellis Realty Investors, LLC, No. 73 115 Y 00140 HLT (the Met 10
Arbitration). A state court action involving GERI is pending in the District Court of Travis
County, Texas captioned NNN Met Center 10, LLC v. Met Center Partners-6, Ltd., et al., No.
D-1-GN-08-002104 (the Met 10 Main Action). Two additional state court actions involving the
Company, GERI, and Grubb & Ellis Management Services, Inc. are pending in the District Court for
Travis County, Texas captioned NNN Met Center 10-1, LLC v. Lexington Insurance Company, et al., No.
D-1-GN-10-004495 and NNN Met Center 10, LLC v. Lexington Insurance Company, et al., No.
D-1-GN-11-000848 (together, the Met 10 Lexington Actions).
In the Met 10 Arbitration, TIC investors asserted, among other things, that GERI should bear
responsibility for alleged diminution in the value of the property and their investments as a
result of ground movement. The Met 10 Arbitration was bifurcated into two phases. In the first
phase, the arbitrator ruled in favor of the TIC investors, finding, among other things, that the
TIC investors had properly terminated the property management agreement for cause. In Phase 2 of
the arbitration, the TICs asserted claims for damages against GERI arising from alleged breaches of
the management agreement and other alleged wrongful acts in connection with the management of the
Met Center 10 property and other alleged breaches of duty.
Before the beginning of the Phase 2 hearing, the TICs, GERI, and Lexington Insurance Company
reached a settlement, which has been documented and executed by the parties, and which is awaiting
court approval. The settlement is for $0.1 million, net of insurance
recoveries. Among other things, under the terms of the settlement, GERI must pay $0.1
million to the TICs shortly after the settlement is approved by the court, and may be obligated to
subsequently pay up to approximately $0.6 million in addition to the initial $0.1 million payment,
depending upon the resolution of claims relating to Met Center 10 against parties other than GERI
and its affiliates. The TICs are
releasing all claims relating to Met Center 10 against, among others, GERI and its affiliates.
In the Met 10 Texas Action, GERI and NNN Met Center 10, LLC were pursuing claims against the
developers and sellers of the property (the Sellers), the due diligence firm retained by GERI in
connection with the purchase of the Met Center 10 property, and the engineering, construction, and
design professionals who performed work relating to the Met Center 10 property (together with the
due diligence firm, the Professionals) to recover damages arising from, among other things,
ground movement. The Sellers and the Professionals were asserting counterclaims against GERI and
NNN Met Center 10, LLC. GERI and NNN Met Center 10, LLC, on the one hand, and the Sellers, on the
other, have reached a settlement resolving all claims between them, which has been documented and
executed by the parties. Under that settlement, GERI, its affiliates, and NNN Met Center 10, LLC
are being released from all claims by the Sellers relating to Met Center 10. Neither GERI nor its
affiliates (or NNN Met Center 10, LLC) are required to make any payments pursuant to the settlement
with the Sellers. In addition, GERI and NNN Met Center 10, LLC, on the one hand, and the
Professionals, on the other hand, have reached a tentative settlement resolving all claims between
them, which is in the process of being documented and approved. Under that settlement, GERI, its
affiliates, and NNN Met Center 10, LLC are being released from all claims by the Professionals
relating to Met Center 10. Neither GERI nor its affiliates (or NNN Met Center 10, LLC) are
required to make any payments pursuant to the tentative settlement with the Professionals.
In the Met 10 Lexington Actions, the TIC investors were asserting claims against former
officers and employees of the Company and other defendants in connection with the negotiation and
documentation of an insurance settlement relating to the Met Center 10 property, and an alleged
misallocation and/or misappropriation of the proceeds of that settlement. In addition, Lexington
Insurance Company asserted claims against NNN Met Center 10, LLC, the Company, GERI, and GEMS
arising of the insurance settlement. Pursuant to the settlement of the Met 10 Arbitration
described above, the TICs are releasing and dismissing certain claims against the former officers
and employees of the Company, including claims that were being asserted in the Met 10 Lexington
Actions, and Lexington is releasing and dismissing its claims against the Company, GERI, GEMS, and
NNN Met Center 10, LLC, including the claims Lexington was asserting in the Met 10 Lexington
Actions.
19
GRUBB & ELLIS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
TIC Program Exchange Litigation GERI and Grubb & Ellis Company are defendants in an action
filed on or about February 14, 2011 in the Superior Court of Orange County, California captioned S.
Sidney Mandel, et al. v. Grubb & Ellis Realty Investors, LLC, et al, Case No. 00449598. The
plaintiffs allege that, in order to induce the plaintiffs to purchase $22.3 million in TIC
investments that
GERI (formerly known as Triple Net Properties, LLC) was syndicating, GERI offered to
subsequently repurchase those investments and provide certain put rights under certain terms
and conditions pursuant to a letter agreement executed between GERI and the plaintiffs. The
plaintiffs allege that GERI has failed to honor its purported obligations under the letter
agreement and have initiated suit for breach of contract, breach of the implied covenant of good
faith and fair dealing and declaratory relief as to the rights and obligations of the parties under
the letter agreement. By way of a first amended complaint, the plaintiffs are alleging that GERI is
merely an inadequately capitalized instrumentality of Grubb & Ellis Company and that Grubb & Ellis
Company should be held liable for acts and omissions of GERI. The plaintiffs are seeking damages
totaling $26.5 million, attorneys fees and costs. We intend to vigorously defend these claims and
to assert all applicable defenses. At this time we are unable to predict the likelihood of an
unfavorable or adverse award or outcome. At this time it is not possible to estimate a range of
possible loss for this matter.
Britannia II Office Park Various Daymark subsidiaries are defendants in an action filed on
or about July 22, 2010 in Superior Court of Alameda County, California captioned NNN Britannia
Business Center II 17, LLC, et al. v. Grubb & Ellis Company, et al., Case No. RG10-527282.
Plaintiffs invested more than $14 million for TIC interests in a commercial real estate project in
Pleasanton, California, known as Britannia Business Center II, which ultimately was foreclosed
upon. Plaintiffs claim that they were induced to invest with misrepresentations concerning the
financial projections and risks for the project, and allege various mismanagement claims.
Plaintiffs current claim is for breach of the implied covenant of good faith and fair dealing.
Plaintiffs seek compensatory and exemplary damages in an unspecified amount, along with costs and
attorneys fees. We intend to vigorously defend these claims and to assert all applicable defenses.
At this time we are unable to predict the likelihood of an unfavorable or adverse award or outcome.
At this time it is not possible to estimate a range of possible loss for this matter.
Durham Office Park We and various Daymark subsidiaries are defendants in an action filed on
or about July 21, 2010 in North Carolina Business Court, Durham County Superior Court Division,
captioned NNN Durham Office Portfolio I, LLC, et al. v. Grubb & Ellis Company, et al., Case No. 10
CVS 4392. Plaintiffs invested more than $11 million for TIC interests in a commercial real estate
project in Durham, North Carolina. Plaintiffs claim, among other things, that information regarding
the intentions of the propertys anchor tenant to remain in occupancy was withheld and
misrepresented. Plaintiffs have asserted claims for breach of contract, negligence, negligent
misrepresentation, breach of fiduciary duty, fraud, unfair and deceptive trade practices and
conspiracy. We intend to vigorously defend these claims and to assert all applicable defenses. At
this time we are unable to predict the likelihood of an unfavorable or adverse award or outcome. At
this time it is not possible to estimate a range of possible loss for this matter.
We are involved in various claims and lawsuits arising out of the ordinary conduct of our
business, many of which may not be covered by our insurance policies. In the opinion of management,
in the event of an unfavorable outcome, the amounts we may be required to pay in the discharge of
liabilities or settlements could have a material adverse effect on our cash flows, financial
position and results of operations. At this time it is not possible to estimate a range of possible
loss for these matters.
Guarantees Historically our Daymark subsidiary provided non-recourse carve-out guarantees
or indemnities with respect to loans for properties now owned or under the management of Daymark.
As of June 30, 2011, there were 126 properties under management with non-recourse carve-out loan
guarantees or indemnities of approximately $3.0 billion in total principal outstanding with terms
ranging from one to 10 years, secured by properties with a total aggregate purchase price of
approximately $4.1 billion. As of December 31, 2010, there were 133 properties under management
with non-recourse carve-out loan guarantees or indemnities of approximately $3.1 billion in total
principal outstanding with terms ranging from one to 10 years, secured by properties with a total
aggregate purchase price of approximately $4.3 billion. In addition, the consolidated VIEs and
unconsolidated VIEs are jointly and severally liable on the non-recourse mortgage debt related to
the interests in our TIC investments as further described in Note 4.
Our guarantees consisted of the following as of June 30, 2011 and December 31, 2010:
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
December 31, |
|
(In thousands) |
|
2011 |
|
|
2010 |
|
Daymark non-recourse/carve-out guarantees of debt of properties under management(1) |
|
$ |
2,782,390 |
|
|
$ |
2,944,311 |
|
Grubb & Ellis Company non-recourse/carve-out guarantees of debt of properties under
management(1) |
|
$ |
78,217 |
|
|
$ |
78,363 |
|
Daymark and Grubb & Ellis Company non-recourse/carve-out guarantees of debt of
properties under management(2) |
|
$ |
31,125 |
|
|
$ |
31,271 |
|
Daymark non-recourse/carve-out guarantees of debt of Company owned property(1) |
|
$ |
60,000 |
|
|
$ |
60,000 |
|
Daymark recourse guarantees of debt of properties under management |
|
$ |
11,650 |
|
|
$ |
12,900 |
|
Grubb & Ellis Company recourse guarantees of debt of properties under management(3) |
|
$ |
11,998 |
|
|
$ |
11,998 |
|
Daymark recourse guarantees of debt of Company owned property(4) |
|
$ |
10,000 |
|
|
$ |
10,000 |
|
20
GRUBB & ELLIS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
|
|
|
(1) |
|
A non-recourse/carve-out guarantee or indemnity generally imposes liability on the
guarantor or indemnitor in the event the borrower engages in certain acts prohibited by the
loan documents. Each non-recourse carve-out guarantee or indemnity 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 or
indemnities, liability under the non-recourse carve-out guarantees or indemnities 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
indemnity agreement from borrower. |
Certain acts (typically the first three listed above) may render the entire debt balance recourse
to the guarantor or indemnitor, while the liability for other acts is typically limited to the
damages incurred by the lender. Notice and cure provisions vary between guarantees and indemnities.
Generally the guarantor or indemnitor irrevocably and unconditionally guarantees or indemnifies the
lender the payment and performance of the guaranteed or indemnified 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 or indemnitor covenants and agrees that it is liable for the guaranteed or
indemnified obligations as a primary obligor. As of June 30, 2011, to the best of our knowledge,
there was no debt owed by us as a result of the borrowers engaging in prohibited acts, despite the
prohibited acts that occurred as more fully described below.
(2) |
|
We and Daymark are each joint and severally liable on such non-recourse/carve-out guarantees. |
(3) |
|
We have $1.0 million held as collateral by a lender related to one of our recourse guarantees
that, upon the occurrence of any triggering event or condition under the guarantee, will be
used to cover all or a portion of the amounts due under the guarantee. |
(4) |
|
In addition to the $10.0 million principal guarantee, Daymark has guaranteed any shortfall in
the payment of interest on the unpaid principal amount of the mortgage debt on one owned
property. |
21
GRUBB & ELLIS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
If property values and performance decline, the risk of exposure under these guarantees
increases. We initially evaluate these guarantees to determine if the guarantee meets the criteria
required to record a liability in accordance with the requirements of ASC Topic 460, Guarantees,
(Guarantees Topic). Any such liabilities were insignificant upon execution of the guarantees. In
addition, on an ongoing basis, we evaluate the need to record an additional liability in accordance
with the requirements of ASC Topic 450, Contingencies, (Contingencies Topic). As of June 30, 2011
and December 31, 2010, we had recourse guarantees of $23.6 million and $24.9 million, respectively
relating to debt of properties under management (of which $12.0 million is recourse back to Grubb &
Ellis Company, the remainder of which is recourse to our Daymark subsidiary). As of June 30, 2011
and December 31, 2010, approximately $9.5 million of these
recourse guarantees relate to debt that has matured, is in default, or is not currently in
compliance with certain loan covenants (of which $2.0 million is
recourse back to Grubb & Ellis Company, the remainder of which is recourse to our Daymark
subsidiary). In addition, as of June 30, 2011, and December 31,
2010, we had $8.0 million of
recourse guarantees related to debt that will mature in the next
twelve months (of which
$8.0 million is recourse back to Grubb & Ellis Company). In connection with the sale
of Daymark, the purchaser indemnified us up to $7.5 million for liabilities, obligations and claims
related to or arising from the business or operations of Daymark or its subsidiaries. Our
evaluation of the potential liability under these guarantees may prove to be inaccurate and
liabilities may exceed estimates. In the event that actual losses materially exceed estimates, individual
investment management subsidiaries may not be able to pay such obligations as they become due.
Failure of any of our subsidiaries to pay its debts as they become due would likely have a
materially negative impact on our ongoing business, and the investment management operations in
particular. In evaluating the potential liability relating to such guarantees, we consider 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 June 30, 2011 and
December 31, 2010, we recorded a liability of $0 and $0.8 million which is included in other
current liabilities, related to our estimate of probable loss related to recourse guarantees of
debt of properties under management and previously under management.
Two unaffiliated, individual investor entities (the TIC debtors), who are minority owners in
two TIC programs located in Texas, Met Center 10 and 2400 West Marshall, which were originally
sponsored by GERI, filed chapter 11 bankruptcy petitions in January 2011. The principal balance of
the mortgage debt for these two properties was approximately $29.4 million and $6.6 million,
respectively, at the time of the bankruptcy filings. On February 1, 2011, the special servicer for
each of these loans foreclosed on all of the undivided TIC ownership interests in these properties,
except those owned by the unaffiliated investor entities which effected the bankruptcy filings. The
automatic stay imposed following the bankruptcy filings by each of these investor entities
prevented the special servicer from foreclosing on 100% of the TIC ownership interests. The special
servicers for each of the TIC debtors loans filed motions for relief from the automatic stay to
foreclose upon the remaining TIC ownership interests. In the Met Center 10 case, by order dated May
2, 2011, the bankruptcy court continued the automatic stay, subject to certain conditions, to
November 1, 2011. The May 2, 2011 order also established a procedure by which the special servicer
would be required to reconvey the foreclosed upon interests to the Met Center 10 debtor and the
other investor entities following payment of an amount due as that term is defined in the May 2,
2011 Order. In the 2400 West Marshall case, by order dated June 15, 2011, the bankruptcy court
continued the automatic stay, subject to certain conditions, to December 1, 2011. The June 15,
2011 order also established a procedure by which the special servicer would be required to reconvey
the foreclosed upon interests to the 2400 West Marshall debtor and the other investor entities
following payment of an amount due as that term is defined in the June 15, 2011 Order.
GERI executed a non-recourse carve-out guarantee in connection with the mortgage loan for the
Met 10 property, and a non-recourse indemnity for the 2400 West Marshall property. As discussed in
the Guarantees disclosure above, such non-recourse carve-out guarantees and indemnities only
impose liability on GERI if certain acts prohibited by the loan documents take place. Liability
under these non- recourse carve-out guarantees and indemnities may be triggered by the voluntary
bankruptcy filings made by the two unaffiliated, individual investor entities. As a consequence of
these bankruptcy filings, the TIC debtors mortgage lenders may assert that GERI is liable under
the guarantee and indemnity. While GERIs ultimate liability under these agreements is uncertain as
a result of numerous factors, including, without limitation, whether the bankruptcy filings of the
TIC debtors triggered GERIs obligations under the guaranty and the indemnification, the amount of
the lenders credit bids at the time of foreclosure, events in the individual bankruptcy
proceedings and the ultimate disposition of those bankruptcy proceedings, and the defenses GERI may
raise under the guarantee and indemnity, such liability may be in an amount in excess of the net
worth of NNNRA and its subsidiaries, including GERI. NNNRA and GERI intend to vigorously dispute
any imposition of any liability under any such guarantee or indemnity obligation. As of June 30,
2011, we did not have any liabilities accrued related to such guarantees or indemnity obligations.
Investment Program Commitments In 2009, we revised the offering terms related to certain
investment programs which we sponsor, including the commitment to fund additional property reserves
and the waiver or reduction of future management fees and disposition fees. Such future funding
commitments have been made in the form of guaranteeing the collectability of advances that one of
our consolidated VIEs has made to these investment programs. As of June 30, 2011 and December 31,
2010, the future funding commitments under the guarantee totaled approximately $1.5 million and
$2.0 million, respectively.
Environmental Obligations In our role as property manager, we could incur liabilities for
the investigation or remediation of hazardous or toxic substances or wastes at properties we
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, we have agreed to
indemnify the lenders for environmental liabilities and to remediate any environmental problems
that may arise. We are not aware of any environmental liability or unasserted claim or assessment
relating to an environmental liability that we believe would require disclosure or the recording of
a loss contingency.
Alesco Seed Capital On November 16, 2007, we completed the acquisition of a 51.0%
membership interest in Alesco from Jay P. Leupp. Pursuant to the Intercompany Agreement between us
and Alesco, dated as of November 16, 2007, we committed to invest up to $20.0 million in seed
capital into certain real estate funds that Alesco planned to launch. Additionally, upon
achievement of certain earn-out targets, we were required to purchase up to an additional 27%
interest in Alesco for $15.0 million. To date those earn-out targets have not been achieved. We are
allowed to use $15.0 million of seed capital to fund the earn-out payments. As of June 30, 2011, we
have invested $1.5 million into the three funds that Alesco has launched to date (the Existing
Alesco Funds) and our
unfunded seed capital commitments with respect to the Existing Alesco Funds totaled $2.5
million. As of February 14, 2011, our obligation to make further seed capital investments under the
Intercompany Agreement terminated, except for the remaining commitments under the Existing Alesco
Funds. On June 1, 2011, we entered into a definitive agreement for the sale of substantially all of
the assets of Alesco to Lazard Asset Management LLC. Closing of the transaction is subject to
customary approvals and is expected to occur in the third quarter of 2011.
22
GRUBB & ELLIS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
Deferred Compensation Plan During 2008, we 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
June 30, 2011 and December 31, 2010, $3.1 million and $3.4 million, respectively, reflecting the
non-stock liability under this plan were included in accounts payable and accrued expenses. We have
purchased whole-life insurance contracts on certain employee participants to recover distributions
made or to be made under this plan and as of June 30, 2011 and December 31, 2010 have recorded the
cash surrender value of the policies of $0.4 million and $1.1 million, respectively, in prepaid
expenses and other assets.
In addition, we award phantom shares of our stock to participants under the deferred
compensation plan. These awards vest over three to five years. Vested phantom stock awards are also
unfunded and paid according to distribution elections made by the participants at the time of
vesting and will be settled by issuing shares of our common stock from our treasury share account
or issuing unregistered shares of our common stock to the participant. As of June 30, 2011 and
December 31, 2010, an aggregate of 3.9 million and 4.1 million phantom share grants were
outstanding, respectively. 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, as of June 30, 2011 grants with respect to 816,000 phantom shares
had a guaranteed minimum share price ($2.8 million in the aggregate) that will result in us paying
additional compensation to the participants should the value of the shares upon vesting be less
than the grant date value of the shares. We account 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.
12. PREFERRED STOCK
During the fourth quarter of 2009, we completed a private placement of 965,700 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, including
our directors and management.
Each share of Preferred Stock is convertible, at the holders option, into our common stock,
par value $.01 per share 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, a 10.0% premium to the closing price of the common stock on October 22, 2009. As of June 30,
2011, the maximum number of shares of common stock that could be required to be issued upon
conversion of the Preferred Stock was 58,527,214 shares of common stock.
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.
During the year ended December 31, 2010, the Board of Directors declared four quarterly
dividends of $3.00 per share on our Preferred Stock, which were paid on March 31, 2010, June 30,
2010, September 30, 2010 and December 31, 2010. The Board of Directors determined, as permitted,
not to declare a dividend on our 12% Preferred Stock, for the quarters ending March 31, 2011 and
June 30, 2011. Since we have missed two consecutive quarterly dividend payments, the dividend rate
will automatically be increased by 0.50% 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, 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. Since the terms of the Preferred Stock provide
for cumulative dividends, we have
accrued the unpaid first and second quarter 2011 dividend payments of $3.00 per share per
quarter on our Preferred Stock, which is included in Preferred Stock on our consolidated balance
sheet as of June 30, 2011. As of June 30, 2011, the amount of accrued and unpaid dividends totaled
$5.8 million.
23
GRUBB & ELLIS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
Holders of Preferred Stock may require us 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 we may, at our 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.
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. Holders
of the Preferred Stock when voting as a single class with holders of common 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. Holders of Preferred Stock 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.
We accounted for the Preferred Stock transaction in accordance with the requirements of the
Derivatives and Hedging Topic and the Distinguishing Liabilities from Equity Topic. Pursuant to
those topics, we determined that the Preferred Stock should be accounted for as a single instrument
as the terms of the Preferred Stock do not include any embedded derivatives that would require
bifurcation from the host instrument. Pursuant to the Distinguishing Liabilities from Equity Topic,
we determined that the Preferred Stock should not be classified as a liability as the
characteristics of the Preferred Stock are more closely related to equity as there is no mandatory
redemption date. According to the terms of the Preferred Stock, the Preferred Stock will only
become redeemable at the option of the holder upon a Fundamental Change. In addition, we determined
that there are various events and circumstances that would allow for redemption of the Preferred
Stock at the option of the holders, however, several of these redemption events are not within our
control and, therefore, the Preferred Stock should be classified outside of permanent equity in
accordance with the Distinguishing Liabilities from Equity Topic as these events were assessed as
not probable of becoming redeemable. We will continuously assess the probability of the Preferred
Stock becoming redeemable as facts and circumstances change to determine if such changes warrant a
reclassification from outside of permanent equity to a liability.
13. EARNINGS (LOSS) PER SHARE
We compute earnings (loss) per share in accordance with the requirements of the Earnings Per
Share Topic. Under the Earnings Per Share Topic, basic earnings (loss) per share is computed using
the weighted-average number of common shares outstanding during the period. 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.
24
GRUBB & ELLIS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
The following is a reconciliation between weighted-average shares used in the basic and
diluted earnings (loss) per share calculations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
June 30, |
|
(In thousands, except per share amounts) |
|
2011 |
|
|
2010 |
|
|
2011 |
|
|
2010 |
|
Numerator for loss per share basic: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations |
|
$ |
(6,771 |
) |
|
$ |
(10,976 |
) |
|
$ |
(26,305 |
) |
|
$ |
(32,220 |
) |
Less: Preferred dividends |
|
|
(2,897 |
) |
|
|
(2,897 |
) |
|
|
(5,794 |
) |
|
|
(5,794 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations attributable to Grubb & Ellis
Company common shareowners |
|
|
(9,668 |
) |
|
|
(13,873 |
) |
|
|
(32,099 |
) |
|
|
(38,014 |
) |
Loss from discontinued operations attributable to Grubb & Ellis
Company common shareowners |
|
|
(7,946 |
) |
|
|
(8,219 |
) |
|
|
(7,096 |
) |
|
|
(11,027 |
) |
Net loss attributable to noncontrolling interests |
|
|
384 |
|
|
|
1,736 |
|
|
|
779 |
|
|
|
2,007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to Grubb & Ellis Company common shareowners |
|
$ |
(17,230 |
) |
|
$ |
(20,356 |
) |
|
$ |
(38,416 |
) |
|
$ |
(47,034 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for loss per share basic: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average number of common shares outstanding |
|
|
65,928 |
|
|
|
64,644 |
|
|
|
65,798 |
|
|
|
64,503 |
|
Loss per share basic: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations attributable to Grubb & Ellis
Company common shareowners |
|
$ |
(0.14 |
) |
|
$ |
(0.18 |
) |
|
$ |
(0.47 |
) |
|
$ |
(0.56 |
) |
Loss from discontinued operations attributable to Grubb & Ellis
Company common shareowners |
|
|
(0.12 |
) |
|
|
(0.13 |
) |
|
|
(0.11 |
) |
|
|
(0.17 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per share attributable to Grubb & Ellis Company common
shareowners |
|
$ |
(0.26 |
) |
|
$ |
(0.31 |
) |
|
$ |
(0.58 |
) |
|
$ |
(0.73 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss per share diluted(1): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations attributable to Grubb & Ellis
Company common shareowners |
|
$ |
(0.14 |
) |
|
$ |
(0.18 |
) |
|
$ |
(0.47 |
) |
|
$ |
(0.56 |
) |
Loss from discontinued operations attributable to Grubb & Ellis
Company common shareowners |
|
|
(0.12 |
) |
|
|
(0.13 |
) |
|
|
(0.11 |
) |
|
|
(0.17 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per share attributable to Grubb & Ellis Company common
shareowners |
|
$ |
(0.26 |
) |
|
$ |
(0.31 |
) |
|
$ |
(0.58 |
) |
|
$ |
(0.73 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total participating shareowners:
(as of the end of the period used to allocate earnings) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred shares (as if converted to common shares) |
|
|
58,527 |
|
|
|
58,527 |
|
|
|
58,527 |
|
|
|
58,527 |
|
Unvested restricted stock |
|
|
4,113 |
|
|
|
5,184 |
|
|
|
4,113 |
|
|
|
5,184 |
|
Unvested phantom stock |
|
|
3,668 |
|
|
|
4,839 |
|
|
|
3,668 |
|
|
|
4,839 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total participating shares |
|
|
66,308 |
|
|
|
68,550 |
|
|
|
66,308 |
|
|
|
68,550 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total vested common shares outstanding |
|
|
65,982 |
|
|
|
64,741 |
|
|
|
65,982 |
|
|
|
64,741 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Excluded from the calculation of diluted weighted-average common shares as of June 30, 2011
and 2010 were the following securities, the effect of which would be anti-dilutive, 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: |
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
June 30, |
|
(In thousands) |
|
2011 |
|
|
2010 |
|
Outstanding unvested restricted stock |
|
|
4,113 |
|
|
|
5,184 |
|
Outstanding options to purchase shares of common stock |
|
|
291 |
|
|
|
442 |
|
Outstanding unvested shares of phantom stock |
|
|
3,668 |
|
|
|
4,839 |
|
Convertible preferred shares (as if converted to common shares) |
|
|
58,527 |
|
|
|
58,527 |
|
Convertible notes (as if converted to common shares) |
|
|
14,036 |
|
|
|
14,036 |
|
Outstanding warrants |
|
|
6,839 |
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
87,474 |
|
|
|
83,028 |
|
|
|
|
|
|
|
|
14. COMPREHENSIVE LOSS
The components of comprehensive loss, net of tax, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
June 30, |
|
(In thousands) |
|
2011 |
|
|
2010 |
|
|
2011 |
|
|
2010 |
|
Net loss |
|
$ |
(14,717 |
) |
|
$ |
(19,195 |
) |
|
$ |
(33,401 |
) |
|
$ |
(43,247 |
) |
Other comprehensive (loss) income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net unrealized (loss) gain on investments |
|
|
56 |
|
|
|
(46 |
) |
|
|
92 |
|
|
|
80 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive loss |
|
|
(14,661 |
) |
|
|
(19,241 |
) |
|
|
(33,309 |
) |
|
|
(43,167 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss attributable to noncontrolling interests |
|
|
(384 |
) |
|
|
(1,736 |
) |
|
|
(779 |
) |
|
|
(2,007 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss attributable to Grubb & Ellis Company |
|
$ |
(14,277 |
) |
|
$ |
(17,505 |
) |
|
$ |
(32,530 |
) |
|
$ |
(41,160 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
25
GRUBB & ELLIS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
15. CHANGES IN DEFICIT
The following is a reconciliation of total deficit, deficit attributable to Grubb & Ellis
Company and equity attributable to noncontrolling interests from December 31, 2010 to June 30, 2011
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
Grubb & Ellis |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional |
|
|
Other |
|
|
|
|
|
|
Company |
|
|
|
|
|
|
|
|
|
Common Stock |
|
|
Paid-In |
|
|
Comprehensive |
|
|
Accumulated |
|
|
Shareowners |
|
|
Noncontrolling |
|
|
Total |
|
|
|
Shares |
|
|
Amount |
|
|
Capital |
|
|
Income |
|
|
Deficit |
|
|
Deficit |
|
|
Interests |
|
|
Deficit |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31,
2010 |
|
|
70,076 |
|
|
$ |
701 |
|
|
$ |
409,943 |
|
|
$ |
148 |
|
|
$ |
(478,881 |
) |
|
$ |
(68,089 |
) |
|
$ |
9,130 |
|
|
$ |
(58,959 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vesting of share-based
compensation |
|
|
|
|
|
|
|
|
|
|
2,378 |
|
|
|
|
|
|
|
|
|
|
|
2,378 |
|
|
|
|
|
|
|
2,378 |
|
Preferred dividends accrued |
|
|
|
|
|
|
|
|
|
|
(5,794 |
) |
|
|
|
|
|
|
|
|
|
|
(5,794 |
) |
|
|
|
|
|
|
(5,794 |
) |
Forfeiture of non-vested
restricted shares |
|
|
(223 |
) |
|
|
(3 |
) |
|
|
(180 |
) |
|
|
|
|
|
|
|
|
|
|
(183 |
) |
|
|
|
|
|
|
(183 |
) |
Contributions from
noncontrolling interests |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14 |
|
|
|
14 |
|
Distributions to
noncontrolling interests |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(998 |
) |
|
|
(998 |
) |
Change in unrealized gain
on marketable securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
92 |
|
|
|
|
|
|
|
92 |
|
|
|
|
|
|
|
92 |
|
Net loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(32,622 |
) |
|
|
(32,622 |
) |
|
|
(779 |
) |
|
|
(33,401 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(32,530 |
) |
|
|
(779 |
) |
|
|
(33,309 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of June 30, 2011 |
|
|
69,853 |
|
|
$ |
698 |
|
|
$ |
406,347 |
|
|
$ |
240 |
|
|
$ |
(511,503 |
) |
|
$ |
(104,218 |
) |
|
$ |
7,367 |
|
|
$ |
(96,851 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During the six months ended June 30, 2011 and 2010, we granted 0 and 2,225,000 restricted
shares of common stock, respectively.
16. OTHER RELATED PARTY TRANSACTIONS
Offering Costs and Other Expenses Related to Public Non-Traded REITs We, through our
consolidated subsidiaries Grubb & Ellis Apartment REIT Advisor, LLC and Grubb & Ellis Healthcare
REIT II Advisor, LLC, bear certain general and administrative expenses in our capacity as advisor
of Grubb & Ellis Apartment REIT, Inc. (now known as Apartment
Trust of America, Inc.) (Apartment REIT) and Grubb & Ellis Healthcare REIT
II, Inc. (Healthcare REIT II), respectively, and are reimbursed for these expenses. However,
Apartment REIT and Healthcare REIT II will not reimburse us 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, if any, are expensed by us. There
were no unreimbursed amounts expensed by us during the three and six months ended June 30, 2011 and
2010.
We also pay for the organizational, offering and related expenses on behalf of Healthcare REIT
IIs initial offering and paid for such expenses related to Apartment REITs follow-on offering
(through December 31, 2010 when we terminated our advisory and dealer-manager relationship with
Apartment REIT). 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 Healthcare REIT II and Apartment REIT in connection with
these offerings. These expenses only become a liability of Healthcare REIT II and Apartment REIT to
the extent other organizational and offering expenses do not exceed 1.0% of the gross proceeds of
the offerings. As of June 30, 2011 and December 31, 2010, we have incurred expenses of $2.9 million
and $2.7 million, respectively, in excess of 1.0% of the gross proceeds of Healthcare REIT IIs
initial offering. We anticipate that such amounts will be reimbursed in the future from the
offering proceeds of Healthcare REIT II. As of June 30, 2011 and December 31, 2010, we have
incurred expenses of $2.5 million, in excess of 1.0% of the gross proceeds of Apartment REITs
follow-on offering. As of June 30, 2011 and December 31, 2010, we have recorded an allowance for
bad debt of approximately $2.5 million, related to Apartment REITs follow-on offering costs as we
believe that such amounts may not be reimbursed.
Management Fees We provide both transaction and management services to parties, which are
related to one of our principal shareowners and directors (collectively, Kojaian Companies). In
addition, we also pay asset management fees to Kojaian Companies related to properties we manage on
their behalf. Revenue, including reimbursable expenses related to salaries, wages and benefits,
earned by us for services rendered to Kojaian Companies, including joint ventures, officers and
directors and their affiliates, net of asset management fees paid to Kojaian Companies, was $1.2
million and $1.3 million for the three months ended June 30, 2011 and 2010, respectively, and $2.4
million and $2.5 million for the six months ended June 30, 2011 and 2010, respectively.
In the second quarter of 2011, we began providing management services to the brother of one of
our principal shareowners and directors. Revenue earned by us for services rendered was
approximately $2,000 for the three months ended June 30, 2011.
26
GRUBB & ELLIS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
Office Leases In December 2010, we entered into two office leases with landlords related to
Kojaian Companies, providing for an annual average base rent of $414,000 and $404,000 over the
ten-year terms of the leases which begin in April 2011 and November 2012, respectively.
Other Related Party Our directors and officers, as well as officers, managers and employees
have purchased, and may continue to purchase, interests in offerings made by our 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. Our net proceeds from these
sales made, net of commissions, will be substantially the same as the net proceeds received from
other sales.
17. INCOME TAXES
The components of income tax (provision) benefit from continuing operations for the three and
six months ended June 30, 2011 and 2010 consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
June 30, |
|
(In thousands) |
|
2011 |
|
|
2010 |
|
|
2011 |
|
|
2010 |
|
Current: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
State |
|
|
16 |
|
|
|
(68 |
) |
|
|
50 |
|
|
|
(130 |
) |
Foreign |
|
|
7 |
|
|
|
(12 |
) |
|
|
(27 |
) |
|
|
(88 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
23 |
|
|
$ |
(80 |
) |
|
$ |
23 |
|
|
$ |
(218 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
State |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We recorded net prepaid taxes totaling approximately $0.2 million and $0.2 million as of June
30, 2011 and December 31, 2010, respectively, comprised primarily of state tax refunds receivable
and state prepaid taxes.
As of December 31, 2010, federal net operating loss carryforwards in the amount of
approximately $154.1 million are available to us, translating to a deferred tax asset before
valuation allowance of $53.9 million. These NOLs will expire between 2027 and 2030.
A significant portion of these NOLs will be transferred to Daymark
upon the sale of Daymark.
We also have state net operating loss carryforwards from December 31, 2010 and previous
periods totaling $244.1 million, translating to a deferred tax asset of $16.3 million before
valuation allowances, which begin to expire in 2017.
We regularly review our deferred tax assets for realizability and have established a valuation
allowance based upon historical taxable income, projected future taxable income and the expected
timing of the reversals of existing temporary differences to reduce our deferred tax assets to the
amount that we believe is more likely than not to be realized. Due to the cumulative pre-tax book
loss in the past three years and the inherent volatility of our business in recent years, we
believe that this negative evidence supports the position that a valuation allowance is required
pursuant to ASC 740, Income Taxes, (Income Taxes Topic). Management determined that as of June
30, 2011, $122.7 million of deferred tax assets do not satisfy the recognition criteria set forth
in the Income Taxes Topic. 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 (provision) benefit from continuing operations
for financial statement purposes and the income taxes computed using the applicable federal income
tax rate of 35.0% for the three and six months ended June 30, 2011 and 2010 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
June 30, |
|
(In thousands) |
|
2011 |
|
|
2010 |
|
|
2011 |
|
|
2010 |
|
Federal income taxes at the statutory rate |
|
$ |
2,378 |
|
|
$ |
3,813 |
|
|
$ |
9,215 |
|
|
$ |
11,234 |
|
State income taxes, net of federal benefit |
|
|
206 |
|
|
|
345 |
|
|
|
835 |
|
|
|
752 |
|
Foreign income taxes |
|
|
7 |
|
|
|
(12 |
) |
|
|
(28 |
) |
|
|
(88 |
) |
Other |
|
|
82 |
|
|
|
(4 |
) |
|
|
208 |
|
|
|
(4 |
) |
Non-deductible expenses |
|
|
(550 |
) |
|
|
(268 |
) |
|
|
(2,081 |
) |
|
|
(581 |
) |
Change in valuation allowance |
|
|
(2,100 |
) |
|
|
(3,954 |
) |
|
|
(8,126 |
) |
|
|
(11,531 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for income taxes |
|
$ |
23 |
|
|
$ |
(80 |
) |
|
$ |
23 |
|
|
$ |
(218 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
27
|
|
|
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 our actual results, performance
or achievements 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 our 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. We 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 our
expectations with regard thereto or any change in events, conditions or circumstances on which any
such statement is based. Factors that could adversely affect our 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 our tenant-in-common programs in particular, (v) an increase in expenses related to
new initiatives, investments in people, technology, and service improvements, (vi) the success of
current and new investment programs, including our non-traded real estate investment trusts, (vii)
the success of new initiatives and investments, (viii) an unfavorable outcome in the amount we may
be required to pay in any known or unknown litigation dispute; (ix) the inability to attain
expected levels of revenue, performance, brand equity in general, and in the current macroeconomic
and credit environment in particular, and (x) other factors described in our Annual Report on Form
10-K for the fiscal year ended December 31, 2010, filed on March 31, 2011.
Overview and Background
We report our revenue by three operating business segments in accordance with the provisions
of the Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC)
Topic 280, Segment Reporting, (Segment Reporting Topic). The three business segments are as
follows: (1) Management Services, which includes property management, corporate facilities
management, project management, client accounting, business services and engineering services for
corporate occupier and real estate investor clients (2) Transaction Services, which comprises our
real estate brokerage valuation and appraisal operations; and (3) Investment Management, which
encompasses acquisition, financing, disposition and asset management services for our investment
programs and dealer-manager services by our securities broker-dealer, which facilitates capital
raising transactions for our REIT and other investment programs. Additional information on these
business segments can be found in Note 9 of Notes to Consolidated Financial Statements in Item 1 of
this Report.
As a result of reclassifying our Daymark subsidiary to discontinued operations in the second
quarter of 2011, our segment disclosure no longer includes a Daymark segment as all of the Daymark
segment is included in discontinued operations. In addition, our Daymark subsidiary historically
provided some Investment Management services. Accordingly, all revenues and expenses related to our
Investment Management segment that were provided by Daymark are also included in discontinued
operations.
On March 21, 2011, we announced that we had retained JMP Securities LLC as an advisor to
explore strategic alternatives for the Company, including a potential merger or sale transaction.
On June 1, 2011, we entered into a definitive agreement for the sale of substantially all of
the assets of our real estate investment fund business, Alesco Global Advisors (Alesco), to
Lazard Asset Management LLC. Closing of the transaction is subject to customary approvals and is
expected to occur in the third quarter of 2011. We anticipate
recognizing a loss on the sale of Alesco
of approximately $3.0 million in the third quarter of 2011.
On August 10, 2011, we entered into a Stock Purchase Agreement dated as of August 10, 2011
(the Purchase Agreement) by and between us and IUC-SOV, LLC (the Purchaser), an entity
affiliated with Sovereign Capital Management and Infinity Real Estate. Pursuant to the Purchase
Agreement, we sold to Purchaser all of the shares of Daymark. The closing (the Closing) of the
transactions contemplated by the Purchase Agreement (the Transactions) was completed on
August 10, 2011.
28
Pursuant to the Purchase Agreement, we sold to Purchaser all of the outstanding shares of
Daymark in exchange for (1) a cash payment of $0.5 million (the Estimated Closing Cash Payment)
from Purchaser and (2) the assumption by Purchaser of $10.7 million of the net intercompany balance
payable from us to NNN Realty Advisors, Inc. (NNNRA), a wholly-owned subsidiary of Daymark.
We expect to record a gain on sale related to the disposition of
Daymark in the third quarter of 2011, after writing off all of the
net assets and liabilities associated with Daymark and recognizing
the transactions costs related to such transaction.
Pursuant to the Purchase Agreement, immediately after the completion of the sale of the
Daymark shares (and after NNNRA had become a wholly-owned subsidiary of the Purchaser), the Company
(1) paid NNNRA a $0.5 million cash payment and (2) issued to NNNRA a $5.0 million promissory note
(the Promissory Note) in full satisfaction of the remaining portion of the Companys net
intercompany balance payable to NNNRA that was not assumed by Purchaser.
Pursuant to the Purchase Agreement, we have agreed to indemnify, subject to various
limitations, Purchaser and its affiliates against any losses incurred or suffered by them as a
result of (1) the breach of any representation or warranty made by us in the Purchase Agreement
(subject to applicable survival limitations); (2) the breach of any covenant or agreement made by
us in the Purchase Agreement; (3) any claim for brokerage or finders fees payable by Daymark or any of its
subsidiaries in connection with the Transactions; (4) any liabilities or claims to the extent
arising from the actions or omissions of (A) the Seller and its subsidiaries (other than Daymark
and its subsidiaries) and (B) Daymark and its subsidiaries prior to the Closing, in each case,
related to the office building at 7551 Metro Center Drive in Austin Texas (Met Center 10)
(provided that indemnification for Met Center 10 (x) shall not cover any legal fees and expenses
that were paid prior to Closing and (y) shall not cover any legal fees and expenses that have not
been paid prior to the Closing except to the extent (and only to the extent) that they exceed $0.65
million); (5) certain liabilities under various employment agreements, plans and policies; or (6)
fraud by Seller or any of its subsidiaries (other than Daymark or any of its subsidiaries).
Pursuant to the Purchase Agreement, the Purchaser has agreed to indemnify, subject to
limitations, us and our affiliates against any losses incurred or suffered by them as a result of
(1) the breach of any representation or warranty made by Purchaser in the Purchase Agreement
(subject to applicable survival limitations); (2) the breach of any covenant or agreement made by
Purchaser in the Agreement; (3) any liabilities of, obligations of or claims against us or any of
our subsidiaries related to or arising from the business or operations of Daymark or any of its
subsidiaries (whether relating to matters that occurred, arose or were asserted prior to the
Closing or relating to matters that occur, arise or are asserted after the Closing), including
existing and future litigation and claims, non-recourse carve-out guarantees and other guaranty
obligations of us and our subsidiaries (provided that Purchaser shall not be obligated to indemnify
Seller or its affiliates for losses of Seller or its affiliates that are the result of (x) a
certain litigation matter or (y) fraud by Seller); (4) the first $0.65 million of legal fees and
expenses relating to Met Center 10 that have not been paid prior to the Closing; and (5) fraud by
Purchaser or any of its subsidiaries. Among other indemnification limitations, the liability of
Purchaser for indemnifying us and our affiliates for liabilities, obligations or claims related to
or arising from the business or operations of Daymark or its subsidiaries as described in clause
(3) above (if related solely to any fact, event or circumstances prior to the Closing) shall not
exceed $7.5 million in the aggregate.
The $5.0 million principal amount of the Promissory Note issued by us to NNNRA becomes due and
payable on August 10, 2016 (the Maturity Date). Interest accrues on the unpaid principal of the
Promissory Note at a rate equal to 7.95% per annum. Accrued and unpaid interest on the Promissory
Note is payable on the last day of each calendar quarter (commencing on September 30, 2011) and on
the Maturity Date. We may prepay all or any portion of the Promissory Note at any time without
premium or penalty.
Upon a change of control of the Company or certain Company recapitalization events, we will be
obligated to prepay, within 10 business days following the date of such event, an amount equal to
the sum of (A) an amount of principal (the Mandatory Principal Prepayment Amount) equal to the
lesser of (i) $3.0 million and (ii) the then-outstanding principal amount of the Promissory Note
plus (B) all accrued and unpaid interest on the Mandatory Principal Prepayment Amount.
Events of default under the Promissory Note include (i) a default by us in the payment of any
interest or principal on the Promissory Note when due and such default continues for a period of 10
days after written notice from the holder and (ii) we become subject to any final and
non-appealable writ, judgment, warrant of attachment, execution or similar process that would cause
a material adverse effect on the financial condition of us and our subsidiaries, taken as a whole.
Upon the occurrence of an event of default, the holder of the Promissory Note may declare and
demand the Promissory Note immediately due and payable.
In connection with the closing of the Transactions, we, Daymark and each of Daymarks
subsidiaries entered into an Intercompany Balance Settlement and Release Agreement dated August 10,
2011 (the IBSRA).
29
Pursuant to the IBSRA, Daymark and its subsidiaries released us from any and all claims,
obligations, contracts, agreements, debts and liabilities that Daymark and its subsidiaries now
have, have ever had or may in the future have against us arising at the time of or prior to the
Closing or on account of or arising out of any matter, fact or event occurring at the time of or
prior to the Closing, including (1) all rights and obligations under that certain Services
Agreement dated as of January 1, 2011 by and among us, Daymark and other parties thereto (the
Services Agreement), (2) all other contracts and arrangements between Daymark or any of its
subsidiaries and us, (3) all intercompany payables and any other financial obligations or amounts
owed to Daymark or any of its subsidiaries by us and (4) rights to indemnification or reimbursement
from us, subject to various exceptions. Daymark and its subsidiaries also waived rights to coverage
under D&O insurance policies maintained by us.
Pursuant to the IBSRA, we released Daymark and each of its subsidiaries from any and all
claims, obligations, contracts, agreements, debts and liabilities that we now have, have ever had
or may in the future have against Daymark or any of its subsidiaries arising at the time of or
prior to the Closing or on account of or arising out of any matter, fact or event occurring at the
time of or prior to the Closing, including (1) all rights and obligations under the Services
Agreement, (2) all other contracts and arrangements between us and Daymark or any of its
subsidiaries, (3) all intercompany payables and any other financial obligations or amounts owed to
us by Daymark or any of its subsidiaries and (4) rights to indemnification or reimbursement from
Daymark or any of its subsidiaries, subject to various exceptions.
Critical Accounting Policies
A discussion of our critical accounting policies, which include principles of consolidation,
revenue recognition, impairment of long-lived assets, deferred taxes, and insurance and claims
reserves, can be found in our Annual Report on Form 10-K for the year ended December 31, 2010.
Except as noted in Note 1 of the Consolidated Financial Statements that are a part of this
Quarterly Report on Form 10-Q, there have been no material changes to these policies in 2011.
RESULTS OF OPERATIONS
Overview
We reported revenue of $138.0 million for the three months ended June 30, 2011, compared with
revenue of $127.1 million for the same period in 2010. The increase was primarily the result of an
increase in Transaction Services revenue of $18.1 million and an increase in Investment Management
revenue of $5.0 million offset by a decrease in Management Services revenue of $12.2 million. The
increase in our Investment Management revenue resulted from more acquisitions in 2011, as $180.7
million of acquisitions were sourced in the second quarter of 2011 compared to $46.8 million of
acquisitions in the second quarter of 2010. The increase in our Transaction Services revenue can be
attributed to increased sales and appraisal transactions. The decrease in our Management Services
revenue as compared to the prior year period is primarily attributed to a decrease in reimbursable
revenue.
The net loss attributable to Grubb & Ellis Company for the second quarter of 2011 was $14.3
million and included non-cash charges of $2.0 million for depreciation and amortization, $2.6
million of charges for bad debt, $0.7 million of share-based compensation and $1.4 million for
amortization of signing bonuses. In addition, the second quarter results included approximately
$0.1 million of severance and other charges. After the accrual of preferred stock dividends of $2.9
million, the net loss attributable to Grubb & Ellis Company common shareowners for the three months
ended June 30, 2011 was $17.2 million, or $0.26 per diluted share.
We reported revenue of $250.2 million for the six months ended June 30, 2011, compared with
revenue of $243.4 million for the same period in 2010. The increase was primarily the result of an
increase in Transaction Services revenue of $26.3 million and an increase in Investment Management
revenue of $6.1 million offset by a decrease in Management Services revenue of $25.6 million. The
increase in our Investment Management revenue resulted from more acquisitions in 2011, as $218.0
million of acquisitions were sourced in 2011 compared to $60.2 million of acquisitions in 2010. The
increase in our Transaction Services revenue can be attributed to increased sales, leasing and
appraisal transactions. The decrease in our Management Services revenue as compared to the prior
year period is primarily attributed to a decrease in reimbursable revenue.
The net loss attributable to Grubb & Ellis Company for the six months ended June 30, 2011 was
$32.6 million and included non-cash charges of $4.1 million for depreciation and amortization, $3.8
million of charges for bad debt, $2.4 million of share-based compensation and $3.1 million for
amortization of signing bonuses. In addition, the six month results included approximately $1.0
million of severance and other charges. After the accrual of preferred stock dividends of $5.8
million, the net loss attributable to Grubb & Ellis Company common shareowners for the six months
ended June 30, 2011 was $38.4 million, or $0.58 per diluted share.
30
Three Months Ended June 30, 2011 Compared to Three Months Ended June 30, 2010
The following summarizes comparative results of operations for the periods indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
|
|
|
June 30, |
|
|
Change |
|
(In thousands) |
|
2011 |
|
|
2010 |
|
|
$ |
|
|
% |
|
Revenue |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Management services |
|
$ |
57,913 |
|
|
$ |
70,110 |
|
|
$ |
(12,197 |
) |
|
|
(17.4 |
)% |
Transaction services |
|
|
72,814 |
|
|
|
54,684 |
|
|
|
18,130 |
|
|
|
33.2 |
|
Investment management |
|
|
7,228 |
|
|
|
2,265 |
|
|
|
4,963 |
|
|
|
219.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue |
|
|
137,955 |
|
|
|
127,059 |
|
|
|
10,896 |
|
|
|
8.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation costs |
|
|
121,215 |
|
|
|
119,495 |
|
|
|
1,720 |
|
|
|
1.4 |
|
General and administrative |
|
|
18,333 |
|
|
|
15,515 |
|
|
|
2,818 |
|
|
|
18.2 |
|
Provision for doubtful accounts |
|
|
2,569 |
|
|
|
673 |
|
|
|
1,896 |
|
|
|
281.7 |
|
Depreciation and amortization |
|
|
1,980 |
|
|
|
1,709 |
|
|
|
271 |
|
|
|
15.9 |
|
Interest |
|
|
915 |
|
|
|
458 |
|
|
|
457 |
|
|
|
99.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expense |
|
|
145,012 |
|
|
|
137,850 |
|
|
|
7,162 |
|
|
|
5.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Loss |
|
|
(7,057 |
) |
|
|
(10,791 |
) |
|
|
3,734 |
|
|
|
34.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Income (Expense) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity in losses of unconsolidated entities |
|
|
235 |
|
|
|
(190 |
) |
|
|
425 |
|
|
|
223.7 |
|
Interest income |
|
|
28 |
|
|
|
85 |
|
|
|
(57 |
) |
|
|
(67.1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income (expense) |
|
|
263 |
|
|
|
(105 |
) |
|
|
368 |
|
|
|
350.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations before income tax benefit (provision) |
|
|
(6,794 |
) |
|
|
(10,896 |
) |
|
|
4,102 |
|
|
|
37.6 |
|
Income tax benefit (provision) |
|
|
23 |
|
|
|
(80 |
) |
|
|
103 |
|
|
|
128.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations |
|
|
(6,771 |
) |
|
|
(10,976 |
) |
|
|
4,205 |
|
|
|
38.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from discontinued operations net of taxes |
|
|
(7,946 |
) |
|
|
(8,219 |
) |
|
|
273 |
|
|
|
3.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loss from discontinued operations |
|
|
(7,946 |
) |
|
|
(8,219 |
) |
|
|
273 |
|
|
|
3.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
|
(14,717 |
) |
|
|
(19,195 |
) |
|
|
4,478 |
|
|
|
23.3 |
|
Net loss attributable to noncontrolling interests |
|
|
(384 |
) |
|
|
(1,736 |
) |
|
|
1,352 |
|
|
|
77.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to Grubb & Ellis Company |
|
|
(14,333 |
) |
|
|
(17,459 |
) |
|
|
3,126 |
|
|
|
17.9 |
|
Preferred stock dividends |
|
|
(2,897 |
) |
|
|
(2,897 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to Grubb & Ellis Company common shareowners |
|
$ |
(17,230 |
) |
|
$ |
(20,356 |
) |
|
$ |
3,126 |
|
|
|
15.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
Management Services Revenue
Management Services revenue decreased $12.2 million, or 17.4%, to $57.9 million for the three
months ended June 30, 2011, compared to $70.1 million for the same period in 2010 due primarily to
reimbursable or pass through revenue of $11.2 million. As of June 30, 2011, we managed
approximately 231.1 million square feet of commercial real estate and multi-family property,
including 3.8 million square feet of our Daymark portfolio compared to 240.1 million square feet of
property as of June 30, 2010 (which included 22.2 million square feet of our Daymark portfolio).
Beginning in April 2011, Grubb & Ellis Management Services (GEMS) transferred management of
approximately 14.6 million square feet of Daymarks portfolio to Daymark. In addition, GEMS began
servicing an approximately 10.0 million square foot facilities management contract during the first
quarter of 2011.
Transaction Services Revenue
Transaction Services revenue increased $18.1 million, or 33.2%, to $72.8 million for the three
months ended June 30, 2011, compared to $54.7 million for the same period in 2010 due to increased
sales transaction volume and values as a result of increased broker productivity and the recovering
real estate market. Leasing activity represented approximately 59% of the total sales and leasing
revenue of $56.9 million in 2011, while sales accounted for 41% of total sales and leasing revenue.
In 2010, the revenue breakdown was 72% leasing, and 28% sales of total sales and leasing revenue of
$47.7 million. As of June 30, 2011, we had 943 brokers in owned offices, down from 1,006 as of
December 31, 2010. Other revenue was $15.9 million and $7.0 million for the three months ended June
30, 2011 and 2010, respectively, and includes $4.8 million of revenue for the three months ended
June 30, 2011 related to our appraisal and valuation business compared to $0.9 million of revenue
in the prior year period. Appraisal and valuation revenue increased approximately 78% sequentially
from the first quarter of 2011 of $2.7 million as a result of the launch of our new Landauer
appraisal business late in the third quarter of 2010.
Investment Management Revenue
Investment Management revenue increased $5.0 million, or 219.2%, to $7.2 million for the three
months ended June 30, 2011, compared to $2.3 million for the same period in 2010. Investment
Management revenue reflects revenue generated through the fee structure of our non-traded REIT
program, Healthcare REIT II, and for the three months ended June 30, 2011, includes acquisition
fees of $5.0 million, broker dealer revenue of $1.4 million and management fees of $0.8
million. Key drivers of this business are the dollar value of equity raised, the amount of
transactions that are consummated and the amount of assets under management.
31
Acquisition fees increased $3.7 million, or 284.6%, to $5.0 million for the three months ended
June 30, 2011, compared to $1.3 million for the same period in 2010 due to more acquisitions in the
second quarter of 2011. We sourced $180.7 million in acquisitions for Healthcare REIT II in the
second quarter of 2011 compared to $46.8 million in the second quarter of 2010.
Management fees increased $0.7 million, or 700.0%, to $0.8 million for the three months ended
June 30, 2011, compared to $0.1 million for the same period in 2010, which primarily reflects the
increase in Healthcare REIT II assets under management. As of June 30, 2011, we had approximately
$411.5 million of assets under management compared to $60.2 million of assets under management as
of June 30, 2010.
Broker dealer revenue increased $0.6 million, or 75.0%, to $1.4 million for the three months
ended June 30, 2011, compared to $0.8 million for the same period in 2010 as a result of an
increase in equity raised during the three months ended June 30, 2011. In total, $80.4 million in
equity was raised for Healthcare REIT II for the three months ended June 30, 2011, compared with
$30.8 million in the same period in 2010.
Operating Expense Overview
Operating expenses increased $7.2 million, or 5.2%, to $145.0 million for the three months
ended June 30, 2011, compared to $137.9 million for the same period in 2010. This increase
primarily reflects an increase in variable compensation costs of $1.7 million, an increase in
general and administrative expenses of $2.8 million and an increase in provision for doubtful
accounts of $1.9 million.
Compensation Costs
Compensation costs increased approximately $1.7 million, or 1.4%, to $121.2 million for the
three months ended June 30, 2011, compared to approximately $119.5 million for the same period in
2010 due to increases in transaction commissions and related costs paid to our brokerage
professionals of $12.0 million offset by decreases in reimbursable salaries, wages and benefits of
$10.7 million. Other compensation costs increased by $2.5 million as a result of $3.9 million in
costs incurred to support growth initiatives of which $2.9 million related to the appraisal
business and the remainder related to new offices and product lines primarily in the brokerage
business partially offset by decreases as a result of managements cost saving efforts. In
addition, share-based compensation decreased $2.1 million as a result of fully vested restricted
stock and phantom stock awards. The following table summarizes compensation costs by segment for
the periods indicated. We expect transaction commissions and related costs as a percentage of revenue
in the Transaction Services segment to be approximately 5% higher than historical levels as a result of retention
programs which have been put in place through the close of a strategic transaction.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
|
|
|
June 30, |
|
|
Change |
|
|
|
2011 |
|
|
2010 |
|
|
$ |
|
|
% |
|
MANAGEMENT SERVICES |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation costs |
|
$ |
10,192 |
|
|
$ |
9,756 |
|
|
$ |
436 |
|
|
|
4.5 |
% |
Transaction commissions and related costs |
|
|
2,846 |
|
|
|
4,212 |
|
|
|
(1,366 |
) |
|
|
(32.4 |
) |
Reimbursable salaries, wages and benefits |
|
|
38,289 |
|
|
|
49,021 |
|
|
|
(10,732 |
) |
|
|
(21.9 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
51,327 |
|
|
|
62,989 |
|
|
|
(11,662 |
) |
|
|
(18.5 |
) |
TRANSACTION SERVICES |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation costs |
|
|
15,024 |
|
|
|
11,210 |
|
|
|
3,814 |
|
|
|
34.0 |
|
Transaction commissions and related costs |
|
|
48,715 |
|
|
|
35,399 |
|
|
|
13,316 |
|
|
|
37.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
63,739 |
|
|
|
46,609 |
|
|
|
17,130 |
|
|
|
36.8 |
|
INVESTMENT MANAGEMENT |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation costs |
|
|
2,030 |
|
|
|
2,514 |
|
|
|
(484 |
) |
|
|
(19.3 |
) |
Transaction commissions and related costs |
|
|
892 |
|
|
|
867 |
|
|
|
25 |
|
|
|
2.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
2,922 |
|
|
|
3,381 |
|
|
|
(459 |
) |
|
|
(13.6 |
) |
Compensation costs related to corporate overhead |
|
|
2,402 |
|
|
|
3,619 |
|
|
|
(1,217 |
) |
|
|
(33.6 |
) |
Severance costs |
|
|
139 |
|
|
|
119 |
|
|
|
20 |
|
|
|
16.8 |
|
Share-based compensation |
|
|
686 |
|
|
|
2,778 |
|
|
|
(2,092 |
) |
|
|
(75.3 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total compensation costs |
|
$ |
121,215 |
|
|
$ |
119,495 |
|
|
$ |
1,720 |
|
|
|
1.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and Administrative
General and administrative expense increased approximately $2.8 million, or 18.2%, to $18.3
million for the three months ended June 30, 2011, compared to $15.5 million for the same period in
2010 due to an increase of $0.6 million related to legal and consulting fees, an increase of $1.0
million in insurance expense and $1.4 million in increases related to our growth initiatives.
32
General and administrative expense was 13.3% of total revenue for the three months ended June
30, 2011, compared with 12.2% for the same period in 2010.
Provision for Doubtful Accounts
Provision for doubtful accounts increased approximately $1.9 million, or 281.7%, to $2.6
million for the three months ended June 30, 2011, compared to $0.7 million for the same period in
2010 primarily due to an increase in the provision for reserves on advances made to brokers and
Transaction Services and Management Services aged receivables.
Depreciation and Amortization
Depreciation and amortization expense increased approximately $0.3 million, or 15.9%, to $2.0
million for the three months ended June 30, 2011, compared to approximately $1.7 million for the
same period in 2010. Included in depreciation and amortization expense for the three months ended
June 30, 2011 and 2010 was $1.0 million and $0.8 million, respectively, for amortization of
identified intangible assets.
Interest Expense
Interest expense increased approximately $0.4 million, or 99.8%, to $0.9 million for the three
months ended June 30, 2011, compared to $0.5 million for the same period in 2010. The increase in
interest expense is primarily related to our Convertible Notes issued in May 2010 and the $18.0
million borrowing on our credit facility in the second quarter of 2011 offset by a $0.4 million
fair market value adjustment related to our warrant derivative liability.
Other Income (Expense)
Other income for the three months ended June 30, 2011 includes $0.2 million in equity in
earnings related to our investment in a joint venture that we separated from in the second quarter
of 2011 and $28,000 of interest income. Other expense for the three months ended June 30, 2010
includes $0.2 million in equity in losses related to our investment in a joint venture and $85,000
of interest income. Equity in earnings (losses) are recorded based on the pro rata ownership
interest in the underlying unconsolidated joint venture.
Discontinued Operations
On June 1, 2011, we entered into a definitive agreement for the sale of substantially all of
the assets of Alesco. Closing of the transaction is subject to customary approvals and is expected
to occur in the third quarter of 2011. On August 10, 2011, we completed the sale of Daymark.
In accordance with the requirements of ASC Topic 360, Property, Plant, and Equipment,
(Property, Plant, and Equipment Topic), discontinued operations for the three months ended June
30, 2011 and 2010 includes the net loss of our Daymark and Alesco subsidiary operations. For the
three months ended June 30, 2011 and 2010, loss from discontinued operations was $7.9 million and
$8.2 million, respectively.
Income Tax
We recognized a tax benefit from continuing operations of $23,000 for the three months ended
June 30, 2011, compared to a tax expense of ($80,000) for the same period in 2010. In 2011 and
2010, the reported effective income tax rates were 0.34% and (0.74%), respectively. The 2011 and
2010 effective tax rates include the effect of valuation allowances recorded against deferred tax
assets to reflect our assessment that it is more likely than not that some portion of the deferred
tax assets will not be realized. Our deferred tax assets are primarily attributable to impairments
of various real estate holdings, net operating losses and share-based compensation. (See Note 17 of
the Notes to Consolidated Financial Statements in Item 1 of this Report for additional
information.)
Net Loss Attributable to Noncontrolling Interests
Net loss attributable to noncontrolling interests decreased by $1.4 million, or 77.9%, to $0.4
million during the three months ended June 30, 2011, compared to net loss attributable to
noncontrolling interests of $1.7 million for the same period in 2010. The decrease
is primarily related to a decrease in provision for doubtful accounts and real estate related
impairments recorded at two of Daymarks consolidated VIEs.
33
Net Loss Attributable to Grubb & Ellis Company
As a result of the above items, we recognized a net loss of $14.3 million for the three months
ended June 30, 2011, compared to a net loss of $17.5 million for the same period in 2010.
Net Loss Attributable to Grubb & Ellis Company Common Shareowners
We accrued $2.9 million in preferred stock dividends during the three months ended June 30,
2011 resulting in a net loss attributable to our common shareowners of $17.2 million, or $0.26 per
diluted share, compared to a net loss attributable to our common shareowners of $20.4 million, or
$0.31 per diluted share, for the same period in 2010.
Six Months Ended June 30, 2011 Compared to Six Months Ended June 30, 2010
The following summarizes comparative results of operations for the periods indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended |
|
|
|
|
|
|
June 30, |
|
|
Change |
|
(In thousands) |
|
2011 |
|
|
2010 |
|
|
$ |
|
|
% |
|
Revenue |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Management services |
|
$ |
116,958 |
|
|
$ |
142,558 |
|
|
$ |
(25,600 |
) |
|
|
(18.0 |
)% |
Transaction services |
|
|
123,266 |
|
|
|
96,917 |
|
|
|
26,349 |
|
|
|
27.2 |
|
Investment management |
|
|
9,989 |
|
|
|
3,893 |
|
|
|
6,096 |
|
|
|
156.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue |
|
|
250,213 |
|
|
|
243,368 |
|
|
|
6,845 |
|
|
|
2.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation costs |
|
|
230,641 |
|
|
|
237,736 |
|
|
|
(7,095 |
) |
|
|
(3.0 |
) |
General and administrative |
|
|
36,480 |
|
|
|
31,741 |
|
|
|
4,739 |
|
|
|
14.9 |
|
Provision for doubtful accounts |
|
|
3,807 |
|
|
|
1,802 |
|
|
|
2,005 |
|
|
|
111.3 |
|
Depreciation and amortization |
|
|
4,062 |
|
|
|
3,314 |
|
|
|
748 |
|
|
|
22.6 |
|
Interest |
|
|
1,688 |
|
|
|
504 |
|
|
|
1,184 |
|
|
|
234.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expense |
|
|
276,678 |
|
|
|
275,097 |
|
|
|
1,581 |
|
|
|
0.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Loss |
|
|
(26,465 |
) |
|
|
(31,729 |
) |
|
|
5,264 |
|
|
|
16.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Income (Expense) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity in losses of unconsolidated entities |
|
|
71 |
|
|
|
(383 |
) |
|
|
454 |
|
|
|
118.5 |
|
Interest income |
|
|
66 |
|
|
|
110 |
|
|
|
(44 |
) |
|
|
(40.0 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income (expense) |
|
|
137 |
|
|
|
(273 |
) |
|
|
410 |
|
|
|
150.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations before income tax benefit (provision) |
|
|
(26,328 |
) |
|
|
(32,002 |
) |
|
|
5,674 |
|
|
|
17.7 |
|
Income tax benefit (provision) |
|
|
23 |
|
|
|
(218 |
) |
|
|
241 |
|
|
|
110.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations |
|
|
(26,305 |
) |
|
|
(32,220 |
) |
|
|
5,915 |
|
|
|
18.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from discontinued operations net of taxes |
|
|
(7,096 |
) |
|
|
(11,027 |
) |
|
|
3,931 |
|
|
|
35.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loss from discontinued operations |
|
|
(7,096 |
) |
|
|
(11,027 |
) |
|
|
3,931 |
|
|
|
35.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
|
(33,401 |
) |
|
|
(43,247 |
) |
|
|
9,846 |
|
|
|
22.8 |
|
Net loss attributable to noncontrolling interests |
|
|
(779 |
) |
|
|
(2,007 |
) |
|
|
1,228 |
|
|
|
61.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to Grubb & Ellis Company |
|
|
(32,622 |
) |
|
|
(41,240 |
) |
|
|
8,618 |
|
|
|
20.9 |
|
Preferred stock dividends |
|
|
(5,794 |
) |
|
|
(5,794 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to Grubb & Ellis Company common shareowners |
|
$ |
(38,416 |
) |
|
$ |
(47,034 |
) |
|
$ |
8,618 |
|
|
|
18.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
Management Services Revenue
Management Services revenue decreased $25.6 million, or 18.0%, to $117.0 million for the six
months ended June 30, 2011, compared to $142.6 million for the same period in 2010 due primarily to
reimbursable or pass through revenue of $21.9 million. As of June 30, 2011, we managed
approximately 231.1 million square feet of commercial real estate and multi-family property,
including 3.8 million square feet of our Daymark portfolio compared to 240.1 million square feet of
property as of June 30, 2010 (which included 22.2 million square feet of our Daymark portfolio).
Beginning in April 2011, Grubb & Ellis Management Services (GEMS) transferred management of
approximately 14.6 million square feet of Daymarks portfolio to Daymark. In addition, GEMS began
servicing an approximately 10.0 million square foot facilities management contract during the first
quarter of 2011.
34
Transaction Services Revenue
Transaction Services revenue increased $26.3 million, or 27.2%, to $123.3 million for the six
months ended June 30, 2011, compared to $96.9 million for the same period in 2010 due to increased
sales and leasing transaction volume and values as a result of increased broker productivity and
the recovering real estate market. Leasing activity represented approximately 62% of the total
sales and leasing revenue of $97.2 million in 2011, while sales accounted for 38% of total sales
and leasing revenue. In 2010, the revenue breakdown was 73% leasing, and 27% sales of total sales
and leasing revenue of $80.5 million. As of June 30, 2011, we had 943 brokers in owned offices,
down from 1,006 as of December 31, 2010. Other revenue was $26.1 million and $16.4 million for the
six months ended June 30, 2011 and 2010, respectively, and includes $7.4 million of revenue for the
six months ended June 30, 2011 related to our appraisal and valuation business compared to $1.8
million of revenue in the prior year period. Appraisal and valuation revenue increased
approximately 200% sequentially from the second half of 2010 of $2.5 million as a result of the
launch of our new Landauer appraisal business late in the third quarter of 2010.
Investment Management Revenue
Investment Management revenue increased $6.1 million, or 156.6%, to $10.0 million for the six
months ended June 30, 2011, compared to $3.9 million for the same period in 2010. Investment
Management revenue reflects revenue generated through the fee structure of our non-traded REIT
programs and for the six months ended June 30, 2011, includes acquisition fees of $6.0 million,
broker dealer revenue of $2.5 million and management fees of $1.3 million. Key drivers of this
business are the dollar value of equity raised, the amount of transactions that are consummated and
the amount of assets under management.
Acquisition fees increased $3.8 million, or 172.7%, to $6.0 million for the six months ended
June 30, 2011, compared to $2.2 million for the same period in 2010 due to more acquisitions in the
first quarter of 2011. We sourced $218.0 million in acquisitions for Healthcare REIT II in 2011
compared to $60.2 million in 2010.
Management fees increased $1.2 million, or 1,200.0%, to $1.3 million for the six months ended
June 30, 2011, compared to $0.1 million for the same period in 2010, which primarily reflects the
increase in Healthcare REIT II assets under management. As of June 30, 2011, we had approximately
$411.5 million of assets under management compared to $60.2 million of assets under management as
of June 30, 2010.
Broker dealer revenue increased $1.0 million, or 66.7%, to $2.5 million for the six months
ended June 30, 2011, compared to $1.5 for the same period in 2010 as a result of an increase in
equity raised during the six months ended June 30, 2011. In total, $140.2 million in equity was
raised for Healthcare REIT II for the six months ended June 30, 2011, compared with $55.5 million
in the same period in 2010.
Operating Expense Overview
Operating expenses increased $1.6 million, or 0.6%, to $276.7 million for the six months ended
June 30, 2011, compared to $275.1 million for the same period in 2010. This increase primarily
reflects an increase in general and administrative expenses of $4.7 million, an increase in the
provision for doubtful accounts of $2.0 million, an increase in depreciation and amortization of
$0.7 million and an increase in interest expense of $1.2 million offset by a decrease in variable
compensation costs of $7.1 million.
35
Compensation Costs
Compensation costs decreased approximately $7.1 million, or 3.0%, to $230.6 million for the
six months ended June 30, 2011, compared to approximately $237.7 million for the same period in
2010 due to decreases in reimbursable salaries, wages and benefits of $21.5 million offset by
increases in transaction commissions and related costs paid to our brokerage professionals of $16.2
million as a result of increased sales and leasing activity. Other compensation costs increased by
a net $3.4 million as a result of approximately $7.4 million in costs incurred to support growth
initiatives of which $5.5 million related to the appraisal business and the remainder related to
new offices and product lines primarily in the brokerage business, partially offset by managements
cost saving efforts. In addition, share-based compensation decreased $3.4 million as a result of
fully vested restricted stock and phantom stock awards and severance costs decreased $1.8 million.
The following table summarizes compensation costs by segment for the periods indicated.
We expect transaction commissions and related costs as a percentage of revenue in the
Transaction Services segment to be approximately 5% higher than historical levels as a result of
retention programs which have been put in place through the close of a strategic transaction.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended |
|
|
|
|
|
|
June 30, |
|
|
Change |
|
|
|
2011 |
|
|
$ |
|
|
$ |
|
|
% |
|
MANAGEMENT SERVICES |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation costs |
|
$ |
18,872 |
|
|
$ |
19,310 |
|
|
$ |
(438 |
) |
|
|
(2.3 |
)% |
Transaction commissions and related costs |
|
|
6,624 |
|
|
|
10,395 |
|
|
|
(3,771 |
) |
|
|
(36.3 |
) |
Reimbursable salaries, wages and benefits |
|
|
77,843 |
|
|
|
99,379 |
|
|
|
(21,536 |
) |
|
|
(21.7 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
103,339 |
|
|
|
129,084 |
|
|
|
(25,745 |
) |
|
|
(19.9 |
) |
TRANSACTION SERVICES |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation costs |
|
|
30,492 |
|
|
|
22,175 |
|
|
|
8,317 |
|
|
|
37.5 |
|
Transaction commissions and related costs |
|
|
81,953 |
|
|
|
62,398 |
|
|
|
19,555 |
|
|
|
31.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
112,445 |
|
|
|
84,573 |
|
|
|
27,872 |
|
|
|
33.0 |
|
INVESTMENT MANAGEMENT |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation costs |
|
|
4,164 |
|
|
|
5,130 |
|
|
|
(966 |
) |
|
|
(18.8 |
) |
Transaction commissions and related costs |
|
|
1,755 |
|
|
|
1,351 |
|
|
|
404 |
|
|
|
29.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
5,919 |
|
|
|
6,481 |
|
|
|
(562 |
) |
|
|
(8.7 |
) |
Compensation costs related to corporate overhead |
|
|
5,604 |
|
|
|
9,032 |
|
|
|
(3,428 |
) |
|
|
(38.0 |
) |
Severance costs |
|
|
956 |
|
|
|
2,769 |
|
|
|
(1,813 |
) |
|
|
(65.5 |
) |
Share-based compensation |
|
|
2,378 |
|
|
|
5,797 |
|
|
|
(3,419 |
) |
|
|
(59.0 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total compensation costs |
|
$ |
230,641 |
|
|
$ |
237,736 |
|
|
$ |
(7,095 |
) |
|
|
(3.0 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and Administrative
General and administrative expense increased approximately $4.7 million, or 14.9%, to $36.5
million for the six months ended June 30, 2011, compared to $31.7 million for the same period in
2010 due to an increase of $0.8 million in legal and consulting fees, an increase of $0.8 million
in insurance expense and $2.8 million in increases related to our growth initiatives.
General and administrative expense was 14.6% of total revenue for the six months ended June
30, 2011, compared with 13.0% for the same period in 2010.
Provision for Doubtful Accounts
Provision for doubtful accounts increased approximately $2.0 million, or 111.3%, to $3.8
million for the six months ended June 30, 2011, compared to $1.8 million for the same period in
2010 primarily due to an increase in the provision for reserves on advances made to brokers and
Transaction Services and Management Services aged receivables.
Depreciation and Amortization
Depreciation and amortization expense increased approximately $0.8 million, or 22.6%, to $4.1
million for the six months ended June 30, 2011, compared to approximately $3.3 million for the same
period in 2010. Included in depreciation and amortization expense for the six months ended June 30,
2011 and 2010 was $2.0 million and $1.6 million, respectively, for amortization of identified
intangible assets.
Interest Expense
Interest expense increased approximately $1.2 million, or 234.9%, to $1.7 million for the six
months ended June 30, 2011, compared to $0.5 million for the same period in 2010. The increase in
interest expense is primarily related to our Convertible Notes issued in May 2010 and the $18.0
million borrowing on our credit facility in the second quarter of 2011 offset by a $0.4 million
fair market value adjustment related to our warrant derivative liability.
36
Other Income (Expense)
Other income for the six months ended June 30, 2011 includes $71,000 in equity in earnings
related to our investment in a joint venture that we separated from in the second quarter of 2011
and $66,000 of interest income. Other expense for the six months ended June 30, 2010 includes $0.4
million in equity in losses related to our investment in a joint venture and $0.1 million of
interest income. Equity in earnings (losses) are recorded based on the pro rata ownership interest
in the underlying unconsolidated joint venture.
Discontinued Operations
On June 1, 2011, we entered into a definitive agreement for the sale of substantially all of
the assets of Alesco. Closing of the transaction is subject to customary approvals and is expected
to occur in the third quarter of 2011. On August 10, 2011, we completed the sale of Daymark.
In accordance with the requirements of ASC Topic 360, Property, Plant, and Equipment,
(Property, Plant, and Equipment Topic), discontinued operations for the six months ended June 30,
2011 and 2010 includes the net loss of our Daymark and Alesco subsidiary operations. For the six
months ended June 30, 2011 and 2010, loss from discontinued operations was $7.1 million and $11.0
million, respectively.
Income Tax
We recognized a tax benefit from continuing operations of $23,000 for the six months ended
June 30, 2011, compared to a tax expense of ($0.2) million for the same period in 2010. In 2011 and
2010, the reported effective income tax rates were 0.09% and (0.68%), respectively. The 2011 and
2010 effective tax rates include the effect of valuation allowances recorded against deferred tax
assets to reflect our assessment that it is more likely than not that some portion of the deferred
tax assets will not be realized. Our deferred tax assets are primarily attributable to impairments
of various real estate holdings, net operating losses and share-based compensation. (See Note 17 of
the Notes to Consolidated Financial Statements in Item 1 of this Report for additional
information.)
Net Loss Attributable to Noncontrolling Interests
Net loss attributable to noncontrolling interests decreased by $1.2 million, or 61.2%, to $0.8
million during the six months ended June 30, 2011, compared to net loss attributable to
noncontrolling interests of $2.0 million for the same period in 2010. The decrease is primarily
related to a decrease in provision for doubtful accounts and real estate related impairments
recorded at two of Daymarks consolidated VIEs.
Net Loss Attributable to Grubb & Ellis Company
As a result of the above items, we recognized a net loss of $33.4 million for the six months
ended June 30, 2011, compared to a net loss of $43.2 million for the same period in 2010.
Net Loss Attributable to Grubb & Ellis Company Common Shareowners
We accrued $5.8 million in preferred stock dividends during the six months ended June 30, 2011
resulting in a net loss attributable to our common shareowners of $38.4 million, or $0.58 per
diluted share, compared to a net loss attributable to our common shareowners of $47.0 million, or
$0.73 per diluted share, for the same period in 2010.
Non-GAAP Financial Measures
EBITDA and Adjusted EBITDA are non-GAAP measures of performance. EBITDA provides an indicator
of economic performance that is unaffected by debt structure, changes in interest rates, changes in
effective tax rates or the accounting effects of capital expenditures and acquisitions because
EBITDA excludes net interest expense, interest income, income taxes, depreciation, amortization,
discontinued operations and impairments related to goodwill and intangible assets.
We use Adjusted EBITDA as an internal management measure for evaluating performance and as a
significant component when measuring performance under employee incentive programs. Management
considers Adjusted EBITDA an important supplemental measure of our performance and believes that it
is frequently used by securities analysts, investors and other interested parties in the evaluation
of companies in our industry, some of which present Adjusted EBITDA when reporting their results.
Management also believes that Adjusted EBITDA is a useful tool for measuring its ability to meet
future capital expenditures and working capital requirements.
37
EBITDA and Adjusted EBITDA are not a substitute for GAAP net income or cash flow and do not
provide a measure of our ability to fund future cash requirements. Other companies may calculate
EBITDA and Adjusted EBITDA differently than we have and, therefore, EBITDA and Adjusted EBITDA have
material limitations as a comparative performance measure. The following tables reconcile EBITDA
and Adjusted EBITDA with the net loss attributable to Grubb & Ellis Company for the three and six
months ended June 30, 2011 and 2010.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
June 30, |
|
|
June 30, |
|
|
June 30, |
|
(In thousands) |
|
2011 |
|
|
2010 |
|
|
2011 |
|
|
2010 |
|
Net loss |
|
$ |
(14,717 |
) |
|
$ |
(19,195 |
) |
|
$ |
(33,401 |
) |
|
$ |
(43,247 |
) |
Discontinued operations |
|
|
7,946 |
|
|
|
8,219 |
|
|
|
7,096 |
|
|
|
11,027 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss from continuing operations |
|
|
(6,771 |
) |
|
|
(10,976 |
) |
|
|
(26,305 |
) |
|
|
(32,220 |
) |
Interest expense |
|
|
915 |
|
|
|
458 |
|
|
|
1,688 |
|
|
|
504 |
|
Interest income |
|
|
(28 |
) |
|
|
(85 |
) |
|
|
(66 |
) |
|
|
(110 |
) |
Depreciation and amortization |
|
|
1,980 |
|
|
|
1,709 |
|
|
|
4,062 |
|
|
|
3,314 |
|
Taxes |
|
|
(23 |
) |
|
|
80 |
|
|
|
(23 |
) |
|
|
218 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA from continuing operations |
|
|
(3,927 |
) |
|
|
(8,814 |
) |
|
|
(20,644 |
) |
|
|
(28,294 |
) |
Charges related to sponsored programs |
|
|
1,018 |
|
|
|
609 |
|
|
|
1,924 |
|
|
|
853 |
|
Share-based compensation |
|
|
686 |
|
|
|
2,778 |
|
|
|
2,378 |
|
|
|
5,797 |
|
Amortization of signing bonuses |
|
|
1,399 |
|
|
|
1,742 |
|
|
|
3,053 |
|
|
|
3,549 |
|
Severance and other charges |
|
|
139 |
|
|
|
119 |
|
|
|
956 |
|
|
|
2,769 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA from continuing operations |
|
$ |
(685 |
) |
|
$ |
(3,566 |
) |
|
$ |
(12,333 |
) |
|
$ |
(15,326 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Liquidity and Capital Resources
Our accompanying financial statements have been prepared assuming that we will continue
as a going concern, which contemplates realization of assets and the satisfaction of liabilities in
the normal course of business for the twelve month period following the date of these financial
statements.
On March 21, 2011, the Company announced that it had engaged an external advisor to explore
strategic alternatives, including the potential sale or merger of the Company. During this period,
the board of directors also determined, as permitted, not to declare the March 31, 2011 or June 30,
2011 quarterly dividends to holders of its 12% Cumulative Participating Perpetual Convertible
Preferred Stock.
On April 15, 2011, we entered into an $18.0 million credit facility with ColFin GNE Loan
Funding, LLC, an affiliate of Colony Capital LLC (Colony), as further described in Commitments,
Contingencies and Other Contractual Obligations below. The Colony credit facility, which addressed
the Companys liquidity needs resulting from operating losses relating to the seasonal nature of
the real estate services businesses, investments made in growth initiatives and increased legal
expenses related to its Daymark subsidiary, matures on March 1, 2012.
On August 10, 2011 we completed the sale of our Daymark subsidiary. Due in part to operating
losses prior to the sale of Daymark and expenses incurred to complete the sale, we may seek
additional financing prior to the completion of our review of strategic alternatives. It is
anticipated that any strategic alternative would include provisions to retire or refinance the
Colony credit facility at or prior to maturity. If the Company is unable to retire or refinance the
Colony credit facility prior to maturity, it could create substantial doubt about the Companys
ability to continue as a going concern for the twelve month period following the date of these
financial statements. We believe that upon completion of our strategic alternative process we will
have sufficient liquidity to operate in the normal course over the next twelve month period.
Current Sources of Capital and Liquidity
We expect to meet our short-term liquidity needs, which may include losses from operations,
repayment of our credit facility, principal repayments of mortgage debt in connection with recourse
guarantee obligations, potential litigation losses, payment of fixed charges, investments in
various real estate investor programs and capital expenditures, through cash on hand, cash flow
from operations, our credit facility and proceeds from the potential issuance of equity securities,
debt offerings and the potential sale of other assets.
In February 2011, we sold the note receivable we held from Apartment REIT to a third party
for $6.1 million in net proceeds. In addition, we expect to
receive approximately $4 million upon
the completion of the sale of Alesco during the quarter ended September 30, 2011, from a
combination of proceeds from the sale and liquidation of our marketable securities.
Long-Term Liquidity Needs
We expect to meet our long-term liquidity needs, which may include losses from operations,
principal repayments of debt obligations, payment of fixed charges, investments in various real
estate investor programs and capital expenditures, through current and retained cash flow
earnings, the sale of real estate property and proceeds from the potential issuance of debt or
equity securities and the potential sale of other assets. We may seek to obtain new secured or
unsecured lines of credit in the future, although we can provide no assurance that we will find
financing on favorable terms or at all.
Factors That May Influence Future Sources of Capital and Liquidity
As further described under Commitments, Contingencies and Other Contractual Obligations
below, we are involved in multiple legal proceedings and have certain contingent liabilities
arising from guarantees and other contractual obligations. While the ultimate outcome and potential
liabilities related to these commitments and contingencies is uncertain, adverse determinations and
outcomes in these matters could result in material and adverse effects on the liquidity and assets
of us or our subsidiaries.
Preferred Stock
The Board of Directors determined, as permitted, not to declare a dividend on our 12%
Preferred Stock, for the quarters ending March 31, 2011 and June 30, 2011. Since we have missed two
consecutive quarterly dividend payments, the dividend rate will automatically be increased by 0.50%
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, 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. Since the terms of the Preferred Stock provide for cumulative dividends, we have accrued
the unpaid first and second quarter 2011 dividend payments of $3.00 per share per quarter on our
Preferred Stock, which is included in Preferred Stock on our consolidated balance sheet as of June
30, 2011. As of June 30, 2011, the amount of accrued and unpaid dividends totaled $5.8 million.
38
Cash Flow
Six Months Ended June 30, 2011 Compared to Six Months Ended June 30, 2010
Net cash used in operating activities was $34.9 million for the six months ended June 30,
2011, compared to net cash used in operating activities of $20.0 million for the same period in
2010. Net cash used in operating activities included a decrease in net loss of $9.8 million
adjusted for decreases in non-cash reconciling items totaling $14.3 million, resulting in a net
decrease of $4.4 million. In addition, there was an increase in cash used in operating activities
of $10.8 million due to negative working capital consisting of accounts payable and accrued
expenses, accounts receivable from related parties, prepaid expenses and other assets and other
liabilities.
Net cash provided by investing activities was $4.3 million and $2.8 million for the six months
ended June 30, 2011 and 2010, respectively. For the six months ended June 30, 2011, net cash
provided by investing activities related primarily to the proceeds from the sale of the Apartment
REIT note receivable of $6.1 million offset by purchases of property and equipment of $3.0 million.
For the six months ended June 30, 2010, net cash provided by investing activities related primarily
to proceeds from the repayment of notes and advances to related parties of $4.2 million offset by
purchases of marketable securities, net of $1.0 million and purchases of property and equipment of
$1.3 million.
Net cash provided by financing activities was $14.5 million and $20.2 million for the six
months ended June 30, 2011 and 2010, respectively. For the six months ended June 30, 2011, net cash
provided by financing activities related primarily advances on the credit facility of $18.0 million
offset by financing costs of $0.9 million, repayment of notes payable and capital lease obligations
of $0.6 million and distributions to noncontrolling interests of $1.0 million. For the six months
ended June 30, 2010, net cash provided by financing activities related primarily the net cash
proceeds of $29.9 million from the issuance of convertible notes offset by the payment of preferred
dividends of $5.8 million and distributions to noncontrolling interests of $3.2 million..
Commitments, Contingencies and Other Contractual Obligations
Contractual Obligations We lease office space throughout the United States through
non-cancelable operating leases, which expire at various dates through June 30, 2020.
Colony Credit Facility On April 15, 2011, we entered into a credit agreement (the Credit
Agreement), by and among us, GEMS and Colony, for an $18.0 million secured credit facility (the
Credit Facility). The terms of the Credit Facility included a payment to Colony of (i) a closing
fee equal to 1.00% of the Credit Facility amount and (ii) warrants (the Warrants) exercisable to
purchase 6,712,000 shares of our common stock, valued at $0.7 million. The Credit Facility was
fully drawn upon as of May 16, 2011.
The Credit Facility matures on March 1, 2012 and has an initial interest rate of 11.00% per
annum, increasing by an additional 0.50% at the end of each three-month period subsequent to the
closing date of the Credit Facility for so long as any loans are outstanding. In lieu of making a
cash interest payment, we have the option to accrue any due and payable interest under the Credit
Facility and issue additional warrants (the Additional Warrants) based on a formula calculation.
The loan is not subject to any required principal amortization payments during the term. As of June
30, 2011, we have issued 62,120 Additional Warrants.
The Credit Agreement contains customary representations and warranties, as well as customary
events of default, in certain cases subject to negotiated periods to cure and exceptions, including
but not limited to: failure to make certain payments when due, breach of covenants, breach of
representations and warranties, certain insolvency proceedings, judgments and attachments and any
change of control.
The Credit Agreement also contains various customary covenants that, in certain instances,
restrict the ability of us and our subsidiaries to: (i) incur indebtedness; (ii) create liens on
assets; (iii) engage in mergers or consolidations; (iv) engage in dispositions of assets; (v) make
investments, loans, guarantees or advances; (vi) pay dividends and distributions with respect to,
or repurchase, its outstanding capital stock; (vii) enter into sale and leaseback transactions;
(viii) engage in transactions with affiliates; and (ix) change the nature of our business. In
addition, the Credit Agreement requires (i) GEMS and its subsidiaries to maintain, as on the last
day of each fiscal quarter, a minimum net worth as defined in the agreement of $20.0 million and
(ii) the outstanding loan to remain in compliance with the defined borrowing base at the end of
each fiscal month (subject to periods to cure).
39
As a condition to the entering into of the Credit Agreement, we, GEMS and certain of our other
subsidiaries simultaneously entered into a Guarantee and Collateral Agreement, dated as of April
15, 2011 with Colony, in its capacity as administrative agent (the Guarantee and Collateral
Agreement), pursuant to which each of our subsidiaries party thereto (other than GEMS) guaranteed
the obligations of us and GEMS under the Credit Agreement and each of us and our subsidiaries party
thereto granted a first priority security interest in substantially all of our assets.
The Warrants have an exercise price equal to $0.01 per share and a maturity date of three
years from the date of issuance (the Expiration Date), but are exercisable prior to the
Expiration Date upon the satisfaction of certain events as set forth in the Warrants, including,
but not limited to, if the volume weighted average price of our common stock equals or exceeds
$1.10 for any consecutive 30 calendar day period prior to the date of exercise or upon the
occurrence of a fundamental change in which the consideration received for each share of our common
stock equals or exceeds $1.10. The Warrants are exercisable, at the option of the holder of such
Warrant, (a) by paying the exercise price in cash, (b) pursuant to a cashless exercise of the
Warrant or (iii) by reduction of the principal amount of loans under the Credit Facility payable to
the holder of such Warrant, or by a combination of the foregoing methods. The number of shares of
our common stock issuable upon exercise of the Warrants or Additional Warrants is subject to
adjustment in certain cases. All Additional Warrants issued pursuant to the Credit Agreement shall
contain the same terms as the Warrants.
On July 22, 2011, each of us and our wholly-owned subsidiary, GEMS, entered into an amendment
and consent agreement (the Credit Facility Amendment) with respect to our Credit
Facility, an amendment to the commitment letter for the Credit Facility, between Colony and the
Company (the Credit Facility Commitment Letter Amendment) and amendments to the outstanding
common stock purchase warrants issued to Colony pursuant to the terms of the Credit Agreement (the
Warrant Agreement Amendments, and together with the Credit Facility Amendment and the Commitment
Letter Amendment, collectively, the Amendment Documents).
Pursuant to the Amendment Documents, among other things, Colony expressly acknowledged and
consented to our currently anticipated sale of Daymark, and each of its wholly-owned (direct and indirect) subsidiaries and the
restructuring of the outstanding intercompany debt obligations owing
by us to Daymark. The Amendment Documents also clarified the
definition of net worth to include any loans included in such net
worth calculation. The
Amendment Documents also permanently eliminated Colonys right of first offer to provide us with
debt financing prior to it consummating or endeavoring to consummate any similar financing with a
third-party. Additionally, the Amendment Documents amended the price at which any common stock
purchase warrants issuable to Colony in lieu of cash interest from time to time payable under the
Credit Agreement and the common stock purchase warrants previously issued to Colony pursuant to the
Credit Agreement, become exercisable from $1.10 per share to $0.71 per share. In addition, if in
connection with any financing arrangement, we issue any options, or other equity linked securities
to purchase our common stock, with an exercise condition that is based on a share price that is
lower than $0.71 per share (Trigger Price), then the Trigger Price shall be adjusted downward
(but not upward) to such lower price without any further action on the part of any party.
We also entered into a Registration Rights Agreement (Registration Rights Agreement) with
the holder of the Warrants, pursuant to which holders of the Warrants have the right to require us,
subject to certain limitations, to effect the registration under the Securities Act of 1933, as
amended (the Securities Act), of all or any portion of the shares of our common stock issued as a
result of the exercise of all or a portion of the Warrants or the Additional Warrants. The
Registration Rights Agreement contains piggy-back registration rights and demand registration
rights with respect to the shares underlying the Warrants and the Additional Warrants.
Other than the Credit Facility borrowing described above, there have been no significant
changes in our contractual obligations since December 31, 2010.
TIC Program Exchange Provision Prior to the merger, Triple Net Properties, LLC (now known
as GERI), a subsidiary of Daymark, entered into agreements providing certain investors the right to
exchange their investments in certain TIC programs for investments in a different TIC program or in
substitute replacement properties. The agreements containing such rights of exchange and repurchase
rights pertain to initial investments in TIC programs totaling $31.6 million. In the fourth quarter
of 2010, GERI was released from certain obligations relating to $6.2 million in initial
investments. In addition, we were released from certain obligations totaling $2.0 million as a
result of the sale of the TIC programs property during the year ended December 31, 2010. In July
2009, we received notice on behalf of certain investors stating their intent to exercise rights
under one of those agreements with respect to an initial investment totaling $4.5 million.
Subsequently, in February 2011, an action was filed in the Superior Court of Orange County,
California on behalf of those same investors against GERI alleging breach of contract and breach of
the implied covenant of good
faith and fair dealing, and seeking damages of $26.5 million with respect to initial cash
investments totaling $22.3 million, which is inclusive of the $4.5 million for which we received
the notice in July 2009. While the outcome of that action is uncertain, GERI will vigorously defend
those claims. See TIC Program Exchange Litigation disclosure under Claims and Lawsuits below for
further information.
40
We deferred revenues relating to these agreements of $0 and $0.1 million for the three months
ended June 30, 2011 and 2010, respectively. We deferred revenues relating to these agreements of $0
and $0.1 million for the six months ended June 30, 2011 and 2010, respectively. During the six
months ended June 30, 2011, pursuant to ASC Topic 970, Real Estate General, (Real Estate
General Topic), we reduced an obligation by $9.0 million related to the re-measurement of our
maximum exposure to loss related to certain obligations at the time the February 2011 action was
filed. No additional potential losses related to these agreements were incurred during the three
months ended June 30, 2011 and 2010, respectively, and additional potential losses of $0 and $0.2
million related to these agreements were incurred during the six months ended June 30, 2011 and
2010, respectively, to record a liability underlying the agreements with investors. As of June 30,
2011, we had recorded liabilities totaling $10.9 million related to such agreements, which is
included in other current liabilities, consisting of $3.6 million of cumulative deferred revenues
and $7.3 million of additional potential losses related to these agreements as a result of
estimated declines in the value of the properties. In addition, we are joint and severally liable
on the non-recourse mortgage debt related to these TIC programs with exchange provisions totaling
$276.1 million and $276.1 million as of June 30, 2011 and December 31, 2010, respectively. This
mortgage debt is not consolidated as the LLCs account for the interests in our TIC investments
under the equity method and the non-recourse mortgage debt does not meet the criteria under the
Transfers and Servicing Topic for recognizing the share of the debt assumed by the other TIC
interest holders for consolidation. We consider the third-party TIC holders ability and intent to
repay their share of the joint and several liability in evaluating the recoverability of our
investment in the TIC program.
Claims and Lawsuits We and certain of our investment management affiliates have been named
as defendants in multiple lawsuits relating to certain of its investment management offerings, in
particular its tenant-in-common programs. These lawsuits allege a variety of claims in connection
with these offerings, including mismanagement, breach of contract, negligence, fraud, breach of
fiduciary duty and violations of state and federal securities laws, among other claims. Plaintiffs
in these suits seek a variety of remedies, including rescission, actual and punitive damages,
injunctive relief, and attorneys fees and costs. In many instances, the damages being sought are
unspecified and to be determined at trial. It is difficult to predict the ultimate disposition of
these lawsuits and our ultimate liability with respect to such claims and lawsuits. It is also
difficult to predict the cost of defending these matters and to what extent claims will be covered
by our existing insurance policies. In the event of an unfavorable outcome, the amounts we may be
required to pay in the discharge of liabilities or settlements could have a material adverse effect
on our cash flows, financial position and results of operations.
Met Center 10 One such matter relates to a TIC property known as Met Center
10, located in Austin, Texas. The Company and its subsidiaries have been involved in multiple legal
proceedings relating to Met Center 10, including three actions pending in state court in Austin,
Texas and an arbitration proceeding being conducted in California. The arbitration proceeding
involves Grubb & Ellis Realty Investors, LLC (GERI), a subsidiary of Daymark, and is pending
before the American Arbitration Association in Orange County, California captioned NNN Met Center
10 1, LLC, et al. v. Grubb & Ellis Realty Investors, LLC, No. 73 115 Y 00140 HLT (the Met 10
Arbitration). A state court action involving GERI is pending in the District Court of Travis
County, Texas captioned NNN Met Center 10, LLC v. Met Center Partners-6, Ltd., et al., No.
D-1-GN-08-002104 (the Met 10 Main Action). Two additional state court actions involving the
Company, GERI, and Grubb & Ellis Management Services, Inc. are pending in the District Court for
Travis County, Texas captioned NNN Met Center 10-1, LLC v. Lexington Insurance Company, et al., No.
D-1-GN-10-004495 and NNN Met Center 10, LLC v. Lexington Insurance Company, et al., No.
D-1-GN-11-000848 (together, the Met 10 Lexington Actions).
In the Met 10 Arbitration, TIC investors asserted, among other things, that GERI should bear
responsibility for alleged diminution in the value of the property and their investments as a
result of ground movement. The Met 10 Arbitration was bifurcated into two phases. In the first
phase, the arbitrator ruled in favor of the TIC investors, finding, among other things, that the
TIC investors had properly terminated the property management agreement for cause. In Phase 2 of
the arbitration, the TICs asserted claims for damages against GERI arising from alleged breaches of
the management agreement and other alleged wrongful acts in connection with the management of the
Met Center 10 property and other alleged breaches of duty.
Before the beginning of the Phase 2 hearing, the TICs, GERI, and Lexington Insurance Company
reached a settlement, which has been documented and executed by the parties, and which is awaiting
court approval. The settlement is for $0.l million, net of insurance
recoveries. Among other things, under the terms of the settlement, GERI must pay $0.1
million to the TICs shortly after the settlement is approved by the court, and may be obligated to
subsequently pay up to approximately $0.6 million in addition to the initial $0.1 million payment,
depending upon the resolution of
claims relating to Met Center 10 against parties other than GERI and its affiliates. The TICs are releasing all claims relating
to Met Center 10 against, among others, GERI and its affiliates.
41
In the Met 10 Texas Action, GERI and NNN Met Center 10, LLC were pursuing claims against the
developers and sellers of the property (the Sellers), the due diligence firm retained by GERI in
connection with the purchase of the Met Center 10 property, and the engineering, construction, and
design professionals who performed work relating to the Met Center 10 property (together with the
due diligence firm, the Professionals) to recover damages arising from, among other things,
ground movement. The Sellers and the Professionals were asserting counterclaims against GERI and
NNN Met Center 10, LLC. GERI and NNN Met Center 10, LLC, on the one hand, and the Sellers, on the
other, have reached a settlement resolving all claims between them, which has been documented and
executed by the parties. Under that settlement, GERI, its affiliates, and NNN Met Center 10, LLC
are being released from all claims by the Sellers relating to Met Center 10. Neither GERI nor its
affiliates (or NNN Met Center 10, LLC) are required to make any payments pursuant to the settlement
with the Sellers. In addition, GERI and NNN Met Center 10, LLC, on the one hand, and the
Professionals, on the other hand, have reached a tentative settlement resolving all claims between
them, which is in the process of being documented and approved. Under that settlement, GERI, its
affiliates, and NNN Met Center 10, LLC are being released from all claims by the Professionals
relating to Met Center 10. Neither GERI nor its affiliates (or NNN Met Center 10, LLC) are
required to make any payments pursuant to the tentative settlement with the Professionals.
In the Met 10 Lexington Actions, the TIC investors were asserting claims against former
officers and employees of the Company and other defendants in connection with the negotiation and
documentation of an insurance settlement relating to the Met Center 10 property, and an alleged
misallocation and/or misappropriation of the proceeds of that settlement. In addition, Lexington
Insurance Company asserted claims against NNN Met Center 10, LLC, the Company, GERI, and GEMS
arising of the insurance settlement. Pursuant to the settlement of the Met 10 Arbitration
described above, the TICs are releasing and dismissing certain claims against the former officers
and employees of the Company, including claims that were being asserted in the Met 10 Lexington
Actions, and Lexington is releasing and dismissing its claims against the Company, GERI, GEMS, and
NNN Met Center 10, LLC, including the claims Lexington was asserting in the Met 10 Lexington
Actions.
TIC Program Exchange Litigation GERI and Grubb & Ellis Company are defendants in an action
filed on or about February 14, 2011 in the Superior Court of Orange County, California captioned S.
Sidney Mandel, et al. v. Grubb & Ellis Realty Investors, LLC, et al, Case No. 00449598. The
plaintiffs allege that, in order to induce the plaintiffs to purchase $22.3 million in TIC
investments that GERI (formerly known as Triple Net Properties, LLC) was syndicating, GERI offered
to subsequently repurchase those investments and provide certain put rights under certain terms
and conditions pursuant to a letter agreement executed between GERI and the plaintiffs. The
plaintiffs allege that GERI has failed to honor its purported obligations under the letter
agreement and have initiated suit for breach of contract, breach of the implied covenant of good
faith and fair dealing and declaratory relief as to the rights and obligations of the parties under
the letter agreement. By way of a first amended complaint, the plaintiffs are alleging that GERI is
merely an inadequately capitalized instrumentality of Grubb & Ellis Company and that Grubb & Ellis
Company should be held liable for acts and omissions of GERI. The plaintiffs are seeking damages
totaling $26.5 million, attorneys fees and costs. We intend to vigorously defend these claims and
to assert all applicable defenses. At this time we are unable to predict the likelihood of an
unfavorable or adverse award or outcome. At this time it is not possible to estimate a range of
possible loss for this matter.
Britannia II Office Park Various Daymark subsidiaries are defendants in an action filed on
or about July 22, 2010 in Superior Court of Alameda County, California captioned NNN Britannia
Business Center II 17, LLC, et al. v. Grubb & Ellis Company, et al., Case No. RG10-527282.
Plaintiffs invested more than $14 million for TIC interests in a commercial real estate project in
Pleasanton, California, known as Britannia Business Center II, which ultimately was foreclosed
upon. Plaintiffs claim that they were induced to invest with misrepresentations concerning the
financial projections and risks for the project, and allege various mismanagement claims.
Plaintiffs current claim is for breach of the implied covenant of good faith and fair dealing.
Plaintiffs seek compensatory and exemplary damages in an unspecified amount, along with costs and
attorneys fees. We intend to vigorously defend these claims and to assert all applicable defenses.
At this time we are unable to predict the likelihood of an unfavorable or adverse award or outcome.
At this time it is not possible to estimate a range of possible loss for this matter.
Durham Office Park We and various Daymark subsidiaries are defendants in an action filed on
or about July 21, 2010 in North Carolina Business Court, Durham County Superior Court Division,
captioned NNN Durham Office Portfolio I, LLC, et al. v. Grubb & Ellis Company, et al., Case No. 10
CVS 4392. Plaintiffs invested more than $11 million for TIC interests in a commercial real estate
project in Durham, North Carolina. Plaintiffs claim, among other things, that information regarding
the intentions of the propertys anchor tenant to remain in occupancy was withheld and
misrepresented. Plaintiffs have asserted claims for breach of contract, negligence, negligent
misrepresentation, breach of fiduciary duty, fraud, unfair and deceptive trade practices and
conspiracy. We intend to vigorously defend these claims and to assert all applicable defenses. At this time
we are unable to predict the likelihood of an unfavorable or adverse award or outcome. At this time
it is not possible to estimate a range of possible loss for this matter.
42
We are involved in various claims and lawsuits arising out of the ordinary conduct of our
business, many of which may not be covered by our insurance policies. In the opinion of management,
in the event of an unfavorable outcome, the amounts we may be required to pay in the discharge of
liabilities or settlements could have a material adverse effect on our cash flows, financial
position and results of operations. At this time it is not possible to estimate a range of possible
loss for these matters.
Guarantees Historically our Daymark subsidiary provided non-recourse carve-out guarantees
or indemnities with respect to loans for properties owned or under the management of Daymark. As of
June 30, 2011 there were 126 properties under management with non-recourse carve-out loan
guarantees or indemnities of approximately $3.0 billion in total principal outstanding with terms
ranging from one to 10 years, secured by properties with a total aggregate purchase price of
approximately $4.1 billion. As of December 31, 2010, there were 133 properties under management
with non-recourse carve-out loan guarantees or indemnities of approximately $3.1 billion in total
principal outstanding with terms ranging from one to 10 years, secured by properties with a total
aggregate purchase price of approximately $4.3 billion. In addition, the consolidated VIEs and
unconsolidated VIEs are jointly and severally liable on the non-recourse mortgage debt related to
the interests in our TIC investments as further described in Note 4.
Our guarantees consisted of the following as of June 30, 2011 and December 31, 2010:
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June 30, |
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December 31, |
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(In thousands) |
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2011 |
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2010 |
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Daymark non-recourse/carve-out guarantees of debt of properties under management(1) |
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$ |
2,782,390 |
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$ |
2,944,311 |
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Grubb & Ellis Company non-recourse/carve-out guarantees of debt of properties under
management(1) |
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$ |
78,217 |
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$ |
78,363 |
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Daymark and Grubb & Ellis Company non-recourse/carve-out guarantees of debt of
properties under management(2) |
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$ |
31,125 |
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$ |
31,271 |
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Daymark non-recourse/carve-out guarantees of debt of Company owned property(1) |
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$ |
60,000 |
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$ |
60,000 |
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Daymark recourse guarantees of debt of properties under management |
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$ |
11,650 |
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$ |
12,900 |
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Grubb & Ellis Company recourse guarantees of debt of properties under management(3) |
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$ |
11,998 |
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$ |
11,998 |
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Daymark recourse guarantees of debt of Company owned property(4) |
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$ |
10,000 |
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$ |
10,000 |
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(1) |
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A non-recourse/carve-out guarantee or indemnity generally imposes liability on the
guarantor or indemnitor in the event the borrower engages in certain acts prohibited by the
loan documents. Each non-recourse carve-out guarantee or indemnity 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 or
indemnities, liability under the non-recourse carve-out guarantees or indemnities 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
indemnity agreement from borrower. |
43
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Certain acts (typically the first three listed above) may render the entire debt balance recourse
to the guarantor or indemnitor, while the liability for other acts is typically limited to the
damages incurred by the lender. Notice and cure provisions vary between guarantees and
indemnities. Generally the guarantor or indemnitor irrevocably and unconditionally guarantees or
indemnifies the lender the payment and performance of the guaranteed or indemnified 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 or indemnitor covenants and agrees that it is liable for
the guaranteed or indemnified obligations as a primary obligor. As of June 30, 2011, to the best
of our knowledge, there was no debt owed by us as a result of the borrowers engaging in
prohibited acts, despite the prohibited acts that occurred as more fully described below. |
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(2) |
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We and Daymark are each joint and severally liable on such non-recourse/carve-out guarantees. |
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(3) |
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We have $1.0 million held as collateral by a lender related to one of our recourse guarantees
that, upon the occurrence of any triggering event or condition under the guarantee, will be
used to cover all or a portion of the amounts due under the guarantee. |
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(4) |
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In addition to the $10.0 million principal guarantee, Daymark has guaranteed any shortfall in
the payment of interest on the unpaid principal amount of the mortgage debt on one owned
property. |
If property values and performance decline, the risk of exposure under these guarantees
increases. We initially evaluate these guarantees to determine if the guarantee meets the criteria
required to record a liability in accordance with the requirements of ASC Topic 460, Guarantees,
(Guarantees Topic). Any such liabilities were insignificant upon execution of the guarantees. In
addition, on an ongoing basis, we evaluate the need to record an additional liability in accordance
with the requirements of ASC Topic 450, Contingencies, (Contingencies Topic). As of June 30, 2011
and December 31, 2010, we had recourse guarantees of $23.6 million and $24.9 million, respectively,
relating to debt of properties under management (of which $12.0 million is recourse back to Grubb &
Ellis Company, the remainder of which is recourse to our Daymark subsidiary). As of June 30, 2011
and December 31, 2010, approximately $9.5 million of these
recourse guarantees relate to debt that has matured, is in default, or is not currently in
compliance with certain loan covenants (of which $2.0 million is
recourse back to Grubb & Ellis Company, the remainder of which is recourse to our Daymark
subsidiary). In addition, as of June 30, 2011 and December 31, 2010, we had $8.0 million of
recourse guarantees related to debt that will mature in the next twelve months (of which
$8.0 million is recourse back to Grubb & Ellis Company). In connection with the sale
of Daymark, the purchaser indemnified us up to $7.5 million for liabilities, obligations and claims
related to or arising from the business or operations of Daymark or its subsidiaries. Our
evaluation of the potential liability under these guarantees may prove to be inaccurate and
liabilities may exceed estimates. In the event that actual losses materially exceed estimates,
individual investment management subsidiaries may not be able to pay such obligations as they
become due. Failure of any of our subsidiaries to pay its debts as they become due would likely
have a materially negative impact on our ongoing business, and the investment management operations
in particular. In evaluating the potential liability relating to such guarantees, we consider
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 June 30, 2011
and December 31, 2010, we recorded a liability of $0 and $0.8 million, respectively, which is
included in other current liabilities, related to our estimate of probable loss related to recourse
guarantees of debt of properties under management and previously under management.
Two unaffiliated, individual investor entities (the TIC debtors), who are minority owners in
two TIC programs located in Texas, Met Center 10 and 2400 West Marshall, which were originally
sponsored by GERI, filed chapter 11 bankruptcy petitions in January 2011. The principal balance of
the mortgage debt for these two properties was approximately $29.4 million and $6.6 million,
respectively, at the time of the bankruptcy filings. On February 1, 2011, the special servicer for
each of these loans foreclosed on all of the undivided TIC ownership interests in these properties,
except those owned by the unaffiliated investor entities which effected the bankruptcy filings. The
automatic stay imposed following the bankruptcy filings by each of these investor entities
prevented the special servicer from foreclosing on 100% of the TIC ownership interests. The special
servicers for each of the TIC debtors loans filed motions for relief from the automatic stay to
foreclose upon the remaining TIC ownership interests. In the Met Center 10 case, by order dated May
2, 2011, the bankruptcy court continued the automatic stay, subject to certain conditions, to
November 1, 2011. The May 2, 2011 order also established a procedure by which the special servicer
would be required to reconvey the foreclosed upon interests to the Met Center 10 debtor and the
other investor entities following payment of an amount due as that term is defined in the May 2,
2011 Order. In the 2400 West Marshall case, by order dated June 15, 2011, the bankruptcy court
continued the automatic stay, subject to certain conditions, to December 1, 2011. The June 15,
2011 order also established a procedure by which the special servicer would be required to reconvey
the foreclosed upon interests to the 2400 West Marshall debtor and the other investor entities
following payment of an amount due as that term is defined in the June 15, 2011 Order.
44
GERI executed a non-recourse carve-out guarantee in connection with the mortgage loan for the
Met 10 property, and a non-recourse indemnity for the 2400 West Marshall property. As discussed in
the Guarantees disclosure above, such non-recourse carve-out guarantees and indemnities only
impose liability on GERI if certain acts prohibited by the loan documents take place. Liability
under these non- recourse carve-out guarantees and indemnities may be triggered by the voluntary
bankruptcy filings made by the two unaffiliated, individual investor entities. As a consequence of
these bankruptcy filings, the TIC debtors mortgage lenders may assert that GERI is liable under
the guarantee and indemnity. While GERIs ultimate liability under these agreements is uncertain as
a result of numerous factors, including, without limitation, whether the bankruptcy filings of the
TIC debtors triggered GERIs obligations under the guaranty and the indemnification, the amount of
the lenders credit bids at the time of foreclosure, events in the individual bankruptcy
proceedings and the ultimate disposition of those bankruptcy proceedings, and the defenses GERI may
raise under the guarantee and indemnity, such liability may be in an amount in excess of the net
worth of NNNRA and its subsidiaries, including GERI. NNNRA and GERI intend to vigorously dispute
any imposition of any liability under any such guarantee or indemnity obligation. As of June 30,
2011, we did not have any liabilities accrued related to such guarantees or indemnity obligations.
Daymark On February 10, 2011, we announced that Daymark, our newly created, wholly owned
and separately managed subsidiary, has been introduced into our ownership structure to manage our
nationwide tenant-in-common (TIC) portfolio of commercial real estate properties managed by
NNNRA. NNNRA is a direct wholly owned subsidiary of Daymark. NNNRA is required to maintain a
specified level of minimum net worth under loan documents related to certain TIC programs that it
has sponsored. As of June 30, 2011, NNNRAs net worth was below the contractually specified level
of $10 million or $15 million with respect to approximately 30 percent of its managed TIC programs.
Except as discussed below, while this circumstance does not, in and of itself, create any direct
recourse liability for NNNRA, failure to meet the minimum net worth on these programs could result
in the imposition of an event of default under these TIC loan agreements and NNNRA potentially
becoming liable for up to $7.5 million, in the aggregate, of certain partial-recourse guarantee
obligations of the underlying mortgage debt for certain of these TIC programs. To date, no events
of default have been declared and we and NNNRA are exploring a number of measures to increase
NNNRAs net worth to the requisite amount required under the TIC loan arrangements. In addition, as
of June 30, 2011, based upon unaudited numbers, we believe that there was a net intercompany
balance payable from us to NNNRA in the amount of approximately $21.3 million, and further, that
NNNRA and its subsidiaries, on a preliminary unaudited basis, held $1.8 million of our $14.7
million of cash and cash equivalents as of such date. The net payable amount is the result of
on-going transactions and services provided amongst us and NNNRA and its subsidiaries and is a
reconciliation of payables and expenses for services rendered between such entities in the normal
course of business. There can be no assurance that an independent third party would arrive at the
same net payable obligation.
On March 25, 2011, we entered into a Services Agreement (the Services Agreement) with
certain of our wholly owned subsidiaries pursuant to which we will provide certain corporate,
administrative and other services to the various subsidiaries, and in connection therewith, such
subsidiaries shall recognize the provision of such services and the allocation of the costs
associated therewith. The Services Agreement, among other things, memorializes the intercompany
account balances between us and certain of our subsidiaries and the treatment of such intercompany
balances upon the occurrence of certain events.
Alesco On November 16, 2007, we completed the acquisition of a 51.0% membership interest in
Grubb & Ellis Alesco Global Advisors, LLC (Alesco) from Jay P. Leupp. Pursuant to the
Intercompany Agreement between us and Alesco, dated as of November 16, 2007, we committed to invest
up to $20.0 million in seed capital into certain real estate funds that Alesco planned to launch.
Additionally, upon achievement of certain earn-out targets, we were required to purchase up to an
additional 27% interest in Alesco for $15.0 million. To date those earn-out targets have not been
achieved. We are allowed to use $15.0 million of seed capital to fund the earn-out payments. As of
June 30, 2011, we have invested $1.5 million into the three funds that Alesco has launched to date
(the Existing Alesco Funds) and our unfunded seed capital commitments with respect to the
Existing Alesco Funds totaled $2.5 million. As of February 14, 2011, our obligation to make further
seed capital investments under the Intercompany Agreement terminated, except for the remaining
commitments under the Existing Alesco Funds. On June 1, 2011, we entered into a definitive
agreement for the sale of substantially all of the assets of Alesco Global Advisors to Lazard Asset
Management LLC. Closing of the transaction is subject to customary approvals and is expected to
occur in the third quarter of 2011.
Deferred Compensation Plan During 2008, we 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
June 30, 2011 and December 31, 2010, $3.1 million and $3.4 million, respectively, reflecting the
non-stock liability under this plan were included in accounts payable and accrued expenses. We have
purchased whole-life insurance contracts on certain employee participants to recover distributions
made or to be made under this plan and as June 30, 2011 and December 31, 2010 have recorded the
cash surrender value of the policies of $0.4 million and $1.1 million, respectively, in prepaid
expenses and other assets.
45
In addition, we award phantom shares of our stock to participants under the deferred
compensation plan. These awards vest over three to five years. Vested phantom stock awards are also
unfunded and paid according to distribution elections made by the participants at the time of
vesting and will be settled by issuing shares of our common stock from our treasury share account
or issuing unregistered shares of our common stock to the participant. During the year ended
December 31, 2010, we issued 358,424 shares of common stock from our treasury share account related
to fully vested phantom stock awards. As of June 30, 2011 and December 31, 2010, an aggregate of
3.9 million and 4.1 million phantom share grants were outstanding, respectively. 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, as of June 30,
2011, grants with respect to 816,000 phantom shares had a guaranteed minimum share price ($2.8
million in the aggregate) that will result in us paying additional compensation to the participants
should the value of the shares upon vesting be less than the grant date value of the shares. We
account 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. |
Interest Rate Risk
Market risks include risks that arise from changes in interest rates, foreign currency
exchange rates, commodity prices, equity prices and other market changes that affect market
sensitive instruments. Management believes that the primary market risk to which we would be
exposed would be interest rate risk. As of June 30, 2011, we had no outstanding variable rate debt;
therefore we believe we have no interest rate risk. The interest rate risk management objective is
to limit the impact of interest rate changes on earnings and cash flows and to lower the overall
borrowing costs. To achieve this objective, in the past we had entered into derivative financial
instruments such as interest rate swap and cap agreements when appropriate and may do so in the
future. We had no such agreements outstanding as of June 30, 2011.
In addition to interest rate risk, the value of our real estate investments is subject to
fluctuations based on changes in local and regional economic conditions and changes in the
creditworthiness of tenants, which may affect our ability to refinance our outstanding mortgage
debt, if necessary.
Except for the acquisition of Grubb & Ellis Alesco Global Advisors, LLC, as previously
described, we do not utilize financial instruments for trading or other speculative purposes, nor
do we utilize leveraged financial instruments.
The table below presents, as of June 30, 2011, the principal amounts and weighted average
interest rates by year of expected maturity to evaluate the expected cash flows and sensitivity to
interest rate changes.
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Expected Maturity Date |
|
(In thousands) |
|
2011 |
|
|
2012 |
|
|
2013 |
|
|
2014 |
|
|
2015 |
|
|
Thereafter |
|
|
Total |
|
|
Fair Value |
|
Fixed rate
debt principal
payments |
|
$ |
156 |
|
|
$ |
555 |
|
|
$ |
16,277 |
(1) |
|
$ |
|
|
|
$ |
31,500 |
(2) |
|
$ |
70,000 |
|
|
$ |
118,488 |
|
|
$ |
104,172 |
|
Weighted average
interest rate on
maturing debt |
|
|
3.46 |
% |
|
|
2.83 |
% |
|
|
9.25 |
% |
|
|
|
|
|
|
7.95 |
% |
|
|
6.29 |
% |
|
|
7.12 |
% |
|
|
|
|
Variable rate debt
principal
payments |
|
$ |
|
|
|
$ |
18,340 |
(3) |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
18,340 |
|
|
$ |
17,747 |
|
Weighted average
interest rate on
maturing debt
(based on rates in
effect as of June
30, 2011) |
|
|
|
|
|
|
11.00 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Assumes the exercise of two one-year extension options. The interest rate will increase to
9.25% per annum during the extension period. |
|
(2) |
|
Excludes unamortized debt discount of $1.2 million on convertible notes. |
|
(3) |
|
Excludes unamortized debt discount of $0.6 million on credit facility. |
As of June 30, 2011, our notes payable, senior notes, mortgage notes and Convertible Notes
totaled $118.5 million had fixed interest rates ranging from 2.00% to 9.25%, a weighted average
effective interest rate of 7.12% per annum and a fair value of $104.2
million. As of June 30, 2011, our credit facility totaled $18.3 million and had a weighted
average effective interest rate of 11.00% per annum and a fair value of $17.7 million.
46
|
|
|
Item 4. |
|
Controls and Procedures. |
Evaluation of disclosure controls and procedures
We maintain disclosure controls and procedures that are designed to ensure that information
required to be disclosed in our reports pursuant to the Securities Exchange Act of 1934, as
amended, or the Exchange Act, is recorded, processed, summarized and reported within the time
periods specified in the SEC rules and regulations, and that such information is accumulated and
communicated to management, including our Chief Executive Officer and Chief Financial Officer, as
appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating
the disclosure controls and procedures, we recognize that any controls and procedures, no matter
how well designed and operated, can provide only reasonable assurance of achieving the desired
control objectives, as ours are designed to do, and we necessarily were required to apply our
judgment in evaluating whether the benefits of the controls and procedures that we adopt outweigh
their costs.
Our Management, including our Chief Executive Officer and our Chief Financial Officer
evaluated the effectiveness of our disclosure controls and procedures pursuant to SEC Rule
13a-15(e) and 15d-15(e) under the Exchange Act as of June 30, 2011, the end of the period covered
by this report. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer
concluded that our disclosure controls and procedures were effective.
Changes in Internal Control over Financial Reporting
Our Management has evaluated, with the participation of our Chief Executive Officer and Chief
Financial Officer, whether any changes in our internal control over financial reporting that
occurred during our last fiscal quarter have materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting. There were no changes in our
internal control over financial reporting during the fiscal quarter ended June 30, 2011 that have
materially affected, or are reasonably likely to materially affect, our internal control over
financial reporting.
PART II
OTHER INFORMATION
|
|
|
Item 1. |
|
Legal Proceedings. |
General
We and our Daymark affiliate have been named as defendants in multiple lawsuits relating to
certain of our investment management offerings, in particular our tenant-in-common programs. These
lawsuits allege a variety of claims in connection with these offerings, including mismanagement,
breach of contract, negligence, fraud, breach of fiduciary duty and violations of state and federal
securities laws, among other claims. Plaintiffs in these suits seek a variety of remedies,
including rescission, actual and punitive damages, injunctive relief, and attorneys fees and
costs. In many instances, the damages being sought are unspecified and to be determined at trial.
It is difficult to predict the ultimate disposition of these lawsuits and our ultimate liability
with respect to such claims and lawsuits. It is also difficult to predict the cost of defending
these matters and to what extent claims will be covered by our existing insurance policies. In the
event of an unfavorable outcome, the amounts we may be required to pay in the discharge of
liabilities or settlements could have a material adverse effect on our cash flows, financial
position and results of operations. See Liquidity and Capital Resources, Commitments, Contingencies
and Other Contractual Obligations, Claims and Lawsuits for further information.
Met Center 10 One such matter relates to a TIC property known as Met Center
10, located in Austin, Texas. The Company and its subsidiaries have been involved in multiple legal
proceedings relating to Met Center 10, including three actions pending in state court in Austin,
Texas and an arbitration proceeding being conducted in California. The arbitration proceeding
involves Grubb & Ellis Realty Investors, LLC (GERI), a subsidiary of Daymark, and is pending
before the American Arbitration Association in Orange County, California captioned NNN Met Center
10 1, LLC, et al. v. Grubb & Ellis Realty Investors, LLC, No. 73 115 Y 00140 HLT (the Met 10
Arbitration). A state court action involving GERI is pending in the District Court of Travis
County, Texas captioned NNN Met Center 10, LLC v. Met Center Partners-6, Ltd., et al., No.
D-1-GN-08-002104 (the Met 10 Main Action). Two additional state court actions involving the
Company, GERI, and Grubb & Ellis Management Services, Inc. are pending in the District Court for
Travis County, Texas captioned NNN Met Center 10-1, LLC v. Lexington Insurance Company, et al., No.
D-1-GN-10-004495 and NNN Met Center 10, LLC v. Lexington Insurance Company, et al., No.
D-1-GN-11-000848 (together, the Met 10 Lexington Actions).
In the Met 10 Arbitration, TIC investors asserted, among other things, that GERI should bear
responsibility for alleged diminution in the value of the property and their investments as a
result of ground movement. The Met 10 Arbitration was bifurcated into two phases. In the first
phase, the arbitrator ruled in favor of the TIC investors, finding, among other things, that the
TIC investors had properly terminated the property management agreement for cause. In Phase 2 of
the arbitration, the TICs asserted claims for damages against GERI arising from alleged breaches of
the management agreement and other alleged wrongful acts in connection with the management of the
Met Center 10 property and other alleged breaches of duty.
Before the beginning of the Phase 2 hearing, the TICs, GERI, and Lexington Insurance Company
reached a settlement, which has been documented and executed by the parties, and which is awaiting
court approval. The settlement is for $0.l million, net of insurance
recoveries. Among other things, under the terms of the settlement, GERI must pay $0.1
million to the TICs shortly after the settlement is approved by the court, and may be obligated to
subsequently pay up to approximately $0.6 million in addition to the initial $0.1 million payment,
depending upon the resolution of
claims relating to Met Center 10 against parties other than GERI and its affiliates. The TICs are releasing all claims relating
to Met Center 10 against, among others, GERI and its affiliates.
In the Met 10 Texas Action, GERI and NNN Met Center 10, LLC were pursuing claims against the
developers and sellers of the property (the Sellers), the due diligence firm retained by GERI in
connection with the purchase of the Met Center 10 property, and the engineering, construction, and
design professionals who performed work relating to the Met Center 10 property (together with the
due diligence firm, the Professionals) to recover damages arising from, among other things,
ground movement. The Sellers and the Professionals were asserting counterclaims against GERI and
NNN Met Center 10, LLC. GERI and NNN Met Center 10, LLC, on the one hand, and the Sellers, on the
other, have reached a settlement resolving all claims between them, which has been documented and
executed by the parties. Under that settlement, GERI, its affiliates, and NNN Met Center 10, LLC
are being released from all claims by the Sellers relating to Met Center 10. Neither GERI nor its
affiliates (or NNN Met Center 10, LLC) are required to make any payments pursuant to the settlement
with the Sellers. In addition, GERI and NNN Met Center 10, LLC, on the one hand, and the
Professionals, on the other hand, have reached a tentative settlement resolving all claims between
them, which is in the process of being documented and approved. Under that settlement, GERI, its
affiliates, and NNN Met Center 10, LLC are being released from all claims by the Professionals
relating to Met Center 10. Neither GERI nor its affiliates (or NNN Met Center 10, LLC) are
required to make any payments pursuant to the tentative settlement with the Professionals.
In the Met 10 Lexington Actions, the TIC investors were asserting claims against former
officers and employees of the Company and other defendants in connection with the negotiation and
documentation of an insurance settlement relating to the Met Center 10 property, and an alleged
misallocation and/or misappropriation of the proceeds of that settlement. In addition, Lexington
Insurance Company asserted claims against NNN Met Center 10, LLC, the Company, GERI, and GEMS
arising of the insurance settlement. Pursuant to the settlement of the Met 10 Arbitration
described above, the TICs are releasing and dismissing certain claims against the former officers
and employees of the Company, including claims that were being asserted in the Met 10 Lexington
Actions, and Lexington is releasing and dismissing its claims against the Company, GERI, GEMS, and
NNN Met Center 10, LLC, including the claims Lexington was asserting in the Met 10 Lexington
Actions.
TIC Program Exchange Litigation GERI and Grubb & Ellis Company are defendants in an action
filed on or about February 14, 2011 in the Superior Court of Orange County, California captioned S.
Sidney Mandel, et al. v. Grubb & Ellis Realty Investors, LLC, et al, Case No. 00449598. The
plaintiffs allege that, in order to induce the plaintiffs to purchase $22.3 million in TIC
investments that GERI (formerly known as Triple Net Properties, LLC) was syndicating, GERI offered
to subsequently repurchase those investments and provide certain put rights under certain terms
and conditions pursuant to a letter agreement executed between GERI and the plaintiffs. The
plaintiffs allege that GERI has failed to honor its purported obligations under the letter
agreement and have initiated suit for breach of contract, breach of the implied covenant of good
faith and fair dealing and declaratory relief as to the rights and obligations of the parties under
the letter agreement. By way of a first amended complaint, the plaintiffs are alleging that GERI is
merely an inadequately capitalized instrumentality of Grubb & Ellis Company and that Grubb & Ellis
Company should be held liable for acts and omissions of GERI. The plaintiffs are seeking damages
totaling $26.5 million, attorneys fees and costs. We intend to vigorously defend these claims and
to assert all applicable defenses. At this time we are unable to predict the likelihood of an
unfavorable or adverse award or outcome. At this time it is not possible to estimate a range of
possible loss for this matter.
Britannia II Office Park Various Daymark subsidiaries are defendants in an action filed on
or about July 22, 2010 in Superior Court of Alameda County, California captioned NNN Britannia
Business Center II 17, LLC, et al. v. Grubb & Ellis Company, et al., Case No. RG10-527282.
Plaintiffs invested more than $14 million for TIC interests in a commercial real estate project in
Pleasanton, California, known as Britannia Business Center II, which ultimately was foreclosed
upon. Plaintiffs claim that they were induced to invest with misrepresentations concerning the
financial projections and risks for the project, and allege various mismanagement claims.
Plaintiffs current claim is for breach of the implied covenant of good faith and fair dealing.
Plaintiffs seek compensatory and exemplary damages in an unspecified amount, along with costs and
attorneys fees. We intend to vigorously defend these claims and to assert all applicable defenses.
At this time we are unable to predict the likelihood of an unfavorable or adverse award or outcome.
At this time it is not possible to estimate a range of possible loss for this matter.
Durham Office Park We and various Daymark subsidiaries are defendants in an action filed on
or about July 21, 2010 in North Carolina Business Court, Durham County Superior Court Division,
captioned NNN Durham Office Portfolio I, LLC, et al. v. Grubb & Ellis Company, et al., Case No. 10
CVS 4392. Plaintiffs invested more than $11 million for TIC interests in a commercial real estate
project in Durham, North Carolina. Plaintiffs claim, among other things, that information regarding
the intentions of the propertys anchor tenant to remain in occupancy was withheld and
misrepresented. Plaintiffs have asserted claims for breach of contract, negligence, negligent
misrepresentation, breach of fiduciary duty, fraud, unfair and deceptive trade practices and
conspiracy. We intend to vigorously defend these claims and to assert all applicable defenses. At this time
we are unable to predict the likelihood of an unfavorable or adverse award or outcome. At this time
it is not possible to estimate a range of possible loss for this matter.
There were no material changes from the risk factors previously disclosed in our Annual Report
on Form 10-K for the fiscal year ended December 31, 2010, filed with the SEC on March 31, 2011,
except as noted below.
We can give no assurances as to the financial wherewithal of the purchaser of Daymark, IUC-SOV,
LLC, which agreed to provide certain indemnification to the Company in connection with the
Daymark Transaction.
47
We entered into a Stock Purchase Agreement dated as of August 10, 2011 (the Purchase
Agreement) by and between us and IUC-SOV, LLC (the Purchaser). Pursuant to the Purchase
Agreement, the Purchaser agreed to indemnify, subject to limitations, us and our affiliates against
any losses incurred or suffered by us as a result of, among other things: (1) any liabilities or
obligations of, or claims against, us or any of our subsidiaries related to or arising from the
business or operations of Daymark or any of its subsidiaries, including existing and future
litigation and claims, non-recourse carve-out guarantees and other guaranty obligations (subject to
a $7.5 million cap as to matters that occurred, arose or were asserted prior to the sale of
Daymark); and (2) up to $0.65 million of the legal fees and expenses relating to Met Center 10 that
have not been paid by us prior to the sale of Daymark (the Indemnified Claims).
The Purchaser is an unaffiliated third party over which we have no control. Accordingly, in
the event that the Purchaser is ever required to fulfill an indemnification obligation under the
Purchase Agreement, we do not know, and can provide no assurances, that the Purchaser will have the
financial wherewithal at that time to fulfill such indemnification obligation. In the event the
Purchaser fails to satisfy a material indemnification obligation and we are liable with respect
thereto, the amount that we may be required to pay with respect to the applicable Indemnified Claim
could have a material adverse effect on our cash flows, financial position and results of
operations.
|
|
|
Item 2. |
|
Unregistered Sales of Equity Securities and Use of Proceeds. |
During the second quarter of 2011, we did not grant any restricted shares of our common stock.
Issuer Purchases of Equity Securities
A summary of our monthly purchases of Grubb & Ellis Company common stock during the quarter
ended June 30, 2011 is as follows:
|
|
|
|
|
|
|
|
|
|
|
Total Number of Shares |
|
|
Average Price |
|
|
|
Purchased(1) |
|
|
Paid per Share |
|
April 1 April 30
|
|
|
|
|
|
$ |
|
|
May 1 May 31
|
|
|
5,745 |
|
|
$ |
0.69 |
|
June 1 June 30
|
|
|
19,036 |
|
|
$ |
0.60 |
|
|
|
|
(1) |
|
Represents shares that were purchased in connection with funding employee income tax
withholding obligations arising upon the lapse of restrictions on restricted shares. |
|
|
|
Item 3. |
|
Defaults Upon Senior Securities. |
The Board of Directors determined, as permitted, not to declare the dividend of $3.00 per
share on our 12% Preferred Stock, for the quarters ending March 31, 2011 and June 30, 2011. As of
June 30, 2011, the amount of cumulative unpaid dividends totaled $5.8 million.
|
|
|
Item 4. |
|
[Removed and Reserved]. |
|
|
|
Item 5. |
|
Other Information. |
None.
The exhibits listed on the Exhibit Index (following the signatures section of this Quarterly
Report on Form 10-Q/A) are included, or incorporated by reference, in this Quarterly Report on Form
10-Q/A.
48
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
|
|
|
|
|
GRUBB & ELLIS COMPANY
(Registrant)
|
|
|
/s/ Michael J. Rispoli
|
|
|
Michael J. Rispoli |
|
|
Chief Financial Officer
(Principal Financial Officer) |
|
Date: August 18, 2011
49
EXHIBIT INDEX
Pursuant to Item 601(a)(2) of Regulation S-K, this Exhibit Index immediately precedes the
exhibits.
The following exhibits are included, or incorporated by reference, in this Quarterly Report on
Form 10-Q/A for the period ended June 30, 2011 (and are numbered in accordance with Item 601 of
Regulation S-K).
(2) Plan of Acquisition, Reorganization, Arrangement, Liquidation or Succession
|
|
|
|
|
|
2.1 |
|
|
Agreement and Plan of Merger, dated as of May 22, 2007, among
NNN Realty Advisors, Inc., B/C Corporate Holdings, Inc. and the
Registrant, incorporated herein by reference to Exhibit 2.1 to
the Registrants Current Report on Form 8-K filed on May 23,
2007. |
|
|
|
|
|
|
2.2 |
|
|
Merger Agreement, dated as of January 22, 2009, by and among the
Registrant, GERA Danbury LLC, GERA Property Acquisition, LLC,
Matrix Connecticut, LLC and Matrix Danbury, LLC, incorporated
herein by reference to Exhibit 2.1 to the Registrants Current
Report on Form 8-K filed on January 29, 2009. |
|
|
|
|
|
|
2.3 |
|
|
First Amendment to Merger Agreement, dated as of January 22,
2009, by and among the Registrant, GERA Danbury LLC, GERA
Property Acquisition, LLC, Matrix Connecticut, LLC and Matrix
Danbury, LLC, incorporated herein by reference to Exhibit 2.2 to
the Registrants Current Report on Form 8-K filed on January 29,
2009. |
|
|
|
|
|
|
2.4 |
|
|
Second Amendment to Merger Agreement, dated as of May 19, 2009,
by and among the Registrant, GERA Danbury LLC, GERA Property
Acquisition, LLC, Matrix Connecticut, LLC and Matrix Danbury,
LLC, incorporated herein by reference to Exhibit 2.1 to the
Registrants Current Report on Form 8-K filed on May 26, 2009. |
(3) Articles of Incorporation and Bylaws
|
|
|
|
|
|
3.1 |
|
|
Restated Certificate of Incorporation of the Registrant,
incorporated herein by reference to Exhibit 3.2 to the
Registrants Annual Report on Form 10-K filed on March 31, 1995. |
|
|
|
|
|
|
3.2 |
|
|
Certificate of Retirement with Respect to 130,233 Shares of
Junior Convertible Preferred Stock of Grubb & Ellis Company,
filed with the Delaware Secretary of State on January 22, 1997,
incorporated herein by reference to Exhibit 3.3 to the
Registrants Quarterly Report on Form 10-Q filed on February 13,
1997. |
|
|
|
|
|
|
3.3 |
|
|
Certificate of Retirement with Respect to 8,894 Shares of Series
A Senior Convertible Preferred Stock, 128,266 Shares of Series B
Senior Convertible Preferred Stock, and 19,767 Shares of Junior Convertible Preferred Stock of Grubb & Ellis Company, filed with
the Delaware Secretary State on January 22, 1997, incorporated
herein by reference to Exhibit 3.4 to the Registrants Quarterly
Report on Form 10-Q filed on February 13, 1997. |
|
|
|
|
|
|
3.4 |
|
|
Amendment to the Restated Certificate of Incorporation of the
Registrant as filed with the Delaware Secretary of State on
December 9, 1997, incorporated herein by reference to Exhibit
4.4 to the Registrants Statement on Form S-8 filed on December
19, 1997 (File No. 333-42741). |
|
|
|
|
|
|
3.5 |
|
|
Certificate of Amendment to the Amended and Restated Certificate
of Incorporation of Grubb & Ellis Company as filed with the
Delaware Secretary of State on December 7, 2007, incorporated
herein by reference to Exhibit 3.1 to the Registrants Current
Report on Form 8-K filed on December 13, 2007. |
|
|
|
|
|
|
3.6 |
|
|
Amendment to the Restated Certificate of Incorporation of the
Registrant as filed with the Delaware Secretary of State on
December 17, 2009, incorporated herein by reference to Exhibit
3.1 to the Registrants Current Report on Form 8-K filed on
December 23, 2009. |
|
|
|
|
|
|
3.7 |
|
|
Bylaws of the Registrant, as amended and restated effective May
31, 2000, incorporated herein by reference to Exhibit 3.5 to the
Registrants Annual Report on Form 10-K filed on September 28,
2000. |
|
|
|
|
|
|
3.8 |
|
|
Amendment to the Amended and Restated By-laws of the Registrant,
effective as of December 7, 2007, incorporated herein by
reference to Exhibit 3.2 to Registrants Current Report on Form
8-K filed on December 13, 2007. |
|
|
|
|
|
|
3.9 |
|
|
Amendment to the Amended and Restated By-laws of the Registrant,
effective as of January 25, 2008, incorporated herein by
reference to Exhibit 3.1 to Registrants Current Report on Form
8-K filed on January 31, 2008. |
|
|
|
|
|
|
3.10 |
|
|
Amendment to the Amended and Restated By-laws of the Registrant,
effective as of October 26, 2008, incorporated herein by
reference to Exhibit 3.1 to Registrants Current Report on Form
8-K filed on October 29, 2008. |
|
|
|
|
|
|
3.11 |
|
|
Amendment to the Amended and Restated By-laws of the Registrant,
effective as of February 5, 2009, incorporated herein by
reference to Exhibit 3.1 to Registrants Current Report on Form
8-K filed on February 9, 2009. |
|
|
|
|
|
|
3.12 |
|
|
Amendment to the Amended and Restated Bylaws of the Registrant,
effective December 17, 2009, incorporated herein by reference to
Exhibit 3.2 to the Registrants Current Report on Form 8-K filed
on December 23, 2009. |
50
(4) Instruments Defining the Rights of Security Holders, including Indentures.
|
|
|
|
|
|
4.1 |
|
|
Certificate of Incorporation, as amended and restated. See Exhibits 3.1, 3.4 3.6. |
|
|
|
|
|
|
4.2 |
|
|
By-laws, as amended and restated. See Exhibits 3.7 3.12. |
|
|
|
|
|
|
4.3 |
|
|
Amended and Restated Certificate of Designations, Number, Voting Powers,
Preferences and Rights of Series A Preferred Stock of Grubb & Ellis Company, as
filed with the Secretary of State of Delaware on September 13, 2002, incorporated
herein by reference to Exhibit 3.8 to the Registrants Annual Report on Form 10-K
filed on October 15, 2002. |
|
|
|
|
|
|
4.4 |
|
|
Certificate of Designations, Number, Voting Powers, Preferences and Rights of
Series A-1 Preferred Stock of Grubb & Ellis Company, as filed with the Secretary of
State of Delaware on January 4, 2005, incorporated herein by reference to Exhibit 2
to the Registrants Current Report on Form 8-K filed on January 6, 2005. |
|
|
|
|
|
|
4.5 |
|
|
Preferred Stock Exchange Agreement, dated as of December 30, 2004, between the
Registrant and Kojaian Ventures, LLC, incorporated herein by reference to Exhibit 1
to the Registrants Current Report on Form 8-K filed on January 6, 2005. |
|
|
|
|
|
|
4.6 |
|
|
Registration Rights Agreement, dated as of April 28, 2006, between the Registrant,
Kojaian Ventures, LLC and Kojaian Holdings, LLC, incorporated herein by reference
to Exhibit 99.2 to the Registrants Current Report on Form 8-K filed on April 28,
2006. |
|
|
|
|
|
|
4.7 |
|
|
Warrant Agreement, dated as of May 18, 2009, by and between the Registrant,
Deutsche Bank Trust Company Americas, Fifth Third Bank, JPMorgan Chase, N.A. and
KeyBank, National Association, incorporated herein by reference to Exhibit 4.2 to
the Registrants Annual Report on Form 10-K filed on May 27, 2009. |
|
|
|
|
|
|
4.8 |
|
|
Registration Rights Agreement, dated as of October 27, 2009, by and among the
Registrant and each of the persons listed on the Schedule of Initial Holders
attached thereto as Schedule A, incorporated herein by reference to Exhibit 4.3 to
the Registrants Amendment No. 1 to Registration Statement on Form S-1 Annual
Report on Form 10-K filed on December 28, 2009. |
|
|
|
|
|
|
4.9 |
|
|
Amendment No. 1 to Registration Rights Agreement, dated as of November 4, 2009, by
and among the Registrant and each of the persons listed on the Schedule of Initial
Holders attached thereto as Schedule A, incorporated herein by reference to Exhibit
4.3 to the Registrants Amendment No. 1 to Registration Statement on Form S-1
Annual Report on Form 10-K filed on December 28, 2009. |
|
|
|
|
|
|
4.10 |
|
|
Certificate of the Powers, Designations, Preferences and Rights of the 12%
Cumulative Participating Perpetual Convertible Preferred Stock, as filed with the
Secretary of State of Delaware on November 4, 2009, incorporated herein by
reference to Annex B to the Registrants Schedule 14A filed on November 6, 2009. |
|
|
|
|
|
|
4.11 |
|
|
Indenture for the 7.95% Convertible Senior Securities due 2015, dated as of May 7,
2010, between Grubb & Ellis Company, as Issuer, and U.S. Bank National Association,
as Trustee, incorporated herein by reference to Exhibit 10.1 to the Registrants
Current Report on Form 8-K filed on May 7, 2010. |
|
|
|
|
|
|
4.12 |
|
|
Registration Rights Agreement, dated as of May 7, 2010, between Grubb & Ellis
Company and JMP Securities LLC, as Initial Purchaser, incorporated herein by
reference to Exhibit 10.2 to the Registrants Current Report on Form 8-K filed on
May 7, 2010. |
|
|
|
|
|
|
4.13 |
|
|
Form of Warrant Agreement, dated as of April 15, 2011, among Grubb & Ellis Company
and CDCF II GNE Holding, LLC and CFI GNE Warrant Investor, LLC, incorporated herein
by reference to Exhibit 4.1 to the Registrants Current Report on Form 8-K filed on
April 20, 2011. |
|
|
|
|
|
|
4.14 |
|
|
Registration Rights Agreement, dated as of April 15, 2011, among Grubb & Ellis
Company and CDCF II GNE Holding, LLC and CFI GNE Warrant Investor, LLC,
incorporated herein by reference to Exhibit 4.2 to the Registrants Current Report
on Form 8-K filed on April 20, 2011. |
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4.15 |
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Amendment No. 1 To Warrants to Purchase Shares of Common Stock of Grubb & Ellis
Company, dated as of July 22, 2011, among Grubb & Ellis Company and CFI GNE Warrant
Investor, LLC, incorporated herein by reference to Exhibit 10.3 to the Registrants
Current Report on Form 8-K filed on July 28, 2011. |
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4.16 |
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Amendment No. 1 To Warrants to Purchase Shares of Common Stock of Grubb & Ellis
Company, dated as of July 22, 2011, among Grubb & Ellis Company and CDCF II GNE
Holding, LLC, incorporated herein by reference to Exhibit 10.4 to the Registrants
Current Report on Form 8-K filed on July 28, 2011. |
51
On an individual basis, instruments other than Exhibits listed above under Exhibit 4 defining
the rights of holders of long-term debt of the Registrant and our consolidated subsidiaries and
partnerships do not exceed ten percent of total consolidated assets and are, therefore, omitted;
however, the Company will furnish supplementally to the Commission any such omitted instrument upon
request.
(10) Material Contracts
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10.1 |
* |
|
Form of Restricted Stock Agreement between the Registrant and each of the Registrants Outside Directors, dated as
of September 22, 2005, incorporated herein by reference to Exhibit 10.15 to Amendment No. 1 to the Registrants
Registration Statement on Form S-1 filed on June 19, 2006 (File No. 333-133659). |
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10.2 |
* |
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Grubb & Ellis Company 2006 Omnibus Equity Plan effective as of November 9, 2006, incorporated herein by reference
to Appendix A to the Registrants Proxy Statement for the 2006 Annual Meeting of Stockholders filed on October 10,
2006. |
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10.3 |
* |
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Employment Agreement between Richard W. Pehlke and the Registrant, dated as of February 9, 2007, incorporated
herein by reference to Exhibit 99.1 to the Registrants Current Report on Form 8-K filed on February 15, 2007. |
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10.4 |
* |
|
Amendment No. 1 Employment Agreement between Richard W. Pehlke and the Registrant dated as of December 23, 2008,
incorporated herein by reference to Exhibit 10.1 to the Registrants Current Report on Form 8-K filed on December
23, 2008. |
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10.5 |
* |
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Consulting and Separation Agreement and General Release of All Claims by and between Grubb & Ellis Company and
Richard W. Pehlke, dated May 3, 2010, incorporated herein by reference to Exhibit 10.2 to the Registrants Current
Report on Form 8-K filed on May 4, 2010. |
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10.6 |
* |
|
Employment Agreement between NNN Realty Advisors, Inc. and Andrea R. Biller incorporated herein by reference to
Exhibit 10.27 to the Registrants Annual Report on Form 10-K filed on March 17, 2008. |
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10.7 |
* |
|
Separation Agreement and General Release of All Claims, between Andrea R. Biller and Grubb & Ellis Company, dated
October 22, 2010, incorporated herein by reference to Exhibit 10.26 to the Registrants Current Report on Form 8-K
filed on October 28, 2010. |
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10.8 |
* |
|
Membership Interest Assignment Agreement by and among Andrea R. Biller, Grubb & Ellis Equity Advisors, LLC and
Grubb & Ellis Equity Advisors Property Management, Inc., dated as of October 22, 2010, incorporated herein by
reference to Exhibit 10.26 to the Registrants Current Report on Form 8-K filed on October 28, 2010. |
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10.9 |
* |
|
Employment Agreement between NNN Realty Advisors, Inc. and Jeffrey T. Hanson incorporated herein by reference to
Exhibit 10.29 to the Registrants Annual Report on Form 10-K filed on March 17, 2008. |
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10.10 |
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Indemnity Agreement dated as of October 23, 2006 between Anthony W. Thompson and NNN Realty Advisors, Inc.,
incorporated herein by reference to Exhibit 10.30 to the Registrants Annual Report on Form 10-K filed on March
17, 2008. |
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10.11 |
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Indemnity and Escrow Agreement by and among Escrow Agent, NNN Realty Advisors, Inc., Anthony W. Thompson, Louis J.
Rogers and Jeffrey T. Hanson, together with Certificate as to Authorized Signatures incorporated herein by
reference to Exhibit 10.31 to the Registrants Annual Report on Form 10-K filed on March 17, 2008. |
52
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10.12 |
* |
|
Form of Indemnity Agreement executed by Andrea R. Biller, Glenn L. Carpenter, Howard H. Greene, Jeffrey T. Hanson,
Gary H. Hunt, C. Michael Kojaian, Francene LaPoint, Robert J. McLaughlin, Devin I. Murphy, Robert H. Osbrink,
Richard W. Pehlke, Scott D. Peters, Dylan Taylor, Jacob Van Berkel, D. Fleet Wallace and Rodger D. Young
incorporated herein by reference to Exhibit 10.41 to the Registrants Annual Report on Form 10-K filed on March
17, 2008. |
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10.13 |
* |
|
Change of Control Agreement dated December 23, 2008 by and between Jacob Van Berkel and the Company, incorporated
herein by reference to Exhibit 10.3 to the Registrants Current Report on Form 8-K filed on December 24, 2008. |
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10.14 |
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Third Amended and Restated Credit Agreement, dated as of May 18, 2009, among the Registrant, certain of its
subsidiaries (the Guarantors), the Lender (as defined therein), Deutsche Bank Securities, Inc., as syndication
agent, sole book-running manager and sole lead arranger, and Deutsche Bank Trust Company Americas, as initial
issuing bank, swing line bank and administrative agent, incorporated herein by reference to Exhibit 10.61 to the
Registrants Annual Report on Form 10-K filed on May 27, 2009. |
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10.15 |
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Third Amended and Restated Security Agreement, dated as of May 18, 2009, among the Registrant, certain of its
subsidiaries and Deutsche Bank Trust Company Americas, as administrative agent, for the Secured Parties (as
defined therein), incorporated herein by reference to Exhibit 10.62 to the Registrants Annual Report on Form 10-K
filed on May 27, 2009. |
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10.16 |
* |
|
Employment Agreement between Thomas P. DArcy and the Registrant, dated as of November 16, 2009, incorporated
herein by reference to Exhibit 10.1 to the Registrants Quarterly Report on Form 10-Q/A filed on November 19,
2009. |
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10.17 |
* |
|
First Amendment to Employment Agreement by and between Grubb & Ellis Company and Thomas P. DArcy, dated as of
August 11, 2010, incorporated herein by reference to Exhibit 10.1 to the Registrants Current Report on Form 8-K
filed on August 11, 2010. |
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10.18 |
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|
First Letter Amendment to Third Amended and Restated Credit Agreement, dated as of September 30, 2009, by and
among Grubb & Ellis Company, the guarantors named therein, Deutsche Bank Trust Company Americas, as administrative
agent, the financial institutions identified therein as lender parties, Deutsche Bank Trust Company Americas, as
syndication agent, and Deutsche Bank Securities Inc., as sole book running manager and sole lead arranger,
incorporated herein by reference to Exhibit 99.1 to the Registrants Current Report on Form 8-K filed on October
2, 2009. |
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10.19 |
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|
First Letter Amendment to Warrant Agreement, dated as of September 30, 2009, by and between Grubb & Ellis Company
and the holders identified in Exhibit B thereto, incorporated herein by reference to Exhibit 99.2 to the
Registrants Current Report on Form 8-K filed on October 2, 2009. |
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10.20 |
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|
First Letter Amendment to the Third Amended and Restated Security Agreement, dated as of September 30, 2009, made
by the grantors referred to therein in favor of Deutsche Bank Trust Company Americas, as administrative agent for
the secured parties referred to therein, incorporated herein by reference to Exhibit 99.3 to the Registrants
Current Report on Form 8-K filed on October 2, 2009. |
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10.21 |
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Senior Subordinated Convertible Note dated October 2, 2009 issued by Grubb & Ellis Company to Kojaian Management
Corporation, incorporated herein by reference to Exhibit 99.4 to the Registrants Current Report on Form 8-K filed
on October 2, 2009. |
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10.22 |
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|
Subordination Agreement dated October 2, 2009 by and among Kojaian Management Corporation, Grubb & Ellis Company
and Deutsche Bank Trust Company Americas, incorporated herein by reference to Exhibit 99.5 to the Registrants
Current Report on Form 8-K filed on October 2, 2009. |
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10.23 |
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Form of Purchase Agreement by and between Grubb & Ellis Company and the accredited investors set forth on Schedule
A attached thereto, incorporated herein by reference to Exhibit 99.1 to the Registrants Current Report on Form
8-K filed on October 26, 2009. |
53
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10.24 |
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Agreement regarding Tremont Net Funding II, LLC Loan Arrangement with GERA 6400 Shafer LLC and GERA Abrams Centre
LLC, dated as of December 29, 2009, by and among GERA Abrams Centre LLC and GERA 6400 Shafer LLC, collectively as
Borrower, Grubb & Ellis Company, as Guarantor, Grubb & Ellis Management Services, Inc., as both Abrams Manager and
Shafer Manager, incorporated herein by reference to Exhibit 10.1 to the Registrants Current Report on Form 8-K
filed on January 6, 2010. |
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10.25 |
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Form of Assignment of Personal Property, Name, Service Contracts, Warranties and Leases for GERA Abrams Centre
LLC, incorporated herein by reference to Exhibit 10.2 to the Registrants Current Report on Form 8-K filed on
January 6, 2010. |
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10.26 |
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Form of Assignment of Personal Property, Name, Service Contracts, Warranties and Leases for GERA 6400 Shafer LLC,
incorporated herein by reference to Exhibit 10.3 to the Registrants Current Report on Form 8-K filed on January
6, 2010. |
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10.27 |
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Form of Special Warranty Deed for GERA Abrams Centre LLC, incorporated herein by reference to Exhibit 10.4 to the
Registrants Current Report on Form 8-K filed on January 6, 2010. |
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10.28 |
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Form of Special Warranty Deed for GERA 6400 Shafer LLC, incorporated herein by reference to Exhibit 10.5 to the
Registrants Current Report on Form 8-K filed on January 6, 2010. |
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10.29 |
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Form of Restricted Stock Award Grant Notice and Restricted Stock Award Agreement by and between the Company and
Jeffrey T. Hanson dated March 10, 2010, incorporated herein by reference to Exhibit 10.75 to the Registrants
Annual Report on Form 10-K filed on March 16, 2010. |
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10.30 |
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Form of Restricted Stock Award Grant Notice and Restricted Stock Award Agreement by and between the Company and
Jacob Van Berkel dated March 10, 2010, incorporated herein by reference to Exhibit 10.76 to the Registrants
Annual Report on Form 10-K filed on March 6, 2010. |
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10.31 |
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Form of Amended and Restated Restricted Stock Award Grant Notice for Annual Restricted Stock Award to
Non-Management Directors, incorporated herein by reference to Exhibit 10.77 to the Registrants Annual Report on
Form 10-K filed on March 16, 2010. |
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10.32 |
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Special Warranty Deed for GERA Abrams Centre LLC recorded on March 31, 2010, incorporated herein by reference to
Exhibit 99.1 to the Registrants Current Report on Form 8-K filed on April 6, 2010. |
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10.33 |
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|
Purchase Agreement between Grubb & Ellis Company and JMP Securities LLC, dated May 3, 2010, incorporated herein by
reference to Exhibit 10.1 to the Registrants Current Report on Form 8-K filed on May 4, 2010. |
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10.34 |
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Shared Services Agreement by and among Grubb & Ellis Company, Daymark Realty Advisors, Inc., Grubb
& Ellis Management Services, Inc., Grubb & Ellis Equity Advisors, LLC, Grubb & Ellis Advisors of
California, Inc., Grubb & Ellis Affiliates, Inc., Grubb & Ellis of Arizona, Inc., Grubb & Ellis
Europe, Inc., G&E Landauer Valuation Advisory Services, LLC, G&E Mortgage Group, Inc., G&E
New York, Inc., G&E Michigan, Inc., G&E of Nevada, Inc., G&E Consulting Services Co., HSM Inc.,
Wm. A. White/G&E Inc., Grubb & Ellis Capital Corp., NNN Realty Advisors, Inc., Triple Net
Properties Realty, Inc., Grubb & Ellis Realty Investors, LLC, and Grubb & Ellis Residential
Management, Inc., dated as of March 25, 2011, incorporated herein by reference to Exhibit 10.1 to
the Registrants Current Report on Form 8-K filed on March 28, 2011. |
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10.35 |
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|
Exclusivity Agreement by and between Colony Capital Acquisitions, LLC and Grubb & Ellis Company,
dated as of March 30, 2011, incorporated herein by reference to Exhibit 10.1 to the Registrants
Current Report on Form 8-K filed on March 30, 2011. |
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10.36 |
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|
Commitment Letter for $18,000,000 Senior Secured Term Loan Facility by and between Colony Capital
Acquisitions, LLC and Grubb & Ellis Company, dated as of March 30, 2011, incorporated herein by
reference to Exhibit 10.2 to the Registrants Current Report on Form 8-K filed on March 30, 2011. |
54
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10.37 |
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|
Credit Agreement, dated as of April 15, 2011, by and among Grubb & Ellis Company, Grubb & Ellis
Management Services, Inc., the lenders party thereto, and ColFin GNE Loan Funding, LLC, an
affiliate of Colony Capital LLC, incorporated herein by reference to Exhibit 10.1 to the
Registrants Current Report on Form 8-K filed on April 20, 2011. |
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10.38 |
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|
Guarantee and Collateral Agreement, dated as of April 15, 2011, by and among Grubb & Ellis
Company, Grubb & Ellis Management Services, Inc., certain other subsidiaries of Grubb & Ellis
Company, and ColFin GNE Loan Funding, LLC, in its capacity as administrative agent, incorporated
herein by reference to Exhibit 10.2 to the Registrants Current Report on Form 8-K filed on April
20, 2011. |
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10.39 |
* |
|
Consulting Agreement, dated as of June 10, 2011, between Grubb & Ellis Company and Mathieu
Streiff, incorporated herein by reference to Exhibit 10.1 to the Registrants Current Report on
Form 8-K filed on June 16, 2011. |
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10.40 |
* |
|
Separation Agreement and General Release of All Claims, dated as of June 10, 2011, by and between
Mathieu B. Streiff and Grubb & Ellis Company, incorporated herein by reference to Exhibit 10.2 to
the Registrants Current Report on Form 8-K filed on June 16, 2011. |
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10.41 |
* |
|
Agreement, dated as of June 15, 2011, by and between Grubb & Ellis Company and Michael Rispoli,
incorporated herein by reference to Exhibit 10.1 to the Registrants Current Report on Form 8-K
filed on June 21, 2011. |
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10.42 |
* |
|
Agreement, dated as of June 15, 2011, by and between Grubb & Ellis Company and Matthew Engel,
incorporated herein by reference to Exhibit 10.2 to the Registrants Current Report on Form 8-K
filed on June 21, 2011. |
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10.43 |
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|
Amendment No. 1 to Credit Agreement, dated as of July 22, 2011, by and among Grubb & Ellis
Company, Grubb & Ellis Management Services, Inc., certain other subsidiaries of Grubb & Ellis
Company, and ColFin GNE Loan Funding, LLC, in its capacity as administrative agent, incorporated
herein by reference to Exhibit 10.1 to the Registrants Current Report on Form 8-K filed on July
28, 2011. |
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10.44 |
|
|
Waiver to Commitment Letter, dated as of July 22, 2011, among Colony Capital Acquisitions, LLC,
Grubb & Ellis Company and Grubb & Ellis Management Services, Inc., incorporated herein by
reference to Exhibit 10.2 to the Registrants Current Report on Form 8-K filed on July 28, 2011. |
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10.45 |
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|
Stock Purchase Agreement, dated as of August 10, 2011, by and between Grubb & Ellis Company and
IUC-SOV, LLC, incorporated herein by reference to Exhibit 10.1 to the Registrants Current Report
on Form 8-K filed on August 1, 2011. |
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10.46 |
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|
Promissory Note, dated as of August 10, 2011, by Grubb & Ellis Company, incorporated herein by
reference to Exhibit 10.2 to the Registrants Current Report on Form 8-K filed on August 1, 2011. |
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10.47 |
|
|
Intercompany Balance Settlement And Release Agreement, dated as of August 10, 2011, by and between
Grubb & Ellis Company and IUC-SOV, LLC, incorporated herein by reference to Exhibit 10.3 to the
Registrants Current Report on Form 8-K filed on August 1, 2011. |
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31.1 |
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Certification of Chief Executive Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
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31.2 |
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Certification of Chief Financial Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
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32 |
|
|
Certification of Chief Executive Officer and Chief Financial Officer, pursuant to 18 U.S.C.
Section 1350, as created by Section 906 of the Sarbanes-Oxley Act of 2002 |
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101.INS**
|
|
XBRL Instance Document |
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101.SCH**
|
|
XBRL Taxonomy Extension Schema Document |
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101.CAL**
|
|
XBRL Taxonomy Extension Calculation Linkbase Document |
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101.LAB**
|
|
XBRL Taxonomy Extension Label Linkbase Document |
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101.PRE**
|
|
XBRL Taxonomy Extension Presentation Linkbase Document |
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101.DEF**
|
|
XBRL Taxonomy Extension Definition Linkbase Document |
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|
Filed herewith. |
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Furnished herewith. |
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* |
|
Management contract or compensatory plan arrangement. |
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** |
|
To be filed by amendment. |
55