e10vq

FORM 10-Q

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549


þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended December 31, 2005


o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number: 1-8122

GRUBB & ELLIS COMPANY

(Exact name of registrant as specified in its charter)


Delaware		94-1424307

(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

2215 Sanders Road, Suite 400,
Northbrook, IL 60062

(Address of principal executive offices)

(Zip Code)

(847) 753-7500

(Registrant’s telephone number, including area code)

No Change

(Former name, former address and former fiscal year,

if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes þ No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o Accelerated filer o Non-accelerated filer o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o No þ

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

Yes o No þ

9,459,901

(Number of shares outstanding of the registrant’s

common stock at February 10, 2006)

Item 1. Financial Statements

GRUBB & ELLIS COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
(unaudited)


	December 31,			June 30,
	2005			2005
ASSETS

Current assets:
Cash and cash equivalents, including restricted deposits of $1,102 and $1,105 at December 31, 2005 and June 30, 2005, respectively	$	32,405		$	26,415
Services fees receivable, net		15,426			9,339
Other receivables		3,040			2,509
Professional service contracts, net		2,539			2,170
Prepaid and other current assets		4,880			2,656
Deferred tax assets, net		2,289			3,500

Total current assets		60,579			46,589
Noncurrent assets:
Equipment, software and leasehold improvements, net		7,593			8,189
Goodwill, net		24,763			24,763
Other assets		5,987			5,079


Total assets	$	98,922		$	84,620


LIABILITIES AND STOCKHOLDERS’ EQUITY

Current liabilities:
Accounts payable	$	5,441		$	4,218
Commissions payable		8,609			6,282
Accrued compensation and employee benefits		15,805			11,433
Deferred commissions payable		19,449			877
Other accrued expenses		8,710			5,685

Total current liabilities		58,014			28,495
Long-term liabilities:
Credit facility debt		25,000			25,000
Accrued claims and settlements		4,858			4,972
Other liabilities		2,025			1,656

Total liabilities		89,897			60,123

Stockholders’ equity:
Preferred stock, $1,000 stated value: 1,000,000 shares authorized; 11,725 shares issued and outstanding at December 31, 2005 and June 30, 2005		11,725			11,725
Common stock, $.01 par value: 50,000,000 shares authorized; 9,403,346 and 15,114,871 shares issued and outstanding at December 31, 2005 and June 30, 2005, respectively		94			153
Additional paid-in-capital		45,381			67,988
Accumulated other comprehensive income		55			27
Retained deficit		(48,230	)		(55,396	)

Total stockholders’ equity		9,025			24,497


Total liabilities and stockholders’ equity	$	98,922		$	84,620

See notes to condensed consolidated financial statements.

GRUBB & ELLIS COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share data)
(unaudited)


	For the three months						For the six months
	ended December 31,						ended December 31,
	2005			2004			2005			2004
Services revenue:
Transaction fees	$	91,602		$	86,197		$	164,735		$	141,950
Management fees, including reimbursed salaries, wages and benefits		48,975			49,383			96,579			97,309

Total services revenue		140,577			135,580			261,314			239,259


Costs of services:
Transaction commissions		60,840			55,513			107,913			90,369
Reimbursable salaries, wages and benefits		36,452			36,224			71,702			71,289
Salaries, wages, benefits and other direct costs		8,937			8,876			18,179			17,769

Total costs of services		106,229			100,613			197,794			179,427

Costs and expenses:
Salaries, wages and benefits		13,048			13,306			27,326			26,596
Selling, general and administrative		12,267			11,510			23,160			22,708
Depreciation and amortization		2,155			1,465			3,633			2,908

Total costs		133,699			126,894			251,913			231,639


Operating income		6,878			8,686			9,401			7,620

Other income and expenses:
Interest income		338			90			562			132
Interest expense		(564	)		(398	)		(1,102	)		(754	)

Income before income taxes		6,652			8,378			8,861			6,998

Provision for income taxes		(1,661	)		(75	)		(1,695	)		(75	)


Net income		4,991			8,303			7,166			6,923

Preferred stock dividends accrued		—			(451	)		—			(889	)


Net income to common stockholders	$	4,991		$	7,852		$	7,166		$	6,034


Net income per weighted average common share outstanding:

Basic -	$	0.37		$	0.52		$	0.50		$	0.40


Diluted -	$	0.36		$	0.52		$	0.49		$	0.40


Weighted average common shares outstanding:

Basic -		13,610,951			15,114,871			14,363,252			15,108,974


Diluted -		13,896,548			15,231,924			14,641,767			15,200,313

See notes to condensed consolidated financial statements.

GRUBB & ELLIS COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)


	For the six months ended
	December 31,
	2005			2004

Cash Flows from Operating Activities:
Net income	$	7,166		$	6,923
Adjustments to reconcile net income to net cash provided by operating activities:
Decrease in deferred tax asset, net		1,211			—
Depreciation and amortization expense		3,633			2,908
Stock-based compensation expense		568			—
Payment of accrued severance and office closure costs		(274	)		(703	)
Recovery for services fees receivable valuation allowances		(174	)		(139	)
Deferral of payment of services commissions		18,572			13,533
Funding of multi-year service contracts		(1,184	)		(375	)
Increase in services fees receivable		(5,858	)		(4,064	)
Increase in prepaid and other assets		(4,421	)		(1,833	)
Increase in accounts and commissions payable		3,519			1,483
Increase in accrued compensation and employee benefits		4,372			3,663
Increase in accrued and other liabilities		3,670			1,790

Net cash provided by operating activities		30,800			23,186


Cash Flows from Investing Activities:
Purchases of equipment, software and leasehold improvements		(1,988	)		(1,251	)
Other investing activities		411			151

Net cash used in investing activities		(1,577	)		(1,100	)


Cash Flows from Financing Activities:
Repurchase of common stock		(23,448	)		—
Other financing activities		215			(85	)

Net cash used in financing activities		(23,233	)		(85	)


Net increase in cash and cash equivalents		5,990			22,001

Cash and cash equivalents at beginning of period		26,415			14,971


Cash and cash equivalents at end of period, including restricted deposits of $1,102 and $800 at December 31, 2005 and 2004, respectively	$	32,405		$	36,972

See notes to condensed consolidated financial statements.

GRUBB & ELLIS COMPANY
Notes to Condensed Consolidated Financial Statements

1. Interim Period Reporting

The accompanying unaudited condensed consolidated financial statements include the accounts of Grubb & Ellis Company and its wholly owned subsidiaries (collectively, the “Company”) and are prepared in accordance with U.S. generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. generally accepted accounting principles for complete financial statements and, therefore, should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended June 30, 2005.

The financial statements have been prepared in conformity with U.S. generally accepted accounting principles, which require management to make estimates and assumptions that affect the reported amounts of assets and liabilities (including disclosure of contingent assets and liabilities) at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

In the opinion of management, all adjustments necessary for a fair statement of the financial position and results of operations for the interim periods presented have been included in these financial statements and are of a normal and recurring nature.

Certain amounts in prior periods have been reclassified to conform to the current presentation. Such reclassifications have not changed previously reported results of operations or cash flows.

Operating results for the six months ended December 31, 2005 are not necessarily indicative of the results that may be achieved in future periods.

2. Total Comprehensive Income

The Company entered into an interest rate protection agreement that effectively caps the variable interest rate exposure on a portion of its existing credit facility debt for a period of two years. The Company determined that this agreement was to be characterized as effective under the definitions included within Statement of Financial Accounting Standards No. 133 “Accounting for Derivative Instruments and Hedging Activities.”

The change in value of these instruments during a reporting period is characterized as Other Comprehensive Income or Loss, and totaled approximately $28,000 and $22,000 of unrealized income during the six months ended December 31, 2005 and 2004, respectively. These results, along with the Company’s net income of $7,166,000 and $6,923,000 for the six months ended December 31, 2005 and 2004, resulted in Total Comprehensive Income of $7,194,000 and $6,945,000 for the respective periods.

3. Income Taxes

The provision for income taxes for the six months ended December 31, 2005 and 2004 is as follows (in thousands):

GRUBB & ELLIS COMPANY
Notes to Condensed Consolidated Financial Statements

3. Income Taxes (Continued)


	For the six months ended
	December 31,
	2005			2004

Current (provision) benefit	$	(3,527	)	$	(2,508	)
Deferred (provision) benefit		(327	)		(672	)
Decrease in valuation allowance		2,159			3,105


	$	(1,695	)	$	(75	)

The Company recorded prepaid taxes totaling approximately $54,000 and $197,000 as of December 31, 2005 and June 30, 2005, respectively, comprised primarily of tax refund receivables, prepaid tax estimates and tax effected operating loss carrybacks related to state tax filings. The Company also received net tax refunds of approximately $9,000 and $45,000 during the six months ended December 31, 2005 and 2004, respectively.

The Company decreased its deferred tax assets by approximately $3.4 million during the six months ended December 31, 2005, primarily due to the application of Federal net operating loss carryforwards against taxable income during the period. The Company decreased its valuation allowance related to its deferred tax assets by approximately $2.2 million during the six months ended December 31, 2005 due to the realization of these assets and the likelihood that the Company would continue to realize a portion of its deferred assets in future periods. During the six months ended December 31, 2004, the Company generated sufficient taxable income to realize a portion of its deferred tax assets and correspondingly reduced the valuation allowance by approximately $3.1 million.

4. Earnings Per Common Share

The following table sets forth the computation of basic and diluted earnings per common share from continuing operations (in thousands, except per share data):


	For the three months ended				For the six months ended
	December 31,				December 31,
	2005		2004		2005		2004

Net income to common stockholders	$	4,991	$	7,852	$	7,166	$	6,034

Basic earnings per common share:

Weighted average common shares outstanding		13,611		15,115		14,363		15,109

Net income per common share — basic	$	0.37	$	0.52	$	0.50	$	0.40

Diluted earnings per common share:

Weighted average common shares outstanding		13,611		15,115		14,363		15,109
Effect of dilutive securities:
Stock options, warrants and restricted stock grants		286		117		279		91


Weighted average dilutive common shares outstanding		13,897		15,232		14,642		15,200

Net income per common share — diluted	$	0.36	$	0.52	$	0.49	$	0.40

GRUBB & ELLIS COMPANY
Notes to Condensed Consolidated Financial Statements

4. Earnings per Common Share (Continued)

Additionally, options to purchase shares of common stock, the effect of which would be anti-dilutive, totaled approximately 414,000 and 767,000 for the six months ended December 31, 2005 and 2004, respectively, and 414,000 and 814,000 for the three months ended. These options were not included in the computation of diluted earnings per share because the option exercise price was greater than the average market price of the common shares for the respective periods.

5. Segment Information

The Company has two reportable segments — Transaction Services and Management Services, and evaluates segment performance and allocates resources based on earnings before interest, taxes, depreciation and amortization (“EBITDA”) that include an allocation of certain corporate level administrative expenses. As of January 1, 2005, the Company revised the method it uses to allocate these corporate expenses to its segments, and, consequently, has restated the segment EBITDA results for the six months ending December 31, 2004 to be comparative with the current method, in the table below (amounts in thousands):


	Transaction		Management			Segment
	Services		Services			Totals
Six months ended December 31, 2005
Total revenue	$	164,735	$	96,579		$	261,314
EBITDA		13,145		(111	)		13,034
Total assets as of December 31, 2005		81,157		15,422			96,579
Goodwill, net		18,376		6,387			24,763

Six months ended December 31, 2004
Total revenue	$	141,950	$	97,309		$	239,259
EBITDA		10,429		99			10,528
Total assets as of December 31, 2004		81,406		15,757			97,163
Goodwill, net		18,376		6,387			24,763

Reconciliation of Segment EBITDA to Income (Loss) Before Income Taxes


	Six Months Ended September 30
	2005			2004
Total segment EBITDA	$	13,034		$	10,528
Less:
Depreciation & amortization		(3,633	)		(2,908	)
Net interest expense		(540	)		(622	)


Income (loss) before income taxes	$	8,861		$	6,998

Reconciliation of Segment Assets to Balance Sheet (in thousands):


	As of December 31,
	2005		2004
Total segment assets	$	96,579	$	97,163
Current tax assets		54		190
Deferred tax assets		2,289		3,000


Total assets	$	98,922	$	100,353

GRUBB & ELLIS COMPANY
Notes to Condensed Consolidated Financial Statements

5. Segment Information (Continued)

In evaluating segment performance, the Company’s management utilizes EBITDA as a measure of the segment’s ability to generate cash flow from its operations. Other items contained within the measurement of net income, such as interest and taxes, and special charges, are generated and managed at the corporate administration level rather than the segment level. In addition, net income measures also include non-cash amounts such as depreciation and amortization expense.

Management believes that EBITDA as presented with respect to the Company’s reportable segments is an important measure of cash generated by the Company’s operating activities. EBITDA is similar to net cash flow from operations because it excludes certain non-cash items; however, it also excludes interest and income taxes. Management believes that EBITDA is relevant because it assists investors in evaluating their investment. EBITDA should not be considered as an alternative to net income (loss) or cash flows from operating activities (which are determined in accordance with GAAP), as an indicator of operating performance or a measure of liquidity. EBITDA also facilitates comparison of the Company’s results of operations with those companies having different capital structures. Other companies may define EBITDA differently, and, as a result, such measures may not be comparable to the Company’s EBITDA.

6. Preferred Stock

In December 2004, the Company entered into an agreement (the “Preferred Stock Exchange Agreement”) with Kojaian Ventures, LLC (“KV”) in KV’s capacity as the holder of all the Company’s issued and outstanding 11,725 shares of Series A Preferred Stock which carried a preferential cumulative dividend of 12% per annum (the “Series A Preferred Stock”). Pursuant to the Preferred Stock Exchange Agreement, the Company paid to KV all accrued and unpaid dividends with respect to the Series A Preferred Stock for the period September 19, 2002, the date of issuance of the Series A Preferred Stock, up to and through December 31, 2004. In exchange therefore, KV agreed to eliminate in its entirety, as of January 1, 2005, the 12% preferential cumulative dividend payable on the Series A Preferred Stock. Upon the closing of the transaction in January 2005, the Company delivered to KV the one time accrued dividend payment of approximately $3.6 million.

The Company and KV effected the elimination of the 12% cumulative preferred dividend with respect to the Series A Preferred Stock by an exchange of preferred securities. Accordingly, simultaneously upon the consummation of the transaction contemplated by the Preferred Stock Exchange Agreement, on January 4, 2005, KV delivered to the Company its original share certificate representing 11,725 shares of Series A Preferred Stock in exchange for a new share certificate representing 11,725 shares of a newly created Series A-1 Preferred Stock of the Company (the “New Preferred Stock”). The New Preferred Stock is identical in all respects to the Series A Preferred Stock except that the New Preferred Stock does not have a cumulative preferred dividend and is now only entitled to receive dividends if and when dividends are declared and paid to holders of the Company’s common stock. As was the case with the Series A Preferred Stock, the New Preferred Stock has a preference over the Company’s Common Stock in the event that the Company undergoes a liquidation, dissolution or certain change in control transactions. In such situations, the holder of the New Preferred Stock would be entitled to payment of the greater of (i) $23.5 million (twice the face value of the New Preferred Stock) or (ii) the amount such holder would have received assuming that each share of the New Preferred Stock equaled 953 shares of the Company’s common stock, with such share amount calculated on an “Adjusted Outstanding Basis” (as defined in the underlying documents). This preference thereby dilutes the return that would otherwise be available to the holders of the Common Stock of the Company had this preference not existed

GRUBB & ELLIS COMPANY
Notes to Condensed Consolidated Financial Statements

6. Preferred Stock (Continued)

Like the Series A Preferred Stock, the New Preferred Stock is not convertible into common stock, but nonetheless votes on an “as liquidated basis” along with the holders of common stock on all matters. Consequently, the New Preferred Stock, like the Series A Preferred Stock, currently is entitled to the number of votes equal to 11,173,925 shares of common stock, or approximately 54.3% of all voting securities of the Company. In addition, as noted above, with the elimination of the preferential cumulative dividend, the New Preferred Stock will now only be entitled to receive dividends if and when dividends are declared by the Company on, and paid to holders of, the Company’s common stock. The holders of the New Preferred Stock will receive dividends, if any, based upon the number of voting common stock equivalents represented by the New Preferred Stock. The New Preferred Stock is not subject to redemption at the option of the holder.

7. Repurchase of Common Stock

On December 7, 2005 the Company repurchased 5,861,902 shares of the Company’s common stock, par value $.01 per share (the “Shares”), owned by Warburg Pincus Investors Liquidating Trust (the “Trust”) for a purchase price of $4.00 per share, or an aggregate purchase price of $23,447,608. The Company repurchased the Shares, which represented all of the securities in the Company owned by the Trust, in a privately negotiated transaction. The closing price of the Company’s common stock was $7.10 on the day prior to the repurchase.

8. Commitments and Contingencies

Environmental:

As first reported in the Company’s Form 10-Q for the period ended December 31, 2000 and subsequently updated in its Form 10-K for the year ended June 30, 2005, a corporate subsidiary of the Company owns a 33% interest in a general partnership, which in turn owns property in the State of Texas which is the subject of an environmental assessment and remediation effort, due to the discovery of certain chemicals related to a release by a former bankrupted tenant of dry cleaning solvent in the soil and groundwater of the partnership’s property and adjacent properties. The Company has no financial recourse available against the former tenant due to its insolvency. Prior assessments had determined that minimal costs would be incurred to remediate the release. However, subsequent findings at and around the partnership’s property increased the probability that additional remediation costs would be necessary. The partnership is working with the Texas Natural Resource Conservation Commission and the local municipality to implement a multi-faceted plan, which includes both remediation and ongoing monitoring of the affected properties. Although the partnership’s other partners have made all past contributions and are expected to make all future required contributions, there can be no assurances to this effect. As of December 31, 2005, the Company’s share of cumulative costs to remediate and monitor this situation is estimated at approximately $1,157,000, based upon a comprehensive project plan prepared by an independent third party environmental remediation firm. Approximately $1,074,000 of this amount has been paid as of December 31, 2005 and the remaining $83,000 has been reflected as a loss reserve for such matters in the consolidated balance sheet. The Company’s management believes that the outcome of these events will not have a material adverse effect on the Company’s consolidated financial position or results of operations.

Insolvent Insurance Provider:

In the Company’s Form 10-Q for the period ended December 31, 2001, the following situation regarding an

GRUBB & ELLIS COMPANY
Notes to Condensed Consolidated Financial Statements

8. Commitments and Contingencies (Continued)

insolvent insurance provider was initially disclosed, and subsequently updated in the Company’s Form 10-K for the year ended June 30, 2005. In fiscal years 1999 and 2000, the Company’s primary errors and omissions insurance carrier was Reliance Insurance Company (of Illinois and California, collectively “Reliance”). The Company had four open claims that were covered by Reliance policies in which defense and/or settlement costs exceeded a self-insured retention.

In October 2001, Reliance was placed in liquidation by order of the Commonwealth of Pennsylvania, which casts doubt on the recovery from Reliance of the Company’s open claims. The Company had established loss reserves for the estimated settlement costs of the claims and all of the claims have now been resolved. The Company is seeking reimbursement for the costs of defense, settlement and/or judgment in excess of the self-insured retention from the liquidator. No new significant information has been obtained in the six months ended December 31, 2005. The Company is unable to estimate the probability and timing of any potential reimbursement at this time, and therefore, has not assumed any potential recoveries in establishing its reserves.

General:

The Company is involved in various claims and lawsuits arising out of the conduct of its business, as well as in connection with its participation in various joint ventures and partnerships, many of which may not be covered by the Company’s insurance policies. In the opinion of management, the eventual outcome of such claims and lawsuits is not expected to have a material adverse effect on the Company’s financial position or results of operations.

9. Stock Options and Stock Purchase Plans

In December 2004, the Financial Accounting Standards Board issued Statement 123(R) (“FAS 123(R)”) effective for fiscal years beginning after June 15, 2005. The new Statement requires mandatory reporting of all stock-based compensation awards on a fair value basis of accounting. Generally, companies are required to calculate the fair value of all stock awards and amortize that fair value as compensation expense over the vesting period of the awards. The Company applied the new rules on accounting for stock-based compensation awards beginning in the first fiscal quarter of fiscal 2006. During the six and three month periods ended December 31, 2005, the Company recognized approximately $568,000 and $269,000, respectively, of stock-based compensation expense, which is included in salaries, wages and benefit expense in the Company’s Condensed Consolidated Statements of Operations.

The Company previously adopted the disclosure-only provisions of Statement 123, as amended by FASB Statement No. 148, “Accounting for Stock-Based Compensation — Transition and Disclosure (“FAS 148”) and accounted for its stock-based employee compensation plan under the intrinsic value method in accordance with APB 25. Compensation expense related to restricted share awards was not presented in the table below because the expense amount was the same under APB 25 and FAS 123 and, therefore, was already reflected in net income. Had the Company elected to adopt the fair value recognition provisions of FAS 123 in the prior fiscal year, pro forma net income and net income per share would have been as follows (in thousands):

GRUBB & ELLIS COMPANY
Notes to Condensed Consolidated Financial Statements

9. Stock Options and Stock Purchase Plans (Continued)


	For the six
	months ended
	December 31,
	2004
Net income to common stockholders, as reported	$	6,034

Add: Total stock-based employee compensation expense determined under the intrinsic value method for all awards, net of related tax effects		—

Deduct: Total stock-based employee compensation expense determined under the fair value based method for all awards, net of related tax effects		(57	)


Pro forma net loss to common stockholders	$	5,977


Net earnings per weighted average common share outstanding:

Basic — as reported	$	0.40


Basic — pro forma	$	0.40


Diluted — as reported	$	0.40


Diluted — pro forma	$	0.39

10. Registration Statement

On October 21, 2005, Grubb & Ellis Realty Advisors, Inc. (“Realty Advisors”), a newly formed, wholly owned subsidiary, filed a Registration Statement on Form S-1 (subsequently changed to Form S-11) with the Securities and Exchange Commission (the “Registration Statement”). Realty Advisors is a “blank check” company organized by the Company for the purpose of acquiring one or more United States commercial real estate properties and/or assets. Pursuant to the Registration Statement, as amended, Realty Advisors proposes to sell 16,666,667 units in an initial public offering to be underwritten on a firm commitment basis by Deutsche Bank Securities Inc. at $6.00 per share for aggregate gross proceeds of $100,000,002. Of the 16,666,667 units to be offered, 15,000,000 units, for an aggregate price of $90,000,000, will be offered to the public, and 1,666,667 units, for an aggregate price of $10,000,002, will be offered to Kojaian Ventures, L.L.C. (and/or its affiliates), an entity affiliated with C. Michael Kojaian, the Company’s Chairman of the Board and also the Chairman of the Board of Realty Advisors. The underwriters will receive a 7% underwriting discount, or $6,300,000, with respect to the $90,000,000 of units offered to the public; however, the underwriters have agreed to defer 2% of their discount, or $1,800,000, until Realty Advisors consummates a business combination. The underwriters will not receive an underwriting discount with respect to the $10,000,002 of units offered to Kojaian Ventures, L.L.C. and Realty Advisors will receive the entire aggregate gross proceeds therefrom. In addition, the underwriters have reserved up to 750,000 units, for an aggregate price of $4,500,000, to be offered to the Company’s officers, directors, employees and other persons affiliated with the Company under the same terms and conditions as all of the units being offered to the public, and any such units not sold to the Company’s officers, directors, employees or other affiliated persons will be offered by the underwriters to the public. Realty Advisors has also granted to Deutsche Bank Securities Inc., the representative of the underwriters, a 30-day option to purchase up to 2,500,000 additional units solely to cover over-allotments, if any.

GRUBB & ELLIS COMPANY
Notes to Condensed Consolidated Financial Statements

10. Registration Statement (Continued)

Each unit is comprised of one share of common stock and two redeemable warrants, each warrant exercisable to purchase one share of common stock at $5.00 per share. In connection with and upon the closing of the offering, Realty Advisors has also agreed to sell to Deutsche Bank Securities, for $100, an option to purchase up to a total of 750,000 units at $6.60 per unit, with the warrants issued as part of such units exercisable at $6.25 per share. The units issuable upon the exercise of this option are otherwise identical to those offered to the public and this purchase option and its underlying securities have been included on the Registration Statement.

The Company provided Realty Advisors with initial equity capital of $2,000,000 and Realty Advisors subsequently transferred an aggregate of approximately 4.4% of its common stock, in equal amounts, to each of the five (5) members of its Board of Directors. If the offering is completed, the Company would own approximately 21% of the outstanding common stock of Realty Advisors, assuming no exercise of the underwriter’s over-allotment option or the exercise of any warrants. The Company also agreed to purchase, for a certain period after the offering is completed and to the extent warrants are available, up to $3,500,000 of Realty Advisor warrants in the public marketplace if the price is $0.70 or less per warrant. In addition, the Company has further agreed that any such warrants purchased by it will not be sold or transferred until the completion of a business combination. The completion of any offering will be subject to a number of conditions, including market conditions. As a result, there can be no assurance as to the terms or size of any offering, or that any offering at all will be consummated.

Due to the Company’s current ownership position, Realty Advisors is fully consolidated within the Company’s Condensed Consolidated Financial Statements as of December 31, 2005. Such Realty Advisors consolidated amounts are not material to the Company’s financial position or results of operations for the periods presented.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Report contains statements that are not historical facts and constitute projections, forecasts or forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. The statements are not guarantees of performance. They involve known and unknown risks, uncertainties and other factors that may cause the actual results, performance or achievements of the Company in future periods to be materially different from any future results, performance or achievements expressed or suggested by these statements. You can identify such statements by the fact that they do not relate strictly to historical or current facts. These statements use words such as “believe,” “expect,” “should,” “strive,” “plan,” “intend,” “estimate” and “anticipate” or similar expressions. When we discuss strategy or plans, we are making projections, forecasts or forward-looking statements. Actual results and stockholder’s value will be affected by a variety of risks and factors, including, without limitation, international, national and local economic conditions and real estate risks and financing risks and acts of terror or war. Many of the risks and factors that will determine these results and values are beyond the Company’s ability to control or predict. These statements are necessarily based upon various assumptions involving judgment with respect to the future. All such forward-looking statements speak only as of the date of this Report. The Company expressly disclaims any obligation or undertaking to release publicly any updates of revisions to any forward-looking statements contained herein to reflect any change in the Company’s expectations with regard thereto or any change in events, conditions or circumstances on which any such statement is based. Factors that could adversely affect the Company’s ability to obtain these results and value include, among other things: (i) the volume of transactions and prices for real estate in the real estate markets generally, (ii) a general or regional economic downturn that could create a recession in the real estate markets, (iii) the Company’s debt level and its ability to make interest and principal payments, (iv) an increase in expenses related to new initiatives, investments in people, technology, and service improvements, (v) the Company’s ability to implement, and the success of, new initiatives and investments, including expansion into new specialty areas and integration of the Company’s business units, (vi) the ability of the Company to consummate acquisitions and integrate acquired companies and assets, and (vii) other factors described in the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2005, filed on September 28, 2005.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

A discussion of the Company’s critical accounting policies, which include revenue recognition, impairment of goodwill, deferred taxes and insurance and claims reserves, can be found in the Annual Report on Form 10-K for the fiscal year ended June 30, 2005. There have been no material changes to these policies in fiscal 2006.

RESULTS OF OPERATIONS

Services Revenue

The Company earns revenue from the delivery of transaction and management services to the commercial real estate industry. Transaction fees include commissions from leasing, acquisition and disposition, and agency leasing assignments as well as fees from appraisal and consulting services. Management fees, which include reimbursed salaries, wages and benefits, comprise the remainder of the Company’s services revenues, and include fees related to both property and facilities management outsourcing and business services.

Services revenue in any given quarter during the three fiscal year period ended June 30, 2005, as a percentage of total annual services revenue, ranged from a high of 29.2% to a low of 22.4%, with services revenue earned in the second quarters of each of the last three fiscal years ranging from 28.1% to 29.2%. The Company has typically experienced its lowest quarterly services revenue in the quarter ending March 31 of each year with higher and more consistent services revenue in the quarters ending June 30 and September 30, and its highest

quarterly services revenue in the quarter ending December 31, due to increased activity caused by the desire of clients to complete transactions by calendar year-end.

Total services revenue of $261.3 million was recognized for the six months ended December 31, 2005 as compared to revenue of $239.3 million for the same period last year. Transaction fees increased by $22.8 million, or 16.1%, in the current fiscal period over the same period in 2004. The Company continued to realize increased commissions from investment sales in the current fiscal year, as well as from industrial, office and retail leasing. Management fees decreased by $730,000, or 0.8%, during that same period.

Total revenue for the quarter ended December 31, 2005 was $140.6 million, an increase of 3.7% over revenue of $135.6 for the same period last year. Transaction services fees increased by $5.4 million, or 6.3%, in the current fiscal quarter over the same quarter in 2004 due primarily to an increase in commissions from investment sales and industrial and retail leases, while management services fees decreased by $408,000, or 0.8%, during the same period.

Costs of Services

Transaction commissions expense has historically been the Company’s largest expense and is a direct function of gross transaction services revenue levels, which include transaction services commissions and other fees. Professionals receive transaction commissions at rates that increase upon achievement of certain levels of production. As a percentage of gross transaction revenue, related commission expense increased to 65.5% for the six months ended December 31, 2005 as compared to 63.7% for the same period in 2004 and increased to 66.4% from 64.4% for the respective quarters ended December 31 in the same periods. These increases resulted from higher overall transaction revenues as well as increased transaction production levels in certain markets in the country.

Reimbursable expenses, related to salaries, wages and benefits, increased slightly by $413,000, or 0.6% in the current fiscal period over the same period in 2004, and $228,000, or 0.6%, for the respective quarters ended December 31 in the same periods.

Salaries and other direct costs increased by $410,000, or 2.3%, in the current fiscal period over the same period in 2004, and $61,000, or 0.7%, for the respective quarters ended December 31 in the same periods.

Costs and Expenses

Salaries, wages and benefits increased by $730,000, or 2.7%, during the six months ended December 31, 2005 as compared to December 31, 2004 as the Company incurred an increase in salaries related to key executive hires and higher performance based incentive compensation. Selling, general and administrative expenses increased by $452,000, or 2.0%, for the same period. For the quarter ended December 31, 2005, salaries, wages and benefits decreased by $258,000, or 1.9%, as compared to the same period in the prior year, while selling, general and administrative expenses increased $757,000, or 6.6%, due in part to expenses related to the relocation of the New York City office described below.

Depreciation and amortization expense for the six months ended December 31, 2005 increased 24.9% to $3.6 million from $2.9 million in the comparable period last year. The Company holds multi-year service contracts with certain key professionals, the costs of which are amortized over the lives of the respective contracts, which are generally two to three years. Amortization expense relating to these contracts increased to $882,000 from $695,000 for the six months ended December 31, 2005 as compared to the same period in the prior year. A similar related increase resulted in the quarter ended December 31, 2005, as depreciation and amortization expense increased $690,000, or 47.1%, from the comparable prior year period. In addition, certain leasehold improvements were fully amortized during the quarter ended December 31, 2005 due to the relocation of the New York City office as described below.

The Company has relocated its New York City operations into newly leased office space in mid-town Manhattan and, as a result, incurred additional expenses totaling approximately $1,083,000 in the quarter ended December 31, 2005 when compared to the prior year’s comparable quarter. Included in these additional expenses were the write-off of unamortized leasehold improvements of approximately $665,000 related to the prior leased space and other relocation costs totaling approximately $418,000.

Interest income increased during the six months and quarter ended December 31, 2005 as compared to the same periods in the prior year as both average invested funds and interest rates increased.

Interest expense incurred during the six months ended December 31, 2005 and 2004 was due primarily to the Company’s term loan borrowings under the credit facility. Interest rates on loan borrowings have risen sharply over the past twelve months, and resulted in the increase in interest expense for the six months and quarter ended December 31, 2005 as compared to the same periods in the prior year.

The Company incurred a tax provision of approximately $2.8 million in the quarter ended December 31, 2005, which was partially offset by a tax benefit of approximately $1.1 million related to a reduction in the valuation allowance against the Company’s deferred tax assets. This resulted in a net tax provision of approximately $1.7 million for both the quarter and six months ended December 31, 2005. Similarly, tax benefits recognized from prior reductions in the valuation allowance, in the first quarter of fiscal year 2006 and the first two quarters of fiscal year 2005, significantly offset the tax provisions incurred for the respective periods.

Net Income

Net income to common stockholders for the six months ended December 31, 2005 was $7.2 million, or $0.49 per common share on a diluted basis, as compared to $6.0 million, or $0.40 per common share, for the same period in the prior fiscal year. For the quarter ended December 31, 2005, net income was $5.0 million, or $0.36 per common share on a diluted basis, as compared to $7.9 million, or $0.52 per common share, for the same period in fiscal year 2005. Dividends accrued on the Series A Preferred Stock issued by the Company were $889,000 for the six months ended December 31, 2004. This preferential cumulative dividend on the Preferred Stock was eliminated in December 2004.

LIQUIDITY AND CAPITAL RESOURCES

For the six months ended December 31, 2005, the Company generated net cash flow from operating activities of $30.8 million including cash retained as a result of the deferral of payments of commissions totaling $18.6 million, used $1.6 million in net investing activities primarily for purchases of equipment, software and leasehold improvements and used $23.2 million in net financing activities primarily for the repurchase of common stock.

The Company has historically experienced the highest use of operating cash in the quarter ended March 31, primarily related to the payment of incentive and deferred commission payable balances which attain peak levels during the quarter ended December 31. Deferred commission balances of approximately $18.6 million, related to revenues earned in calendar year 2005, were paid in January 2006, and production and incentive bonuses of approximately $9.4 million are expected to be paid during the quarter ended March 31, 2006.

See Note 5 of Notes to Condensed Consolidated Financial Statements in Item 1 of this Report for information concerning earnings before interest, taxes, depreciation and amortization.

The Company has no current principal payments due under the $25.0 million term portion of its Credit Facility with Deutsche Bank as of December 31, 2005. The Company also has a revolving line of credit of $35.0 million, of which approximately $31.4 million is available as of December 31, 2005. The Company issued various letters of credit, totaling approximately $3.6 million, under the revolving line of credit primarily to collateralize certain obligations related to its insurance programs. In January 2006, a letter of credit totaling $401,000 was cancelled. The Company believes that it can meet its working capital and investing needs with internally generated operating cash flow and, as necessary, borrowings under its revolving line of credit.

Interest on outstanding borrowings under the credit facility is based upon Deutsche Bank’s prime rate and/or a LIBOR based rate plus, in either case, an additional margin based upon a particular financial leverage ratio of the Company, and will vary depending upon which interest rate options the Company chooses to be applied to specific borrowings. The average interest rate incurred by the Company on all credit facility obligations during fiscal years 2006 and 2005 was 7.30% and 5.75%, respectively.

The Company provided Realty Advisors with initial equity capital of $2,000,000 and Realty Advisors subsequently transferred an aggregate of approximately 4.4% of its common stock, in equal amounts, to each of the five (5) members of its Board of Directors. If the offering is completed the Company would own approximately 21% of the outstanding common stock of Realty Advisors, assuming no exercise of the underwriter’s over-allotment option or the exercise of any warrants. The Company also agreed to purchase, for a certain period after the offering is completed and to the extent warrants are available, up to $3,500,000 of Realty Advisor warrants in the public marketplace if the price is $0.70 or less per warrant. In addition, the Company has further agreed that any such warrants purchased by it will not be sold or transferred until the completion of a business combination. The completion of any offering will be subject to a number of conditions, including market conditions. As a result, there can be no assurance as to the terms or size of any offering, or that any offering at all will be consummated.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Interest Rate Risk — Derivatives

The Company’s credit facility debt obligations are floating rate obligations whose interest rate and related monthly interest payments vary with the movement in LIBOR. As of December 31, 2005, the outstanding principal balances on these debt obligations totaled $25.0 million. Since interest payments on this obligation will increase if interest rate markets rise, or decrease if interest rate markets decline, the Company is subject to cash flow risk related to these debt instruments. In order to mitigate this risk, the terms of the new credit agreement executed by the Company in June 2004 required the Company to enter into interest rate protection agreements to effectively cap the variable interest rate exposure on a portion of the obligations for a period of two years. The Company executed such an interest agreement with Deutsche Bank AG in July 2004, which will provide for quarterly payments to the Company equal to the variable LIBOR based interest amount paid by the Company in excess of 3.5% of the underlying notional amounts.

The Company does not utilize financial instruments for trading or other speculative purposes, nor does it utilize leveraged financial instruments.

Interest rate risk — Debt

The Company’s earnings are affected by changes in short term interest rates as a result of the variable interest rates incurred on the Company’s credit facility obligations. However, due to its purchase of the interest rate cap agreement described above, the effects of interest rate changes are limited. If LIBOR borrowing rates increase by 50 basis points, over the average levels incurred by the Company during fiscal 2006, the Company’s interest expense would increase, and income before income taxes would decrease, by $62,500 per annum. Comparatively, if LIBOR borrowing rates decrease by 50 basis points below the average levels incurred by the Company during fiscal 2006, the Company’s interest expense would decrease, and income before income taxes would increase, by $125,000 per annum. These amounts are determined by considering the impact of the hypothetical interest rates on the Company’s borrowing cost and interest rate cap agreement. They do not consider the effects that such an environment could have on the level of overall economic activity. These sensitivity analyses also assume no changes in the Company’s future or past years’ financial structure.

Item 4. Controls and Procedures

Effective as of December 31, 2005, the Company carried out an evaluation, under the supervision and with the participation of management, including the Chief Executive Officer and the Chief Financial Officer, of the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a — 15e under the Exchange Act). Based upon the evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures are effective to timely alert them to material information relating to the Company (including its consolidated subsidiaries) required to be included in the Company’s Exchange Act filings. There were no significant changes in the Company’s internal controls or in other factors that could significantly affect those controls subsequent to the date of the evaluation.

Item 1. Legal Proceedings

The disclosure called for by Item 1 is incorporated by reference to Note 8 of Notes to Condensed Consolidated Financial Statements.

Item 4. Submission of Matters to a Vote of Security Holders

The 2005 annual meeting of stockholders of the Company was held on November 16, 2005. The Company submitted to a vote of stockholders, through the solicitation of proxies, the election of six directors, representing the entire Board of Directors. The votes cast for and withheld with respect to each nominee for election as director were as follows:


			Votes
			Withholding
Nominee	Votes For		Authority

R. David Anacker		25,446,444		619,460
Anthony G. Antone		24,848,000		1,217,904
C. Michael Kojaian		24,810,021		1,255,883
Robert J. McLaughlin		25,542,456		523,448
Mark E. Rose		24,876,922		1,188,982
Rodger D. Young		24,777,500		1,288,404

Item 6. Exhibits and Reports on Form 8-K

(a) Exhibits

(10) Material Contracts

10.1*

Employment Agreement entered into between Shelby E. Sherard and the Registrant dated October 10, 2005, incorporated herein by reference to Exhibit 1 to the Registrant’s Current Report on Form 8-K filed on October 14, 2005.

*Management contract or compensatory plan or arrangement.

(31) Section 302 Certifications

(32) Section 906 Certification

(b)		Reports on Form 8-K

		A Current Report on Form 8-K dated October 10, 2005 was filed with the Securities and Exchange Commission on October 14, 2005 reporting under Item 1.01 that the Company had issued a press release announcing that it had named Shelby E. Sherard as the Company’s Chief Financial Officer, and the related financial impact of her employment agreement.

		A Current Report on Form 8-K dated October 21, 2005 was filed with the Securities and Exchange Commission on October 25, 2005 reporting under Item 8.01 that the Company had filed a registration statement with the Securities and Exchange Commission relating to the proposed sale of 25 million units at $6.00 per unit of Grubb & Ellis Realty Advisors, Inc., a newly formed “blank check” company organized for the purpose of raising capital for the acquisition of commercial real estate.


PART I
	Item 1. Financial Statements
	Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
	Item 3. Quantitative and Qualitative Disclosures About Market Risk
	Item 4. Controls and Procedures
PART II
	Item 1. Legal Proceedings
	Item 4. Submission of Matters to a Vote of Security Holders
	Item 6. Exhibits and Reports on Form 8-K
SIGNATURE
EXHIBIT INDEX
Certification
Certification


	GRUBB & ELLIS COMPANY (Registrant)
Date: February 14, 2006	/s/ Shelby E. Sherard
	Shelby E. Sherard
	Chief Financial Officer

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	1.		I have reviewed this quarterly report on Form 10-Q of Grubb & Ellis Company;

	2.		Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

	3.		Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

	4.		The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

	a		designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

	b		evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

	c		disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

	a		all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

	b		any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls over financial reporting.



	/s/ Mark E. Rose
	Mark E. Rose
	Chief Executive Officer
	February 14, 2006