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MarketScreener Homepage  >  Equities  >  Nasdaq  >  Griffin Industrial Realty Inc    GRIF

GRIFFIN INDUSTRIAL REALTY INC

(GRIF)
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GRIFFIN INDUSTRIAL REALTY : MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. (form 10-K)

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02/12/2019 | 10:22am EDT

Overview

Griffin Industrial Realty, Inc. ("Griffin") is a real estate business principally engaged in developing, managing and leasing industrial/warehouse properties, and to a lesser extent, office/flex properties. Griffin seeks to add to its property portfolio through the acquisition and development of land or the purchase of buildings in select markets targeted by Griffin. Periodically, Griffin may sell certain portions of its undeveloped land that it has owned for an extended time period and the use of which is not consistent with Griffin's core development and leasing strategy.

The notes to Griffin's consolidated financial statements included in Item 8 of this Annual Report contain a summary of the significant accounting policies and methods used in the preparation of Griffin's consolidated financial statements. In the opinion of management, because of the relative magnitude of Griffin's real estate assets, accounting methods and estimates related to those assets are critical to the preparation of Griffin's consolidated financial statements. Griffin uses accounting policies and methods under accounting principles generally accepted in the United States of America ("U.S. GAAP"). The following are the critical accounting estimates and methods used by Griffin:

Revenue and gain recognition: Revenue includes rental revenue from Griffin's industrial and commercial properties and proceeds from property sales. Rental revenue is accounted for on a straight­line basis over the applicable lease term in accordance with the Financial Accounting Standards Board ("FASB") ASC 840, "Leases." Gains on property sales are recognized in accordance with FASB ASC 360­20 "Property, Plant and Equipment­Real Estate Sales" based on the specific terms of each sale. When the percentage of completion method is used to account for a sale of real estate, costs included in determining the percentage of completion include the costs of the land sold, allocated master planning costs, selling and transaction costs and estimated future costs related to the land sold.

Impairment of long­lived assets: Griffin reviews annually, as well as when conditions may indicate, its long­lived assets to determine if there are any indications of impairment, such as a prolonged vacancy in one of Griffin's rental properties. If indications of impairment are present, Griffin evaluates the carrying value of the assets in relation to undiscounted cash flows or the estimated fair value of the underlying assets. Development costs that have been capitalized are reviewed periodically for future recoverability.

Stock based compensation: Griffin determines stock based compensation based on the estimated fair values of stock options as determined on their grant dates using the Black­Scholes option­pricing model. In determining the estimated fair values of stock options issued, Griffin makes assumptions on expected volatility, risk free interest rates, expected option terms and dividend yields.

Derivative instruments: Griffin evaluates each interest rate swap agreement to determine if it qualifies as an effective cash flow hedge. Changes in the fair value of each interest rate swap agreement that management determines to be an effective cash flow hedge are recorded as a component of other comprehensive income. The fair value of each interest rate swap agreement is determined based on observable market participant data, such as yield curves, as of the fair value measurement date.

Income taxes: In accounting for income taxes under FASB ASC 740, "Income Taxes," management estimates future taxable income from operations, the sale of appreciated assets, the remaining years before the expiration of loss credit carryforwards, future reversals of existing temporary differences and tax planning strategies in determining if it is more likely than not that Griffin will realize the benefits of its deferred tax assets. Deferred tax assets and deferred tax liabilities are measured using the enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and deferred tax liabilities of a change in tax rates on income is recognized in the period that the tax rate change is enacted.




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Summary

In the fiscal year ended November 30, 2018 ("fiscal 2018"), Griffin incurred a net loss of approximately $1.7 million as compared to net income of approximately $4.6 million in the fiscal year ended November 30, 2017 ("fiscal 2017"). The net loss in fiscal 2018, as compared to the net income in fiscal 2017, principally reflected: (a) a decrease of approximately $7.7 million in operating income in fiscal 2018 as compared to fiscal 2017; (b) an increase of approximately $0.6 million in interest expense in fiscal 2018 as compared to fiscal 2017; and (c) a gain of approximately $0.3 million in fiscal 2017 from the sale of Griffin's holdings of common stock of Centaur Media, plc ("Centaur Media"); partially offset by (d) a decrease of approximately $2.2 million in the income tax provision in fiscal 2018 as compared to fiscal 2017.

The lower operating income in fiscal 2018, as compared to fiscal 2017, reflected: (a) an approximately $9.3 million decrease in gain from property sales; and (b) an approximately $1.3 million increase in depreciation and amortization expense in fiscal 2018 as compared to fiscal 2017; partially offset by (c) an approximately $2.2 million increase in profit from leasing activities2 (which Griffin defines as rental revenue less operating expenses of rental properties); and (d) an approximately $0.8 million decrease in general and administrative expenses in fiscal 2018 as compared to fiscal 2017. The lower gain from property sales in fiscal 2018, as compared to fiscal 2017, principally reflected a gain of approximately $8.0 million in fiscal 2017 on the sale of approximately 67 acres of undeveloped land in Phoenix Crossing (the "2017 Phoenix Crossing Land Sale"). The higher depreciation and amortization expense in fiscal 2018, as compared to fiscal 2017, principally reflected depreciation and amortization related to: (a) 215 International Drive ("215 International"), an approximately 277,000 square foot industrial/warehouse building that was acquired in the fiscal 2017 third quarter and is Griffin's first property in the Charlotte, North Carolina area; (b) 330 Stone Road ("330 Stone"), an approximately 137,000 square foot industrial/warehouse building that was completed and placed in service just prior to the end of fiscal 2017 in New England Tradeport ("NE Tradeport"), Griffin's industrial park located in Windsor and East Granby, Connecticut; and (c) tenant improvements and lease commissions related to new leases in the latter part of fiscal 2017 and fiscal 2018.

The increase in profit from leasing activities to approximately $23.2 million in fiscal 2018, from approximately $21.1 million in fiscal 2017, principally reflected an approximately $2.8 million increase in rental revenue in fiscal 2018 as a result of more space under lease in fiscal 2018 than fiscal 2017, partially offset by an increase of approximately $0.7 million in operating expenses of rental properties, due principally to 215 International and 330 Stone being in service for the entire year in fiscal 2018. The lower general and administrative expenses in fiscal 2018, as compared to fiscal 2017, principally reflected a decrease of approximately $0.5 million of expenses related to Griffin's non-qualified deferred compensation plan in fiscal 2018 and an expense of approximately $0.3 million in fiscal 2017 for the write-off of costs related to a land purchase that was not completed. The higher interest expense in fiscal 2018, as compared to fiscal 2017, principally reflected the higher amount of debt outstanding in fiscal 2018 as compared to fiscal 2017.

The lower income tax provision in fiscal 2018, as compared to fiscal 2017, reflected pretax income in fiscal 2017, as compared to a pretax loss in fiscal 2018, partially offset by approximately $1.0 million in the fiscal 2018 income tax provision for the re-measurement of Griffin's deferred tax assets and liabilities from the reduction in the U.S. federal corporate statutory tax rate from 35% to 21% under the Tax Cuts and Jobs Act ("TCJA") that became effective for Griffin in the fiscal 2018 first quarter. As Griffin had net deferred tax assets when the TCJA became effective for Griffin, the re-measurement of deferred tax assets and liabilities resulted in the charge that is included in the fiscal 2018 income tax provision.







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2Profit from leasing activities is not a financial measure in conformity with accounting principles generally accepted in the United States of America ("U.S. GAAP"). It is presented because Griffin believes it is a useful financial indicator for measuring results of its real estate leasing activities. However, it should not be considered as an alternative to operating income as a measure of operating results in accordance with U.S. GAAP.




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Results of Operations

Fiscal 2018 Compared to Fiscal 2017

Total revenue decreased from approximately $43.9 million in fiscal 2017 to approximately $33.8 million in fiscal 2018, reflecting a decrease of approximately $12.9 million in revenue from property sales partially offset by an increase of approximately $2.8 million in rental revenue.

Rental revenue increased to approximately $32.8 million in fiscal 2018 from approximately $29.9 million in fiscal 2017. The approximately $2.8 million increase in rental revenue in fiscal 2018 over fiscal 2017 was principally due to: (a) approximately $1.0 million of rental revenue from two newly constructed buildings added to Griffin's portfolio, 330 Stone and 220 Tradeport Drive ("220 Tradeport"), an approximately 234,000 square foot build-to-suit industrial/warehouse building in NE Tradeport that was completed and fully leased in the fiscal 2018 fourth quarter; (b) an increase of approximately $0.8 million of rental revenue from 215 International as a result of owning that building for the entire year in fiscal 2018 versus a partial year in fiscal 2017; (c) approximately $1.8 million of rental revenue from leasing previously vacant space; and (d) an increase in rental revenue of approximately $0.2 million from all other properties; partially offset by (e) approximately $1.0 million of rental revenue from leases that expired.

A summary of the total square footage and leased square footage of the buildings in Griffin's real estate portfolio is as follows:


                                        Total       Square
                                       Square       Footage     Percentage
                                       Footage      Leased        Leased
           As of November 30, 2018    4,078,000    3,777,000       93%
           As of November 30, 2017    3,710,000    3,515,000       95%



The approximately 368,000 square foot increase in Griffin's real estate portfolio from November 30, 2017 to November 30, 2018 was due to the completion and placing into service in the fiscal 2018 fourth quarter of 220 Tradeport and 6975 Ambassador Drive ("6975 Ambassador"), an approximately 134,000 square foot industrial/warehouse building, built on speculation, in the Lehigh Valley of Pennsylvania. 6975 Ambassador is not yet leased.

The approximately 262,000 square foot net increase in space leased as of November 30, 2018, as compared to November 30, 2017, reflected: (a) an increase of approximately 234,000 square feet from the completion of and lease commencement at 220 Tradeport; (b) an increase of approximately 63,000 square feet from leasing the remaining vacant space at 330 Stone, resulting in that building, which was built on speculation, becoming fully leased; and (c) leasing approximately 47,000 square feet of previously vacant space (mostly industrial/warehouse space); partially offset by (d) a reduction of approximately 82,000 square feet from lease expirations, including approximately 48,000 square feet in a NE Tradeport industrial/warehouse building as a result of a lease amendment (the "Lease Amendment") with a tenant that had filed for protection under Chapter 11 of the U.S. Bankruptcy Code whereby the tenant reduced its space under lease from approximately 100,000 square feet to approximately 52,000 square feet. In fiscal 2018, Griffin renewed several leases aggregating approximately 415,000 square feet (mostly industrial/warehouse space), including a three year renewal of a full building lease of an approximately 228,000 square foot building in the Lehigh Valley scheduled to expire on September 30, 2018, at a rental rate 12% higher than the rental rate in effect at the time of the lease renewal and a three year renewal of a full building lease of an approximately 127,000 square foot building in NE Tradeport that was scheduled to expire on February 28, 2019.

As of November 30, 2018, Griffin's approximately 3,645,000 square feet of industrial/warehouse space, which comprised approximately 89% of Griffin's total square footage, was 95% leased, with the only significant vacancies being 6975 Ambassador and the approximately 48,000 square feet in NE Tradeport that was vacated as a result of the Lease Amendment. Griffin's office/flex buildings, aggregating approximately 433,000 square feet (11% of Griffin's total square footage) are located in the Hartford, Connecticut area, and were approximately 72% leased as of November 30, 2018.

All of Griffin's industrial/warehouse buildings and office/flex buildings in Connecticut are in the north submarket of Hartford. The Q4 2018 CBRE|New England Marketview Report ("Q4 2018 CBRE|New England Report")


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from CBRE Group, Inc. ("CBRE"), a national real estate services company, stated that the vacancy rate in the greater Hartford industrial market decreased to 7.2% at the end of 2018 from 8.8% at the end of 2017, and that net absorption in the greater Hartford industrial market in 2018 was approximately 1.2 million square feet. The Q4 2018 CBRE|New England Report also stated that the vacancy rate in the north submarket of Hartford, where a portion of Griffin's properties are located, decreased to 5.4% at the end of 2018 from 6.3% at the end of 2017, with net absorption of approximately 0.3 million square feet in 2018. The decrease in the Hartford industrial market vacancy rate in 2018 continued the downward trend from 2014, when the vacancy rate in the Hartford industrial market was 12.3%. The Hartford office/flex market remained weak in 2018, as evidenced by vacancy rates at the end of 2018, as stated in the Q4 2018 CBRE|New England Report, of 17.2% for the overall Hartford market and 33.6% in north submarket of Hartford.

The strong growth and active leasing market for industrial/warehouse space that the Lehigh Valley experienced in recent years continued in 2018. The vacancy rate of Lehigh Valley industrial/warehouse properties, in the counties where Griffin's Lehigh Valley properties are located, as reported in CBRE's Q4 2018 Marketview Lehigh Valley PA Industrial Report, was 4.8% at the end of 2018, with a net absorption of approximately 5.5 million square feet in 2018. The Charlotte, North Carolina industrial real estate market remained strong in 2018. CBRE's Q4 2018 Marketview Charlotte Industrial Report stated a vacancy rate of 5.3% for warehouse space at the end of 2018 and absorption of 4.8 million square feet of warehouse space in 2018. There is no guarantee that an active or strong real estate market or an increase in inquiries from prospective tenants will result in leasing space that was vacant as of November 30, 2018 or leasing space in buildings expected to be completed in 2019.

Revenue from property sales of approximately $1.0 million in fiscal 2018 reflected approximately $0.8 million from the sale of approximately 49 acres of undeveloped land in Southwick, Massachusetts (the "2018 Southwick Land Sale"), approximately $0.1 million from the sale of a residential lot at Stratton Farms, Griffin's residential subdivision in Suffield, Connecticut, and approximately $0.1 million from a buyer's forfeiture of a deposit on a potential land sale that was not completed. The aggregated cost related to the 2018 Southwick Land Sale, the Stratton Farms residential lot sale and the deposit forfeiture was approximately $0.1 million, resulting in a total pretax gain of approximately $0.9 million from property sales in fiscal 2018.

Revenue from property sales of approximately $14.0 million in fiscal 2017 reflected: (a) approximately $10.3 million from the 2017 Phoenix Crossing Land Sale; (b) approximately $2.1 million from the sale of approximately 76 acres of undeveloped land in Southwick, Massachusetts (the "2017 Southwick Land Sale"); and (c) approximately $1.3 million from the sale of two smaller parcels of undeveloped land in Phoenix Crossing. In addition, Griffin sold two small residential lots for total revenue of approximately $0.2 million and recognized approximately $0.1 million of revenue from a prior year land sale. The costs related to the 2017 Phoenix Crossing Land Sale, the 2017 Southwick Land Sale and the sale of two smaller Phoenix Crossing parcels of undeveloped land were approximately $2.3 million, $0.2 million and $1.2 million, respectively, resulting in pretax gains of approximately $8.0 million, $1.9 million and $0.1 million, respectively. Property sales occur periodically and year to year changes in revenue from property sales may not be indicative of any trends in Griffin's real estate business.

Operating expenses of rental properties increased to approximately $9.5 million in fiscal 2018 from approximately $8.9 million in fiscal 2017. The approximately $0.6 million increase in operating expenses of rental properties in fiscal 2018, as compared to fiscal 2017, principally reflected approximately $0.2 million of expenses at 330 Stone (placed in service just prior to the end of fiscal 2017), a total of approximately $0.2 million of expenses at 220 Tradeport and 6975 Ambassador (both were placed in service in the fiscal 2018 fourth quarter), an increase of approximately $0.1 million of expenses at 215 International (acquired in the fiscal 2017 third quarter) and an increase of approximately $0.1 million of expenses across all other properties.

Depreciation and amortization expense increased to approximately $11.4 million in fiscal 2018 from approximately $10.1 million in fiscal 2017. The approximately $1.3 million increase in depreciation and amortization expense in fiscal 2018, as compared to fiscal 2017, principally reflected: (a) an approximately $0.4 million increase from a full year of depreciation and amortization expense at 215 International in fiscal 2018 versus a partial year in fiscal 2017; (b) approximately $0.4 million of depreciation and amortization expense at 330 Stone; (c) approximately $0.2 million of depreciation and amortization expense related to 220 Tradeport and 6975 Ambassador; and (d) approximately $0.3 million of depreciation and amortization expense on tenant improvements and lease commissions related to new leases in the latter part of fiscal 2017 and fiscal 2018.


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Griffin's general and administrative expenses decreased to approximately $7.7 million in fiscal 2018 from approximately $8.6 million in fiscal 2017. The approximately $0.8 million decrease in general and administrative expenses in fiscal 2018, as compared to fiscal 2017, principally reflected approximately $0.5 million of lower expenses related to Griffin's non-qualified deferred compensation plan, a decrease of approximately $0.2 million of incentive compensation expense and approximately $0.3 million of expense incurred in fiscal 2017 for the write-off of expenditures incurred for a potential purchase of undeveloped land in the Lehigh Valley that was not completed, partially offset by an increase of approximately $0.2 million for all other general and administrative expenses. The lower expense related to Griffin's non-qualified deferred compensation plan reflected the effect of lower stock market performance on participant balances in fiscal 2018, as compared to fiscal 2017, which resulted in a smaller increase in the non-qualified deferred compensation plan liability in fiscal 2018 as compared to fiscal 2017.

Griffin's interest expense increased to approximately $6.3 million in fiscal 2018 from approximately $5.7 million in fiscal 2017. The approximately $0.6 million increase in interest expense in fiscal 2018, as compared to fiscal 2017, principally reflected interest expense of approximately $0.8 million on the higher amount of outstanding debt in fiscal 2018, partially offset by an increase of approximately $0.2 million of interest capitalized in fiscal 2018 as compared to fiscal 2017.

Griffin's income tax provision was approximately $0.5 million in fiscal 2018 as compared to approximately $2.7 million in fiscal 2017. The income tax provision in fiscal 2018 included approximately $1.0 million for the re-measurement of Griffin's deferred tax assets and liabilities as a result of the reduction in the U.S. federal corporate statutory tax rate from 35% to 21% under the TCJA. As Griffin had net deferred tax assets at the time the TCJA became effective for Griffin, the re-measurement of deferred tax assets and liabilities resulted in the charge included in the fiscal 2018 income tax provision. Partially offsetting the charge for the re-measurement of deferred tax assets and liabilities were income tax benefits of approximately $0.3 million on the approximately $1.1 million pretax loss in fiscal 2018 and approximately $0.2 million related to the exercise of stock options in fiscal 2018.

Fiscal 2017 Compared to Fiscal 2016

Total revenue increased to approximately $43.9 million in fiscal 2017 from approximately $30.9 million in fiscal 2016, reflecting increases of approximately $9.6 million in revenue from property sales and approximately $3.4 million in rental revenue. Rental revenue increased to approximately $29.9 million in fiscal 2017 from approximately $26.5 million in fiscal 2016. The approximately $3.4 million increase in rental revenue in fiscal 2017 over fiscal 2016 was principally due to: (a) an increase of approximately $1.9 million from leasing previously vacant space; (b) an increase of approximately $1.8 million from 5210 Jaindl Blvd. ("5210 Jaindl"), an approximately 252,000 square foot industrial/warehouse building in the Lehigh Valley that was placed in service and fully leased in fiscal 2016 with tenants taking occupancy and generating rental revenue starting in fiscal 2017; and (c) approximately $0.7 million of rental revenue from 215 International, the industrial/warehouse building acquired in the fiscal 2017 third quarter; partially offset by (d) a decrease of approximately $1.0 million from leases that expired.

A summary of the total square footage and leased square footage of the buildings in Griffin's real estate portfolio is as follows:




                                        Total       Square
                                       Square       Footage     Percentage
                                       Footage      Leased        Leased
           As of November 30, 2017    3,710,000    3,515,000       95%
           As of November 30, 2016    3,297,000    3,066,000       93%



The approximately 413,000 square foot increase in total square footage as of November 30, 2017, as compared to November 30, 2016, was due to the acquisition of 215 International and the completion of construction and placing into service of 330 Stone just prior to the end of fiscal 2017.

The approximately 449,000 square foot net increase in space leased as of November 30, 2017, as compared to November 30, 2016, was principally due to: (a) approximately 277,000 square feet at 215 International, which was 74%


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leased when acquired and subsequently became fully leased; (b) approximately 74,000 square feet being leased in 330 Stone; and (c) two new leases of industrial/warehouse space aggregating approximately 104,000 square feet in NE Tradeport; partially offset by (d) the expiration of an approximately 12,000 square foot lease of office/flex space in Griffin Center South in Bloomfield, Connecticut.

Revenue from property sales increased to approximately $14.0 million in fiscal 2017 from approximately $4.4 million in fiscal 2016. Property sales revenue in fiscal 2017 included: (a) approximately $10.3 million from the 2017 Phoenix Crossing Land Sale; (b) approximately $2.1 million from the 2017 Southwick Land Sale; and (c) approximately $1.3 million from the sale of two smaller parcels of undeveloped land in Phoenix Crossing. In addition, Griffin sold two small residential lots for total revenue of approximately $0.2 million and recognized approximately $0.1 million of revenue from a prior year land sale. The costs related to the 2017 Phoenix Crossing Land Sale, the Southwick Land Sale and the sale of two smaller Phoenix Crossing parcels of undeveloped land were approximately $2.3 million, $0.2 million and $1.2 million, respectively, resulting in pretax gains of approximately $8.0 million, $1.9 million and $0.1 million, respectively. The costs of the two smaller Phoenix Crossing parcels were relatively higher than the costs of other Phoenix Crossing land sold because those parcels were acquired more recently than the other Phoenix Crossing land, which had been held for many years and had a low cost basis.

Revenue from property sales in fiscal 2017 included recognition of the remaining approximately $0.1 million from the sale of approximately 90 acres of undeveloped land in Phoenix Crossing (the "2013 Phoenix Crossing Land Sale") that closed in the fiscal year ended November 30, 2013 ("fiscal 2013") and was accounted for under the percentage of completion method whereby revenue and gain were recognized as costs related to the 2013 Phoenix Crossing Land Sale were incurred. Under the terms of the 2013 Phoenix Crossing Land Sale, Griffin constructed roads to connect the land sold to existing town roads. Such construction was completed in fiscal 2017. Accordingly, because of Griffin's continued involvement with the land that was sold, the 2013 Phoenix Crossing Land Sale was accounted for under the percentage of completion method. From the closing of the 2013 Phoenix Crossing Land Sale through the end of fiscal 2017, Griffin recognized total revenue of approximately $9.0 million and a total pretax gain of approximately $6.7 million from the 2013 Phoenix Crossing Land Sale. Property sales occur periodically and changes in revenue from year to year from property sales may not be indicative of any trends in Griffin's real estate business.

Griffin's revenue from property sales of approximately $4.4 million in fiscal 2016 reflected approximately $3.8 million from the sale of approximately 29 acres of undeveloped land in Griffin Center (the "2016 Griffin Center Land Sale") that resulted in a pretax gain of approximately $3.2 million and the recognition of approximately $0.6 million of revenue from the 2013 Phoenix Crossing Land Sale that resulted in a pretax gain of approximately $0.4 million.

Operating expenses of rental properties increased to approximately $8.9 million in fiscal 2017 from approximately $8.3 million in fiscal 2016. The increase of approximately $0.6 million in operating expenses of rental properties in fiscal 2017, as compared to fiscal 2016, principally reflected: (a) an increase of approximately $0.4 million at 5210 Jaindl, which was in service for the entire year in fiscal 2017 versus five months in fiscal 2016; (b) approximately $0.1 million at 215 International; and (c) increases aggregating approximately $0.1 million across all other properties.

Depreciation and amortization expense increased to approximately $10.1 million in fiscal 2017 from approximately $8.8 million in fiscal 2016. The increase of approximately $1.3 million in depreciation and amortization expense in fiscal 2017, as compared to fiscal 2016, principally reflected: (a) an increase of approximately $0.6 million related to 5210 Jaindl; (b) approximately $0.5 million related to 215 International; and (c) an increase of approximately $0.2 million across all other properties.

Griffin's general and administrative expenses increased to approximately $8.6 million in fiscal 2017 from approximately $7.4 million in fiscal 2016. The increase of approximately $1.2 million in general and administrative expenses in fiscal 2017, as compared to fiscal 2016, principally reflected: (a) an increase of approximately $0.6 million in compensation expense, which includes increases of approximately $0.4 million of incentive compensation expense and approximately $0.2 million of salary expense; (b) an increase of approximately $0.3 million related to Griffin's non-qualified deferred compensation plan; and (c) approximately $0.3 million for the write-off of costs incurred for a potential purchase of a parcel of undeveloped land in the Lehigh Valley that was not completed. The increase in incentive compensation expense in fiscal 2017, as compared to fiscal 2016, reflected Griffin's improved results of


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operations in fiscal 2017, as compared to fiscal 2016, that led to the achievement of certain objectives of Griffin's incentive compensation plan. The increase in salary expense in fiscal 2017, as compared to fiscal 2016, principally reflected the addition of the Director of Acquisitions position in fiscal 2017. The expense increase related to the non-qualified deferred compensation plan reflected the effect of higher stock market performance on participant balances in fiscal 2017, as compared to fiscal 2016, which resulted in a greater increase in Griffin's non-qualified deferred compensation plan liability in fiscal 2017, as compared to fiscal 2016.

Griffin's interest expense increased to approximately $5.7 million in fiscal 2017 from approximately $4.5 million in fiscal 2016. The increase of approximately $1.2 million in interest expense in fiscal 2017, as compared to fiscal 2016, principally reflected: (a) approximately $0.5 million from financing 5210 Jaindl, which closed just prior to the end of fiscal 2016; (b) approximately $0.4 million from financing two previously unleveraged NE Tradeport industrial/warehouse buildings in fiscal 2017; (c) approximately $0.2 million less interest capitalized in fiscal 2017 as compared to fiscal 2016; and (d) approximately $0.1 million from financing 215 International in fiscal 2017.

In fiscal 2017, Griffin sold its remaining holdings of the common stock of Centaur Media for cash proceeds of approximately $1.2 million and a pretax gain of approximately $0.3 million. The approximately $0.1 million gain on the sale of assets in fiscal 2016 was from the disposition of certain fully depreciated equipment.

Griffin's income tax provision increased to approximately $2.7 million in fiscal 2017 from approximately $0.7 million in fiscal 2016. The income tax provision in fiscal 2017 reflected an effective tax rate of 36.7% on pretax income of approximately $7.3 million as compared to an effective tax rate of 56.1% on pretax income of approximately $1.3 million in fiscal 2016. The approximately $2.0 million increase in the income tax provision in fiscal 2017, as compared to fiscal 2016, reflected approximately $2.2 million as a result of the higher pretax income in fiscal 2017 than fiscal 2016, partially offset by the inclusion in fiscal 2016 of a charge of approximately $0.2 million related to the reduction of the expected realization rate of tax benefits from Connecticut state net operating loss carryforwards as a result of a change in Connecticut tax law, effective for Griffin in fiscal 2016, that limits the future usage of loss carryforwards to 50% of taxable income. The charge for the reduction of the expected realization rate of tax benefits from Connecticut state net operating loss carryforwards increased the fiscal 2016 effective tax rate by approximately 12%.

Off Balance Sheet Arrangements

Griffin does not have any off balance sheet arrangements.

Liquidity and Capital Resources

Net cash provided by operating activities was approximately $8.4 million in fiscal 2018 as compared to approximately $9.4 million in fiscal 2017. The approximately $1.0 million decrease in net cash provided by operating activities in fiscal 2018, as compared to fiscal 2017, principally reflected a decrease in cash of approximately $3.4 million from changes in assets and liabilities substantially offset by an increase in cash of approximately $2.4 million from results of operations as adjusted for gains on property sales and noncash expenses in fiscal 2018, as compared to fiscal 2017. The increase in cash provided by results of operations as adjusted for gains on property sales and noncash expenses principally reflected the approximately $2.2 million increase in profit from leasing activities in fiscal 2018, as compared to fiscal 2017.

The approximately $3.4 million decrease in cash from changes in assets and liabilities in fiscal 2018, as compared to fiscal 2017, principally reflected: (a) a decrease in deferred revenue of approximately $1.2 million in fiscal 2018 as compared to an increase of approximately $2.4 million in fiscal 2017; (b) an increase in other liabilities of approximately $0.2 million in fiscal 2018 as compared to an increase of approximately $1.1 million in fiscal 2017; and (c) a decrease in accounts payable and accrued liabilities of approximately $0.3 million in fiscal 2018 as compared to an increase of approximately $0.3 million in fiscal 2017; partially offset by (d) a decrease in other assets of approximately $0.3 million in fiscal 2018 as compared to an increase of approximately $2.1 million in fiscal 2017. The unfavorable change in deferred revenue in fiscal 2018, as compared to fiscal 2017, principally reflected less cash received in fiscal 2018 for tenant and building improvements that will be recognized as rental revenue over the tenants' respective lease terms. The less favorable change in other liabilities in fiscal 2018, as compared to fiscal 2017, principally reflected a smaller increase of Griffin's non-qualified deferred compensation plan liability, reflected through lower general and


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administrative expenses, as a result of the effect of lower stock market performance on participant balances in fiscal 2018. The unfavorable change in accounts payable and accrued liabilities in fiscal 2018, as compared to fiscal 2017, principally reflected the timing of payments. The lower increase in other assets in fiscal 2018, as compared to fiscal 2017, principally reflected a decrease in amounts due from tenants.

In fiscal 2017, net cash provided by operating activities increased to approximately $9.4 million from approximately $7.2 million in fiscal 2016. The approximately $2.2 million increase in net cash provided by operating activities in fiscal 2017, as compared to fiscal 2016, principally reflected an increase of approximately $1.6 million of cash provided by changes in assets and liabilities in fiscal 2017, as compared to fiscal 2016, and an increase of approximately $0.6 million of cash provided by results of operations as adjusted for gains on property sales and noncash expenses in fiscal 2017, as compared to fiscal 2016. The increase in net income as adjusted for gains on property sales and noncash expenses reflected the approximately $2.8 million increase in profit from leasing activities in fiscal 2017, as compared to fiscal 2016, partially offset by the approximately $1.1 million increase in interest expense and the approximately $1.2 million increase in general and administrative expenses, a portion of which were noncash and reflected in the favorable changes in assets and liabilities.

The approximately $1.6 million increase in cash from changes in assets and liabilities in fiscal 2017, as compared to fiscal 2016, principally reflected: (a) an increase in deferred revenue of approximately $2.4 million in fiscal 2017 as compared to a decrease of approximately $0.7 million in fiscal 2016; and (b) an increase in other liabilities of approximately $1.1 million in fiscal 2017 as compared to an increase of approximately $0.4 million in fiscal 2016; partially offset by (c) an increase in other assets of approximately $2.1 million in fiscal 2017 as compared to a decrease of approximately $0.1 million in fiscal 2016. The favorable change in deferred revenue in fiscal 2017, as compared to fiscal 2016, principally reflected cash received for tenant and building improvements that will be recognized as rental revenue over the tenants' respective lease terms. The favorable change in other liabilities in fiscal 2017, as compared to fiscal 2016, principally reflected the increase of Griffin's non-qualified deferred compensation plan liability, reflected in general and administrative expenses, as a result of the increase in participant balances in fiscal 2017. The unfavorable change in other assets principally reflected differences in reported rental revenue and cash received from tenants due to the effect of rent abatements given to tenants primarily at the start of leases and an increase in amounts due from tenants, principally due to timing of payments received from tenants for additional tenant and building improvements related to new leases.

Net cash used in investing activities was approximately $45.3 million in fiscal 2018, as compared to approximately $19.9 million in fiscal 2017 and approximately $16.6 million in fiscal 2016. The net cash used in investing activities in fiscal 2018 reflected: (a) cash payments of approximately $28.6 million for additions to real estate assets; (b) net cash of $17.0 million used for short-term investments; and (c) cash payments of approximately $0.8 million for deferred leasing costs and other uses; partially offset by (d) cash proceeds of approximately $1.0 million from property sales; and (e) approximately $0.1 million of cash proceeds from a fiscal 2017 property sale returned from escrow.

The approximately $28.6 million of cash payments for additions to real estate assets in fiscal 2018 reflected the following:




       New building construction (including site work)        $ 20.7 million
       Tenant and building improvements related to leasing    $  4.6 million
       Purchase of undeveloped land                           $  2.7 million
       Development costs and infrastructure improvements      $  0.6 million

Cash payments for new building construction (including site work) in fiscal 2018 included approximately $12.8 million for the construction of 220 Tradeport and approximately $7.7 million for the construction, on speculation, of 6975 Ambassador. Griffin completed construction of both 220 Tradeport and 6975 Ambassador in the fiscal 2018 fourth quarter. The total cost of site work and construction (excluding tenant improvements) of 220 Tradeport and 6975 Ambassador were approximately $13.2 million and approximately $8.1 million, respectively. Cash payments for new building construction (including site work) in fiscal 2018 also included the approximately $0.1 million of final payments for the construction of 330 Stone, which was completed in the fiscal 2017 fourth quarter, and approximately $0.1 million for the start of construction, on speculation, of two industrial/warehouse buildings aggregating


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approximately 283,000 square feet on a land parcel in Concord, North Carolina (the "Concord Land") that was purchased in fiscal 2018 (see below). Griffin expects to spend approximately $15.0 million for the site work and construction (excluding tenant improvements) of the two buildings being built on the Concord Land, with expected completion in the second half of fiscal 2019.

Cash payments for tenant and building improvements in fiscal 2018 principally related to the full building lease at 220 Tradeport (approximately $2.0 million), the approximately 74,000 square foot lease at 330 Stone that commenced just prior to the end of fiscal 2017 (approximately $1.5 million) and approximately $1.1 million related to other new leases and lease renewals signed in the latter part of fiscal 2017 and fiscal 2018.

The cash payment of approximately $2.7 million, including acquisition costs, for the purchase of undeveloped land in fiscal 2018 was for the purchase of the Concord Land, an approximately 22 acre parcel in the greater Charlotte area. Approximately $0.8 million of the purchase price of the Concord Land was paid using the proceeds from the 2018 Southwick Land Sale to complete a like-kind exchange ("1031 Like-Kind Exchange") under Section 1031 of the Internal Revenue Code of 1986, as amended (see below).

Net cash payments of $17.0 million used for short-term investments in fiscal 2018 reflected the investment in repurchase agreements with Webster Bank, N.A. ("Webster Bank") that are collateralized with securities issued by the United States Government or its sponsored agencies. These repurchase agreements have maturities of up to six months, and as of November 30, 2018, had a weighted average maturity of less than 90 days. Cash payments of approximately $0.8 million for deferred leasing costs and other uses in fiscal 2018 reflected approximately $0.7 million for lease commissions and other costs related to new and renewed leases and approximately $0.1 million for purchases of equipment.

The approximately $1.0 million of cash proceeds from property sales in fiscal 2018 reflected approximately $0.8 million from the 2018 Southwick Land Sale, approximately $0.1 million from the sale of a Stratton Farms residential lot and approximately $0.1 million from a buyer's forfeiture of a deposit on a potential land sale that did not close. The approximately $0.1 million of cash proceeds from property sales returned from escrow in fiscal 2018 reflected the amount remaining after approximately $1.8 million of the approximately $1.9 million of total cash proceeds from the 2017 Southwick Land Sale, deposited into escrow at closing, were used to purchase the Lehigh Valley land site for 6975 Ambassador in fiscal 2017 to complete a 1031 Like-Kind Exchange.

In fiscal 2017, net cash used in investing activities of approximately $19.9 million reflected: (a) cash payments of approximately $18.4 million for the acquisition of 215 International; (b) cash payments of approximately $17.6 million for additions to real estate assets; and (c) cash payments of approximately $1.6 million for deferred leasing costs and other uses; partially offset by (d) cash proceeds of approximately $13.0 million from property sales; (e) approximately $3.4 million of net cash proceeds from property sales returned from escrow; and (f) cash proceeds of approximately $1.2 million from the sale of Centaur Media common stock.

On June 9, 2017, Griffin paid cash of approximately $18.4 million (net of allowances) for the acquisition of 215 International, using the approximately $9.7 million of proceeds from the 2017 Phoenix Crossing Land Sale that were deposited in escrow at the closing of that transaction for the purchase of a replacement property for a 1031 Like-Kind Exchange, with the balance of approximately $8.7 million paid from cash on hand. Subsequent to the acquisition, Griffin closed on a nonrecourse mortgage loan of $12.15 million collateralized by 215 International (see below).

Cash payments for additions to real estate assets in fiscal 2017 reflected the following:


       Tenant and building improvements related to leasing    $ 7.9 million
       New building construction (including site work)        $ 7.0 million
       Purchase of undeveloped land                           $ 2.4 million
       Development costs and infrastructure improvements      $ 0.3 million

Cash payments for tenant and building improvements in fiscal 2017 related to new leases signed in the latter part of fiscal 2016 and fiscal 2017. Cash payments for new building construction in fiscal 2017 were for 330 Stone, which was 54% leased as of November 30, 2017, as a result of a lease for approximately 74,000 square feet with a tenant


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that had leased approximately 39,000 square feet in one of Griffin's other NE Tradeport industrial/warehouse buildings. The balance of 330 Stone was leased in fiscal 2018 and that building was fully leased as of November 30, 2018. Cash of approximately $2.4 million (including acquisition expenses) was paid for the purchase of approximately 14 acres of undeveloped land in the Lehigh Valley that had been under agreement. In fiscal 2018, 6975 Ambassador was built on the Lehigh Valley land acquired.

The approximately $13.0 million of cash proceeds from property sales in fiscal 2017 reflected approximately $9.7 million from the 2017 Phoenix Crossing Land Sale, approximately $1.9 million from the 2017 Southwick Land Sale, approximately $1.2 million from the sale of two smaller parcels of undeveloped land in Phoenix Crossing and approximately $0.2 million from the sale of two small residential lots. The approximately $3.4 million of net cash proceeds from property sales returned from escrow reflects approximately $3.5 million from the 2016 Griffin Center Land Sale, offset by approximately $0.1 million of cash that remained in escrow from the 2017 Southwick Land Sale. The cash proceeds from the 2016 Griffin Center Land Sale were deposited into escrow at closing for the potential purchase of a replacement property under a 1031 Like-Kind Exchange. The net cash proceeds from the 2016 Griffin Center Land Sale were returned to Griffin in fiscal 2017 because a replacement property was not purchased in the time period required for a 1031 Like-Kind Exchange. The cash proceeds of approximately $1.9 million from the 2017 Southwick Land Sale were deposited into escrow at closing and subsequently, approximately $1.8 million of such proceeds were used to purchase the approximately 14 acre parcel of undeveloped land in the Lehigh Valley where 6975 Ambassador was built (see above). The approximately $0.1 million of proceeds from the 2017 Southwick Land Sale that remained in escrow were returned to Griffin in fiscal 2018.

Cash payments of approximately $1.6 million in fiscal 2017 for deferred leasing costs and other uses reflected approximately $1.5 million for lease commissions and other costs related to new and renewed leases and approximately $0.1 million for purchases of equipment.

In fiscal 2016, the net cash used in investing activities of approximately $16.6 million reflected cash payments of approximately $15.7 million for additions to real estate assets and approximately $0.9 million for deferred leasing costs and other uses. The approximately $3.5 million of proceeds, net of transaction expenses, received from the 2016 Griffin Center Land Sale were placed in escrow for potential acquisition of a replacement property under a 1031 Like-Kind Exchange. As a replacement property was not purchased in the time period required for a 1031 Like-Kind Exchange, the proceeds from the 2016 Griffin Center Land Sale were returned to Griffin in fiscal 2017.

Cash payments for additions to real estate assets in fiscal 2016 reflected the following:


       New building construction (including site work)        $ 9.2 million
       Tenant and building improvements related to leasing    $ 5.4 million
       Development costs and infrastructure improvements      $ 0.6 million
       Other                                                  $ 0.5 million

Cash payments in fiscal 2016 for new building construction reflected the construction, on speculation, of 5210 Jaindl, which was started in the fiscal 2015 fourth quarter and completed in fiscal 2016. Cash payments in fiscal 2016 for tenant and building improvements principally reflected tenant improvement work related to leases signed in the latter part of fiscal 2015 and fiscal 2016. The cash spent on development costs and infrastructure improvements in fiscal 2016 principally reflected road improvements related to the 2013 Phoenix Crossing Land Sale. The cash spent on deferred leasing costs and other in fiscal 2016 principally reflected lease commissions paid to real estate brokers for new leases.

Net cash provided by financing activities was approximately $15.4 million in fiscal 2018, as compared to approximately $15.9 million in fiscal 2017 and approximately $15.8 million in fiscal 2016. The net cash provided by financing activities in fiscal 2018 reflected proceeds of approximately $31.6 million from a mortgage loan and a construction loan and approximately $1.8 million from the exercise of stock options; partially offset by: (a) approximately $15.4 million of principal payments on mortgage loans; (b) a payment of approximately $2.0 million for a dividend on Griffin's common stock ("Common Stock") that was declared in the fiscal 2017 fourth quarter and paid in fiscal 2018; and (c) approximately $0.6 million for payments of debt issuance costs.

The proceeds from a mortgage loan and a construction loan in fiscal 2018 reflected approximately $18.8 million from a mortgage loan refinancing (see below) and approximately $12.8 million from a construction loan (see below).


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The principal payments on mortgage loans reflected a payment of approximately $11.8 million in connection with the mortgage loan refinancing and approximately $3.6 million of recurring principal payments.

On March 15, 2017, a subsidiary of Griffin closed on a $12.0 million nonrecourse mortgage (the "2017 People's Mortgage") with People's United Bank, N.A. ("People's Bank"). On January 30, 2018, that subsidiary refinanced the 2017 People's Mortgage with a new approximately $18.8 million nonrecourse mortgage loan (the "2018 People's Mortgage") with People's Bank. The 2017 People's Mortgage had a balance of approximately $11.8 million at the time of refinancing. The 2018 People's Mortgage is collateralized by the same two NE Tradeport industrial/warehouse buildings (aggregating approximately 275,000 square feet) that collateralized the 2017 People's Mortgage, in addition to 330 Stone. Upon closing the 2018 People's Mortgage, Griffin received proceeds of $7.0 million (before transaction costs), net of the approximately $11.8 million used to refinance the 2017 People's Mortgage. The 2018 People's Mortgage has a ten year term with monthly principal payments based on a twenty-five year amortization schedule. The interest rate for the 2018 People's Mortgage is a floating rate of the one month LIBOR rate plus 1.95%. At the time the 2018 People's Mortgage closed, Griffin entered into an interest rate swap agreement with People's Bank that, combined with an interest rate swap agreement with People's Bank entered into at the time the 2017 People's Mortgage closed, effectively fixes the interest rate of the 2018 People's Mortgage at 4.57% over the mortgage loan's ten year term. Under the terms of the 2018 People's Mortgage, Griffin entered into a master lease for 759 Rainbow Road ("759 Rainbow"), one of the buildings that collateralize the 2018 People's Mortgage. The master lease would become effective only if the full building tenant in 759 Rainbow does not renew its lease when it is scheduled to expire in fiscal 2022 and would stay in effect until either the space is re-leased to a new tenant or the maturity date of the 2018 People's Mortgage.

On March 29, 2018, a subsidiary of Griffin closed on a $13.8 million construction to permanent mortgage loan (the "State Farm Loan") with State Farm Life Insurance Company ("State Farm"), to provide a significant portion of the funds for the construction of 220 Tradeport and tenant improvements related to the full building lease of that building. As a build-to-suit building, Griffin entered into a twelve and a half year lease for 220 Tradeport prior to the start of construction. Through November 30, 2018, Griffin had borrowed approximately $12.8 million under the State Farm Loan. Upon the commencement of rent payments by the tenant in 220 Tradeport, the terms of the State Farm Loan provide that it will convert to a fifteen year nonrecourse permanent mortgage loan, which is expected to take place in fiscal 2019. Under the terms of the State Farm Loan, the interest rate on the State Farm Loan is 4.51% during both the construction period and for the term of the permanent mortgage. Monthly principal payments, which begin after the conversion to a nonrecourse permanent mortgage loan, will be based on a twenty-five year amortization schedule. The State Farm Loan may be increased to approximately $14.3 million if certain additional improvements are made to 220 Tradeport.

The net cash provided by financing activities of approximately $15.9 million in fiscal 2017 reflected proceeds of approximately $39.1 million from new mortgage loans partially offset by: (a) approximately $19.3 million of principal payments on mortgage loans; (b) a payment of approximately $1.5 million for a dividend on Griffin's Common Stock that was declared in the fiscal 2016 fourth quarter and paid in fiscal 2017; (c) approximately $1.5 million paid for the repurchase of Common Stock; (d) approximately $0.6 million of payments for debt issuance costs; and (e) a payment of approximately $0.3 million for the termination of an interest rate swap agreement. The principal payments on mortgage loans include approximately $16.0 million for the repayment of two mortgage loans that were refinanced (see below) and approximately $3.3 million of recurring principal payments.

On September 22, 2017, two subsidiaries of Griffin closed on the refinancing of a nonrecourse mortgage (the "2012 Webster Mortgage") with Webster Bank that was collateralized by 5 and 7 Waterside Crossing, two multi-story office buildings aggregating approximately 161,000 square feet in Griffin Center in Windsor, Connecticut. Immediately prior to the refinancing, the 2012 Webster Mortgage had a balance of approximately $5.9 million with a maturity date of October 2, 2017. The refinanced nonrecourse mortgage loan (the "2017 Webster Mortgage") was for approximately $4.4 million, has a five year term with monthly principal payments based on a twenty-five year amortization schedule and is collateralized by the same properties that collateralized the 2012 Webster Mortgage. The 2017 Webster Mortgage has a variable interest rate of the one-month LIBOR rate plus 2.75%, but Griffin entered into an interest rate swap agreement with Webster Bank that effectively fixes the interest rate on the 2017 Webster Mortgage at 4.72% over the term of the 2017 Webster Mortgage. The 2012 Webster Mortgage had a variable interest rate that was effectively fixed at 3.86% through an interest rate swap agreement with Webster Bank. Griffin used cash on hand of approximately


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$1.0 million and approximately $0.5 million of cash that had been held in escrow by Webster Bank to repay a portion of the 2012 Webster Mortgage in connection with the refinancing.

On August 30, 2017, a subsidiary of Griffin closed on a $12.15 million nonrecourse mortgage (the "2017 40|86 Mortgage") with 40|86 Mortgage Capital, Inc. The 2017 40|86 Mortgage is collateralized by 215 International, which Griffin acquired on June 9, 2017. The 2017 40|86 Mortgage has an interest rate of 3.97% and a ten year term with monthly principal payments based on a thirty year amortization schedule.

On July 14, 2017, a subsidiary of Griffin closed on a $10.6 million nonrecourse mortgage loan (the "2017 Berkshire Mortgage") with Berkshire Bank. The 2017 Berkshire Mortgage refinanced an existing mortgage loan (the "2009 Berkshire Mortgage") with Berkshire Bank that was due on February 1, 2019 and was collateralized by 100 International Drive ("100 International"), an approximately 304,000 square foot industrial/warehouse building in NE Tradeport. The 2009 Berkshire Mortgage had a balance of approximately $10.1 million at the time of the refinancing and a variable interest rate of the one month LIBOR rate plus 2.75%. At the time Griffin closed on the 2009 Berkshire Mortgage, Griffin entered into an interest rate swap agreement with Berkshire Bank (the "2009 Berkshire Swap") to effectively fix the interest rate on the 2009 Berkshire Mortgage at 6.35% for the term of that loan. The 2017 Berkshire Mortgage is collateralized by the same property that collateralized the 2009 Berkshire Mortgage. Just prior to the closing on the 2017 Berkshire Mortgage, Griffin completed a lease amendment with the full building tenant in 100 International to extend the lease from its scheduled expiration date of July 31, 2019 to July 31, 2025. Under the terms of the 2017 Berkshire Mortgage, Griffin entered into a master lease of 100 International that would become effective if the tenant in 100 International does not renew its lease when it expires. The 2017 Berkshire Mortgage has a ten year term with monthly principal payments based on a twenty-five year amortization schedule. The interest rate for the 2017 Berkshire Loan is a variable rate of the one month LIBOR rate plus 2.05%. At the time the 2017 Berkshire Mortgage closed, Griffin terminated the 2009 Berkshire Swap and entered into a new interest rate swap agreement with Berkshire Bank that effectively fixes the interest rate of the 2017 Berkshire Mortgage at 4.39% over the loan term. Griffin paid approximately $0.3 million in connection with the termination of the 2009 Berkshire Swap.

The net cash provided by financing activities of approximately $15.8 million in fiscal 2016 reflected approximately $45.5 million of proceeds from new mortgage debt (see below) and $0.6 million of mortgage proceeds released from escrow, partially offset by: (a) approximately $24.8 million of principal payments on mortgage loans; (b) approximately $3.4 million paid for the repurchase of Common Stock (see below); (c) a payment of approximately $1.5 million for a dividend on Griffin's Common Stock that was declared in the fiscal 2015 fourth quarter and paid in fiscal 2016; and (d) approximately $0.6 million of payments for debt issuance costs. The principal payments on mortgage loans included approximately $21.1 million for the repayment of two mortgage loans that were refinanced (see below), approximately $2.7 million of recurring principal payments and a $1.0 million principal repayment from mortgage proceeds that had been held in escrow.

On November 17, 2016, Griffin closed on a nonrecourse mortgage (the "2016 Webster Mortgage") for approximately $26.7 million. The 2016 Webster Mortgage refinanced an existing mortgage with Webster Bank, which was due on September 1, 2025 and was collateralized by 5220 Jaindl Blvd. ("5220 Jaindl") (see below). The 2016 Webster Mortgage is collateralized by the approximately 280,000 square foot industrial/warehouse building, 5220 Jaindl, along with 5210 Jaindl, the adjacent approximately 252,000 square foot industrial/warehouse building. Griffin received net proceeds of $13.0 million (before transaction costs), net of approximately $13.7 million used to refinance the existing mortgage with Webster Bank. The 2016 Webster Mortgage has a ten year term with monthly principal payments based on a twenty-five year amortization schedule. The interest rate for the 2016 Webster Mortgage is a variable rate of the one month LIBOR rate plus 1.70%. At the time the 2016 Webster Mortgage closed, Griffin entered into an interest rate swap agreement with Webster Bank that, combined with two existing swap agreements with Webster Bank, effectively fixes the rate of the 2016 Webster Mortgage at 3.79% over the mortgage loan's ten year term.

On April 26, 2016, Griffin closed on a nonrecourse mortgage (the "2016 People's Mortgage") with People's Bank and received mortgage proceeds of $14.4 million, before transaction costs. The 2016 People's Mortgage refinanced an existing mortgage (the "2009 People's Mortgage") with People's Bank that was due on August 1, 2019 and was collateralized by four of Griffin's NE Tradeport industrial/warehouse buildings totaling approximately 240,000 square feet (14, 15, 16 and 40 International Drive). The 2009 People's Mortgage had a balance of approximately $7.4 million at the time of the refinancing and a variable interest rate of the one month LIBOR rate plus 3.08%. Griffin had entered into an interest rate swap agreement with People's Bank to effectively fix the rate on the 2009 People's Mortgage at 6.58%


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for the term of that loan. The 2016 People's Mortgage is collateralized by the same four properties as the 2009 People's Mortgage along with an additional approximately 98,000 square foot industrial/warehouse building (35 International Drive) in NE Tradeport. At the closing of the 2016 People's Mortgage, Griffin used a portion of the proceeds to repay the 2009 People's Mortgage. The 2016 People's Mortgage has a ten year term with monthly principal payments based on a twenty-five year amortization schedule. The interest rate for the 2016 People's Mortgage is a variable rate of the one month LIBOR rate plus 2.0%. At the time the 2016 People's Mortgage closed, Griffin entered into a second interest rate swap agreement with People's Bank that, combined with the existing interest rate swap agreement with People's Bank, effectively fixes the interest rate of the 2016 People's Mortgage at 4.17% over the loan term. The terms of the 2016 People's Mortgage require that if either the tenant that leases approximately 58,000 square feet in 40 International Drive or the tenant that leases approximately 40,000 square feet in 14 International Drive does not extend its respective lease when it expires in fiscal 2021, a subsidiary of Griffin will enter into a master lease of the vacated space. The master lease would be guaranteed by Griffin and be in effect until either the space is re-leased to a new tenant or the due date of the 2016 People's Mortgage Loan, whichever occurs first. Also in fiscal 2016, Griffin received additional mortgage proceeds of approximately $2.6 million and approximately $1.8 million from mortgages that closed in fiscal 2015.

On July 22, 2016, Griffin renewed its revolving credit line with Webster Bank (the "Webster Credit Line") that was scheduled to expire on August 1, 2016. The terms of the renewal increased the amount of the credit line from $12.5 million to $15.0 million and granted Griffin an option to extend the credit line for an additional year provided there is no default at the time such extension is requested. On June 18, 2018, Griffin exercised its option for a one year extension of the Webster Credit Line that was scheduled to expire on July 31, 2018. Interest on borrowings under the Webster Credit Line remained at the one month LIBOR rate plus 2.75%. The Webster Credit Line is collateralized by Griffin's properties in Griffin Center South, aggregating approximately 235,000 square feet, and an approximately 48,000 square foot single-story office building in Griffin Center. There have been no borrowings under the Webster Credit Line since its inception in fiscal 2013. As of November 30, 2018, the Webster Credit Line secured certain standby letters of credit aggregating approximately $1.1 million that are related to Griffin's development activities.

In fiscal 2016, Griffin's Board of Directors authorized a stock repurchase program whereby, effective May 11, 2016, Griffin could repurchase up to $5.0 million of its outstanding Common Stock over a twelve month period in privately negotiated transactions. The stock repurchase program did not obligate Griffin to repurchase any specific amount of stock. In fiscal 2016, Griffin repurchased 105,000 shares of its Common Stock for approximately $3.4 million. In fiscal 2017, Griffin repurchased 47,173 shares of its outstanding Common Stock for approximately $1.5 million before the repurchase program expired on May 10, 2017. Under the stock repurchase program, Griffin repurchased a total of 152,173 shares of its outstanding Common Stock for approximately $4.8 million.

On April 11, 2018, Griffin filed a universal shelf registration statement on Form S-3 (the "Universal Shelf") with the SEC. Under the Universal Shelf, Griffin may offer and sell up to $50 million of a variety of securities including common stock, preferred stock, warrants, depositary shares, debt securities, units or any combination of such securities during the three year period that commenced upon the Universal Shelf becoming effective on April 25, 2018. Under the Universal Shelf, Griffin may periodically offer one or more types of securities in amounts, at prices and on terms announced, if and when the securities are ever offered. On May 10, 2018, Griffin filed a prospectus supplement with the SEC under which it may issue and sell, from time to time, up to an aggregate of $30 million of its Common Stock under an "at-the-market" equity offering program (the "ATM Program") through Robert W. Baird & Co. Incorporated ("Baird"), as sales agent. Under the sales agreement with Baird, Griffin sets the parameters for the sales of its Common Stock under the ATM Program, including the number of shares to be issued, the time period during which sales are requested to be made, limitations on the number of shares that may be sold in any one trading day and any minimum price below which sales of shares may not be made. Sales of Common Stock, if any, under the ATM Program would be made in offerings as defined in Rule 415 of the Securities Act of 1933, as amended. In addition, with the prior consent of Griffin, Baird may also sell shares in privately negotiated transactions. Griffin expects to use the net proceeds, if any, from the ATM Program for acquisitions of target properties consistent with Griffin's investment strategies, repayment of debt and general corporate purposes. If Griffin obtains additional capital by issuing equity, the interests of its existing stockholders will be diluted. If Griffin incurs additional indebtedness, that indebtedness may impose financial and other covenants that may significantly restrict Griffin's operations.

With its significant amount of cash, cash equivalents and short-term investments and availability under the Webster Credit Line, Griffin does not expect to issue Common Stock under the ATM Program or issue other securities


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under the Universal Shelf in the near term. Griffin cannot give assurance that it could issue Common Stock under the ATM Program or obtain additional capital under the Universal Shelf on favorable terms, or at all. See "Risk Factors-Risks Related to the Real Estate Industry-Volatility in the capital and credit markets could materially adversely impact Griffin" and "Risk Factors-Risks Related to Griffin's Common Stock-Issuances or sales of Griffin's common stock or the perception that such issuances or sales might occur could adversely affect the per share trading price of Griffin's common stock" included in Part I, Item 1A of this Annual Report.

On January 25, 2016, Griffin entered into an Option Purchase Agreement (the "Simsbury Option Agreement"), subsequently amended on January 22, 2019. Under the terms of the Simsbury Option Agreement, as amended, Griffin granted the buyer an exclusive option to purchase approximately 280 acres of undeveloped land in Simsbury, Connecticut for approximately $7.7 million. Through November 30, 2018, the buyer paid approximately $0.3 million of option fees to extend its option period through January 25, 2019. In fiscal 2018, the buyer received approval from Connecticut's regulatory authority for the buyer's planned use of the land, which is to generate solar electricity. Subsequent litigation challenging that approval was settled thereby allowing the buyer to use the land to be purchased as planned. On January 24, 2019, the buyer exercised its option to purchase the land under the Simsbury Option Agreement. As per the terms of the Simsbury Option Agreement, as amended, closing on the land sale contemplated by the Simsbury Option Agreement, as amended, is required to take place within 90 days from the date the buyer exercised its option to purchase the land. There is no guarantee that the sale of land contemplated under the Simsbury Option Agreement, as amended, will be completed under its current terms, or at all.

On May 5, 2017, Griffin entered into an Option Purchase Agreement (the "EGW Option Agreement") whereby Griffin granted the buyer an exclusive option to purchase approximately 288 acres of undeveloped land in East Granby and Windsor, Connecticut for approximately $7.8 million. The buyer intended to use the land to generate solar electricity. The buyer's option expired on May 5, 2018 and was not extended, thus terminating the EGW Option Agreement. Accordingly, the buyer forfeited the option fees (approximately $50,000) paid through that date, which is included in revenue from property sales in the fiscal 2018 statement of operations.

On January 11, 2018, Griffin entered into an agreement to purchase an approximately 14 acre parcel of undeveloped land in the Lehigh Valley of Pennsylvania (the "Lehigh Valley Land"). Subsequently, the agreement was amended to reduce the purchase price from $3.6 million in cash to $3.1 million in cash and extend the due diligence period. If the transaction closes, Griffin plans to construct an approximately 156,000 square foot industrial/warehouse building on the Lehigh Valley Land. The closing of this purchase, anticipated to take place in fiscal 2019, is subject to several conditions, including obtaining all governmental approvals for Griffin's development plans for the Lehigh Valley Land. There is no guarantee that this transaction will be completed under its current terms, or at all.

On June 26, 2018, Griffin entered into an agreement for the purchase of approximately 36 acres of undeveloped land in Mecklenburg County, North Carolina in the greater Charlotte area (the "Mecklenburg Land") for approximately $4.7 million in cash. On December 5, 2018, Griffin entered into an agreement for the purchase of approximately 9 acres of undeveloped land (the "Additional Mecklenburg Land") which is adjacent to the Mecklenburg Land for approximately $0.9 million in cash. If acquired, the Additional Mecklenburg Land is expected to be combined with the Mecklenburg Land to enable Griffin to construct more industrial/warehouse space than could be constructed on the Mecklenburg Land only. Closings on the purchases of the Mecklenburg Land and the Additional Mecklenburg Land are subject to several conditions, including obtaining all governmental approvals for Griffin's development plans. Griffin would only complete the purchase of the Additional Mecklenburg Land if the Mecklenburg Land is acquired. The amount of industrial/warehouse space to be developed on the Mecklenburg Land and, if also acquired, the Additional Mecklenburg Land, will be based upon findings during the approvals process. The closings on the purchases of the Mecklenburg Land and the Additional Mecklenburg Land are not anticipated to take place until the third quarter of fiscal 2019. There is no guarantee that the purchases of the Mecklenburg Land and the Additional Mecklenburg Land will be completed under their current terms, or at all.

In the near-term, Griffin plans to continue to invest in its real estate business, including construction of additional buildings on its undeveloped land, expenditures for tenant improvements as new leases and lease renewals are signed, infrastructure improvements required for future development of its real estate holdings and the potential acquisition of additional properties and/or undeveloped land parcels in the Middle Atlantic, Northeast and Southeast regions to expand the industrial/warehouse portion of its real estate portfolio. Real estate acquisitions may or may not


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occur based on many factors, including real estate pricing. Griffin may commence speculative construction projects on its undeveloped land that is either currently owned or acquired in the future if it believes market conditions are favorable for such development. Griffin may also construct additional build-to-suit facilities on its undeveloped land if lease terms are favorable.

As of November 30, 2018, Griffin had cash, cash equivalents and short-term investments totaling approximately $25.6 million. Management believes that its cash, cash equivalents and short-term investments as of November 30, 2018, cash generated from leasing operations and property sales (including the potential approximately $7.7 million property sale contemplated under the Simsbury Option Agreement, as amended) and borrowing capacity under the Webster Credit Line will be sufficient to meet its working capital requirements, to purchase land parcels currently under agreement, to make other investments in real estate assets, and to pay dividends on its Common Stock, when and if declared by the Board of Directors, for at least the next twelve months.



Forward­Looking Information


The above information in Management's Discussion and Analysis of Financial Condition and Results of Operations includes "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Exchange Act of 1934, as amended. These forward-looking statements include, but are not limited to, statements about the costs of site work and construction of the buildings under construction on the Concord Land; near-term expectations regarding any potential issuance of securities under the ATM Program or the Universal Shelf, and anticipated use of any future proceeds from the ATM program; completion of the land sale under the Simsbury Option Agreement, as amended; the purchases of the Lehigh Valley Land, the Mecklenburg Land and the Additional Mecklenburg Land, anticipated closing dates of such purchases and Griffin's plans with regard to the foregoing properties; the conversion of the State Farm Loan to a nonrecourse permanent mortgage loan and related use of proceeds; the acquisition and development of additional properties and/or undeveloped land parcels; construction of additional buildings, tenant improvements and infrastructure improvements; Griffin's anticipated future liquidity and capital expenditures; and other statements with the words "believes," "anticipates," "plans," "expects" or similar expressions. Although Griffin believes that its plans, intentions and expectations reflected in such forward-looking statements are reasonable, it can give no assurance that such plans, intentions or expectations will be achieved. The forward­looking statements made herein are based on assumptions and estimates that, while considered reasonable by Griffin as of the date hereof, are inherently subject to significant business, economic, competitive and regulatory uncertainties and contingencies, many of which are beyond the control of Griffin. Griffin's actual results could differ materially from those anticipated in these forward­looking statements as a result of various important factors, including those set forth under the heading Item 1A "Risk Factors" and elsewhere in this Annual Report.

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