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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-Q)

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07/09/2019 | 09:48am 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 also seeks to add to its industrial/warehouse 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 significant accounting policies and methods used in the preparation of Griffin's unaudited consolidated financial statements included in Item 1 of this Quarterly Report on Form 10-Q are consistent with those used in the preparation of Griffin's audited consolidated financial statements for its fiscal year ended November 30, 2018 ("fiscal 2018") included in Griffin's Annual Report on Form 10-K/A as filed with the United States Securities and Exchange Commission (the "SEC") on April 5, 2019 ("Form 10-K").

The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America ("U.S. GAAP") requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses in the reporting period. Griffin regularly evaluates estimates and assumptions related to the useful life and recoverability of long-lived assets, stock-based compensation expense, deferred income tax asset valuations and the valuation of derivative instruments. Griffin bases its estimates and assumptions on current facts, historical experience and various other factors that it believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities and the accrual of costs and expenses that are not readily apparent from other sources. The actual results experienced by Griffin may differ materially and adversely from Griffin's estimates. To the extent there are material differences between the estimates and the actual results, future results of operations will be affected. The significant accounting estimates used by Griffin in the preparation of its financial statements for the three months and six months ended May 31, 2019 are consistent with those used by Griffin to prepare its consolidated financial statements for fiscal 2018.





Summary


For the three months ended May 31, 2019 (the "2019 second quarter"), Griffin had net income of approximately $5.8 million as compared to net income of approximately $0.3 million for the three months ended May 31, 2018 (the "2018 second quarter"). The approximately $5.5 million increase in net income in the 2019 second quarter, as compared to the 2018 second quarter, principally reflected an approximately $7.1 million increase in operating income and an approximately $0.1 million increase in investment income in the 2019 second quarter, as compared to the 2018 second quarter, partially offset by an approximately $0.1 million increase in interest expense and an approximately $1.6 million increase in income tax expense in the 2019 second quarter, as compared to the 2018 second quarter.

The approximately $7.1 million increase in operating income in the 2019 second quarter, as compared to the 2018 second quarter, principally reflected an approximately $6.8 million increase in gains on property sales (revenue from property sales less costs related to property sales), an approximately $0.2 million increase in net operating income from leasing ("Leasing NOI")1, which Griffin defines as rental revenue less operating expenses of rental properties, and an approximately $0.1 million gain from an insurance recovery in the 2019 second quarter, partially offset by an approximately $0.1 million increase in depreciation and amortization expense in the 2019 second quarter as compared to the 2018 second quarter. General and administrative expenses were essentially unchanged in the 2019 second quarter, as compared to the 2018 second quarter. The increase in gains from property sales principally reflected a

pretax gain of approximately $7.4 million from the closing of the sale of approximately 280 acres of undeveloped land in Simsbury, Connecticut (the "Simsbury Land Sale"). The increase in Leasing NOI principally reflected higher rental revenue as a

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1Leasing NOI is not a financial measure in conformity with 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. In prior years, Griffin referred to this metric as "profit from leasing activities." In fiscal 2019, Griffin changed from profit from leasing activities to Leasing NOI to be more in line with terminology used by other real estate companies.

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result of more space under lease in the 2019 second quarter than the 2018 second quarter, driven by the commencement in the three months ended November 30, 2018 (the "2018 fourth quarter") of the full building lease of 220 Tradeport Drive ("220 Tradeport"), an approximately 234,000 square foot build-to-suit industrial/warehouse building in New England Tradeport ("NE Tradeport"), Griffin's industrial park in Windsor and East Granby, Connecticut. The higher depreciation and amortization expense principally reflected depreciation and amortization expense on properties that were added to Griffin's real estate portfolio subsequent to the end of the 2018 second quarter. The gain from an insurance recovery reflected the settlement of an insurance claim for storm damage to Griffin's nursery farm in Quincy, Florida (the "Florida Farm") that had been leased to a grower of landscape nursery products. The higher interest expense principally reflected the higher amount of mortgage loans outstanding in the 2019 second quarter, as compared to the 2018 second quarter. The higher income taxes principally reflected the higher pretax income in the 2019 second quarter, as compared to the 2018 second quarter.

For the six months ended May 31, 2019 (the "2019 six month period"), Griffin had net income of approximately $5.2 million as compared to a net loss of approximately $1.4 million for the six months ended May 31, 2018 (the "2018 six month period"). The net income in the 2019 six month period, as compared to the net loss in the 2018 six month period, principally reflected an approximately $7.3 million increase in operating income and an approximately $0.2 million increase in investment income in the 2019 six month period, as compared to the 2018 six month period, partially offset by an approximately $0.2 million increase in interest expense and an approximately $0.7 million increase in income tax expense in the 2019 six month period, as compared to the 2018 six month period.

The approximately $7.3 million increase in operating income in the 2019 six month period, as compared to the 2018 six month period, principally reflected an approximately $6.8 million increase in gains on property sales, an approximately $0.5 million increase in Leasing NOI, an approximately $0.1 million decrease in general and administrative expenses and an approximately $0.1 million gain from an insurance recovery in the 2019 six month period, partially offset by an approximately $0.2 million increase in depreciation and amortization expense in the 2019 six month period, as compared to the 2018 six month period. The increase in gains from property sales in the 2019 six month period, as compared to the 2018 six month period, principally reflected the pretax gain from the Simsbury Land Sale. The increase in Leasing NOI principally reflected higher rental revenue in the 2019 six month period as a result of more space under lease in the 2019 six month period than the 2018 six month period, driven by the full building lease for 220 Tradeport that commenced in the 2018 fourth quarter. The lower general and administrative expenses in the 2019 six month period, as compared to the 2018 six month period, principally reflected the 2018 six month period including an approximately $0.1 million expense for the removal of structures that remained on Griffin's land holdings from the tobacco growing operations of former affiliates of Griffin. The gain from an insurance recovery reflected the settlement of the insurance claim for storm damage to the Florida Farm. The higher depreciation and amortization expense in the 2019 six month period, as compared to the 2018 six month period, principally reflected depreciation and amortization expense on properties that were added to Griffin's real estate portfolio subsequent to the end of the 2018 six month period.

The higher interest expense in the 2019 six month period, as compared to the 2018 six month period, principally reflected the higher amount of mortgage loans outstanding in the 2019 six month period as compared to the 2018 six month period. The approximately $1.5 million income tax provision in the 2019 six month period related entirely to the 2019 six month period pretax income of approximately $6.7 million. The approximately $0.8 million income tax provision in the 2018 six month period reflected an approximately $1.0 million charge 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 Tax Cuts and Jobs Act ("TCJA") that became effective for Griffin in the three months ended February 28, 2018 (the "2018 first quarter"), partially offset by an approximately $0.2 million income tax benefit related to the fiscal 2018 six month period pretax loss of approximately $0.6 million and the benefit from stock options exercised in the 2018 six month period. As Griffin had net deferred tax assets when the TCJA became effective for Griffin, the re-measurement of its deferred tax assets and liabilities resulted in the charge that is included in Griffin's 2018 six month period income tax provision.





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Results of Operations


2019 Second Quarter Compared to 2018 Second Quarter

Total revenue increased from approximately $9.1 million in the 2018 second quarter to approximately $17.1 million in the 2019 second quarter, reflecting increases in revenue from property sales and rental revenue of approximately $7.8 million and $0.2 million, respectively.

Revenue from property sales of approximately $8.7 million in the 2019 second quarter principally reflected approximately $7.7 million from the Simsbury Land Sale, which generated a pretax gain of approximately $7.4 million, and approximately $0.7 million from the sale of approximately 116 acres of undeveloped land in East Windsor, Connecticut (the "East Windsor Land"). The Simsbury Land Sale closed after the buyer procured the required entitlements and approvals for its planned development of a facility to generate solar electricity on the land acquired. Revenue from property sales of approximately $0.9 million in the 2018 second quarter principally reflected approximately $0.8 million from the sale of approximately 49 acres of undeveloped land in Southwick, Massachusetts (the "Southwick Land Sale"). 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.

Rental revenue increased to approximately $8.4 million in the 2019 second quarter from approximately $8.2 million in the 2018 second quarter. The approximately $0.2 million increase in rental revenue in the 2019 second quarter, as compared to the 2018 second quarter, was principally due to: (a) approximately $0.4 million of rental revenue from 220 Tradeport; and (b) an increase of approximately $0.1 million in rental revenue from leasing previously vacant space subsequent to the 2018 second quarter; partially offset by (c) a decrease of approximately $0.3 million in rental revenue from leases that expired or terminated subsequent to the 2018 second quarter, including approximately $0.1 million as a result of the early termination, in the 2018 fourth quarter, of the Florida Farm lease due to the former tenant's bankruptcy filing. Leasing NOI for the 2019 second quarter increased to approximately $6.0 million from approximately $5.8 million in the 2018 second quarter as a result of the increase in rental revenue in the 2019 second quarter, as compared to the 2018 second quarter.

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 May 31, 2018         3,710,000    3,478,000       94%
           As of November 30, 2018    4,078,000    3,777,000       93%
           As of May 31, 2019         4,078,000    3,751,000       92%



The increase in total square footage of approximately 368,000 square feet from May 31, 2018 to November 30, 2018 was due to the completion in the 2018 fourth quarter of 220 Tradeport and 6975 Ambassador Drive ("6975 Ambassador"), an approximately 134,000 square foot industrial/warehouse building in the Lehigh Valley of Pennsylvania, that was built on speculation. 6975 Ambassador is not yet leased. The approximately 26,000 square foot decrease in space leased as of May 31, 2019, as compared to November 30, 2018, reflected a lease of approximately 23,000 square feet of industrial/warehouse space in NE Tradeport that expired and was not renewed and a reduction of approximately 9,000 square feet as a result of a tenant relocation, partially offset by leasing approximately 7,000 square feet of previously vacant office/flex space. The tenant relocation reflected a tenant that leased a total of approximately 34,000 square feet in two of Griffin's multi-story office buildings in Griffin Center in Windsor, Connecticut under leases scheduled to expire on July 31, 2019, and entered into a new six-year lease for approximately 25,000 square feet in one of those Griffin Center office buildings.

As of May 31, 2019, Griffin's approximately 3,645,000 square feet of industrial/warehouse space (89% of Griffin's total square footage), comprised of approximately 2,051,000 square feet in the north submarket of Hartford, Connecticut, 1,317,000 square feet in the Lehigh Valley and approximately 277,000 square feet in the Charlotte, North Carolina area were 94% leased. The only significant vacancies of industrial/warehouse space were 6975 Ambassador and approximately 71,000 square feet in NE Tradeport.



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In the 2018 fourth quarter, Griffin commenced construction, on speculation, of two industrial/warehouse buildings ("160 and 180 International") aggregating approximately 283,000 square feet on a land parcel in Concord, North Carolina (the "Concord Land") in the greater Charlotte area, that was purchased in fiscal 2018. Upon completion of 160 and 180 International, expected in the second half of fiscal 2019, Griffin's total real estate portfolio is expected to be approximately 4,361,000 square feet, with expected industrial/warehouse space of approximately 3,928,000 square feet (90% of Griffin's total square footage).

The 2019 second quarter industrial/warehouse market activity in the north submarket Hartford was muted, whereas the Lehigh Valley and Charlotte, North Carolina industrial/warehouse real estate markets remained relatively strong through the 2019 second quarter. Griffin's office/flex buildings, aggregating approximately 433,000 square feet (11% of Griffin's total square footage) and located entirely in the north submarket of Hartford, were approximately 72% leased as of May 31, 2019. The office/flex market where Griffin's space is located remained weak through the 2019 second quarter.

Operating expenses of rental properties of approximately $2.4 million in the 2019 second quarter were essentially unchanged from the 2018 second quarter. Approximately $0.1 million of operating expenses at 220 Tradeport and 6975 Ambassador, the two buildings that were placed in service in the 2018 fourth quarter, were offset by an approximately $0.1 million net reduction in operating expenses across all other properties.

Depreciation and amortization expense of approximately $2.9 million in the 2019 second quarter was essentially unchanged from the 2018 second quarter. Approximately $0.2 million of depreciation and amortization expense related to 220 Tradeport and 6975 Ambassador in the 2019 second quarter was offset by a decrease of approximately $0.2 million of depreciation and amortization expense across all other properties as a result of certain real estate assets becoming fully depreciated and certain deferred leasing costs becoming fully amortized prior to the 2019 second quarter.

General and administrative expenses in the 2019 second quarter were essentially unchanged from the 2018 second quarter. An approximately $0.1 million decrease in expenses related to Griffin's non-qualified deferred compensation plan was offset by an approximately $0.1 million increase in all other general and administrative expenses. The decrease in expenses related to the non-qualified deferred compensation plan reflected the effect of lower stock market performance on participant balances in the 2019 second quarter, as compared to the 2018 second quarter, which resulted in a smaller increase in the non-qualified deferred compensation plan liability in the 2019 second quarter, as compared to the 2018 second quarter.

Operating income in the 2019 second quarter also included a gain on an insurance recovery of approximately $0.1 million, which related solely to proceeds, net of expenses, from the settlement of an insurance claim for storm damage to the Florida Farm.

Interest expense increased to approximately $1.6 million in the 2019 second quarter from approximately $1.5 million in the 2018 second quarter. The approximately $0.1 million increase in interest expense in the 2019 second quarter, as compared to the 2018 second quarter, principally reflected an approximately $0.1 million increase in interest expense on the State Farm Loan (as defined below) as a result of the higher amount outstanding thereunder in the 2019 second quarter, as compared to the 2018 second quarter.

Investment income of approximately $0.1 million in the 2019 second quarter principally reflected earnings on Griffin's short-term investments (repurchase agreements with Webster Bank, N.A. ("Webster Bank") that are collateralized with securities issued by the United States government or its sponsored agencies). Griffin did not have any short-term investments in the 2018 second quarter.

The income tax provision of approximately $1.7 million in the 2019 second quarter, as compared to less than $0.1 million in the 2018 second quarter, principally reflected an increase in pretax income from approximately $0.4 million in the 2018 second quarter to approximately $7.5 million in the 2019 second quarter. The effective tax rate of 22.4% reflects the federal statutory rate of 21% adjusted for state income taxes and the tax benefit of stock options exercised.







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2019 Six Month Period Compared to 2018 Six Month Period

Total revenue increased from approximately $17.4 million in the 2018 six month period to approximately $26.4 million in the 2019 six month period, reflecting increases in revenue from property sales and rental revenue of approximately $8.5 million and $0.5 million, respectively.

Revenue from property sales of approximately $9.5 million in the 2019 six month period principally reflected approximately $7.7 million from the Simsbury Land Sale, which generated a pretax gain of approximately $7.4 million, and a total of approximately $1.6 million from the sales of the East Windsor Land and its development rights in two separate transactions. Revenue from property sales of approximately $1.0 million in the 2018 six month period principally reflected approximately $0.8 million from the Southwick Land Sale and approximately $0.1 million from the sale of a residential lot at Stratton Farms, Griffin's residential subdivision in Suffield, Connecticut. 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.

Rental revenue increased to approximately $16.9 million in the 2019 six month period from approximately $16.4 million in the 2018 six month period. The approximately $0.5 million increase in rental revenue in the 2019 six month period, as compared to the 2018 six month period, was principally due to: (a) approximately $0.8 million of rental revenue from 220 Tradeport; and (b) an increase of approximately $0.2 million in rental revenue from leasing previously vacant space; partially offset by (c) a decrease of approximately $0.5 million in rental revenue from leases that expired or terminated subsequent to the 2018 six month period, including approximately $0.2 million as a result of the early termination of the Florida Farm lease. Leasing NOI for the 2019 six month period increased to approximately $11.8 million from approximately $11.3 million in the 2018 six month period as a result of the increase in rental revenue in the 2019 six month period, as compared to the 2018 six month period.

Operating expenses of rental properties of approximately $5.1 million in the 2019 six month period were essentially unchanged from the 2018 six month period.

Approximately $0.2 million of operating expenses at 220 Tradeport and 6975 Ambassador, the two buildings that were placed in service in the 2018 fourth quarter, were offset by an approximately $0.2 million net reduction in operating expenses across all other rental properties, principally due to lower snow removal expenses in the 2019 six month period as compared to the 2018 six month period.

Depreciation and amortization expense increased to approximately $5.9 million in the 2019 six month period from approximately $5.7 million in the 2018 six month period. Approximately $0.5 million of depreciation and amortization expense related to 220 Tradeport and 6975 Ambassador in the 2019 six month period was partially offset by a decrease of approximately $0.3 million of depreciation and amortization expense across all other properties as a result of certain real estate assets becoming fully depreciated and certain deferred leasing costs becoming fully amortized prior to the 2019 six month period.

General and administrative expenses decreased to approximately $3.9 million in the 2019 six month period from approximately $4.0 million in the 2018 six month period. The approximately $0.1 million decrease in the 2019 six month period, as compared to the 2018 six month period, principally reflected an expense in the 2018 six month period of approximately $0.1 million for removal of structures that remained on Griffin's land holdings from the tobacco growing operations of former affiliates of Griffin. All other general and administrative expenses were essentially unchanged in the 2019 six month period as compared to the 2018 six month period.

Operating income in the 2019 six month period also included a gain on insurance recovery of approximately $0.1 million, which related solely to proceeds, net of expenses, from the settlement of the insurance claim for storm damage to the Florida Farm.

Interest expense increased to approximately $3.3 million in the 2019 six month period from approximately $3.1 million in the 2018 six month period. The approximately $0.2 million increase in interest expense in the 2019 six month period, as compared to the 2018 six month period, principally reflected an approximately $0.3 million increase in interest expense on the State Farm Loan as a result of the higher amount outstanding thereunder in the 2019 six month period, as compared to the 2018 six month period, partially offset by a decrease in interest expense of approximately $0.1 million across all other mortgage loans.



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Investment income increased to approximately $0.2 million in the 2019 six month period from less than $0.1 million in the 2018 six month period. The approximately $0.2 million increase in investment income in the 2019 six month period, as compared to the 2018 six month period, principally reflected the earnings on Griffin's short-term investments (repurchase agreements with Webster Bank that are collateralized with securities issued by the United States government or its sponsored agencies). Griffin did not have any short-term investments in the 2018 six month period.

The income tax provision was approximately $1.5 million in the 2019 six month period, as compared to approximately $0.8 million in the 2018 six month period.

The 2019 six month period income tax provision reflected an effective tax rate of 23.2% based on the federal statutory rate of 21% adjusted for state income taxes and the tax benefit of stock options exercised. The income tax provision in the 2018 six month period included a charge of 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, which was enacted on December 22, 2017 and became effective for Griffin in the 2018 first quarter. As Griffin had net deferred tax assets when the TCJA became effective for Griffin, the re-measurement of its deferred tax assets and liabilities resulted in the charge that is included in the 2018 six month period income tax provision. Partially offsetting the charge for the re-measurement of deferred tax assets and liabilities in the 2018 six month period was an income tax benefit of approximately $0.2 million related to the 2018 six month period pretax loss of approximately $0.6 million and stock options exercised in the 2018 six month period.

Off Balance Sheet Arrangements

Griffin does not have any material off balance sheet arrangements.

Liquidity and Capital Resources

Net cash provided by operating activities was approximately $3.5 million in the 2019 six month period as compared to approximately $3.7 million in the 2018 six month period. The approximately $0.1 million decrease in net cash provided by operating activities in the 2019 six month period, as compared to the 2018 six month period, principally reflected a net decrease of approximately $0.6 million in cash from changes in assets and liabilities in the 2019 six month period, as compared to the 2018 six month period, substantially offset by an increase in cash of approximately $0.4 million from results of operations as adjusted for noncash expenses, gains on property sales and a gain on an insurance settlement. The increase in cash from results of operations as adjusted for noncash expenses and gains on property sales principally reflected the approximately $0.5 million increase in Leasing NOI2 in the 2019 six month period, as compared to the 2018 six month period.

Net cash used in investing activities was approximately $1.3 million in the 2019 six month period as compared to approximately $8.1 million in the 2018 six month period. The net cash used in investing activities in the 2019 six month period reflected: (a) cash payments of approximately $7.5 million for additions to real estate assets; and (b) cash payments of approximately $0.3 million for deferred leasing costs and other uses; partially offset by (c) $5.0 million of cash from a decrease in short-term investments; and (d) net cash proceeds of approximately $9.2 million from property sales, partially offset by approximately $7.6 million of proceeds from property sales deposited into escrow at closing for the purchase of a replacement property for a like-kind exchange (a "1031 Like-Kind Exchange") under Section 1031 of the Internal Revenue Code of 1986, as amended, for income tax purposes.

The approximately $7.5 million of cash payments for additions to real estate assets in the 2019 six month period reflected the following:




       New building construction (including site work)        $ 6.1 million
       Tenant and building improvements related to leasing    $ 1.2 million
       Development costs and infrastructure improvements      $ 0.2 million

Cash payments for new building construction (including site work) in the 2019 six month period included approximately $5.7 million for construction, on speculation, of 160 and 180 International. Griffin expects to spend

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2Leasing NOI is not a financial measure in conformity with 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. In prior years, Griffin referred to this metric as "profit from leasing activities." In fiscal 2019, Griffin changed from profit from leasing activities to Leasing NOI to be more in line with terminology used by other real estate companies.

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approximately $15.0 million for the site work and construction (excluding tenant improvements) of 160 and 180 International, with expected completion of both buildings in the second half of fiscal 2019. Cash payments for new building construction in the 2019 six month period also included a total of approximately $0.4 million on 220 Tradeport and 6975 Ambassador, which were both completed in the 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 tenant and building improvements in the 2019 six month period were related to leases signed in the latter part of fiscal 2018 and fiscal 2019. Cash payments of approximately $0.3 million for deferred leasing costs and other uses in the 2019 six month period reflected approximately $0.4 million of cash payments for lease commissions and other costs related to new and renewed leases partially offset by approximately $0.1 million of cash received from the insurance settlement for storm damage to the Florida Farm.

The $5.0 million of cash from short-term investments in the 2019 six month period reflected the net reduction in Griffin's investment in repurchase agreements with Webster Bank from $17.0 million as of November 30, 2018 to $12.0 million as of May 31, 2019. The weighted average maturity of Griffin's short-term investments as of May 31, 2019 was approximately 70 days with no maturities longer than six months. The net cash proceeds of approximately $9.2 million from property sales principally reflected the proceeds from the Simsbury Land Sale and the sales of the East Windsor Land and the East Windsor Land development rights (see "Results of Operations - 2019 Second Quarter Compared to 2018 Second Quarter" and "Results of Operations - 2019 Six Month Period Compared to 2018 Six Month Period" above). The approximately $7.6 million of net cash proceeds, after transaction costs, from the Simsbury Land Sale were deposited into escrow at closing for the purchase of a replacement property under a 1031 Like-Kind Exchange.

The net cash of approximately $8.1 million used in investing activities in the 2018 six month period reflected: (a) cash payments of approximately $8.1 million for additions to real estate assets; and (b) cash payments of approximately $0.2 million for deferred leasing costs and other uses; partially offset by (c) net cash proceeds of approximately $1.0 million from property sales less the approximately $0.8 million of proceeds that were deposited into escrow at closing.

The approximately $8.1 million of cash payments for additions to real estate assets in the 2018 six month period reflected the following:




       New building construction (including site work)        $ 5.6 million
       Tenant and building improvements related to leasing    $ 2.1 million
       Development costs and infrastructure improvements      $ 0.2 million
       Other                                                  $ 0.2 million

Cash payments for new building construction (including site work) in the 2018 six month period included approximately $3.2 million for construction of 220 Tradeport, approximately $2.3 million for construction of 6975 Ambassador and approximately $0.1 million for the final payments for the construction of 330 Stone Road ("330 Stone"), an approximately 137,000 square foot industrial/warehouse building built on speculation in NE Tradeport that was completed in the three months ended November 30, 2017 (the "2017 fourth quarter") and currently fully leased. Cash payments in the 2018 six month period for tenant and building improvements related to new leases signed in the latter part of the fiscal year ended November 30, 2017 ("fiscal 2017"). Cash payments of approximately $0.2 million in the 2018 six month period for deferred leasing costs and other uses principally reflected purchases of equipment.

The cash proceeds from property sales in the 2018 six month period principally reflected approximately $0.8 million from the Southwick Land Sale and approximately $0.1 million from the sale of a Stratton Farms residential lot. The approximately $0.7 million of proceeds from property sales deposited into escrow reflected the approximately $0.8 million of proceeds from the Southwick Land Sale (used in the second half of fiscal 2018 to purchase the Concord Land as a replacement property to complete a 1031 Like-Kind Exchange) partially offset by approximately $0.1 million of cash proceeds from property sales that were returned from escrow from a land sale in fiscal 2017. The approximately $1.9 million of cash proceeds from that fiscal 2017 land sale were deposited into escrow at closing for the purchase of a replacement property under a 1031 Like-Kind Exchange. Subsequently in fiscal 2017, approximately $1.8 million of those land sale proceeds were used to purchase the Lehigh Valley land site for 6975 Ambassador to complete the 1031 Like-Kind Exchange, with the remaining approximately $0.1 million of proceeds returned to Griffin in the 2018 six month period.

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Net cash used in financing activities was approximately $3.8 million in the 2019 six month period as compared to net cash provided by financing activities of approximately $3.1 million in the 2018 six month period. The net cash used in financing activities in the 2019 six month period reflected: (a) a payment of approximately $2.3 million for a dividend on Griffin's common stock that was declared in the fiscal 2018 fourth quarter and paid in the 2019 six month period; and (b) approximately $1.9 million of recurring principal payments on mortgage loans; partially offset by (c) approximately $0.3 million of proceeds from the State Farm Loan (see below); and (d) approximately $0.1 million of cash received from the exercise of stock options.

Net cash provided by financing activities of approximately $3.1 million in the 2018 six month period reflected proceeds of approximately $18.8 million from a mortgage loan refinancing with People's United Bank, N.A. ("People's Bank") (see below) and approximately $0.5 million of cash received from the exercise of stock options; partially offset by: (a) approximately $13.6 million of principal payments on mortgage loans; (b) a payment of approximately $2.0 million for a dividend on Griffin's common stock that was declared in the fiscal 2017 fourth quarter and paid in the 2018 six month period; and (c) approximately $0.6 million of payments for debt issuance costs. The principal payments on mortgage loans included approximately $11.8 million in connection with the mortgage loan refinancing with People's Bank and approximately $1.8 million of recurring principal payments.

On January 30, 2018, a subsidiary of Griffin closed on a nonrecourse mortgage loan (the "2018 People's Mortgage") with People's Bank for approximately $18.8 million. The 2018 People's Mortgage refinanced an existing mortgage loan with People's Bank (the "2017 People's Mortgage") that was due on March 1, 2027 and was collateralized by two industrial/warehouse buildings in NE Tradeport. The 2018 People's Mortgage is collateralized by the same two buildings aggregating approximately 275,000 square feet along with 330 Stone. Griffin received cash proceeds of $7.0 million (before transaction costs), net of 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 existing swap agreement with People's Bank, 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 collateralizes the 2018 People's Mortgage. The master lease would only become effective if the full building tenant in 759 Rainbow does not renew its lease when it is scheduled to expire in fiscal 2022 and would remain 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 transaction, prior to the start of construction, Griffin entered into a twelve and a half year lease for 220 Tradeport. Through May 31, 2019, Griffin had borrowed approximately $13.1 million under the State Farm Loan. Griffin intends to convert the State Farm Loan to a fifteen year nonrecourse permanent mortgage loan and draw down all remaining funds available under the State Farm Loan in the second half of 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.

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

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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.

Griffin has a $15.0 million revolving credit line (the "Webster Credit Line") with Webster Bank that is scheduled to expire on July 31, 2019. Interest on borrowings under the Webster Credit Line are at the one month LIBOR rate plus 2.75%. The Webster Credit Line is collateralized by Griffin's properties in Griffin Center South in Bloomfield, Connecticut, aggregating approximately 235,000 square feet, and an approximately 48,000 square foot single-story office building in Griffin Center in Windsor, Connecticut. There have been no borrowings under the Webster Credit Line since its inception in fiscal 2013. As of May 31, 2019, the Webster Credit Line secured certain unused standby letters of credit aggregating approximately $0.6 million that are related to Griffin's development activities.

On June 25, 2019, Griffin and Webster Bank agreed to terms for an extension of the Webster Credit Line and also agreed to terms for an additional credit line of $15.0 million to be used to finance property acquisitions (the "Acquisition Credit Line"). The terms for the extension of the Webster Credit Line include increasing the borrowing capacity to $19.5 million and adding an approximately 31,000 square foot industrial/warehouse building to the collateral for the Webster Credit Line. The Acquisition Credit Line would be available only to fund acquisitions of real estate assets and would be unsecured. If permanent financing on properties acquired using funds drawn on the Acquisition Credit Line is not obtained within 135 days from the date the properties are acquired, a first mortgage would be placed on the properties acquired. Both the Webster Credit Line extension and the Acquisition Credit Line will have two year terms with Griffin having an option to extend each agreement for one additional year. There is no guarantee that definitive loan agreements for the extension of the Webster Credit Line and the Acquisition Credit Line will be completed under their current terms, or at all.

With its cash and cash equivalents, 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 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 "Risk Factors" of Griffin's Form 10-K.

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. During the process of obtaining government approvals to construct an approximately 156,000 square foot industrial/warehouse building on the Lehigh Valley Land, it was determined that certain wetlands could not be disturbed, thereby reducing the size of the potential industrial/warehouse building on the site. Griffin currently is evaluating the feasibility of developing a smaller building on the site and negotiating with the seller regarding a reduction to the $3.1 million purchase price to reflect the lower development potential for the Lehigh Valley Land. The closing of this purchase, is subject to several conditions, including reaching an agreement with the seller on a revised purchase price and determining the potential receipt of the required governmental approvals for Griffin's revised development plans for the Lehigh Valley Land. There is no guarantee that Griffin and the seller will reach an agreement on a revised purchase price or that this transaction will be completed under revised terms, or at all.

On June 26, 2018, Griffin entered into an agreement to purchase 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 to purchase 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. Griffin plans to construct approximately 500,000 square feet of industrial/warehouse space on the Mecklenburg


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Land and Additional Mecklenburg Land combined parcels. 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 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 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 May 31, 2019, Griffin had approximately $19.0 million of cash, cash equivalents and short-term investments and approximately $7.6 million of cash proceeds from a property sale held in escrow. Management believes that its cash, cash equivalents, short-term investments, cash proceeds held in escrow, cash generated from leasing operations and borrowing capacity under the Webster Credit Line as of May 31, 2019 will be sufficient to meet its working capital requirements, to complete the construction of 160 and 180 International, 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.



Forward-Looking 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 (the "Exchange Act"). These forward-looking statements include, but are not limited to, statements about the costs of site work and construction and the expected completion of 160 and 180 International; near-term expectations regarding any potential issuances of securities under the ATM Program or the Universal Shelf, and anticipated uses of any future proceeds from the ATM Program; 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, including potential revised plans for the Lehigh Valley Land; the conversion of the State Farm Loan to a nonrecourse permanent mortgage loan; the extension of the Webster Credit Line and securing additional financing under the Acquisition Credit Line; the acquisition and development of additional properties and/or undeveloped land parcels; construction of additional buildings, tenant improvements and infrastructure improvements; the signing of new and renewal leases; the investment in Griffin's real estate business and expansion of the industrial/warehouse portion of Griffin's real estate portfolio; Griffin's anticipated future liquidity and capital expenditures; and other statements with the words "believes," "anticipates," "plans," "expects,"

"may" 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 forward-looking 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 and other important factors, many of which are beyond the control of Griffin. Griffin's actual results could differ materially from those anticipated in these forward-looking statements as a result of various important factors, including those set forth under the heading Part I, Item 1A "Risk Factors" of Griffin's Annual Report on Form 10-K.

© Edgar Online, source Glimpses

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