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

GRIFFIN INDUSTRIAL REALTY, INC.

(GRIF)
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09:08aGRIFFIN INDUSTRIAL REALTY, INC. : Regulation FD Disclosure (form 8-K)
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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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10/09/2019 | 10:02am EST

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 nine months ended August 31, 2019 are consistent with those used by Griffin to prepare its consolidated financial statements for fiscal 2018.





Summary


For the three months ended August 31, 2019 (the "2019 third quarter"), Griffin had net income of approximately $1.0 million as compared to a net loss of approximately $0.1 million for the three months ended August 31, 2018 (the "2018 third quarter"). The net income in the 2019 third quarter, as compared to the net loss in the 2018 third quarter, principally reflected an approximately $0.4 million increase in operating income and an approximately $0.7 million increase in income tax benefit in the 2019 third quarter, as compared to the 2018 third quarter.

The approximately $0.4 million increase in operating income in the 2019 third quarter, as compared to the 2018 third quarter, principally reflected: (a) an approximately $0.3 million increase in net operating income from leasing ("Leasing NOI")1, which Griffin defines as rental revenue less operating expenses of rental properties; (b) an approximately $0.1 million increase in gain on property sales (revenue from property sales less costs related to property sales); and (c) an approximately $0.2 million decrease in general and administrative expenses; partially offset by (d) an approximately $0.2 million increase in depreciation and amortization expense in the 2019 third quarter, in each case as compared to the 2018 third quarter.

The increase in Leasing NOI principally reflected higher rental revenue as a result of more space under lease

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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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in the 2019 third quarter than the 2018 third 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 increase in gain on property sales reflected several small land sales completed in the 2019 third quarter. There were no property sales in the 2018 third quarter. The lower general and administrative expenses in the 2019 third quarter, as compared to the 2018 third quarter, principally reflected lower compensation expense. The higher depreciation and amortization expense in the 2019 third quarter, as compared to the 2018 third quarter, principally reflected depreciation and amortization expense on properties that were added to Griffin's real estate portfolio subsequent to the end of the 2018 third quarter.

The higher income tax benefit in the 2019 third quarter, as compared to the 2018 third quarter, principally reflected the inclusion in the 2019 third quarter of approximately $0.9 million for a reduction to the valuation allowance on Connecticut state deferred tax assets as a result of a change in Connecticut's tax law whereby the capital based tax is being phased out over the next four years.

For the nine months ended August 31, 2019 (the "2019 nine month period"), Griffin had net income of approximately $6.3 million as compared to a net loss of approximately $1.5 million for the nine months ended August 31, 2018 (the "2018 nine month period"). The net income in the 2019 nine month period, as compared to the net loss in the 2018 nine month period, principally reflected an approximately $7.8 million increase in operating income and an approximately $0.2 million increase in investment income in the 2019 nine month period, as compared to the 2018 nine month period, partially offset by an approximately $0.2 million increase in interest expense in the 2019 nine month period, as compared to the 2018 nine month period.

The approximately $7.8 million increase in operating income in the 2019 nine month period, as compared to the 2018 nine month period, principally reflected: (a) an approximately $7.0 million increase in gains on property sales; (b) an approximately $0.8 million increase in Leasing NOI; (c) an approximately $0.2 million decrease in general and administrative expenses; and (d) an approximately $0.1 million gain from an insurance recovery in the 2019 nine month period; partially offset by (e) an approximately $0.3 million increase in depreciation and amortization expense in the 2019 nine month period, as compared to the 2018 nine month period.

The increase in gains from property sales in the 2019 nine month period, as compared to the 2018 nine month period, principally reflected a pretax gain of approximately $7.3 million from 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 in the 2019 nine month period as a result of more space under lease in the 2019 nine month period than the 2018 nine month period, driven by the full building lease of 220 Tradeport that commenced in the 2018 fourth quarter. The lower general and administrative expenses in the 2019 nine month period, as compared to the 2018 nine month period, principally reflected lower compensation expense and the 2018 nine month period including an approximately $0.1 million expense for the removal of structures on Griffin's land that remained from the tobacco growing operations of former affiliates of Griffin. 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 depreciation and amortization expense in the 2019 nine month period, as compared to the 2018 nine 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 nine month period. The higher interest expense in the 2019 nine month period, as compared to the 2018 nine month period, principally reflected the higher principal amount of mortgage loans outstanding in the 2019 nine month period as compared to the 2018 nine month period.

The approximately $0.7 million income tax provision in the 2019 nine month period reflected approximately $1.6 million related to the 2019 nine month period pretax income of approximately $6.9 million, partially offset by the income tax benefit of approximately $0.9 million for a reduction to the valuation allowance on Connecticut state deferred tax assets as a result of the aforementioned change in Connecticut's tax law. The approximately $0.7 million income tax provision in the 2018 nine 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 nine month period pretax loss of approximately $0.8 million and a benefit of approximately $0.1 million from stock options exercised in the 2018 nine month period. As Griffin had net deferred tax


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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 nine month period income tax provision.



Results of Operations


2019 Third Quarter Compared to 2018 Third Quarter

Total revenue increased from approximately $8.0 million in the 2018 third quarter to approximately $8.9 million in the 2019 third quarter, reflecting increases in rental revenue and revenue from property sales of approximately $0.6 million and $0.3 million, respectively.

Rental revenue increased to approximately $8.6 million in the 2019 third quarter from approximately $8.0 million in the 2018 third quarter. The approximately $0.6 million increase in rental revenue in the 2019 third quarter, as compared to the 2018 third quarter, was principally due to: (a) approximately $0.5 million of rental revenue from 220 Tradeport; (b) an increase of approximately $0.2 million in rental revenue from leasing previously vacant space subsequent to the 2018 third quarter; and (c) an increase of approximately $0.1 million from all other rental properties; partially offset by (d) a decrease of approximately $0.2 million in rental revenue from leases that expired or terminated subsequent to the 2018 third 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 third quarter increased to approximately $6.1 million from approximately $5.8 million in the 2018 third quarter as a result of the increase in rental revenue in the 2019 third quarter, as compared to the 2018 third quarter, partially offset by the increase of approximately $0.3 million in operating expenses of rental properties in the 2019 third quarter, as compared to the 2018 third 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       Leased
                                       Square       Square      Percentage
                                       Footage      Footage       Leased
           As of August 31, 2018      3,710,000    3,471,000       94%
           As of November 30, 2018    4,078,000    3,777,000       93%
           As of August 31, 2019      4,078,000    3,830,000       94%



The increase in total square footage of approximately 368,000 square feet from August 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. The approximately 53,000 square foot increase in space leased as of August 31, 2019, as compared to November 30, 2018, reflected: (a) a lease for approximately 64,000 square feet of 6975 Ambassador executed during the 2019 third quarter; and (b) leasing approximately 30,000 square feet of previously vacant primarily industrial/warehouse space in connection with the expansion and extension of two leases; partially offset by (c) a lease of approximately 23,000 square feet of industrial/warehouse space in NE Tradeport that expired and was not renewed; and (d) a reduction of approximately 17,000 square feet as a result of several lease extensions and relocations of office/flex space whereby the tenants reduced their space leased. Such relocations included a tenant in Griffin's two multi-story office buildings in Griffin Center in Windsor, Connecticut that downsized from approximately 34,000 square feet under leases that were scheduled to expire on July 31, 2019, to approximately 25,000 square feet under a new six-year lease.

As of August 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, was 97% leased. The only significant vacancies of industrial/warehouse space included the remaining approximately 70,000 square feet in 6975 Ambassador and approximately 48,000 square feet in NE Tradeport.

Subsequent to August 31, 2019, Griffin completed the 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, Griffin's total real estate portfolio increased to approximately 4,361,000 square feet, with

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industrial/warehouse space of approximately 3,928,000 square feet (90% of Griffin's total square footage). On September 13, 2019, Griffin entered into a lease for approximately 74,000 square feet of 160 International.

Activity in the industrial/warehouse market in the north submarket of Hartford improved during the 2019 third quarter, whereas the Lehigh Valley and Charlotte, North Carolina industrial/warehouse real estate markets remained relatively strong through the 2019 third 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 70% leased as of August 31, 2019. The office/flex market where Griffin's space is located remained weak through the 2019 third quarter.

Revenue from property sales of approximately $0.3 million in the 2019 third quarter principally reflected approximately $0.2 million from the sale of two residential lots (one of which is in Stratton Farms, Griffin's residential development in Suffield, Connecticut) and approximately $0.1 million from the sale of air rights of certain land parcels in NE Tradeport. There were no property sales in the 2018 third quarter. 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 $2.5 million in the 2019 third quarter from approximately $2.2 million in the 2018 third quarter. The approximately $0.3 million increase in operating expenses of rental properties in the 2019 third quarter, as compared to the 2018 third quarter, principally reflected approximately $0.1 million of operating expenses at each of 220 Tradeport and 6975 Ambassador, the two buildings that were placed in service in the 2018 fourth quarter, and an approximately $0.1 million net increase in operating expenses across all other properties.

Depreciation and amortization expense increased to approximately $2.9 million in the 2019 third quarter from approximately $2.7 million in the 2018 third quarter. The approximately $0.2 million increase in depreciation and amortization expense in the 2019 third quarter, as compared to the 2018 third quarter, is principally related to 220 Tradeport and 6975 Ambassador.

General and administrative expenses decreased to approximately $1.6 million in the 2019 third quarter from approximately $1.8 million in the 2018 third quarter. The approximately $0.2 million decrease in general and administrative expenses in the 2019 third quarter, as compared to the 2018 third quarter, principally reflected lower compensation expense.

Interest expense of approximately $1.5 million in the 2019 third quarter was essentially unchanged from the 2018 third quarter. An increase of approximately $0.1 million in interest expense on the State Farm Loan (as defined below) as a result of the higher amount outstanding thereunder in the 2019 third quarter, as compared to the 2018 third quarter, was offset by lower interest expense across all other mortgage loans.

The income tax benefit increased to approximately $0.8 million in the 2019 third quarter from approximately $0.1 million in the 2018 third quarter. The income tax benefit in the 2019 third quarter principally reflected an income tax benefit of approximately $0.9 million in the 2019 third quarter for a partial reduction of the valuation allowance on Connecticut state deferred tax assets partially offset by a charge of approximately $0.1 million for income taxes on current period pretax income. On June 26, 2019, Connecticut enacted legislation phasing out its capital based tax over a four-year period beginning January 1, 2021. Griffin historically has paid the Connecticut capital based tax rather than the corporation income tax, because the capital based tax was the higher amount. In light of the new tax law, management evaluated the recoverability of its Connecticut deferred tax assets and determined that, based on projected future operating results and the phase-out of the capital based tax, the valuation allowance against its Connecticut deferred tax assets should be reduced. The income tax benefit in the 2018 third quarter related to the 2018 third quarter pretax loss of approximately $0.2 million and tax benefits from the exercise of stock options.





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2019 Nine Month Period Compared to 2018 Nine Month Period

Total revenue increased from approximately $25.4 million in the 2018 nine month period to approximately $35.3 million in the 2019 nine month period, reflecting increases in revenue from property sales and rental revenue of approximately $8.8 million and $1.1 million, respectively.

Revenue from property sales of approximately $9.8 million in the 2019 nine month period principally reflected: (a) approximately $7.7 million from the Simsbury Land Sale which 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; (b) a total of approximately $1.6 million from the sales of approximately 116 acres of undeveloped land in East Windsor, Connecticut (the "East Windsor Land") and the East Windsor Land's development rights in two separate transactions; and (c) approximately $0.5 million from several smaller land sales. Revenue from property sales of approximately $1.0 million in the 2018 nine month period principally reflected approximately $0.8 million from the sale of approximately 49 acres of undeveloped land in Southwick, Massachusetts (the "Southwick Land Sale"), approximately $0.1 million from the sale of a residential lot at Stratton Farms, and the recognition of approximately $0.1 million of revenue from a buyer's forfeiture of a deposit on a potential 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 $25.5 million in the 2019 nine month period from approximately $24.4 million in the 2018 nine month period. The approximately $1.1 million increase in rental revenue in the 2019 nine month period, as compared to the 2018 nine month period, was principally due to: (a) approximately $1.3 million of rental revenue from 220 Tradeport; and (b) an increase of approximately $0.4 million in rental revenue from leasing previously vacant space; partially offset by (c) a decrease of approximately $0.6 million in rental revenue from leases that expired or terminated subsequent to the 2018 nine month period, including approximately $0.3 million as a result of the early termination of the Florida Farm lease. Leasing NOI increased to approximately $17.9 million in the 2019 nine month period from approximately $17.1 million in the 2018 nine month period as a result of the increase in rental revenue partially offset by an increase in operating expenses of rental properties in the 2019 nine month period, as compared to the 2018 nine month period.

Operating expenses of rental properties increased to approximately $7.6 million in the 2019 nine month period from approximately $7.3 million in the 2018 nine month period. The approximately $0.3 million increase in operating expenses of rental properties in the 2019 nine month period, as compared to the 2018 nine month period, was principally due to approximately $0.4 million of operating expenses at 220 Tradeport and 6975 Ambassador, the two buildings that were placed in service in the 2018 fourth quarter, partially offset by an approximately $0.1 million net reduction in operating expenses across all other rental properties, principally due to lower snow removal expenses in the 2019 nine month period, as compared to the 2018 nine month period.

Depreciation and amortization expense increased to approximately $8.8 million in the 2019 nine month period from approximately $8.4 million in the 2018 nine month period. Approximately $0.7 million of depreciation and amortization expense related to 220 Tradeport and 6975 Ambassador in the 2019 nine 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 nine month period.

General and administrative expenses decreased to approximately $5.6 million in the 2019 nine month period from approximately $5.8 million in the 2018 nine month period. The approximately $0.2 million decrease in the 2019 nine month period, as compared to the 2018 nine month period, principally reflected an approximately $0.1 million decrease in compensation expense in the 2019 nine month period and an expense in the 2018 nine month period of approximately $0.1 million for removal of structures on Griffin's land holdings that remained from the tobacco growing operations of former affiliates of Griffin.

Operating income in the 2019 nine 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 an insurance claim for storm damage to the Florida Farm.

Interest expense increased to approximately $4.8 million in the 2019 nine month period from approximately $4.6 million in the 2018 nine month period. The approximately $0.2 million increase in interest expense in the 2019 nine

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month period, as compared to the 2018 nine month period, principally reflected an approximately $0.4 million increase in interest expense on the State Farm Loan as a result of the higher amount outstanding thereunder in the 2019 nine month period, as compared to the 2018 nine month period, partially offset by a decrease in interest expense of approximately $0.2 million across all other mortgage loans.

Investment income increased to approximately $0.2 million in the 2019 nine month period from approximately $0.1 million in the 2018 nine month period. The approximately $0.1 million increase in investment income in the 2019 nine month period, as compared to the 2018 nine month period, principally reflected the earnings on Griffin's short-term investments, which are repurchase agreements with Webster Bank, N.A. ("Webster Bank") that are collateralized with securities issued by the United States government or its sponsored agencies.

The income tax provision of approximately $0.7 million in the 2019 nine month period was essentially unchanged from the 2018 nine month period. The 2019 nine month period income tax provision included an income tax benefit of approximately $0.9 million due to a partial reduction to the valuation allowance on Connecticut state deferred tax assets as a result of a change in Connecticut's tax law whereby the capital based tax is being phased out over the next four years beginning January 1,2021. Excluding the benefit from the reduction of the valuation allowance on state deferred tax assets, the 2019 nine month period income tax provision reflected an effective tax rate of 23.4%, partially offset by a benefit for the exercise of stock options. The income tax provision in the 2018 nine 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 was included in the 2018 nine month period income tax provision. Partially offsetting the charge for the re-measurement of deferred tax assets and liabilities in the 2018 nine month period was an income tax benefit of approximately $0.3 million related to the 2018 nine month period pretax loss of approximately $0.8 million and stock options exercised in the 2018 nine 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 $6.7 million in the 2019 nine month period as compared to approximately $5.0 million in the 2018 nine month period. The approximately $1.7 million increase in net cash provided by operating activities in the 2019 nine month period, as compared to the 2018 nine month period, principally reflected an increase in cash of approximately $0.9 million from results of operations as adjusted for noncash expenses, gains on property sales and a gain on an insurance recovery, and a net increase of approximately $0.8 million in cash from changes in assets and liabilities in the 2019 nine month period, as compared to the 2018 nine month period. The increase in cash from results of operations, as adjusted for noncash expenses and gains on property sales, principally reflected the approximately $0.8 million increase in Leasing NOI2 in the 2019 nine month period, as compared to the 2018 nine month period.

Net cash used in investing activities was approximately $7.0 million in the 2019 nine month period as compared to approximately $34.1 million in the 2018 nine month period. The net cash used in investing activities in the 2019 nine month period reflected: (a) cash payments of approximately $21.8 million for additions to real estate assets; and (b) cash payments of approximately $0.5 million for deferred leasing costs and other uses; partially offset by (c) $8.0 million of cash from a decrease in short-term investments; and (d) net cash proceeds of approximately $9.5 million from property sales, partially offset by approximately $2.2 million of proceeds from property sales deposited into escrow

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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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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 $21.8 million of cash payments for additions to real estate assets in the 2019 nine month period reflected the following:




       New building construction (including site work)        $ 13.1 million
       Purchase of undeveloped land                           $  5.7 million
       Tenant and building improvements related to leasing    $  2.5 million
       Development costs and infrastructure improvements      $  0.5 million

Cash payments for new building construction (including site work) in the 2019 nine month period included approximately $12.7 million for construction, on speculation, of 160 and 180 International. Griffin expects to spend a total of approximately $15.0 million for the site work and construction (excluding tenant improvements) of 160 and 180 International, which were both completed subsequent to August 31, 2019. Cash payments for new building construction in the 2019 nine 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 was approximately $13.2 million and approximately $8.1 million, respectively.

Cash payments of $5.7 million, including transaction costs, for the purchase of undeveloped land in the 2019 nine month period, was for a total of approximately 44 acres in two separate purchases of adjoining land parcels in Charlotte, North Carolina (the "Charlotte Land"). Both land purchases were replacement properties under a 1031 Like-Kind Exchange for the Simsbury Land Sale. Griffin has obtained most of the governmental approvals required for its planned construction of three industrial/warehouse buildings aggregating approximately 500,000 square feet on the Charlotte Land and expects to obtain the remaining approvals in the 2019 fourth quarter.

Cash payments of approximately $2.5 million for tenant and building improvements in the 2019 nine month period were related to leases signed in the latter part of fiscal 2018 and fiscal 2019.

Cash payments of approximately $0.5 million for deferred leasing costs and other uses in the 2019 nine month period reflected approximately $0.6 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 approximately $8.0 million of cash from short-term investments in the 2019 nine 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 approximately $9.0 million as of August 31, 2019. The weighted average maturity of Griffin's short-term investments as of August 31, 2019 was approximately 55 days with no maturities longer than six months. The net cash proceeds of approximately $9.5 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 Nine Month Period Compared to 2018 Nine 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. Approximately $5.4 million of the net cash proceeds from the Simsbury Land Sale that were deposited in escrow were subsequently used for the purchase of the Charlotte Land, leaving approximately $2.2 million remaining in escrow as of August 31, 2019. If Griffin does not acquire another replacement property by October 30, 2019, the remaining proceeds held in escrow would be returned to Griffin.

The net cash of approximately $34.1 million used in investing activities in the 2018 nine month period reflected: (a) cash payments of approximately $23.7 million for additions to real estate assets; (b) net cash of $11.0 million used for short-term investments; and (c) cash payments of approximately $0.5 million for deferred leasing

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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 $23.7 million of cash payments for additions to real estate assets in the 2018 nine month period reflected the following:




       New building construction (including site work)        $ 16.7 million
       Tenant and building improvements related to leasing    $  3.7 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 the 2018 nine month period principally reflected approximately $10.4 million for the construction of 220 Tradeport, approximately $6.2 million for the construction, on speculation, 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 is currently fully leased. Griffin paid a total of approximately $7.6 million for site work and construction of the building shell for 330 Stone. Cash payments for tenant and building improvements in the 2018 nine month period principally related to the full-building lease at 220 Tradeport (approximately $1.3 million), the approximately 74,000 square foot lease at 330 Stone that commenced just prior to the end of fiscal 2017 (approximately $1.4 million), and other new leases (approximately $1.0 million) signed in the latter part of fiscal 2017 or the 2018 nine month period.

The cash payment of approximately $2.7 million in the 2018 nine month period for the purchase of undeveloped land was for the Concord Land. Approximately $0.8 million of the purchase price of the Concord Land was paid using the proceeds from the Southwick Land Sale (see below) to complete a 1031 Like-Kind Exchange.

The cash proceeds of approximately $1.0 million from property sales in the 2018 nine month period principally reflected approximately $0.8 million from the sale of approximately 49 acres (the "Southwick Land Sale") of undeveloped land in Southwick, Massachusetts, 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. The approximately $0.1 million of cash proceeds from property sales that were returned from escrow reflected the remaining cash proceeds from a fiscal 2017 land sale that were deposited into escrow at closing that were returned to Griffin after a replacement property under a 1031 Like-Kind Exchange was purchased.

Net cash used in financing activities was approximately $3.8 million in the 2019 nine month period as compared to net cash provided by financing activities of approximately $11.0 million in the 2018 nine month period. The net cash used in financing activities in the 2019 nine month period reflected: (a) approximately $2.9 million of recurring principal payments on mortgage loans; and (b) a payment of approximately $2.3 million for a dividend on Griffin's common stock ("Common Stock") that was declared in the fiscal 2018 fourth quarter and paid in the 2019 nine month period; partially offset by (c) approximately $1.3 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.

The net cash provided by financing activities of approximately $11.0 million in the 2018 nine month period reflected proceeds of approximately $26.8 million from mortgage loans and a construction loan and approximately $1.2 million from the exercise of stock options; partially offset by: (a) approximately $14.5 million of principal payments on mortgage loans; (b) a payment of approximately $2.0 million for a dividend on Common Stock that was declared in the 2017 fourth quarter and paid in the 2018 nine month period; and (c) approximately $0.6 million for payments of debt issuance costs.

On January 30, 2018, a subsidiary of Griffin closed on a nonrecourse mortgage loan (the "2018 People's Mortgage") with People's Bank N.A. ("People's Bank") for approximately $18.8 million. The 2018 People's Mortgage refinanced an existing $12.0 million nonrecourse 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 additional 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

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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 construction to permanent mortgage loan (the "State Farm Loan") with State Farm Life Insurance Company 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. In the 2019 nine month period, Griffin received loan proceeds from the State Farm Loan of approximately $1.3 million, increasing the amount outstanding under the State Farm Loan to approximately $14.1 million. On August 1, 2019, Griffin converted the State Farm Loan to a $14.1 million nonrecourse permanent mortgage loan that matures on April 1, 2034, with monthly payments of principal and interest that began on September 1, 2019. Monthly principal payments under the State Farm Loan are based on a twenty-five year amortization schedule. Under the terms of the State Farm Loan, the interest rate on the loan remains at 4.51% for the term of the permanent mortgage.

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.

On September 19, 2019, Griffin executed an amendment ( the "Revolving Credit Line Amendment") to its $15.0 million revolving credit line (the "Webster Credit Line" and, as amended by the Revolving Credit Line Amendment, the "Amended Webster Credit Line") with Webster Bank that was originally scheduled to expire on July 31, 2019 (which was extended to September 30, 2019 on July 26, 2019). The Revolving Credit Line Amendment provided for an extension of the maturity date to September 30, 2021, with an option to extend for an additional year through September 30, 2022, reduced the interest rate from the one month LIBOR rate plus 2.75% to the one month LIBOR rate plus 2.50%, and increased the amount of the Webster Credit Line from $15.0 million to $19.5 million, while adding an approximately 31,000 square foot industrial/warehouse building in Bloomfield, Connecticut to the Webster Credit Line's original collateral, which included 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. Under the terms of the Revolving Credit Line Amendment, Griffin must maintain (a) a maximum loan to value ratio of 72%, (b) a minimum liquidity, as defined in the Revolving Credit Line Amendment, of $5.0 million and (c) a fixed charge coverage ratio, defined as EBITDA minus cash income taxes and dividends paid, divided by debt service, of at least 1.1 to 1.0.



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On September 19, 2019, Griffin and Webster Bank also entered into an additional credit line of $15.0 million to be used to finance property acquisitions (the "Acquisition Credit Line"). The Acquisition Credit Line is unsecured, expires on September 30, 2021, with an option to extend for an additional year through September 30, 2022, and may be used to fund up to 65% of the purchase price of real estate acquisitions. Interest on advances under the Acquisition Credit Line are at the one month LIBOR rate plus 2.75%. Amounts borrowed under the Acquisition Credit Line are expected to be repaid from proceeds from long-term financing of the property acquired. If amounts borrowed under the Acquisition Credit Line are not repaid within 135 days from the date the properties are acquired Griffin has agreed to either (a) repay the portion of the Acquisition Credit Line allocable to such advance or (b) execute a first-lien mortgage in favor of Webster Bank. Under the terms of the Acquisition Credit Line, Griffin must maintain (i) a minimum debt service coverage ratio of the aggregate acquired property (as defined in the Acquisition Credit Line) equal to or greater than 1.25 times, (ii) a minimum net worth of not less than $80.0 million, (iii) a minimum liquidity, as defined in the Acquisition Credit Line, of $5.0 million, (iv) a ratio of total debt plus preferred stock, to total assets not to exceed 50% of the total fair market value of Griffin's assets and (v) a fixed charge coverage ratio, calculated the same as under the Revolving Credit Line Amendment, of at least 1.1 to 1.0.

With its cash and cash equivalents, short-term investments, and availability under the Amended Webster Credit Line and Acquisition 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") for $3.6 million in cash. Subsequently, the agreement has been amended several times, reducing the purchase price to approximately $1.9 million in cash as a result of determining that certain wetlands on the site could not be disturbed, thereby reducing the development potential for an industrial/warehouse building on the Lehigh Valley Land from approximately 156,000 square feet to approximately 100,000 square feet. The closing of this purchase is subject to several conditions, including obtaining the required governmental approvals for Griffin's revised development plans for the Lehigh Valley Land. There is no guarantee that this transaction will be completed under its revised terms, or at all.

On September 5, 2019, Griffin entered into an agreement to sell all real estate assets of the Florida Farm previously used by Imperial Nurseries, Inc. prior to being shut down in fiscal 2009 for a purchase price of $2.3 million in cash. Completion of this transaction is subject to the satisfactory outcome of the buyer's due diligence and is not expected to take place until fiscal 2020. There is no guarantee that this transaction will be completed under its current terms, or at all.

On September 11, 2019, Griffin entered into an agreement to sell the approximately seven acres of undeveloped land in Windsor, Connecticut for a purchase price of approximately $0.8 million in cash. Completion of this transaction is subject to the satisfactory outcome of the buyer's due diligence and is scheduled to close in the fiscal 2020 first quarter. There is no guarantee that this transaction will be completed under its current terms, or at all.

Also on September 11, 2019, Griffin entered into an agreement to sell the approximately 7,200 square foot restaurant building (the "Restaurant Building") in Windsor, Connecticut for a purchase price of approximately $0.7 million in cash. Completion of this transaction is subject to the satisfactory outcome of the buyer's due diligence and is scheduled to close in the 2019 fourth quarter. There is no guarantee that this transaction will be completed under its current terms, or at all.

On September 27, 2019, Griffin entered into an agreement to acquire an approximately 100,000 square foot fully leased industrial/warehouse building in Orlando, Florida (the "Orlando Building") for approximately $10.2 million to be paid in cash at closing. This would be Griffin's first industrial/warehouse building in the Orlando area. Griffin intends to finance the purchase of the Orlando Building using the Acquisition Credit Line and cash on hand. Closing on the purchase of the Orlando Building is subject to the satisfactory completion of due diligence by Griffin. There is no guarantee that this transaction will be completed under its current terms, or at all.



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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 August 31, 2019, Griffin had approximately $13.4 million of cash, cash equivalents and short-term investments and approximately $2.2 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 Amended Webster Credit Line and the Acquisition Credit Line will be sufficient to meet its working capital requirements, to purchase the Orlando Building and the Lehigh Valley Land, to fund the anticipated construction on the Charlotte Land, 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; 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 purchase of the Orlando Building, the purchase of the Lehigh Valley Land and Griffin's plans with regard to the foregoing property, the closing of the sales of the Florida Farm, the Restaurant Building and the seven acres of undeveloped land in Windsor, Connecticut, expectations regarding obtaining approvals for, and planned construction on the Charlotte Land; 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.


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