Overview
Griffin Industrial Realty, Inc. ("Griffin") is a real estate business
principally engaged in developing, acquiring, managing and leasing
industrial/warehouse properties. Griffin 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.
Griffin also owns several office/flex properties and undeveloped land.
Periodically, Griffin may sell certain of its real estate assets that it has
owned for an extended time period and the use of which is not consistent with
Griffin's core focus on industrial/warehouse properties.
The notes to Griffin's consolidated financial statements included in Part II,
Item 8 "Financial Statements and Supplemental Data" of this Annual Report
contain a summary of the significant accounting policies and methods used in the
preparation of Griffin's consolidated financial statements. In the opinion of
management, because of the relative magnitude of Griffin's real estate assets,
accounting methods and estimates related to those assets are critical to the
preparation of Griffin's consolidated financial statements. Griffin uses
accounting policies and methods under accounting principles generally accepted
in the United States of America ("U.S. GAAP"). The following are the critical
accounting estimates and methods used by Griffin:
Revenue and gain recognition: Revenue includes rental revenue from Griffin's
industrial and commercial properties and proceeds from property sales. Rental
revenue is accounted for on a straightline basis over the applicable lease
terms in accordance with the Financial Accounting Standards Board ("FASB")
Accounting Standards Codification ("ASC") 840, "Leases." Gains on property sales
are recognized in accordance with FASB ASC 606, "Revenue from Contracts with
Customers," based on the specific terms of each sale. When the percentage of
completion method is used to account for a sale of real estate, gains on sales
are recognized over time as performance obligations are satisfied.
Impairment of longlived assets: Griffin reviews annually, as well as when
conditions may indicate, its longlived assets to determine if there are any
indicators of impairment, such as a prolonged vacancy in one of Griffin's rental
properties. If indicators of impairment are present, Griffin evaluates the
carrying value of the assets in relation to the operating performance and
expected future undiscounted cash flows or the estimated fair value based on
expected future cash flows of the underlying assets. Development costs that have
been capitalized are reviewed periodically for future recoverability.
Stock based compensation: Griffin determines stock-based compensation based on
the estimated fair values of stock options as determined on their grant dates
using the BlackScholes optionpricing model. In determining the estimated fair
values of stock options issued, Griffin makes assumptions on expected
volatility, risk-free interest rates, expected option terms and dividend yields.
Derivative instruments: Griffin evaluates each interest rate swap agreement to
determine if it qualifies as an effective cash flow hedge. Changes in the fair
value of each interest rate swap agreement that management determines to be an
effective cash flow hedge are recorded as a component of other comprehensive
income. The fair value of each interest rate swap agreement is determined based
on observable market participant data, such as yield curves, as of the fair
value measurement date.
Income taxes: In accounting for income taxes under FASB ASC 740, "Income Taxes,"
management estimates future taxable income from operations, the sale of
appreciated assets, the remaining years before the expiration of net operating
loss carryforwards, future reversals of existing temporary differences and tax
planning strategies in determining if it is more likely than not that Griffin
will realize the benefits of its deferred tax assets. Deferred tax assets and
deferred tax liabilities are measured using the enacted tax rates expected to
apply to taxable income in the years in which those temporary differences are
expected to be recovered or settled. The effect on deferred tax assets and
deferred tax liabilities of a change in tax rates on income is recognized in the
period that the tax rate change is enacted.
29
Table of Contents
Summary
In the fiscal year ended November 30, 2019 ("fiscal 2019"), Griffin had net
income of approximately $3.7 million as compared to a net loss of approximately
$1.7 million in the fiscal year ended November 30, 2018 ("fiscal 2018"). Net
income in fiscal 2019, as compared to the net loss in fiscal 2018, principally
reflected: (a) an increase of approximately $4.6 million in operating income in
fiscal 2019 as compared to fiscal 2018; and (b) an increase of approximately
$0.1 million in investment income in fiscal 2019 as compared to fiscal 2018;
partially offset by (c) an increase of approximately $0.7 million in the income
tax provision in fiscal 2019 as compared to fiscal 2018; and (d) an increase of
approximately $0.1 million in interest expense in fiscal 2019 as compared to
fiscal 2018.
The higher operating income in fiscal 2019, as compared to fiscal 2018,
reflected: (a) an approximately $7.0 million increase in gain from property
sales; (b) an approximately $1.0 million increase in operating income from
leasing ("Leasing NOI")2, which Griffin defines as rental revenue less operating
expenses of rental properties; (c) an approximately $0.1 million decrease in
general and administrative expense in fiscal 2019 as compared to fiscal 2018;
and (d) a gain on insurance recovery of approximately $0.1 million for storm
damage to the approximately 1,066 acre parcel of undeveloped land in Quincy,
Florida (the "Florida Farm"); partially offset by (e) an impairment loss on real
estate assets of $3.1 million; and (f) an approximately $0.4 million increase in
depreciation and amortization expense in fiscal 2019 as compared to fiscal 2018.
The higher gain from property sales in fiscal 2019, as compared to fiscal 2018,
principally reflected a gain of approximately $7.3 million in fiscal 2019 from
the sale of approximately 280 acres of undeveloped land in Simsbury, Connecticut
(the "Simsbury Land Sale").
The increase in Leasing NOI to approximately $24.2 million in fiscal 2019, from
approximately $23.2 million in fiscal 2018, principally reflected an
approximately $1.4 million increase in rental revenue in fiscal 2019, as
compared to fiscal 2018, partially offset by an increase of approximately $0.5
million in operating expenses of rental properties in fiscal 2019, as compared
to fiscal 2018. The increase in rental revenue principally reflects more space
under lease in fiscal 2019 as compared to fiscal 2018. The increase in operating
expenses of rental properties principally reflects a full year of expenses in
fiscal 2019 for both 6975 Ambassador Drive ("6975 Ambassador"), an approximately
134,000 square foot industrial/warehouse building in the Lehigh Valley of
Pennsylvania and 220 Tradeport Drive ("220 Tradeport"), an approximately 234,000
square foot industrial/warehouse building in New England Tradeport ("NE
Tradeport"), Griffin's industrial park in Windsor and East Granby, Connecticut,
as compared to expenses for those buildings only being incurred during the
fourth quarter of fiscal 2018 (the "2018 fourth quarter"). 6975 Ambassador and
220 Tradeport were both placed in service in the 2018 fourth quarter. The
impairment loss reflects the write down of the real estate assets of Griffin's
approved but unbuilt residential development ("Meadowood") in Simsbury,
Connecticut. The higher depreciation and amortization expense in fiscal 2019, as
compared to fiscal 2018, principally reflected higher depreciation and
amortization related to 220 Tradeport and 6975 Ambassador, partially offset by a
reduction of depreciation and amortization expense on tenant improvements
related to leases that terminated in fiscal 2019. The higher interest expense in
fiscal 2019, as compared to fiscal 2018, principally reflected the higher amount
of debt outstanding in fiscal 2019 as compared to fiscal 2018.
Griffin had an income tax benefit of approximately $0.2 million in fiscal 2019
as compared to an income tax provision of approximately $0.5 million in fiscal
2018. The income tax benefit in fiscal 2019 principally reflected a credit of
approximately $0.9 million included in the fiscal 2019 income tax provision from
a change in Connecticut tax law that more than offset approximately $0.7 million
of income taxes provided on fiscal 2019 pretax income of approximately
$3.5 million. The income tax provision in fiscal 2018 principally reflected a
charge of approximately $1.0 million for the re-measurement of Griffin's
deferred tax assets and liabilities due to the reduction of the U.S. federal
corporate statutory tax rate from 35% to 21% under the Tax Cuts and Jobs Act
("TCJA"), partially offset by a tax benefit of approximately $0.5 million on
Griffin's pretax loss of approximately $1.1 million in fiscal 2018.
___________________
2 Leasing 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.
30
Table of Contents
Results of Operations
Fiscal 2019 Compared to Fiscal 2018
Total revenue increased to approximately $44.0 million in fiscal 2019 from
approximately $33.8 million in fiscal 2018, reflecting increases of
approximately $8.8 million in revenue from property sales and approximately
$1.4 million in rental revenue. Rental revenue increased to approximately
$34.2 million in fiscal 2019 from approximately $32.8 million in fiscal 2018.
The approximately $1.4 million increase in rental revenue in fiscal 2019 over
fiscal 2018 was principally due to: (a) an increase of approximately
$1.3 million from 220 Tradeport, which was completed and fully leased in the
2018 fourth quarter; and (b) an increase of approximately $0.6 million from
leasing previously vacant space; partially offset by (c) a decrease of
approximately $0.5 million in rental revenue from leases that expired.
A summary of the total square footage and leased square footage of the buildings
in Griffin's real estate portfolio is as follows:
Total Leased
Square Square Percentage
Footage Footage Leased
As of November 30, 2019 4,462,000 4,034,000 90%
As of November 30, 2018 4,078,000 3,777,000 93%
The approximately 384,000 square foot increase in total square footage as of
November 30, 2019, as compared to November 30, 2018, was due to: (a) placing
into service in the fiscal 2019 fourth quarter (the "2019 fourth quarter") upon
the completion of construction, on speculation, two industrial/warehouse
buildings ("160 International" and "180 International"), aggregating
approximately 283,000 square feet in Concord, North Carolina in the greater
Charlotte area; and (b) the acquisition in the 2019 fourth quarter of
7466 Chancellor Drive ("7466 Chancellor"), an approximately 100,000 square foot
industrial/warehouse building in Orlando, Florida, and Griffin's first property
in that market.
The approximately 257,000 square foot net increase in leased square footage as
of November 30, 2019, as compared to November 30, 2018, was principally due to:
(a) approximately 105,000 square feet in 160 International being leased; (b) the
acquisition of 7466 Chancellor, which is fully leased: (c) approximately
64,000 square feet in 6975 Ambassador being leased; (d) 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
(e) a reduction of approximately 23,000 square feet due to the expiration of a
lease of industrial/warehouse space in NE Tradeport; and (f) a reduction of
approximately 17,000 square feet as the 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 an aggregate of
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.
In fiscal 2019, Griffin extended leases aggregating approximately 141,000 square
feet, that included two leases for industrial/warehouse space in NE Tradeport
aggregating approximately 80,000 square feet and several leases for office/flex
space aggregating approximately 60,000 square feet.
As of November 30, 2019, Griffin's approximately 4,029,000 square feet of
industrial/warehouse space, which comprised approximately 90% of Griffin's total
square footage, was 93% leased (97% leased excluding 160 International and 180
International). The only significant vacancies, excluding the vacancies in 160
International and 180 International, were approximately 70,000 square feet in
6975 Ambassador and approximately 48,000 square feet in NE Tradeport. Both of
those spaces were leased in the fiscal 2020 first quarter. Griffin's office/flex
buildings aggregating approximately 433,000 square feet (10% of Griffin's total
square footage) in the Hartford, Connecticut area, were approximately 70% leased
as of November 30, 2019.
Revenue from property sales increased to approximately $9.8 million in fiscal
2019 from approximately $1.0 million in fiscal 2018. Property sales revenue in
fiscal 2019 included: (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
31
Table of Contents
several smaller land sales, including approximately $0.1 million from the sale
of a residential lot at Stratton Farms ("Stratton Farms"), Griffin's residential
subdivision in Suffield, Connecticut. The aggregated cost related to the
property sales in fiscal 2019 was approximately $2.0 million, resulting in a
total pretax gain of approximately $7.8 million from property sales in fiscal
2019.
Revenue from property sales of approximately $1.0 million in fiscal 2018
reflected approximately $0.8 million from the sale of approximately 49 acres of
undeveloped land in Southwick, Massachusetts (the "2018 Southwick Land Sale"),
approximately $0.1 million from the sale of a Stratton Farms residential lot and
approximately $0.1 million from the buyer's forfeiture of a deposit on a
potential land sale that was not completed. The aggregated costs related to such
property sales and the deposit forfeiture in fiscal 2018 was approximately
$0.1 million, resulting in a total pretax gain of approximately $0.9 million
from property sales in fiscal 2018. Property sales occur periodically and
changes in revenue from year to year from property sales may not be indicative
of any trends in Griffin's real estate business.
Operating expenses of rental properties increased to approximately $10.0 million
in fiscal 2019 from approximately $9.5 million in fiscal 2018. The increase of
approximately $0.5 million in operating expenses of rental properties in fiscal
2019, as compared to fiscal 2018, principally reflected: (a) an increase of
approximately $0.2 million in operating expenses for 6975 Ambassador being in
service for the entire year in fiscal 2019; (b) an increase of approximately
$0.2 million in operating expenses for 220 Tradeport being in service for the
entire year in fiscal 2019; and (c) increases aggregating approximately
$0.1 million in operating expenses across all other properties.
Depreciation and amortization expense increased to approximately $11.8 million
in fiscal 2019 from approximately $11.4 million in fiscal 2018. The increase of
approximately $0.4 million in depreciation and amortization expense in fiscal
2019, as compared to fiscal 2018, principally reflected: (a) an increase of
approximately $0.5 million related to 220 Tradeport; (b) an increase of
approximately $0.2 million related to 6975 Ambassador; and (c) increases
aggregating approximately $0.1 million across all other properties; partially
offset by (d) a decrease of approximately $0.3 million related to tenant
improvements becoming fully depreciated in fiscal 2018 as a result of leases
that terminated in that year.
General and administrative expenses decreased by less than $0.1 million in
fiscal 2019 to remain essentially unchanged at approximately $7.7 million. The
less than $0.1 million decrease in fiscal 2019, as compared to fiscal 2018,
principally reflected: (a) an approximately $0.4 million decrease in
compensation expenses in fiscal 2019; and (b) an expense of approximately
$0.1 million in fiscal 2018 for removal of structures on Griffin's land that
remained from the tobacco growing operations of former affiliates of Griffin;
partially offset by (c) an increase of approximately $0.3 million related to
Griffin's non-qualified deferred compensation plan; and (d) a net increase of
approximately $0.1 million in all other general and administrative expenses. The
decrease in compensation expenses principally reflects the effect of the
retirement of Frederick M. Danziger as Griffin's Executive Chairman and the
resignation of the Director of Acquisitions in fiscal 2019. Mr. Danziger
remained as Non-executive Chairman of Griffin's Board of Directors. The higher
expense related to Griffin's non-qualified deferred compensation plan reflected
the effect of higher stock market performance on participant balances in fiscal
2019, as compared to fiscal 2018, which resulted in a greater increase in the
non-qualified deferred compensation plan liability in fiscal 2019 as compared to
fiscal 2018.
In the 2019 fourth quarter, management decided to pursue alternatives to a large
scale long-term residential development for Meadowood that would enable Griffin
to realize proceeds in a more timely manner that could be redeployed by Griffin
towards its key strategy of increasing its industrial/warehouse portfolio. As a
result of these actions, in the fiscal 2019 fourth quarter, Griffin recorded an
impairment loss of $3.1 million to lower the carrying value of the real estate
assets of Meadowood to their estimated fair value of approximately
$5.4 million. On February 3, 2020, Griffin entered into an option agreement that
contemplates a sale of the Meadowood land that, if exercised, would generate net
cash proceeds to Griffin of approximately $5.4 million (see "Liquidity and
Capital Resources" below).
Interest expense increased to approximately $6.4 million in fiscal 2019 from
approximately $6.3 million in fiscal 2018. The increase of approximately
$0.1 million in interest expense in fiscal 2019, as compared to fiscal 2018,
principally reflected: (a) an approximately $0.4 million increase in interest
expense on the 2018 State Farm Loan (as defined below) as a result of the higher
amount outstanding thereunder in fiscal 2019 as compared to fiscal 2018; offset
by (b) a decrease of approximately $0.2 million across all other mortgage loans
in fiscal 2019 as compared to fiscal 2018; and (c) a decrease of $0.1 million in
fiscal 2019, as compared to fiscal 2018, due to an interest rate swap agreement
that expired in the first quarter of fiscal 2019.
32
Table of Contents
Investment income increased to approximately $0.3 million in fiscal 2019 from
approximately $0.2 million in fiscal 2018. The increase of approximately
$0.1 million in investment income in fiscal 2019, as compared to fiscal 2018,
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.
Griffin had an income tax benefit of approximately $0.2 million in fiscal 2019
as compared to an income tax provision of approximately $0.5 million in fiscal
2018. The income tax benefit in fiscal 2019 principally reflected a credit of
approximately $0.9 million included in the fiscal 2019 income tax provision from
a change in Connecticut tax law that more than offset approximately $0.7 million
of income taxes provided on fiscal 2019 pretax income of approximately
$3.5 million. The credit of approximately $0.9 million included in the fiscal
2019 income tax benefit was due to a partial reduction to the valuation
allowance on Connecticut state deferred tax assets as a result of the change in
Connecticut's tax law whereby the capital based tax is being phased out over
four consecutive years beginning January 1, 2021. The income tax provision in
fiscal 2018 principally reflected a charge of approximately $1.0 million for the
re-measurement of Griffin's deferred tax assets and liabilities due to the
reduction of the U.S. federal corporate statutory tax rate from 35% to 21% as
the TCJA became effective for Griffin in the fiscal 2018 first quarter,
partially offset by a tax benefit of approximately $0.5 million on Griffin's
pretax loss of approximately $1.1 million in fiscal 2018.
For a discussion of Griffin's results of operations for fiscal 2017, including a
year-to-year comparison between fiscal 2018 and fiscal 2017, refer to Part II,
Item 7, "Management's Discussion and Analysis of Financial Condition and Results
of Operations" in Griffin's Annual Report Form 10-K/A for the year ended
November 30, 2018.
Off Balance Sheet Arrangements
Griffin does not have any off balance sheet arrangements.
Liquidity and Capital Resources
In fiscal 2019, net cash provided by operating activities increased to
approximately $11.3 million from approximately $8.4 million in fiscal 2018. The
approximately $2.8 million increase in net cash provided by operating activities
in fiscal 2019, as compared to fiscal 2018, principally reflected the
approximately $1.0 million increase in Leasing NOI in fiscal 2019, as compared
to fiscal 2018, and an increase in cash from changes in assets and liabilities
in fiscal 2019, as compared to fiscal 2018. The increase in cash from changes in
assets and liabilities principally reflected the increase in deferred revenue of
approximately $1.8 million in fiscal 2019, as compared to an increase of
approximately $0.3 million in fiscal 2018. The favorable change in deferred
revenue in fiscal 2019, as compared to fiscal 2018, principally reflected cash
received from tenants for tenant and building improvements that will be
recognized as rental revenue over the tenants' respective lease terms.
Net cash used in investing activities was approximately $15.0 million in fiscal
2019, as compared to approximately $45.3 million in fiscal 2018. The net cash
used in investing activities in fiscal 2019 reflected: (a) cash payments of
approximately $29.4 million for additions to real estate assets; (b) cash
payments of approximately $10.2 million for the acquisition of 7466 Chancellor;
and (c) cash payments of approximately $1.0 million for deferred leasing costs
and other uses; partially offset by (d) $16.0 million of cash received as a
result of a decrease in short-term investments; and (e) net cash proceeds of
approximately $9.5 million from property sales.
The approximately $29.4 million of cash payments for additions to real estate
assets in fiscal 2019 reflected the following:
New building construction (including site work) $ 15.4 million
Purchases of undeveloped land $ 7.9 million
Tenant and building improvements related to leasing $ 5.0 million
Development costs and infrastructure improvements $ 1.1 millionCash payments for new building construction (including site work) in fiscal 2019
included approximately $15.0 million for the construction, on speculation, of
160 International and 180 International which were started in the 2018 fourth
quarter and completed in fiscal 2019. Including cash paid in fiscal 2018 and
remaining cash to be paid
33
Table of Contents
subsequent to November 30, 2019, the total cost of construction (including site
work) for 160 International and 180 International is expected to be
approximately $16.3 million. Cash payments for new building construction
(including site work) in fiscal 2019 also included the approximately
$0.4 million of final payments for the construction of 220 Tradeport and 6975
Ambassador, which were both completed in the 2018 fourth quarter. The total cost
of site work and construction (excluding tenant improvement costs) of 220
Tradeport and 6975 Ambassador was approximately $13.2 million and approximately
$8.1 million, respectively.
Cash payments of $7.9 million for purchases of undeveloped land in fiscal 2019
were comprised of (a) approximately $5.7 million for the purchase of
approximately 44 acres in two adjoining land parcels in Charlotte, North
Carolina (the "Charlotte Land"); and (b) approximately $2.2 million for the
purchase of approximately 14 acres of undeveloped land in the Lehigh Valley (the
"Lehigh Valley Land"). These acquired land parcels were replacement properties
in 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, for the
Simsbury Land Sale. Griffin has obtained governmental approvals required for its
planned construction of three industrial/warehouse buildings aggregating
approximately 520,000 square feet on the Charlotte Land and an approximately
100,000 square foot industrial/warehouse building on the Lehigh Valley Land.
Cash payments of approximately $5.0 million in fiscal 2019 for tenant and
building improvements related to leasing principally reflected tenant
improvement work for leases signed in the latter part of fiscal 2018 and fiscal
2019. The cash spent on development costs and infrastructure improvements in
fiscal 2019 principally reflected approximately $0.5 million for initial
planning and development of the Lehigh Valley Land and approximately
$0.4 million for the initial planning and development of the Charlotte Land.
On October 25, 2019, Griffin paid cash of approximately $10.2 million for the
acquisition of 7466 Chancellor, using approximately $5.9 million borrowed under
the Acquisition Credit Line (as defined below), with the balance paid from cash
on hand. Subsequent to November 30, 2019, Griffin closed on a nonrecourse
mortgage loan of $6.5 million collateralized by 7466 Chancellor (see below).
7466 Chancellor was a replacement property under a reverse like-kind exchange
(a "Reverse 1031 Like-Kind Exchange") under Section 1031 of the Internal Revenue
Code of 1986, as amended, to defer taxable gains on subsequent sales of real
property. On February 3, 2020, Griffin sold a parcel of undeveloped land to
complete the Reverse 1031 Like-Kind Exchange (see below).
Cash payments of approximately $1.0 million for deferred leasing costs and other
in fiscal 2019 principally reflected lease commissions paid to real estate
brokers for new leases.
The approximately $16.0 million of cash from short-term investments in fiscal
2019 reflected the net reduction of Griffin's investment in repurchase
agreements with Webster Bank from $17.0 million as of November 30, 2018 to
approximately $1.0 million as of November 30, 2019. As of November 30, 2019,
Griffin held one repurchase agreement that is scheduled to mature on February
14, 2020.
The approximately $9.5 million of net cash proceeds from property sales, after
transaction costs, in fiscal 2019 principally reflected approximately
$7.6 million from the Simsbury Land Sale, approximately $1.6 million from the
sales of the East Windsor Land and the East Windsor Land development rights and
approximately $0.3 million from several smaller property sales (see "Results of
Operations - Fiscal 2019 Compared to Fiscal 2018" above). The net cash
proceeds from the Simsbury Land Sale were deposited into escrow at closing for
the purchase of replacement properties under a 1031 Like-Kind Exchange.
In fiscal 2018, net cash used in investing activities of approximately
$45.3 million reflected: (a) cash payments of approximately $28.6 million for
additions to real estate assets; (b) net cash of $17.0 million used for
short-term investments; and (c) cash payments of approximately $0.8 million for
deferred leasing costs and other uses; partially offset by (d) cash proceeds of
approximately $1.0 million from property sales; and (e) approximately
$0.1 million of cash proceeds from a fiscal 2017 property sale returned from
escrow.
34
Table of Contents
The approximately $28.6 million of cash payments for additions to real estate
assets in fiscal 2018 reflected the following:
New building construction (including site work) $ 20.7 million
Tenant and building improvements related to leasing $ 4.6 million
Purchase of undeveloped land $ 2.7 million
Development costs and infrastructure improvements $ 0.6 millionCash payments for new building construction (including site work) in fiscal 2018
included approximately $12.8 million for the construction of 220 Tradeport and
approximately $7.7 million for the construction, on speculation, of
6975 Ambassador. Griffin completed construction of both 220 Tradeport and
6975 Ambassador in the 2018 fourth quarter. Cash payments for new building
construction (including site work) in fiscal 2018 also included the
approximately $0.1 million of final payments for the construction of 330 Stone,
which was completed in the fiscal 2017 fourth quarter, and approximately
$0.1 million for the start of construction, on speculation, of 160 International
and 180 International.
Cash payments for tenant and building improvements related to leasing in fiscal
2018 principally related to the full building lease at 220 Tradeport
(approximately $2.0 million), the approximately 74,000 square foot lease at
330 Stone that commenced just prior to the end of fiscal 2017 (approximately
$1.5 million) and approximately $1.1 million related to other new leases and
lease renewals signed in the latter part of fiscal 2017 and fiscal 2018.
The cash payment of approximately $2.7 million, including acquisition costs, for
the purchase of undeveloped land in fiscal 2018 was for the purchase of
undeveloped land in Concord, North Carolina (the "Concord Land"), an
approximately 22 acre parcel in the greater Charlotte area on which 160
International and 180 International were built. Approximately $0.8 million of
the purchase price of the Concord Land was paid using proceeds from the 2018
Southwick Land Sale to complete a 1031 Like-Kind Exchange (see below).
Net cash payments of $17.0 million used for short-term investments in fiscal
2018 reflected the investment in repurchase agreements with Webster Bank that
are collateralized with securities issued by the United States Government or its
sponsored agencies. As of November 30, 2018, these repurchase agreements had
maturities of up to six months, and a weighted average maturity of less than 90
days. Cash payments of approximately $0.8 million for deferred leasing costs and
other uses in fiscal 2018 reflected approximately $0.7 million for lease
commissions and other costs related to new and renewed leases and approximately
$0.1 million for purchases of equipment.
The approximately $1.0 million of cash proceeds from property sales in fiscal
2018 reflected approximately $0.8 million from the 2018 Southwick Land Sale,
approximately $0.1 million from the sale of a Stratton Farms residential lot and
approximately $0.1 million from a buyer's forfeiture of a deposit on a potential
land sale that did not close. The approximately $0.1 million of cash proceeds
from property sales returned from escrow in fiscal 2018 reflected the amount
remaining after approximately $1.8 million of the approximately $1.9 million of
total cash proceeds from the 2017 Southwick Land Sale, deposited into escrow at
closing, were used to purchase the Lehigh Valley land site for 6975 Ambassador
in fiscal 2017 to complete a 1031 Like-Kind Exchange.
Net cash provided by financing activities was approximately $1.0 million in
fiscal 2019, as compared to approximately $15.4 million in fiscal 2018. The net
cash provided by financing activities in fiscal 2019 reflected: (a) proceeds of
approximately $5.9 million from borrowing under Griffin's Acquisition Credit
Line (defined below) for the acquisition of 7466 Chancellor; (b) proceeds of
approximately $1.3 million received from the 2018 State Farm Loan (defined
below) at the time it was converted from a construction loan to a nonrecourse
permanent mortgage loan (see below); and (c) approximately $0.1 million of cash
received from the exercise of stock options; partially offset by (d)
approximately $4.0 million of recurring principal payments on mortgage loans;
and (e) a payment of approximately $2.3 million for a dividend on Griffin's
common stock ("Common Stock") that was declared in the 2018 fourth quarter and
paid in the first quarter of fiscal 2019.
On March 29, 2018, a subsidiary of Griffin closed on a construction to permanent
mortgage loan (the "2018 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
35
Table of Contents
fiscal 2019, Griffin received cash proceeds of approximately $1.3 million
from the 2018 State Farm Loan, increasing the amount outstanding under the 2018
State Farm Loan to approximately $14.1 million. On August 1, 2019, Griffin
converted the 2018 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 2018 State Farm Loan are based on a twenty-five-year amortization schedule.
Under the terms of the 2018 State Farm Loan, the interest rate on the loan
remains at 4.51% for the term of the permanent mortgage loan.
On September 19, 2019, Griffin executed an amendment (the "Revolving Credit Line
Amendment") to its $15 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 had been extended to September 30, 2019.
The Revolving Credit Line Amendment (i) 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; (ii) reduced the interest rate from the one
month London Interbank Offered Rate ("LIBOR") plus 2.75% to the one month LIBOR
rate plus 2.50%; and (iii) increased the amount of the Amended 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 is comprised of 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. In the
event that Webster Bank determines that LIBOR is no longer available, the
Amended Webster Credit Line contemplates that Webster Bank will transition to a
comparable rate of interest to the LIBOR rate. 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
("Fixed Charge Coverage Ratio"), of at least 1.1 to 1.0. As of November 30,
2019, the Amended Webster Credit Line secured certain standby letters of credit
aggregating approximately $0.5 million that are related to Griffin's development
activities.
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%. In the event that LIBOR is no longer
readily determinable or widely available, the Acquisition Credit Line
contemplates that Webster Bank shall transition to an alternate rate of interest
to the LIBOR rate taking into account then prevailing standards in the market
for determining interest rates for commercial loans made by financial
institutions in the United States at such time. 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) total stockholders' equity and 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 of at least 1.1
to 1.0. As of November 30, 2019, approximately $5.9 million was outstanding
under the Acquisition Credit Line for the purchase of 7466 Chancellor that was
subsequently repaid with the proceeds from a nonrecourse mortgage secured by
7466 Chancellor (see below).
In fiscal 2018, the net cash provided by financing activities reflected proceeds
from mortgage and construction loans of approximately $31.6 million and
approximately $1.8 million from the exercise of stock options; partially offset
by: (a) approximately $15.4 million of principal payments on mortgage loans;
(b) a payment of approximately $2.0 million for a dividend on Common Stock that
was declared in the fiscal 2017 fourth quarter and paid in fiscal 2018; and
(c) approximately $0.6 million for payments of debt issuance costs.
The proceeds of $31.6 million from mortgage and construction loans in fiscal
2018 reflected approximately $18.8 million from the 2018 People's Mortgage
(defined below) and approximately $12.8 million from the 2018 State Farm Loan.
The principal payments on mortgage loans of approximately $15.4 million
reflected a payment of
36
Table of Contents
approximately $11.8 million in connection with a mortgage loan refinancing and
approximately $3.6 million of recurring principal payments.
On March 15, 2017, a subsidiary of Griffin closed on a $12.0 million nonrecourse
mortgage (the "2017 People's Mortgage") with People's United Bank, N.A.
("People's Bank"). On January 30, 2018, that subsidiary refinanced the 2017
People's Mortgage with a new approximately $18.8 million nonrecourse mortgage
loan (the "2018 People's Mortgage") with People's Bank. The 2017 People's
Mortgage had a balance of approximately $11.8 million at the time of
refinancing. The 2018 People's Mortgage is collateralized by the same two NE
Tradeport industrial/warehouse buildings (aggregating approximately 275,000
square feet) that collateralized the 2017 People's Mortgage, in addition to
330 Stone. Upon closing the 2018 People's Mortgage, Griffin received cash
proceeds of $7.0 million (before transaction costs), net of the approximately
$11.8 million used to refinance the 2017 People's Mortgage. The 2018 People's
Mortgage has a ten-year term with monthly principal payments based on a
twenty-five-year amortization schedule. The interest rate for the 2018 People's
Mortgage is a floating rate of the one-month LIBOR rate plus 1.95%. At the time
the 2018 People's Mortgage closed, Griffin entered into an interest rate swap
agreement with People's Bank that, combined with an interest rate swap agreement
with People's Bank that was entered into at the time the 2017 People's Mortgage
closed, effectively fixes the interest rate of the 2018 People's Mortgage at
4.57% over the mortgage loan's ten-year term. Under the terms of the 2018
People's Mortgage, Griffin entered into a master lease for 759 Rainbow Road
("759 Rainbow"), one of the buildings that collateralize the 2018 People's
Mortgage. The master lease would become effective only if the full building
tenant in 759 Rainbow does not renew its lease when it is scheduled to expire in
fiscal 2022 and would stay in effect until either the space is re-leased to a
new tenant or the maturity date of the 2018 People's Mortgage.
On December 20, 2019, two wholly owned subsidiaries of Griffin entered into a
$6.5 million nonrecourse mortgage loan (the "2020 Webster Mortgage") with
Webster Bank. The 2020 Webster Mortgage is collateralized by 7466 Chancellor and
has a ten-year term with monthly principal payments based on a twenty-five-year
amortization schedule. The interest rate for the 2020 Webster Mortgage is a
floating rate of the one-month LIBOR rate plus 1.75%. At the time the 2020
Webster Mortgage closed, Griffin entered into an interest rate swap agreement
with Webster Bank that effectively fixes the interest rate on the 2020 Webster
Mortgage at 3.6% for the entire loan term. Approximately $5.9 million of the
proceeds from the 2020 Webster Mortgage were used to repay Webster Bank for the
borrowing under the Acquisition Credit Line that was used to finance a portion
of the purchase price of 7466 Chancellor (see above).
On January 23, 2020, two wholly owned subsidiaries of Griffin entered into a
$15.0 million nonrecourse mortgage loan (the "2020 State Farm Mortgage") with
State Farm Life Insurance Company. The 2020 State Farm Mortgage is
collateralized by two industrial/warehouse buildings, 6975 Ambassador and
871 Nestle Way, that aggregate approximately 254,000 square feet in the Lehigh
Valley of Pennsylvania. The 2020 State Farm Mortgage has a ten-year term with
monthly principal payments based on a twenty-five-year amortization schedule.
The interest rate for the 2020 State Farm Mortgage is 3.48%. Approximately
$3.2 million of the proceeds from the 2020 State Farm Mortgage were used to
repay the mortgage loan on 871 Nestle Way that was scheduled to mature on
January 27, 2020.
On February 3, 2020, Griffin closed on the sale of approximately seven acres of
undeveloped land in Windsor, Connecticut for a purchase price of approximately
$0.8 million in cash to complete a Reverse 1031 Like-Kind Exchange.
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,
37
Table of Contents
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 December 10, 2019, Griffin entered into an Option Purchase Agreement (the
"East Granby/Windsor Option Agreement") whereby Griffin granted the buyer an
exclusive one-year option, in exchange for a nominal fee, to purchase
approximately 280 acres of undeveloped land in East Granby and Windsor,
Connecticut. The purchase price has a range of a minimum of $6.0 million to a
maximum of $7.95 million based upon the final approved use of the land. The
buyer may extend the option period for an additional two years upon payment of
additional option fees. The land subject to the East Granby/Windsor Option
Agreement does not have any of the approvals that would be required for the
buyer's planned use of the land. A closing on the land sale contemplated by the
East Granby/Windsor Option Agreement is subject to several significant
contingencies, including the buyer securing contracts under a competitive
bidding process that would require changes in the use of the land and obtaining
local and state approvals for that planned use. There is no guarantee that the
land sale contemplated under the East Granby/Windsor Option Agreement will be
completed under its current terms, or at all.
On January 2, 2020, Griffin entered into an Agreement of Sale and Purchase to
acquire an approximately 108,000 square foot fully leased industrial/warehouse
building in Orlando, Florida for a purchase price of approximately $7.9 million,
before transaction costs. On January 13, 2020, Griffin entered into another
Agreement of Sale and Purchase to acquire a mostly vacant approximately 68,000
square foot industrial/warehouse building in Orlando, Florida for a purchase
price of approximately $5.7 million, before transaction costs. There is no
guarantee that either of these building acquisitions will be completed under
their current terms, or at all.
On January 7, 2020, Griffin entered into an agreement to sell approximately
27 acres of undeveloped land in Windsor, Connecticut for a purchase price is
approximately $3.8 million, before transaction costs. Completion of this
transaction is contingent on a number of factors, including the buyer entering
into a lease agreement with a third-party for a development on the land to be
acquired and obtaining all necessary final permits from governmental authorities
for such development plans for the site it would acquire. There is no guarantee
that this transaction will be completed under its current terms, or at all.
On February 3, 2020, Griffin entered into an option agreement (the "Meadowood
Option Agreement") with a national land conservation organization (the
"Conservation Organization") to sell the approximate 277 acres of Meadowood (the
"Meadowood Land"). For a minimal fee, the Meadowood Option Agreement grants the
Conservation Organization the right to purchase the Meadowood Land for open
space and farmland preservation whereby Griffin would receive net proceeds of
approximately $5.4 million, if the purchase option is exercised. The Meadowood
Option Agreement grants the Conservation Organization an initial term of twelve
months, with one six-month extension, to exercise its option to acquire the
Meadowood Land. Completion of a sale of the Meadowood Land contemplated under
the Meadowood Option Agreement is subject to several contingencies, including
the satisfactory outcome of due diligence by the Conservation Organization and
the Conservation Organization securing funding from several public and private
sources to acquire the Meadowood Land. There is no guarantee that a sale of the
Meadowood Land contemplated under the Meadowood Option Agreement will be
completed under its current terms, or at all.
Griffin cannot give assurance that it could issue Common Stock under the ATM
Program or obtain additional capital under the Universal Shelf on favorable
terms, or at all. See "Risk Factors-Risks Related to the Real Estate
Industry-Volatility in the capital and credit markets could materially adversely
impact Griffin" and "Risk Factors-Risks Related to Griffin's Common
Stock-Issuances or sales of Griffin's common stock or the perception that such
issuances or sales might occur could adversely affect the per share trading
price of Griffin's common stock" included in Part I, Item 1A of this Annual
Report.
In the near-term, Griffin plans to continue to invest in its real estate
business, including acquisition of the industrial/warehouse buildings under
agreement, 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
38
Table of Contents
estate pricing. Griffin may commence speculative construction projects on its
undeveloped land that is either currently owned or acquired in the future if it
believes market conditions are favorable for such development. Griffin may also
construct additional build-to-suit facilities on its undeveloped land if lease
terms are favorable.
As of November 30, 2019, Griffin had cash, cash equivalents and short-term
investments totaling approximately $6.9 million. Management believes that its
cash, cash equivalents and short-term investments as of November 30, 2019, cash
generated from leasing operations and property sales, proceeds from mortgage
loans closed subsequent to November 30, 2019 and borrowing capacity under the
Amended Webster Credit Line and Acquisition Credit Line will be sufficient to
meet its working capital requirements, to purchase industrial/warehouse
buildings currently under agreement, to make other investments in real estate
assets, and to pay dividends on its Common Stock, when and if declared by the
Board of Directors, for at least the next twelve months.
ForwardLooking Information
The above information in Management's Discussion and Analysis of Financial
Condition and Results of Operations includes "forward-looking statements" within
the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Exchange Act of 1934, as amended. These forward-looking
statements include, but are not limited to, statements about the completion of
building purchases currently under agreement or the possibility of sales
pursuant to certain option agreements; completion of property sales under
agreement, near-term expectations regarding any potential issuance of securities
under the ATM Program or the Universal Shelf, and anticipated use of any future
proceeds from the ATM program; anticipated closing dates of such purchases and
Griffin's plans with regard to the foregoing properties; the acquisition and
development of additional properties and/or undeveloped land parcels;
construction of additional buildings, tenant improvements and infrastructure
improvements; Griffin's anticipated future liquidity and capital expenditures;
and other statements with the words "believes," "anticipates," "plans,"
"expects" or similar expressions. Although Griffin believes that its plans,
intentions and expectations reflected in such forward-looking statements are
reasonable, it can give no assurance that such plans, intentions or expectations
will be achieved. The forwardlooking statements made herein are based on
assumptions and estimates that, while considered reasonable by Griffin as of the
date hereof, are inherently subject to significant business, economic,
competitive and regulatory uncertainties and contingencies, many of which are
beyond the control of Griffin. Griffin's actual results could differ materially
from those anticipated in these forwardlooking statements as a result of
various important factors, including those set forth under the heading Item 1A
"Risk Factors" and elsewhere in this Annual Report.
© Edgar Online, source Glimpses
INDUS REALTY TRUST, INC. 
