UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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þ |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 |
For the quarter ended June 30, 2010
OR
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o |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number 1-8122
GRUBB & ELLIS COMPANY
(Exact name of registrant as specified in its charter)
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Delaware
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94-1424307 |
(State or other jurisdiction of
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(IRS Employer |
incorporation or organization)
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Identification No.) |
1551 North Tustin Avenue, Suite 300, Santa Ana, California 92705
(Address of principal executive offices) (Zip Code)
(714) 667-8252
(Registrants telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Indicate by check mark whether the registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period
that the registrant was required to submit and post such files). Yes o No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large
accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the
Exchange Act. (Check one):
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Large accelerated filer o
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Accelerated filer o
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Non-accelerated filer þ
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Smaller reporting company o |
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(Do not check if a smaller reporting company) |
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act). Yes o No þ
The number of shares outstanding of the registrants common stock as of July 31, 2010 was
69,501,320 shares.
GRUBB & ELLIS COMPANY
TABLE OF CONTENTS
2
Part I FINANCIAL INFORMATION
Item 1. Financial Statements.
GRUBB & ELLIS COMPANY
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
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June 30, |
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December 31, |
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2010 |
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2009 |
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(Unaudited) |
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ASSETS
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Current assets: |
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Cash and cash equivalents (including $402 and $581 from VIEs, respectively) |
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$ |
42,104 |
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$ |
39,101 |
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Restricted cash (including $761 and $36 from VIEs, respectively) |
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13,552 |
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13,875 |
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Investment in marketable equity securities (including $1,444 and $147 from VIEs, respectively) |
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2,384 |
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|
690 |
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Accounts receivable from related parties net (including $0 and $3 from VIEs, respectively) |
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7,362 |
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9,169 |
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Advances to related parties net (including $8,275 and $0 from VIEs, respectively) |
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8,766 |
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1,019 |
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Service fees receivable net (including $861 and $1,076 from VIEs, respectively) |
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28,008 |
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30,293 |
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Current portion of professional service contracts net |
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3,925 |
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3,626 |
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Real estate deposits and pre-acquisition costs |
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1,743 |
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1,321 |
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Prepaid expenses and other assets (including $30 and $38 from VIEs, respectively) |
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13,933 |
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21,489 |
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Total current assets |
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121,777 |
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120,583 |
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Accounts receivable from related parties net |
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16,314 |
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15,609 |
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Notes and advances to related parties net |
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11,672 |
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14,607 |
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Professional service contracts net |
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5,463 |
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7,271 |
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Investments in unconsolidated entities (including $3,055 and $2,239 from VIEs, respectively) |
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3,726 |
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|
3,783 |
|
Properties held for investment net |
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81,193 |
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82,189 |
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Property, equipment and leasehold improvements net (including $0 and $17 from VIEs,
respectively) |
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11,568 |
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13,190 |
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Identified intangible assets net (including $32 and $44 from VIEs, respectively) |
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91,608 |
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94,952 |
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Other assets net (including $40 and $6 from VIEs, respectively) |
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5,912 |
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5,140 |
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Total assets |
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$ |
349,233 |
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$ |
357,324 |
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LIABILITIES AND
SHAREOWNERS (DEFICIT) EQUITY
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Current liabilities: |
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Accounts payable and accrued expenses (including $647 and $769 from VIEs, respectively) |
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$ |
59,148 |
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$ |
62,867 |
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Due to related parties (including $692 and $681 from VIEs, respectively) |
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2,773 |
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2,267 |
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Current portion of capital lease obligations |
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846 |
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|
939 |
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Other liabilities |
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34,925 |
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38,864 |
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Total current liabilities |
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97,692 |
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104,937 |
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Long-term liabilities: |
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Senior notes |
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16,277 |
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16,277 |
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Convertible notes |
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29,975 |
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Mortgage notes |
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107,000 |
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107,000 |
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Capital lease obligations (including $0 and $13 from VIEs, respectively) |
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321 |
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|
755 |
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Other long-term liabilities |
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11,633 |
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11,622 |
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Deferred tax liabilities |
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25,486 |
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25,477 |
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Total liabilities |
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288,384 |
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266,068 |
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Commitment and contingencies (Note 15) |
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Preferred stock: 12% cumulative participating perpetual convertible; $0.01 par value; 1,000,000
authorized as of June 30, 2010 and December 31, 2009; 965,700 shares issued and outstanding as
of June 30, 2010 and December 31, 2009 |
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90,080 |
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90,080 |
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Shareowners
(deficit) equity: |
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Preferred stock: $0.01 par value; 19,000,000 shares authorized as of June 30, 2010 and
December 31, 2009; no shares issued and outstanding as of June 30, 2010 and December 31, 2009 |
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Common stock: $0.01 par value; 200,000,000 shares authorized as of June 30, 2010 and December
31, 2009; 69,507,832 and 67,352,440 shares issued and outstanding as of June 30, 2010 and
December 31, 2009, respectively |
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695 |
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674 |
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Additional paid-in capital |
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412,586 |
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412,754 |
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Accumulated deficit |
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(453,341 |
) |
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(412,101 |
) |
Other comprehensive income |
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80 |
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Total Grubb & Ellis Company shareowners (deficit) equity |
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(39,980 |
) |
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1,327 |
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Noncontrolling interests (including $10,551 and ($507) from VIEs, respectively) |
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10,749 |
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(151 |
) |
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Total (deficit) equity |
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(29,231 |
) |
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1,176 |
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Total
liabilities and shareowners (deficit) equity |
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$ |
349,233 |
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$ |
357,324 |
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The abbreviation VIEs above means Variable Interest Entities.
See accompanying notes to consolidated financial statements.
3
GRUBB & ELLIS COMPANY
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
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Three Months Ended |
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Six Months Ended |
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June 30, |
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June 30, |
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2010 |
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2009 |
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2010 |
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2009 |
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REVENUE |
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Management services |
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$ |
69,911 |
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$ |
66,649 |
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$ |
142,327 |
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$ |
132,180 |
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Transaction services |
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54,684 |
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38,939 |
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96,917 |
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72,472 |
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Investment management |
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8,566 |
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13,426 |
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18,668 |
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29,083 |
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Rental related |
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7,585 |
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7,823 |
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15,299 |
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15,255 |
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Total revenue |
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140,746 |
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126,837 |
|
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|
273,211 |
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248,990 |
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OPERATING EXPENSE |
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Compensation costs |
|
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124,588 |
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112,462 |
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|
248,902 |
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225,733 |
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General and administrative |
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18,961 |
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20,082 |
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37,400 |
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41,860 |
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Provision for doubtful accounts |
|
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1,634 |
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|
11,059 |
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|
3,301 |
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|
16,477 |
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Depreciation and amortization |
|
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3,370 |
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2,423 |
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6,628 |
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4,864 |
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Rental related |
|
|
5,418 |
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5,582 |
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10,785 |
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|
11,198 |
|
Interest |
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2,729 |
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|
|
5,113 |
|
|
|
5,048 |
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|
8,749 |
|
Real estate related impairments |
|
|
1,553 |
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1,950 |
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|
1,823 |
|
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|
14,222 |
|
Intangible asset impairment |
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|
1,025 |
|
|
|
|
|
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1,639 |
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|
|
|
|
|
|
|
|
|
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Total operating expense |
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159,278 |
|
|
|
158,671 |
|
|
|
315,526 |
|
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|
323,103 |
|
|
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OPERATING LOSS |
|
|
(18,532 |
) |
|
|
(31,834 |
) |
|
|
(42,315 |
) |
|
|
(74,113 |
) |
|
|
|
|
|
|
|
|
|
|
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|
OTHER (EXPENSE) INCOME |
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
Equity in losses of unconsolidated entities |
|
|
(392 |
) |
|
|
(180 |
) |
|
|
(606 |
) |
|
|
(1,411 |
) |
Interest income |
|
|
116 |
|
|
|
139 |
|
|
|
162 |
|
|
|
284 |
|
Other (expense) income |
|
|
(283 |
) |
|
|
847 |
|
|
|
(238 |
) |
|
|
122 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other (expense) income |
|
|
(559 |
) |
|
|
806 |
|
|
|
(682 |
) |
|
|
(1,005 |
) |
|
|
|
|
|
|
|
|
|
|
|
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|
Loss from continuing operations before income tax provision |
|
|
(19,091 |
) |
|
|
(31,028 |
) |
|
|
(42,997 |
) |
|
|
(75,118 |
) |
Income tax provision |
|
|
(104 |
) |
|
|
(629 |
) |
|
|
(250 |
) |
|
|
(310 |
) |
|
|
|
|
|
|
|
|
|
|
|
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|
Loss from continuing operations |
|
|
(19,195 |
) |
|
|
(31,657 |
) |
|
|
(43,247 |
) |
|
|
(75,428 |
) |
|
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|
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|
|
|
|
|
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Discontinued operations |
|
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|
|
|
|
|
|
|
|
|
|
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|
(Loss) income from discontinued operations net of taxes |
|
|
|
|
|
|
(335 |
) |
|
|
|
|
|
|
156 |
|
Loss on disposal of discontinued operations net of taxes |
|
|
|
|
|
|
(626 |
) |
|
|
|
|
|
|
(626 |
) |
|
|
|
|
|
|
|
|
|
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|
Total loss from discontinued operations |
|
|
|
|
|
|
(961 |
) |
|
|
|
|
|
|
(470 |
) |
|
|
|
|
|
|
|
|
|
|
|
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|
NET LOSS |
|
|
(19,195 |
) |
|
|
(32,618 |
) |
|
|
(43,247 |
) |
|
|
(75,898 |
) |
Net (loss) income attributable to noncontrolling interests |
|
|
(1,736 |
) |
|
|
190 |
|
|
|
(2,007 |
) |
|
|
(1,588 |
) |
|
|
|
|
|
|
|
|
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|
NET LOSS ATTRIBUTABLE TO GRUBB & ELLIS COMPANY |
|
|
(17,459 |
) |
|
|
(32,808 |
) |
|
|
(41,240 |
) |
|
|
(74,310 |
) |
Preferred stock dividends |
|
|
(2,897 |
) |
|
|
|
|
|
|
(5,794 |
) |
|
|
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|
|
|
|
|
|
|
|
|
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NET LOSS ATTRIBUTABLE TO GRUBB & ELLIS COMPANY COMMON SHAREOWNERS |
|
$ |
(20,356 |
) |
|
$ |
(32,808 |
) |
|
$ |
(47,034 |
) |
|
$ |
(74,310 |
) |
|
|
|
|
|
|
|
|
|
|
|
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|
Basic loss per share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations attributable to Grubb & Ellis Company
common shareowners |
|
$ |
(0.31 |
) |
|
$ |
(0.50 |
) |
|
$ |
(0.73 |
) |
|
$ |
(1.16 |
) |
Loss from discontinued operations attributable to Grubb & Ellis Company
common shareowners |
|
|
|
|
|
|
(0.02 |
) |
|
|
|
|
|
|
(0.01 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per share attributable to Grubb & Ellis Company common shareowners |
|
$ |
(0.31 |
) |
|
$ |
(0.52 |
) |
|
$ |
(0.73 |
) |
|
$ |
(1.17 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted loss per share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations attributable to Grubb & Ellis Company
common shareowners |
|
$ |
(0.31 |
) |
|
$ |
(0.50 |
) |
|
$ |
(0.73 |
) |
|
$ |
(1.16 |
) |
Loss from discontinued operations attributable to Grubb & Ellis Company
common shareowners |
|
|
|
|
|
|
(0.02 |
) |
|
|
|
|
|
|
(0.01 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per share attributable to Grubb & Ellis Company common shareowners |
|
$ |
(0.31 |
) |
|
$ |
(0.52 |
) |
|
$ |
(0.73 |
) |
|
$ |
(1.17 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic weighted average shares outstanding |
|
|
64,644 |
|
|
|
63,587 |
|
|
|
64,503 |
|
|
|
63,557 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted weighted average shares outstanding |
|
|
64,644 |
|
|
|
63,587 |
|
|
|
64,503 |
|
|
|
63,557 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
4
GRUBB & ELLIS COMPANY
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
|
2010 |
|
|
2009 |
|
CASH FLOWS FROM OPERATING ACTIVITIES |
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(43,247 |
) |
|
$ |
(75,898 |
) |
Adjustments to reconcile net loss to net cash used in operating activities: |
|
|
|
|
|
|
|
|
Loss on sale of real estate |
|
|
|
|
|
|
1,031 |
|
Equity in losses of unconsolidated entities |
|
|
606 |
|
|
|
1,411 |
|
Depreciation and amortization (including amortization of signing bonuses) |
|
|
9,557 |
|
|
|
8,264 |
|
Impairment of real estate |
|
|
1,823 |
|
|
|
13,972 |
|
Impairment of intangible assets |
|
|
1,639 |
|
|
|
|
|
Stock-based compensation |
|
|
5,797 |
|
|
|
6,181 |
|
Allowance for uncollectible accounts |
|
|
3,301 |
|
|
|
5,648 |
|
Other |
|
|
1,255 |
|
|
|
1,546 |
|
Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
|
Accounts receivable from related parties |
|
|
867 |
|
|
|
8,736 |
|
Prepaid expenses and other assets |
|
|
5,873 |
|
|
|
13,814 |
|
Accounts payable and accrued expenses |
|
|
(5,021 |
) |
|
|
(11,023 |
) |
Other liabilities |
|
|
(2,491 |
) |
|
|
(3,203 |
) |
|
|
|
|
|
|
|
Net cash used in operating activities |
|
|
(20,041 |
) |
|
|
(29,521 |
) |
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES |
|
|
|
|
|
|
|
|
Net cash effect from deconsolidation of VIE |
|
|
(184 |
) |
|
|
|
|
Purchases of property and equipment |
|
|
(1,297 |
) |
|
|
(1,885 |
) |
Tenant improvements and capital expenditures |
|
|
(517 |
) |
|
|
(1,658 |
) |
Purchases of marketable equity securities, net |
|
|
(936 |
) |
|
|
(3,406 |
) |
Advances to related parties |
|
|
(365 |
) |
|
|
(3,312 |
) |
Proceeds from repayment of advances to related parties |
|
|
4,610 |
|
|
|
2,264 |
|
Investments in unconsolidated entities, net |
|
|
(243 |
) |
|
|
547 |
|
Sale of tenant-in-common interest in unconsolidated entities |
|
|
391 |
|
|
|
|
|
Proceeds from sale of properties |
|
|
|
|
|
|
93,471 |
|
Payments of (proceeds from collection of) real estate deposits and pre-acquisition costs, net |
|
|
(422 |
) |
|
|
2,465 |
|
Acquisition of business |
|
|
(200 |
) |
|
|
|
|
Change in restricted cash |
|
|
2,002 |
|
|
|
(3,981 |
) |
|
|
|
|
|
|
|
Net cash provided by investing activities |
|
|
2,839 |
|
|
|
84,505 |
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES |
|
|
|
|
|
|
|
|
Advances on line of credit, net |
|
|
|
|
|
|
3,289 |
|
Repayments of mortgage notes and capital lease obligations, net |
|
|
(514 |
) |
|
|
(77,948 |
) |
Other financing costs |
|
|
(489 |
) |
|
|
(1,521 |
) |
Proceeds from the issuance of convertible notes, net |
|
|
29,925 |
|
|
|
|
|
Dividends paid to preferred stockholders |
|
|
(5,794 |
) |
|
|
|
|
Contributions from noncontrolling interests |
|
|
321 |
|
|
|
4,560 |
|
Distributions to noncontrolling interests |
|
|
(3,244 |
) |
|
|
(1,506 |
) |
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities |
|
|
20,205 |
|
|
|
(73,126 |
) |
|
|
|
|
|
|
|
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS |
|
|
3,003 |
|
|
|
(18,142 |
) |
Cash and cash equivalents Beginning of period |
|
|
39,101 |
|
|
|
32,985 |
|
|
|
|
|
|
|
|
Cash and cash equivalents End of period |
|
$ |
42,104 |
|
|
$ |
14,843 |
|
|
|
|
|
|
|
|
SUPPLEMENTAL DISCLOSURE OF NONCASH ACTIVITIES |
|
|
|
|
|
|
|
|
Issuance of warrants |
|
$ |
|
|
|
$ |
534 |
|
|
|
|
|
|
|
|
Capital lease obligations |
|
$ |
|
|
|
$ |
2,270 |
|
|
|
|
|
|
|
|
Consolidation of assets held by VIEs |
|
$ |
15,389 |
|
|
$ |
|
|
|
|
|
|
|
|
|
Consolidation of liabilities held by VIEs |
|
$ |
651 |
|
|
$ |
|
|
|
|
|
|
|
|
|
Consolidation of noncontrolling interests held by VIEs |
|
$ |
14,740 |
|
|
$ |
|
|
|
|
|
|
|
|
|
Deconsolidation of assets held by VIEs |
|
$ |
338 |
|
|
$ |
|
|
|
|
|
|
|
|
|
Deconsolidation of liabilities held by VIEs |
|
$ |
411 |
|
|
$ |
|
|
|
|
|
|
|
|
|
Deconsolidation of noncontrolling interests held by VIEs |
|
$ |
73 |
|
|
$ |
|
|
|
|
|
|
|
|
|
Consolidation of assets related to sponsored mutual fund |
|
$ |
823 |
|
|
$ |
|
|
|
|
|
|
|
|
|
Consolidation of noncontrolling interests related to sponsored mutual fund |
|
$ |
823 |
|
|
$ |
|
|
|
|
|
|
|
|
|
Deconsolidation of sponsored mutual fund |
|
$ |
|
|
|
$ |
3,951 |
|
|
|
|
|
|
|
|
Acquisition of business |
|
$ |
1,009 |
|
|
$ |
|
|
|
|
|
|
|
|
|
The abbreviation VIEs above means Variable Interest Entities.
See accompanying notes to consolidated financial statements.
5
GRUBB & ELLIS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Overview
Grubb & Ellis Company and its consolidated subsidiaries are referred to herein as the
Company or Grubb & Ellis, we, us, and our. Grubb & Ellis, a Delaware corporation founded
over 50 years ago, is a commercial real estate services and investment company. Our 6,000
professionals in more than 100 company-owned and affiliate offices draw from a unique platform of
real estate services, practice groups and investment products to deliver comprehensive, integrated
solutions to real estate owners, tenants and investors.
We offer property owners, corporate occupants and program investors comprehensive integrated
real estate solutions, including management, transactions, consulting and investment advisory
services supported by market research and local market expertise. Through our investment
subsidiaries, we sponsor real estate investment programs that provide individuals and institutions
the opportunity to invest in a broad range of real estate investment vehicles, including public
non-traded real estate investment trusts (REITs), mutual funds and other real estate investment
funds.
Basis of Presentation
The consolidated financial statements include our accounts and those of our wholly owned and
majority-owned controlled subsidiaries, variable interest entities (VIEs) in which we are the
primary beneficiary, and partnerships/limited liability companies (LLCs) in which we are the
managing member or general partner and the other partners/members lack substantive rights. The
consolidated financial statements are prepared in accordance with generally accepted accounting
principles (GAAP) for interim financial information, the instructions to Form 10-Q and Article 10
of Regulation S-X. Accordingly, they do not include all of the information and footnotes required
by GAAP for complete financial statements. These consolidated financial statements should be read
in conjunction with our Annual Report on Form 10-K/A for the year ended December 31, 2009. In our
opinion, all adjustments necessary for a fair presentation of the financial position and results of
operations for the interim periods presented have been included in these financial statements and
are of a normal and recurring nature.
We consolidate entities that are VIEs when we are deemed to be the primary beneficiary of the
VIE. We are deemed to be the primary beneficiary of the VIE if we have a significant variable
interest in the VIE that provides us with a controlling financial interest in the VIE. For entities
in which (i) we are not deemed to be the primary beneficiary, (ii) our ownership is 50.0% or less
and (iii) we have the ability to exercise significant influence, we use the equity accounting
method (i.e. at cost, increased or decreased by our share of earnings or losses, plus contributions
less distributions). We also use the equity method of accounting for jointly controlled
tenant-in-common interests. As reconsideration events occur, we will reconsider our determination
of whether an entity is a VIE and who the primary beneficiary is to determine if there is a change
in the original determinations and will report such changes on a quarterly basis. In addition, we
will continuously evaluate our VIEs primary beneficiary as facts and circumstances change to
determine if such changes warrant a change in an enterprises status as primary beneficiary of the
VIEs.
On January 1, 2010, we adopted an amendment to the requirements of the Financial Accounting
Standards Board (FASB) Accounting Standards Codification (ASC), Topic 810, Consolidation,
(Consolidation Topic) and as a result, consolidated four LLCs and deconsolidated one joint
venture LLC. We recorded the cumulative effect of the adoption of this amendment to our financial
statements as of January 1, 2010. For the four LLCs that were consolidated, this consisted
primarily of consolidating: (i) investments in unconsolidated entities for the LLCs ownership
interest in properties, (ii) advances made by a consolidated LLC to other unconsolidated LLCs,
(iii) restricted cash, (iv) accounts payable and accrued liabilities and (v) noncontrolling
interests related to the LLCs equity. For the one joint venture LLC that was deconsolidated, this
consisted primarily of deconsolidating: (i) cash, (ii) accounts payable and accrued liabilities and
(iii) noncontrolling interests related to the LLC equity.
The adoption of the amendment to the requirements of the Consolidation Topic resulted in the
following impact to our Consolidated Balance Sheet as of January 1, 2010: (i) assets increased by
$14.9 million, (ii) liabilities increased by $0.1 million and (iii) noncontrolling interests
increased by $14.8 million. See the parenthetical disclosures on our Consolidated Balance Sheets
regarding amounts of VIEs assets and liabilities that are consolidated as of June 30, 2010 and
December 31, 2009.
6
GRUBB & ELLIS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
Use of Estimates
The financial statements have been prepared in conformity with GAAP, which require management
to make estimates and assumptions that affect the reported amounts of assets and liabilities
(including disclosure of contingent assets and liabilities) as of the date of the financial
statements and the reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
Reclassifications
Certain reclassifications have been made to prior year and prior period amounts in order to
conform to the current period presentation. These reclassifications have no effect on reported net
loss.
Restricted Cash
Restricted cash is comprised primarily of cash and loan impound reserve accounts for property
taxes, insurance, capital improvements, and tenant improvements related to consolidated properties
as well as cash reserve accounts held for the benefit of various insurance providers. As of June
30, 2010 and December 31, 2009, the restricted cash balance was $13.6 million and $13.9 million,
respectively.
Fair Value Measurements
In September 2006, the FASB issued the requirements of ASC Topic 820, Fair Value Measurements
and Disclosures, (Fair Value Measurements and Disclosures Topic). The Fair Value Measurements and
Disclosures Topic defines fair value, establishes a framework for measuring fair value in generally
accepted accounting principles, and expands disclosures about fair value instruments. In February
2008, the FASB amended the Fair Value Measurements and Disclosures Topic to delay the effective
date of the fair value measurements and disclosures for non-financial assets and non-financial
liabilities, except for items that are recognized or disclosed at fair value in the financial
statements on a recurring basis (that is, at least annually). There was no effect on our
consolidated financial statements as a result of our adoption of the Fair Value Measurements and
Disclosures Topic as of January 1, 2008 as it relates to financial assets and financial
liabilities. For items within its scope, the amended Fair Value Measurements and Disclosures Topic
deferred the effective date of Fair Value Measurements and Disclosures to fiscal years beginning
after November 15, 2008, and interim periods within those fiscal years. We adopted the requirements
of the Fair Value Measurements and Disclosures Topic as it relates to non-financial assets and
non-financial liabilities in the first quarter of 2009, which did not have a material impact on our
consolidated financial statements.
The Fair Value Measurements and Disclosures Topic establishes a three-tiered fair value
hierarchy that prioritizes inputs to valuation techniques used in fair value calculations. Level 1
inputs are the highest priority and are quoted prices in active markets for identical assets or
liabilities. Level 2 inputs reflect other than quoted prices included in Level 1 that are either
observable directly or through corroboration with observable market data. Level 3 inputs are
unobservable inputs, due to little or no market activity for the asset or liability, such as
internally-developed valuation models. If quoted market prices or inputs are not available, fair
value measurements are based upon valuation models that utilize current market or independently
sourced market inputs, such as interest rates, option volatilities, credit spreads and market
capitalization rates. Items valued using such internally-generated valuation techniques are
classified according to the lowest level input that is significant to the fair value measurement.
As a result, the asset or liability could be classified in either Level 2 or 3 even though there
may be some significant inputs that are readily observable.
We generally use a discounted cash flow model to estimate the fair value of our consolidated
real estate investments, unless better market comparable data is available. Management uses its
best estimate in determining the key assumptions, including the expected holding period, future
occupancy levels, capitalization rates, discount rates, rental rates, lease-up periods and capital
expenditure requirements. The estimated fair value is further adjusted for anticipated selling
expenses. Generally, if a property is under contract, the contract price adjusted for selling
expenses is used to estimate the fair value of the property.
7
GRUBB & ELLIS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
The following table presents financial and nonfinancial assets measured at fair value on
either a recurring or nonrecurring basis for the six months ended June 30, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quoted Prices in |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Active Markets |
|
|
Significant Other |
|
|
Significant |
|
|
|
|
|
|
|
|
|
|
for Identical |
|
|
Observable |
|
|
Unobservable |
|
|
Total |
|
(In thousands) |
|
June 30, |
|
|
Assets |
|
|
Inputs |
|
|
Inputs |
|
|
Impairment |
|
Assets |
|
2010 |
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
Losses |
|
Investments in marketable equity securities |
|
$ |
2,384 |
|
|
$ |
2,384 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Property held for investment |
|
$ |
81,193 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
81,193 |
|
|
$ |
|
|
Investments in unconsolidated entities |
|
$ |
3,726 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
3,726 |
|
|
$ |
(646 |
) |
Life insurance contracts |
|
$ |
1,010 |
|
|
$ |
|
|
|
$ |
1,010 |
|
|
$ |
|
|
|
$ |
|
|
The following table presents financial and nonfinancial assets measured at fair value on
either a recurring or nonrecurring basis for the year ended December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quoted Prices in |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Active Markets |
|
|
Significant Other |
|
|
Significant |
|
|
|
|
|
|
|
|
|
|
for Identical |
|
|
Observable |
|
|
Unobservable |
|
|
Total |
|
(In thousands) |
|
December 31, |
|
|
Assets |
|
|
Inputs |
|
|
Inputs |
|
|
Impairment |
|
Assets |
|
2009 |
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
Losses |
|
Investments in marketable equity securities |
|
$ |
690 |
|
|
$ |
690 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Property held for investment |
|
$ |
82,189 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
82,189 |
|
|
$ |
(7,050 |
) |
Investments in unconsolidated entities |
|
$ |
3,783 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
3,783 |
|
|
$ |
(3,201 |
) |
Life insurance contracts |
|
$ |
1,044 |
|
|
$ |
|
|
|
$ |
1,044 |
|
|
$ |
|
|
|
$ |
|
|
Fair Value of Financial Instruments
ASC Topic 825, Financial Instruments, (Financial Instruments Topic) requires disclosure of
fair value of financial instruments, whether or not recognized on the face of the balance sheet,
for which it is practical to estimate that value. The Financial Instruments Topic defines fair
value as the quoted market prices for those instruments that are actively traded in financial
markets. In cases where quoted market prices are not available, fair values are estimated using
present value or other valuation techniques. The fair value estimates are made at the end of each
quarter based on available market information and judgments about the financial instrument, such as
estimates of timing and amount of expected future cash flows. Such estimates do not reflect any
premium or discount that could result from offering for sale at one time our entire holdings of a
particular financial instrument, nor do they consider the tax impact of the realization of
unrealized gains or losses. In many cases, the fair value estimates cannot be substantiated by
comparison to independent markets, nor can the disclosed value be realized in immediate settlement
of the instrument.
The fair value of our mortgage notes, senior notes, convertible notes and preferred stock is
estimated using borrowing rates available to us for debt instruments with similar terms and
maturities. As of June 30, 2010, the fair values of our mortgage notes, senior notes, convertible
notes and preferred stock were calculated to be approximately $94.9 million, $15.9 million, $25.9
million and $77.7 million, respectively, compared to the carrying values of $107.0 million, $16.3
million, $30.0 million (which includes an unamortized debt discount of $1.5 million) and $90.1
million, respectively. As of December 31, 2009, the fair values of our mortgage notes, senior notes
and preferred stock were approximately $94.5 million, $15.8 million and $94.6 million,
respectively, compared to the carrying values of $107.0 million, $16.3 million and $90.1 million,
respectively. The amounts recorded for accounts receivable, notes receivable, advances and accounts
payable and accrued liabilities approximate fair value due to their short-term nature.
Recently Issued Accounting Pronouncements
On January 1, 2009, we adopted an amendment to the requirements of the Consolidation Topic
which requires noncontrolling interests to be reported within the equity section of the
consolidated balance sheets, and amounts attributable to controlling and noncontrolling interests
to be reported separately in the consolidated income statements and consolidated statement of
shareowners equity. The adoption of these provisions did not impact earnings (loss) per share
attributable to our common shareowners.
8
GRUBB & ELLIS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
On January 1, 2009, we adopted an amendment to ASC Topic 260, Earnings Per Share, (Earnings
Per Share Topic) which requires that the two-class method of computing basic earnings per share be
applied when there are unvested share-based payment
awards that contain rights to nonforfeitable dividends outstanding during a reporting period.
These participating securities share in undistributed earnings with common shareowners for purposes
of calculating basic earnings per share. Upon adoption, the presentation of all prior period
earnings per share data was adjusted retrospectively with no material impact.
In June 2009, the FASB issued an amendment to the requirements of the Consolidation Topic,
which amends the consolidation guidance applicable to VIEs. The amendments to the overall
consolidation guidance affect all entities currently defined as VIEs, as well as qualifying
special-purpose entities that are currently excluded from the definition of VIEs by the
Consolidation Topic. Specifically, an enterprise will need to reconsider its conclusion regarding
whether an entity is a VIE, whether the enterprise is the VIEs primary beneficiary and what type
of financial statement disclosures are required. The requirements of the amended Consolidation
Topic are effective as of the beginning of the first fiscal year that begins after November 15,
2009. Early adoption is prohibited. The Company adopted this amendment to the requirements of the
Consolidation Topic on January 1, 2010 and as a result, consolidated four VIEs and deconsolidated
one VIE as of January 1, 2010. See Note 4 for further information.
In January 2010, the FASB issued Accounting Standards Update, or ASU, 2010-06, Improving
Disclosures about Fair Value Measurements, or ASU 2010-06. ASU 2010-06 amends the Fair Value
Measurements and Disclosures Topic to require additional disclosure and clarify existing disclosure
requirements about fair value measurements. ASU 2010-06 requires entities to provide fair value
disclosures by each class of assets and liabilities, which may be a subset of assets and
liabilities within a line item in the statement of financial position. The additional requirements
also include disclosure regarding the amounts and reasons for significant transfers in and out of
Level 1 and 2 of the fair value hierarchy and separate presentation of purchases, sales, issuances
and settlements of items within Level 3 of the fair value hierarchy. The guidance clarifies
existing disclosure requirements regarding the inputs and valuation techniques used to measure fair
value for measurements that fall in either Level 2 or Level 3 of the hierarchy. ASU 2010-06 is
effective for interim and annual reporting periods beginning after December 15, 2009 except for the
disclosures about purchases, sales, issuances and settlements which is effective for fiscal years
beginning after December 15, 2010 and for interim periods within those fiscal years. We adopted ASU
2010-06 on January 1, 2010, which only applies to our disclosures on the fair value of financial
instruments. The adoption of ASU 2010-06 did not have a material impact on our footnote
disclosures. We have provided these disclosures in Note 1, Summary of Significant Accounting
Policies, above.
We have adopted the requirements of ASC Topic 855, Subsequent Events, (Subsequent Events
Topic) effective beginning with the year ended December 31, 2009 and have evaluated for disclosure
subsequent events that have occurred up through the date of issuance of these financial statements.
2. MARKETABLE SECURITIES
The historical cost and estimated fair value of the available-for-sale marketable securities
held by us are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2010 |
|
|
As of December 31, 2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair |
|
|
|
Historical |
|
|
Gross Unrealized |
|
|
Market |
|
|
Historical |
|
|
Gross Unrealized |
|
|
Market |
|
(In thousands) |
|
Cost |
|
|
Gains |
|
|
Losses |
|
|
Value |
|
|
Cost |
|
|
Gains |
|
|
Losses |
|
|
Value |
|
|
|
|
|
|
|
(Unaudited) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities |
|
$ |
860 |
|
|
$ |
80 |
|
|
$ |
|
|
|
$ |
940 |
|
|
$ |
543 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
543 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
There were no sales of marketable equity securities during the six month periods ended June
30, 2010 or 2009.
Investments in Limited Partnerships
We served as general partner and investment advisor, through our 51.0% ownership interest in
Grubb & Ellis Alesco Global Advisors, LLC (Alesco), to one limited partnership and as investment
advisor to three mutual funds as of June 30, 2010 and December 31, 2009. As of June 30, 2010 and
December 31, 2009, the limited partnership, Grubb & Ellis AGA Real Estate Investment Fund LP, is
required to be consolidated in accordance with the requirements of the Consolidation Topic. In
addition, as of June 30, 2010, one mutual fund, Grubb & Ellis AGA International Realty Fund, is
required to be consolidated in accordance with the requirements of the Consolidation Topic.
9
GRUBB & ELLIS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
For the three and six months ended June 30, 2010, Alesco had investment (losses) of
approximately ($0.2) million and ($0.1) million, respectively. For the three and six months ended
June 30, 2009, Alesco had investment income of approximately $0.8 million and $0.4 million,
respectively. The investment income (loss) is related to the limited partnership and mutual funds
and is reflected in other income (expense) and offset in non-controlling interest in loss of
consolidated entities on the statements of operations. As of June 30, 2010 and December 31, 2009,
the consolidated limited partnership and mutual fund had assets of approximately $1.4 million and
$0.1 million, respectively, primarily consisting of exchange traded marketable securities,
including equity securities and foreign currencies.
The following table reflects trading securities and their original cost, gross unrealized
appreciation and depreciation, and estimated market value:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2010 |
|
|
As of December 31, 2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair |
|
|
|
Historical |
|
|
Gross Unrealized |
|
|
Market |
|
|
Historical |
|
|
Gross Unrealized |
|
|
Market |
|
(In thousands) |
|
Cost |
|
|
Gains |
|
|
Losses |
|
|
Value |
|
|
Cost |
|
|
Gains |
|
|
Losses |
|
|
Value |
|
|
|
|
|
|
|
(Unaudited) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities |
|
$ |
1,545 |
|
|
$ |
25 |
|
|
$ |
(126 |
) |
|
$ |
1,444 |
|
|
$ |
170 |
|
|
$ |
|
|
|
$ |
(23 |
) |
|
$ |
147 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, 2010 |
|
|
Three Months Ended June 30, 2009 |
|
|
|
Investment |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment |
|
|
|
|
|
|
|
|
|
|
(In thousands) |
|
Income |
|
|
Realized |
|
|
Unrealized |
|
|
Total |
|
|
Income |
|
|
Realized |
|
|
Unrealized |
|
|
Total |
|
|
|
|
|
|
|
(Unaudited) |
|
|
|
|
|
|
|
|
|
|
(Unaudited) |
|
|
|
|
|
Equity securities |
|
$ |
23 |
|
|
$ |
27 |
|
|
$ |
(219 |
) |
|
$ |
(169 |
) |
|
$ |
106 |
|
|
$ |
69 |
|
|
$ |
600 |
|
|
$ |
775 |
|
Less investment expenses |
|
|
(8 |
) |
|
|
|
|
|
|
|
|
|
|
(8 |
) |
|
|
(11 |
) |
|
|
|
|
|
|
|
|
|
|
(11 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
15 |
|
|
$ |
27 |
|
|
$ |
(219 |
) |
|
$ |
(177 |
) |
|
$ |
95 |
|
|
$ |
69 |
|
|
$ |
600 |
|
|
$ |
764 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, 2010 |
|
|
Six Months Ended June 30, 2009 |
|
|
|
Investment |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment |
|
|
|
|
|
|
|
|
|
|
(In thousands) |
|
Income |
|
|
Realized |
|
|
Unrealized |
|
|
Total |
|
|
Income |
|
|
Realized |
|
|
Unrealized |
|
|
Total |
|
|
|
|
|
|
|
(Unaudited) |
|
|
|
|
|
|
|
|
|
|
(Unaudited) |
|
|
|
|
|
Equity securities |
|
$ |
35 |
|
|
$ |
99 |
|
|
$ |
(265 |
) |
|
$ |
(131 |
) |
|
$ |
191 |
|
|
$ |
(236 |
) |
|
$ |
420 |
|
|
$ |
375 |
|
Less investment expenses |
|
|
(15 |
) |
|
|
|
|
|
|
|
|
|
|
(15 |
) |
|
|
(20 |
) |
|
|
|
|
|
|
|
|
|
|
(20 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
20 |
|
|
$ |
99 |
|
|
$ |
(265 |
) |
|
$ |
(146 |
) |
|
$ |
171 |
|
|
$ |
(236 |
) |
|
$ |
420 |
|
|
$ |
355 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3. RELATED PARTIES
Related party balances are summarized below:
Accounts Receivable
Accounts receivable from related parties consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
December 31, |
|
(In thousands) |
|
2010 |
|
|
2009 |
|
Accrued property and asset management fees |
|
$ |
21,625 |
|
|
$ |
21,564 |
|
Accrued lease commissions |
|
|
7,725 |
|
|
|
7,449 |
|
Other accrued fees |
|
|
2,691 |
|
|
|
2,200 |
|
Accounts receivable from sponsored REITs |
|
|
4,605 |
|
|
|
3,696 |
|
Accrued real estate acquisition fees |
|
|
609 |
|
|
|
697 |
|
Other receivables |
|
|
133 |
|
|
|
162 |
|
|
|
|
|
|
|
|
Total |
|
|
37,388 |
|
|
|
35,768 |
|
Allowance for uncollectible receivables |
|
|
(13,712 |
) |
|
|
(10,990 |
) |
|
|
|
|
|
|
|
Accounts receivable from related parties net |
|
|
23,676 |
|
|
|
24,778 |
|
Less portion classified as current |
|
|
(7,362 |
) |
|
|
(9,169 |
) |
|
|
|
|
|
|
|
Non-current portion |
|
$ |
16,314 |
|
|
$ |
15,609 |
|
|
|
|
|
|
|
|
10
GRUBB & ELLIS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
Advances to Related Parties
We make advances to affiliated real estate entities under management in the normal course of
business. Such advances are uncollateralized, have payment terms of one year or less unless
extended by us, and generally bear interest at a range of 6.0% to 12.0% per annum. The advances
consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
December 31, |
|
(In thousands) |
|
2010 |
|
|
2009 |
|
Notes and advances to related parties |
|
$ |
31,898 |
|
|
$ |
28,302 |
|
Allowance for uncollectible advances |
|
|
(11,460 |
) |
|
|
(12,676 |
) |
|
|
|
|
|
|
|
Notes and advances to related parties net |
|
|
20,438 |
|
|
|
15,626 |
|
Less portion classified as current |
|
|
(8,766 |
) |
|
|
(1,019 |
) |
|
|
|
|
|
|
|
Non-current portion |
|
$ |
11,672 |
|
|
$ |
14,607 |
|
|
|
|
|
|
|
|
The current portion of advances to related parties as of June 30, 2010 includes $8.2 million
related to a VIE that was consolidated as of January 1, 2010 pursuant to an amendment to the
requirements of the Consolidation Topic which was effective as of January 1, 2010.
In 2009, we revised the offering terms related to certain investment programs which we
sponsor, including the commitment to fund additional property reserves and the waiver or reduction
of future management fees and disposition fees. Such future funding commitments have been made in
the form of guaranteeing the collectability of advances that one of our consolidated VIEs has made
to these investment programs. As of June 30, 2010, the future funding commitments totaled
approximately $2.1 million.
Note Receivable From Related Party
Included in notes and advances to related parties is a note receivable from Grubb & Ellis
Apartment REIT, Inc. (Apartment REIT) of $7.8 million and $9.1 million as of June 30, 2010 and
December 31, 2009, respectively. The note has an interest rate of 4.5% per annum, a default
interest rate of 2.0% in excess of the interest rate then in effect, and a maturity date of January
1, 2011. The interest rate payable under the note is subject to a one-time adjustment to a maximum
rate of 6.0% per annum, which will be evaluated and may be adjusted by us, in our sole discretion,
on July 1, 2010. The interest rate was not adjusted on July 1, 2010 and remains at 4.5% per annum.
On August 11, 2010, we executed the Amended Consolidated Promissory Note with Apartment REIT.
The material terms of the Amended Consolidated Promissory Note amends the principal amount
outstanding to $7.8 million, extends the maturity date from January 1, 2011 to July 17, 2012, and
fixes the interest rate at 4.5% per annum and the default interest rate at 6.5% per annum.
4. VARIABLE INTEREST ENTITIES
The determination of the appropriate accounting method with respect to our VIEs, including
joint ventures, is based on the requirements of the Consolidation Topic. We consolidate any VIE for
which we are the primary beneficiary. In accordance with the requirements of the Consolidation
Topic, we analyze our variable interests, including equity investments, guarantees, management
agreements and advances, to determine if an entity in which we have a variable interest, is a VIE.
Our analysis includes both quantitative and qualitative reviews. We base our quantitative analysis
on the estimated future cash flows of the entity, and our qualitative analysis on the design of the
entity, its organizational structure including decision-making ability and relevant financial
agreements.
11
GRUBB & ELLIS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
Pursuant to the requirements of the Consolidation Topic that existed prior to January 1, 2010,
we consolidated VIEs if we determined we were the primary beneficiary of the VIE. We were deemed to
be the primary beneficiary of the VIE if we were to absorb a majority of the entitys expected
losses, receive a majority of the entitys expected residual returns or both. However, under
the requirements that exist subsequent to January 1, 2010, we are deemed to be the primary
beneficiary of the VIE if we have a significant variable interest in the VIE that provides us with
a controlling financial interest. Our variable interest provides us with a controlling financial
interest if we have both (i) the power to direct the activities of the VIE that most significantly
impact the entitys economic performance and (ii) the obligation to absorb losses of the entity
that could potentially be significant to the VIE or the right to receive benefits from the entity
that could potentially be significant to the VIE. As reconsideration events occur, we will
reconsider our determination of whether an entity is a VIE and who the primary beneficiary is to
determine if there is a change in the original determinations and will report such changes on a
quarterly basis. In addition, we will continuously evaluate our VIEs primary beneficiary as facts
and circumstances change to determine if such changes warrant a change in an enterprises status as
primary beneficiary of our VIEs.
Our Investment Management segment is a sponsor of TIC Programs and related formation LLCs. As
of June 30, 2010 we had investments in 11 LLCs that are VIEs in which we are the primary
beneficiary. This includes an additional three LLCs that were consolidated as of January 1, 2010
pursuant to an amendment to the requirements of the Consolidation Topic and one LLC that was
consolidated in the second quarter of 2010 as a result of an equity investment we made in the LLC
during the second quarter of 2010. These LLCs hold interests in our TIC investments. The carrying
value of the assets and liabilities for these consolidated VIEs as of June 30, 2010 was $3.3
million and $0.2 million, respectively. The carrying value of the assets and liabilities for these
consolidated VIEs as of December 31, 2009 was $2.3 million and $25,000, respectively. The assets of
these LLCs are only used to settle the liabilities associated with these LLCs. In addition, each
consolidated VIE is joint and severally liable on the non-recourse mortgage debt related to the
interest in our TIC investment totaling $392.9 million and $277.0 million as of June 30, 2010 and
December 31, 2009, respectively. This non-recourse mortgage debt is not consolidated as the LLCs
account for the interests in our TIC investments under the equity method and the non-recourse
mortgage debt does not meet the criteria under the requirements of ASC Topic 860, Transfers and
Servicing, (Transfers and Servicing Topic) for recognizing the share of the debt assumed by the
other TIC interest holders for consolidation. We consider the third party TIC holders ability and
intent to repay their share of the joint and several liability in evaluating the recovery of our
investments.
We are also a sponsor of an LLC that was formed for the primary purpose of providing mezzanine
financing to entities acquiring, investing in, holding, developing, managing, operating, selling,
selling undivided interests in, or owning direct and indirect interests in real estate. The LLC
provides capital to TIC Programs in the form of advances. We have guaranteed the collectability of
certain advances this LLC has made to various TIC Programs which we have determined represents a
variable interest in the LLC. As of June 30, 2010, the future funding commitments totaled
approximately $2.1 million. In accordance with the requirements of the amendment to the
Consolidation Topic, we determined that we are the primary beneficiary of this LLC, which is a VIE,
and consolidated this LLC as of January 1, 2010. The carrying value of the assets and liabilities
associated with this LLC as of June 30, 2010 were $8.8 million and $11,000, respectively. The
assets of the LLC are only used to settle the liabilities associated with the LLC.
We have a 51.0% equity interest in an LLC that serves as an investment advisor to a limited
partnership and mutual fund programs. This LLC is a VIE in which we are the primary beneficiary.
The carrying value of the assets and liabilities associated with this VIE as of June 30, 2010 was
$1.6 million and $0.3 million, respectively. The carrying value of the assets and liabilities
associated with this VIE as of December 31, 2009 was $0.4 million and $0.2 million, respectively.
The assets of the LLC are only used to settle the liabilities associated with the LLC.
We have a 67.0% equity interest in an LLC that invests in and manages foreign entities.
Further, this LLC has a 49.0% equity interest in an LLC that provides property management and
facilities management services. These LLCs are VIEs in which we are the primary beneficiary. The
carrying value of the assets and liabilities associated with these VIEs as of June 30, 2010 was
$1.2 million and $0.9 million, respectively. The carrying value of the assets and liabilities
associated with these VIEs as of December 31, 2009 was $1.3 million and $1.0 million, respectively.
The assets of these LLCs are only used to settle the liabilities associated with these LLCs.
We have a 60.0% equity interest in a joint venture that serves as an advisor to energy and
infrastructure programs. This joint venture is a VIE which we determined we were the primary
beneficiary of as of December 31, 2009 as we were to absorb a majority of the entitys expected
losses and to receive a majority of the entitys expected residual returns. However, pursuant to
the requirements of the amendment to the Consolidation Topic, we deconsolidated this VIE as of
January 1, 2010 as our variable interest does not provide us with a controlling financial interest
in the VIE. Pursuant to the organizational documents for this joint venture, all major decisions
require the consent of both us and our joint venture partner. Therefore, the power to direct the
activities of the VIE that most significantly impact the VIEs economic performance is shared. The
carrying value of the assets and liabilities associated
with this VIE as of December 31, 2009 were $0.2 million and $0.2 million, respectively. The
assets of the joint venture are only used to settle the liabilities associated with the joint
venture.
12
GRUBB & ELLIS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
We advanced $1.7 million and $1.5 million during the six months ended June 30, 2010 and 2009
to one of our consolidated VIEs to fund operations. In addition, we invested an additional $0.3
million in our unconsolidated VIE during the six months ended June 30, 2010 to fund operations. We
may provide additional financial support to our consolidated and unconsolidated VIEs in the future;
however, we are not contractually required to do so.
If an entity is determined to not be a VIE under the requirements of the Consolidation Topic,
then the entity is evaluated for consolidation under the requirements of ASC Topic 970, Real Estate
General, (Real Estate General Topic), as amended by the requirements of the Consolidation
Topic.
As of June 30, 2010 and December 31, 2009, we had a number of entities that were determined to
be VIEs that did not meet the consolidation requirements of the Consolidation Topic. The
unconsolidated VIEs are accounted for under the equity method. The aggregate investment carrying
value of the unconsolidated VIEs was ($0.2) million and $0.3 million as of June 30, 2010 and
December 31, 2009, respectively, and was classified under Investments in Unconsolidated Entities in
the consolidated balance sheet. Our maximum exposure to loss as a result of our investments in
unconsolidated VIEs is typically limited to the aggregate of the carrying value of the investment,
future funding commitments and mortgage debt guarantees. There were no future funding commitments
as of June 30, 2010 and December 31, 2009 related to these unconsolidated VIEs. In addition, as of
June 30, 2010 and December 31, 2009, these unconsolidated VIEs are joint and severally liable on
non-recourse mortgage debt totaling $0 and $93.3 million, respectively. This mortgage debt is not
consolidated as the LLCs account for the interests in our TIC investments under the equity method
and the non-recourse mortgage debt does not meet the requirements of Transfers and Servicing Topic
for recognizing the share of the debt assumed by the other TIC interest holders for consolidation.
We considered the third party TIC holders ability and intent to repay their share of the joint and
several liability in evaluating the recovery of our investment or outstanding deposits and
advances. In evaluating the recovery of the TIC investment, we evaluated the likelihood that the
lender would foreclose on the VIEs interest in the TIC to satisfy the obligation.
5. INVESTMENTS IN UNCONSOLIDATED ENTITIES
As of June 30, 2010 and December 31, 2009, we held investments in five joint ventures totaling
$0.3 million and $0.4 million, which represent a range of 5.0% to 10.0% ownership interest in each
property. In addition, pursuant to the requirements of the Consolidation Topic, we have
consolidated seven LLCs which have investments in unconsolidated entities totaling $2.1 million and
$2.2 million as of June 30, 2010 and December 31, 2009, respectively. In addition, pursuant to the
requirements of an amendment to the Consolidation Topic which were effective as of January 1, 2010,
we have consolidated four LLCs which have investments in unconsolidated entities totaling $1.0
million as of June 30, 2010 and have deconsolidated a joint venture that was previously
consolidated as of December 31, 2009. Accordingly, we now reflect an investment in such joint
venture of ($0.2) million as of June 30, 2010. The remaining amounts within investments in
unconsolidated entities of $0.5 million and $1.2 million as of June 30, 2010 and December 31, 2009,
respectively, are related to various LLCs, which represent ownership interests in each property of
less than 1.0%.
6. PROPERTY HELD FOR INVESTMENT
Property held for investment consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
December 31, |
|
(In thousands) |
|
Useful Life |
|
|
2010 |
|
|
2009 |
|
Building and capital improvements |
|
39 years |
|
$ |
$73,779 |
|
|
$ |
73,712 |
|
Tenant improvements |
|
112 years |
|
|
7,406 |
|
|
|
6,955 |
|
Accumulated depreciation |
|
|
|
|
|
|
(9,472 |
) |
|
|
(7,958 |
) |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
|
71,713 |
|
|
|
72,709 |
|
Land |
|
|
|
|
|
|
9,480 |
|
|
|
9,480 |
|
|
|
|
|
|
|
|
|
|
|
|
Property held for investment, net |
|
|
|
|
|
$ |
81,193 |
|
|
$ |
82,189 |
|
|
|
|
|
|
|
|
|
|
|
|
13
GRUBB & ELLIS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
We recognized $0.8 million and $1.5 million of depreciation expense related to the two
properties held for investment for the three and six months ended June 30, 2010, respectively. No
depreciation expense was recorded for the three and six months ended June 30, 2009. Both of these
properties were previously held for sale and one was reclassified as held for investment as of June
30, 2009 and the other was reclassified as held for investment as of September 30, 2009. During the
periods each property was held for sale, we did not record any depreciation expense related to the
property. In accordance with ASC Topic 360, Property, Plant and Equipment, (Property, Plant and
Equipment Topic), we record catch up depreciation during the period a property is reclassified as
held for investment if the carrying value of the property before the property was classified as
held for sale adjusted for any depreciation and amortization expense and impairment losses that
would have been recognized had the asset been continuously classified as held for investment is
less than the fair value of the property at the date of the subsequent decision not to sell.
7. BUSINESS COMBINATIONS
In March 2010, we acquired a regional commercial real estate services company for $1.0
million.
The purchase price was preliminarily allocated to the assets acquired and liabilities assumed
based on the estimated fair value as of the acquisition date as follows (in thousands):
|
|
|
|
|
Property and equipment |
|
$ |
59 |
|
Identified intangible assets acquired |
|
|
950 |
|
|
|
|
|
Total assets |
|
$ |
1,009 |
|
|
|
|
|
Total purchase price |
|
$ |
1,009 |
|
|
|
|
|
Pro forma financial information has not been included as it is immaterial.
8. IDENTIFIED INTANGIBLE ASSETS
Identified intangible assets consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
December 31, |
|
(In thousands) |
|
Useful Life |
|
2010 |
|
|
2009 |
|
Non-amortizing intangible assets: |
|
|
|
|
|
|
|
|
|
|
Trade name |
|
Indefinite |
|
$ |
64,100 |
|
|
$ |
64,100 |
|
Amortizing intangible assets: |
|
|
|
|
|
|
|
|
|
|
Identified intangible assets |
|
|
|
|
|
|
|
|
|
|
Contract rights, established for the legal right to future
disposition fees of a portfolio of real estate properties under
contract |
|
Amortize per disposition transactions |
|
|
9,547 |
|
|
|
11,186 |
|
Affiliate agreement |
|
20 years |
|
|
10,600 |
|
|
|
10,600 |
|
Customer relationships |
|
5 to 7 years |
|
|
5,750 |
|
|
|
5,400 |
|
Customer backlog |
|
1 year |
|
|
250 |
|
|
|
|
|
Internally developed software |
|
4 years |
|
|
6,200 |
|
|
|
6,200 |
|
Other contract rights |
|
5 to 7 years |
|
|
1,164 |
|
|
|
1,164 |
|
Non-compete and employment agreements |
|
3 to 4 years |
|
|
447 |
|
|
|
97 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
33,958 |
|
|
|
34,647 |
|
Accumulated amortization |
|
|
|
|
(13,068 |
) |
|
|
(11,387 |
) |
|
|
|
|
|
|
|
|
|
Identified intangible assets, net |
|
|
|
|
20,890 |
|
|
|
23,260 |
|
|
|
|
|
|
|
|
|
|
Identified intangible assets of properties held for investment |
|
|
|
|
|
|
|
|
|
|
In place leases and tenant relationships |
|
1 to 104 months |
|
|
11,510 |
|
|
|
11,510 |
|
Above market leases |
|
1 to 92 months |
|
|
2,364 |
|
|
|
2,364 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13,874 |
|
|
|
13,874 |
|
Accumulated amortization |
|
|
|
|
(7,256 |
) |
|
|
(6,282 |
) |
|
|
|
|
|
|
|
|
|
Identified intangible assets of properties held for investment, net |
|
|
|
|
6,618 |
|
|
|
7,592 |
|
|
|
|
|
|
|
|
|
|
Total identified intangible assets, net |
|
|
|
$ |
91,608 |
|
|
$ |
94,952 |
|
|
|
|
|
|
|
|
|
|
14
GRUBB & ELLIS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
Amortization expense for intangible contract rights is charged as a reduction to investment
management revenue in the applicable period. The amortization of the contract rights will be
applied based on the net relative value of disposition fees realized when properties are sold.
There was no amortization expense recorded for contract rights for the three and six months ended
June 30, 2010 and 2009. The intangible contract rights represent the legal right to future
disposition fees of a portfolio of real estate properties under contract. As a result of the
current economic environment, a portion of these disposition fees may not be recoverable. Based on
our analysis for the current and projected property values, condition of the properties and status
of mortgage loans payable associated with these contract rights, we determined that there are
certain properties for which receipt of disposition fees was improbable. As a result, we recorded
an impairment charge of approximately $1.0 million and $1.6 million related to the impaired
intangible contract rights for the three and six months ended June 30, 2010, respectively. There
were no impairment charges recorded for the three and six months ended June 30, 2009. Amortization
expense recorded for the remaining identified intangible assets was approximately $0.9 million and
$1.7 million for the three and six months ended June 30, 2010, respectively. Amortization expense
recorded for the remaining identified intangible assets was approximately $0.8 million and $1.6
million for the three and six months ended June 30, 2009, respectively. Amortization expense is
included as part of operating expense in the accompanying consolidated statement of operations.
Amortization expense recorded for the in place leases and tenant relationships was
approximately $0.4 million and $0.8 million for the three and six months ended June 30, 2010. No
amortization expense was recorded for the three and six months ended June 30, 2009. The two
properties were previously held for sale and one was reclassified as held for investment as of June
30, 2009 and the other was reclassified as held for investment as of September 30, 2009. In
accordance with the provisions of the Property, Plant and Equipment Topic, we determined that the
carrying value of the property before the property was classified as held for sale adjusted for any
depreciation and amortization expense and impairment losses that would have been recognized had the
asset been continuously classified as held for investment was greater than the fair value of the
property at the date of the subsequent decision not to sell and as such, made no additional
adjustments to the carrying value of the asset as of June 30, 2009. Amortization expense is
included as part of operating expense in the accompanying consolidated statement of operations.
Amortization expense recorded for the above market leases was approximately $0.1 million and
$0.2 million for the three and six months ended June 30, 2010, respectively. Amortization expense
recorded for the above market leases was approximately $0.1 million and $0.3 million for the three
and six months ended June 30, 2009, respectively. Amortization expense is charged as a reduction to
rental related revenue in the accompanying consolidated statement of operations.
9. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
December 31, |
|
(In thousands) |
|
2010 |
|
|
2009 |
|
Accrued liabilities |
|
$ |
12,098 |
|
|
$ |
11,744 |
|
Salaries and related costs |
|
|
14,641 |
|
|
|
14,592 |
|
Accounts payable |
|
|
13,933 |
|
|
|
17,864 |
|
Broker commissions |
|
|
7,452 |
|
|
|
8,807 |
|
Bonuses |
|
|
5,819 |
|
|
|
7,797 |
|
Property management fees and commissions due to third parties |
|
|
5,205 |
|
|
|
2,063 |
|
|
|
|
|
|
|
|
Total |
|
$ |
59,148 |
|
|
$ |
62,867 |
|
|
|
|
|
|
|
|
10. CONVERTIBLE NOTES
During the second quarter of 2010, we completed our offering (Offering) of $31.5 million of
unsecured convertible notes (Convertible Notes) to qualified institutional buyers pursuant to
Section 144A of the Securities Act of 1933, as amended. The Convertible Notes pay interest at
a rate of 7.95% per year semi-annually in arrears on May 1 and November 1 of each year, beginning
November 1, 2010. The Convertible Notes mature on May 1, 2015. The Convertible Notes are
convertible into common stock at an initial conversion price of approximately $2.24 per share, or a
17.5% premium above the closing price of our common stock on May 3, 2010. The conversion rate is
subject to adjustment in certain circumstances.
15
GRUBB & ELLIS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
We received net proceeds from the Offering of approximately $29.4 million after deducting all
estimated offering expenses. We intend to use the net proceeds from the Offering to fund growth
initiatives, short-term working capital and for general corporate purposes.
Holders of the Notes may convert notes into shares of our common stock at the initial
conversion rate of 445.583 share per $1,000 principal amount of the Notes (equal to a conversion
price of approximately $2.24 per share of our common stock), subject to adjustment in certain
events (but not for accrued interest) at any time prior to the close of business on the scheduled trading day before the stated
maturity date. In addition, following certain
corporate transactions, we will increase the conversion rate for a holder who elects to convert in
connection with such corporate transaction by a number of additional shares of our common stock as
set forth in the Indenture.
No holder of the Notes will be entitled to acquire shares of common stock delivered upon
conversion to the extent (but only to the extent) such receipt would cause such converting holder
to become, directly or indirectly, a beneficial owner (within the meaning of Section 13(d) of the
Exchange Act of 1934, as amended, and the rules and regulations promulgated thereunder) of more
than 14.99% of the shares of our common stock outstanding at such time.
We may not redeem the Convertible Notes prior to May 6, 2013. On or after May 6, 2013 and
prior to the maturity date, we may redeem for cash all or part of the Convertible Notes at 100% of
the principal amount of the Convertible Notes to be redeemed, plus accrued and unpaid interest,
including any additional interest, to but excluding the redemption date.
Under certain circumstances following a fundamental change, which is substantially similar to
a Fundamental Change with respect to the Preferred Stock, we will be required to make an offer to
purchase all of the Convertible Notes at a purchase price of 100% of their principal amount, plus
accrued and unpaid interest, if any, to the date of repurchase.
The Convertible Notes are our unsecured senior obligations that:
|
|
|
rank equally with all of our other unsecured senior indebtedness; |
|
|
|
|
effectively rank junior to any of our existing and future secured indebtedness to the extent of
the assets securing such indebtedness; and |
|
|
|
|
will be structurally subordinated to any indebtedness and other liabilities of our subsidiaries. |
The Indenture provides for customary events of default, including our failure to pay any
indebtedness for borrowed money, other than non-recourse mortgage debt, when due in excess of $1.0
million.
Registration Rights Agreement
In connection with the Offering, we entered into a registration rights agreement pursuant to
which we agreed to file with the Securities and Exchange Commission (SEC) a shelf registration
statement registering the resale of the notes and the shares of common stock issuable upon
conversion of the Convertible Notes no later than June 30, 2010, and to use commercially reasonable
efforts to cause the shelf registration statement to become effective within 85 days of May 7,
2010, or within 115 days of the closing date of the Offering if the registration statement is
reviewed by the SEC. The shelf registration statement was filed on June 25, 2010 and became
effective on July 19, 2010.
We have an obligation to continue to keep the shelf registration statement effective for a
certain period of time, subject to certain suspension periods under certain circumstances. In the
event that we fail to keep the registration statement effective in excess of such permissible
suspension periods, we will be obligated to pay additional interest to holders of the Convertible
Notes in an amount equal to 0.25% of the principal amount of the outstanding Convertible Notes to
and including the 90th day following any such registration default and 0.50% of the
principal amount of the outstanding Convertible Notes from and after the 91st day following any
such
registration default. Such additional interest will accrue until the date prior to the day the
default is cured, or until the Convertible Notes are converted.
16
GRUBB & ELLIS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
11. MORTGAGE NOTES
Mortgage notes consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
December 31, |
|
(In thousands) |
|
2010 |
|
|
2009 |
|
Mortgage debt payable to a financial
institution collateralized by real estate
held for investment. Fixed interest rate
of 6.29% per annum as of June 30, 2010.
The note is non-recourse up to $60.0
million with a $10.0 million recourse
guarantee and matures in February 2017. As
of June 30, 2010, the note requires
monthly interest-only payments |
|
$ |
70,000 |
|
|
$ |
70,000 |
|
Mortgage debt payable to financial
institution collateralized by real estate
held for investment. Fixed interest rate
of 6.32% per annum as of June 30, 2010.
The non-recourse note matures in August
2014. As of June 30, 2010, the note
requires monthly interest-only payments |
|
|
37,000 |
|
|
|
37,000 |
|
|
|
|
|
|
|
|
Total |
|
$ |
107,000 |
|
|
$ |
107,000 |
|
|
|
|
|
|
|
|
On December 10, 2009, the loan agreement for the $37.0 million in principal outstanding was
modified to reduce the interest pay rate from 6.32% to 4.25% for the first 24 months following the
modification and provide for a 6.32% interest rate on the accrued but unpaid interest which will
begin to fully amortize beginning in the 25th month following the modification. The August 1, 2014
maturity date of the loan and the 6.32% interest accrual rate on the outstanding principal balance
of the loan were not changed.
12. LINE OF CREDIT
On December 7, 2007, we entered into a $75.0 million credit agreement by and among us, the
guarantors named therein, and the financial institutions defined therein as lender parties, with
Deutsche Bank Trust Company Americas, as lender and administrative agent (the Credit Facility).
We amended our Credit Facility four times: on August 5, 2008; November 4, 2008; May 20, 2009;
and, September 30, 2009. In conjunction with the May 20, 2009 amendment, among other things, we
issued warrants to the lenders giving them the right, commencing October 1, 2009, to purchase
common stock equal to 15% of our common stock on a fully diluted basis if we did not effect the
recapitalization required by the May 20th amendment. We calculated the fair value of the warrants
to be $534,000 and recorded such amount in shareowners equity with a corresponding debt discount
to the line of credit balance. Such debt discount amount was fully amortized into interest expense
as of December 31, 2009 as a result of the repayment of the Credit Facility as discussed below. The
September 30th amendment, among other things, extended the time to effect a recapitalization under
our Credit Facility from September 30, 2009 to November 30, 2009 and also extended the date on
which the warrants could first be executed from October 1, 2009 to December 1, 2009. In addition,
pursuant to the September 30th amendment, we also received the right to prepay our Credit Facility
in full at any time on or prior to November 30, 2009 at a discounted amount equal to 65% of the
aggregate principal amount outstanding. On November 6, 2009, concurrently with the closing of the
private placement of our 12% cumulative participating perpetual convertible preferred stock, we
repaid our Credit Facility in full at the discounted amount equal to $43.4 million and the Credit
Facility was terminated in accordance with our terms (as such, the warrants never became
exercisable). As a result of the early repayment of the Credit Facility, we recorded a gain on
early extinguishment of debt of $21.9 million, or $0.35 per common share, net of expenses, for the
year ended December 31, 2009.
13. SEGMENT DISCLOSURE
Management has determined the reportable segments identified below according to the types of
services offered and the manner in which operations and decisions are made. We operate in the
following reportable segments:
Management Services Management Services provides property management and related services
for owners of investment properties and facilities management services for corporate owners and
occupiers.
17
GRUBB & ELLIS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
Transaction Services Transaction Services advises buyers, sellers, landlords and tenants on
the sale, leasing, financing and valuation of commercial property and includes our national accounts group and
national affiliate program operations.
Investment Management Investment Management includes services for acquisition, financing and
disposition with respect to our investment programs, asset management services related to our
programs, and dealer-manager services by our securities broker-dealer, which facilitates capital
raising transactions for our investment programs.
We also have certain corporate-level activities including interest income from notes and
advances, property rental related operations, legal administration, accounting, finance and
management information systems which are not considered separate operating segments.
We evaluate the performance of our segments based upon operating income (loss). Operating
(loss) income is defined as operating revenue less compensation and general and administrative
costs and excludes other rental related, rental expense, interest expense, depreciation and
amortization and certain other operating and non-operating expenses. The accounting policies of the
reportable segments are the same as those described in our summary of significant accounting
policies (See Note 1).
18
GRUBB & ELLIS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
June 30, |
|
(In thousands) |
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
Management Services |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue |
|
$ |
69,911 |
|
|
$ |
66,649 |
|
|
$ |
142,327 |
|
|
$ |
132,180 |
|
Compensation costs |
|
|
9,756 |
|
|
|
8,779 |
|
|
|
19,310 |
|
|
|
18,387 |
|
Transaction commissions and related costs |
|
|
4,212 |
|
|
|
2,244 |
|
|
|
10,395 |
|
|
|
5,155 |
|
Reimbursable salaries, wages and benefits |
|
|
49,021 |
|
|
|
46,975 |
|
|
|
99,379 |
|
|
|
94,268 |
|
General and administrative |
|
|
2,543 |
|
|
|
2,256 |
|
|
|
4,790 |
|
|
|
4,343 |
|
Provision for doubtful accounts |
|
|
448 |
|
|
|
567 |
|
|
|
789 |
|
|
|
1,342 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment operating income |
|
|
3,931 |
|
|
|
5,828 |
|
|
|
7,664 |
|
|
|
8,685 |
|
Transaction Services |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue |
|
|
54,684 |
|
|
|
38,939 |
|
|
|
96,917 |
|
|
|
72,472 |
|
Compensation costs |
|
|
11,210 |
|
|
|
10,180 |
|
|
|
22,175 |
|
|
|
21,769 |
|
Transaction commissions and related costs |
|
|
35,399 |
|
|
|
25,723 |
|
|
|
62,398 |
|
|
|
48,361 |
|
General and administrative |
|
|
8,667 |
|
|
|
8,238 |
|
|
|
17,515 |
|
|
|
17,055 |
|
Provision for doubtful accounts |
|
|
224 |
|
|
|
425 |
|
|
|
1,029 |
|
|
|
699 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment operating loss |
|
|
(816 |
) |
|
|
(5,627 |
) |
|
|
(6,200 |
) |
|
|
(15,412 |
) |
Investment Management |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue |
|
|
8,566 |
|
|
|
13,426 |
|
|
|
18,668 |
|
|
|
29,083 |
|
Compensation costs |
|
|
5,085 |
|
|
|
6,706 |
|
|
|
11,089 |
|
|
|
14,502 |
|
Transaction commissions and related costs |
|
|
113 |
|
|
|
18 |
|
|
|
152 |
|
|
|
25 |
|
Reimbursable salaries, wages and benefits |
|
|
2,639 |
|
|
|
2,530 |
|
|
|
4,964 |
|
|
|
4,701 |
|
General and administrative |
|
|
4,096 |
|
|
|
3,644 |
|
|
|
7,152 |
|
|
|
7,998 |
|
Provision for doubtful accounts |
|
|
247 |
|
|
|
10,007 |
|
|
|
706 |
|
|
|
14,345 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment operating loss |
|
|
(3,614 |
) |
|
|
(9,479 |
) |
|
|
(5,395 |
) |
|
|
(12,488 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reconciliation to net loss attributable to Grubb & Ellis
Company: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total segment operating loss |
|
|
(499 |
) |
|
|
(9,278 |
) |
|
|
(3,931 |
) |
|
|
(19,215 |
) |
Non-segment: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rental and
other operations, net of rental related and other expenses |
|
|
1,289 |
|
|
|
2,018 |
|
|
|
3,458 |
|
|
|
3,512 |
|
Corporate overhead (compensation, general and administrative
costs) |
|
|
(7,570 |
) |
|
|
(11,871 |
) |
|
|
(17,880 |
) |
|
|
(24,394 |
) |
Stock based compensation |
|
|
(2,778 |
) |
|
|
(3,217 |
) |
|
|
(5,797 |
) |
|
|
(6,181 |
) |
Severance and other charges |
|
|
(297 |
) |
|
|
|
|
|
|
(3,027 |
) |
|
|
|
|
Depreciation and amortization |
|
|
(3,370 |
) |
|
|
(2,423 |
) |
|
|
(6,628 |
) |
|
|
(4,864 |
) |
Interest |
|
|
(2,729 |
) |
|
|
(5,113 |
) |
|
|
(5,048 |
) |
|
|
(8,749 |
) |
Real estate related impairments |
|
|
(1,553 |
) |
|
|
(1,950 |
) |
|
|
(1,823 |
) |
|
|
(14,222 |
) |
Intangible asset impairment |
|
|
(1,025 |
) |
|
|
|
|
|
|
(1,639 |
) |
|
|
|
|
Other expense |
|
|
(559 |
) |
|
|
806 |
|
|
|
(682 |
) |
|
|
(1,005 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations before income tax provision
|
|
|
(19,091 |
) |
|
|
(31,028 |
) |
|
|
(42,997 |
) |
|
|
(75,118 |
) |
Income tax provision |
|
|
(104 |
) |
|
|
(629 |
) |
|
|
(250 |
) |
|
|
(310 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations |
|
|
(19,195 |
) |
|
|
(31,657 |
) |
|
|
(43,247 |
) |
|
|
(75,428 |
) |
Loss from discontinued operations |
|
|
|
|
|
|
(961 |
) |
|
|
|
|
|
|
(470 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
|
(19,195 |
) |
|
|
(32,618 |
) |
|
|
(43,247 |
) |
|
|
(75,898 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss)
income attributable to noncontrolling interests |
|
|
(1,736 |
) |
|
|
190 |
|
|
|
(2,007 |
) |
|
|
(1,588 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to Grubb & Ellis Company |
|
$ |
(17,459 |
) |
|
$ |
(32,808 |
) |
|
$ |
(41,240 |
) |
|
$ |
(74,310 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
14. DISCONTINUED OPERATIONS
On June 3, 2009, we completed the sale of Danbury Corporate Center for $72.4 million. We
recognized a loss on sale of $1.1 million.
19
GRUBB & ELLIS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
On December 29, 2009, GERA Abrams Centre LLC (Abrams) and GERA 6400 Shafer LLC (Shafer)
modified the terms of its $42.5 million loan initially due on July 9, 2009. The amendment to the
loan provided, among other things, for an extension of the term of the loan until March 31, 2010.
In addition, the principal balance of the loan was reduced from $42.5 million to $11.0 million in
connection with the transfer of the Shafer property to an affiliate of the lender for nominal
consideration pursuant to a special warranty deed that was recorded on December 29, 2009. On March
31, 2010, the Abrams Property was transferred from the borrower to an affiliate of the lender for
nominal consideration pursuant to a special warranty deed recorded on March 31, 2010.
In connection with the completion of the deed in lieu of foreclosure on the Shafer property
prior to December 31, 2009, we deconsolidated the property and related assets and liabilities.
Additionally, the Abrams property and related assets and liabilities were deconsolidated pursuant
to the Consolidation Topic due to the loss of control over this property, of which the fair value
of the assets and liabilities totaled $6.7 million as of December 31, 2009. We recognized a gain on
extinguishment of debt of $13.3 million, or $0.21 per common share, during the year ended December
31, 2009 related to the deconsolidation of the Shafer and Abrams properties. As the Shafer and
Abrams properties were abandoned under the accounting standards, the results of operations were
reclassified to discontinued operations.
In instances when we expect to have significant ongoing cash flows or significant continuing
involvement in the component beyond the date of sale, the income (loss) from certain properties
held for sale continue to be fully recorded within continuing operations through the date of sale.
The net results of discontinued operations and the net gain (loss) on dispositions of
properties sold during the year ended December 31, 2009, in which we have no significant ongoing
cash flows or significant continuing involvement, are reflected in the consolidated statements of
operations as discontinued operations. We will receive certain fee income from these properties on
an ongoing basis that is not considered significant when compared to the operating results of such
properties.
The following table summarizes the income (loss) and expense components net of taxes that
comprised discontinued operations for the three and six months ended June 30, 2009 (there were no
discontinued operations for the three and six months ended June 30, 2010):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
(In thousands) |
|
June 30, 2009 |
|
|
June 30, 2009 |
|
Rental income |
|
$ |
2,753 |
|
|
$ |
7,685 |
|
Rental expense |
|
|
(2,441 |
) |
|
|
(5,775 |
) |
Interest expense (including amortization of deferred financing costs) |
|
|
(865 |
) |
|
|
(1,903 |
) |
Real estate related impairments |
|
|
|
|
|
|
250 |
|
Tax benefit (provision) |
|
|
218 |
|
|
|
(101 |
) |
|
|
|
|
|
|
|
(Loss) income from discontinued operations net of taxes |
|
|
(335 |
) |
|
|
156 |
|
|
|
|
|
|
|
|
Loss on disposal of discontinued operations net of taxes |
|
|
(626 |
) |
|
|
(626 |
) |
|
|
|
|
|
|
|
Total loss from discontinued operations |
|
$ |
(961 |
) |
|
$ |
(470 |
) |
|
|
|
|
|
|
|
15. COMMITMENTS AND CONTINGENCIES
Operating Leases We have non-cancelable operating lease obligations for office space and
certain equipment ranging from one to ten years, and sublease agreements under which we act as a
sublessor. The office space leases often times provide for annual rent increases, and typically
require payment of property taxes, insurance and maintenance costs.
Rent expense under these operating leases was approximately $5.7 million and $6.2 million for
the three months ended June 30, 2010 and 2009, respectively, and approximately $12.3 million and
$12.4 million for the six months ended June 30, 2010 and 2009, respectively. Rent expense is
included in general and administrative expense in the accompanying consolidated statements of
operations.
20
GRUBB & ELLIS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
Operating Leases Other We are a master lessee of seven multifamily properties in various
locations under non-cancelable leases. The leases, which commenced in various months and expire
from June 2015 through March 2016, require minimum monthly rent payments averaging $795,000 over
the 10-year period. Master lease rent expense under these operating leases was approximately
$3.2 million and $2.3 million for the three months ended June 30, 2010 and 2009, respectively,
and approximately $5.6 million and $4.6 million for the six months ended June 30, 2010 and 2009,
respectively. In addition, we are required to pay operating costs related to the operation,
maintenance, management and security of the property. Operating costs under these operating leases
was approximately $2.1 million and $1.9 million for the three months ended June 30, 2010 and 2009,
respectively, and approximately $3.9 million and $3.7 million for the six months ended June 30,
2010 and 2009, respectively.
We sublease these multifamily spaces to third parties for no more than one year. Rental income
from these subleases was approximately $3.8 million and $3.8 million for the three months ended
June 30, 2010 and 2009, respectively, and approximately $7.7 million and $7.5 million for the six
months ended June 30, 2010 and 2009, respectively.
We are also a 50% joint venture partner of four multifamily residential properties in various
locations under non-cancelable leases. The leases, which commenced in various months and expire
from November 2014 through January 2015, require minimum monthly rent payments averaging $372,000
over the 10-year period. Master lease rent expense under these operating leases was approximately
$1.1 million and $1.1 million for the three months ended June 30, 2010 and 2009, respectively, and
approximately $2.2 million and $2.3 million for the six months ended June 30, 2010 and 2009,
respectively. In addition, we are required to pay operating costs related to the operation,
maintenance, management and security of the property. Operating costs under these operating leases
was approximately $1.1 million and $1.0 million for the three months ended June 30, 2010 and 2009,
respectively, and approximately $2.1 million and $2.0 million for the six months ended June 30,
2010 and 2009, respectively.
We sublease these multifamily spaces to third parties. Rental income from these subleases was
approximately $2.1 million and $2.2 million for the three months ended June 30, 2010 and 2009,
respectively, and approximately $4.3 million and $4.5 million for the six months ended June 30,
2010 and 2009, respectively.
As of June 30, 2010, we had recorded liabilities totaling $7.2 million related to such master
lease arrangements, consisting of $4.6 million of cumulative deferred revenues relating to
acquisition fees and loan fees received from 2004 through 2006 and $2.6 million of additional loss
reserves which were recorded through June 30, 2010.
TIC Program Exchange Provision Prior to the Merger, NNN Realty Advisors, Inc. (NNN)
entered into agreements in which NNN agreed to provide certain investors with a right to exchange
their investment in certain TIC Programs for an investment in a different TIC program. NNN also
entered into an agreement with another investor that provided the investor with certain repurchase
rights under certain circumstances with respect to their investment. The agreements containing such
rights of exchange and repurchase rights pertain to initial investments in TIC programs totaling
$31.6 million. In July 2009, we received notice from an investor of their intent to exercise such
rights of exchange and repurchase with respect to an initial investment totaling $4.5 million. We
are currently evaluating such notice to determine the nature and extent of the right of such
exchange and repurchase, if any.
We deferred revenues relating to these agreements of $0.1 million and $0.1 million for the
three months ended June 30, 2010 and 2009, respectively. We deferred revenues relating to these
agreements of $0.1 million and $0.2 million for the six months ended June 30, 2010 and 2009,
respectively. Additional losses of $0 and $1.5 million related to these agreements were recorded
for the three months ended June 30, 2010 and 2009, respectively, and additional losses of $0.2
million and $4.4 million related to these agreements were recorded for the six months ended June
30, 2010 and 2009, respectively, to reflect the decline in value of properties underlying the
agreements with investors. As of June 30, 2010, we recorded liabilities totaling $22.9 million
related to such agreements, which is included in other current liabilities, consisting of $3.8
million of cumulative deferred revenues and $19.1 million of additional losses related to these
agreements. In addition, we are joint and severally liable on the non-recourse mortgage debt
related to these TIC Programs totaling $276.5 million and $277.0 million as of June 30, 2010 and
December 31, 2009, respectively. This mortgage debt is not consolidated as the LLCs account for the
interests in our TIC investments under the equity method and the non-recourse mortgage debt does
not meet the criteria under the Transfers and Servicing Topic for recognizing the share of the debt
assumed by the other TIC interest holders for consolidation. We consider the third-party TIC
holders ability and intent to repay their share of the joint and several liability in evaluating
the recoverability of our investment in the TIC Program.
Capital Lease Obligations We lease computers, copiers and postage equipment that are
accounted for as capital leases.
General We are involved in various claims and lawsuits arising out of the ordinary conduct
of our business, as well as in connection with our participation in various joint ventures and
partnerships, some of which involve substantial amounts of damages and many of which may not be
covered by our insurance policies. It is difficult to predict our ultimate liability with respect
to such claims and lawsuits. In the event of an unfavorable outcome, the amounts we may be required
to pay in the discharge of liabilities or settlements could have a material adverse effect on our
financial position or results of operations.
21
GRUBB & ELLIS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
Guarantees We previously provided guarantees from time to time of loans for properties under
management (including properties we own). As of June 30, 2010 there were 141 properties under
management with loan guarantees of approximately $3.4 billion in total principal outstanding with
terms ranging from one to 10 years, secured by properties with a total aggregate purchase price of
approximately $4.4 billion. As of December 31, 2009, there were 146 properties under management
with loan guarantees of approximately $3.6 billion in total principal outstanding with terms
ranging from one to 10 years, secured by properties with a total aggregate purchase price of
approximately $4.8 billion. In addition, the consolidated VIEs and unconsolidated VIEs are jointly
and severally liable on the non-recourse mortgage debt related to the interests in the Companys
TIC investments as further described in Note 4.
Our guarantees consisted of the following as of June 30, 2010 and December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
December 31, |
|
(In thousands) |
|
2010 |
|
|
2009 |
|
Non-recourse/carve-out guarantees of debt of properties under management(1) |
|
$ |
3,339,099 |
|
|
$ |
3,416,849 |
|
Non-recourse/carve-out guarantees of our debt(1) |
|
$ |
97,000 |
|
|
$ |
97,000 |
|
Recourse guarantees of debt of properties under management |
|
$ |
25,898 |
|
|
$ |
33,898 |
|
Recourse guarantees of our debt(2) |
|
$ |
10,000 |
|
|
$ |
10,000 |
|
|
|
|
(1) |
|
A non-recourse/carve-out guarantee imposes liability on the
guarantor in the event the borrower engages in certain acts prohibited
by the loan documents. Each non-recourse carve-out guarantee is an
individual document entered into with the mortgage lender in
connection with the purchase or refinance of an individual property. |
|
(2) |
|
In addition to the $10.0 million principal guarantee, we have
guaranteed any shortfall in the payment of interest on the unpaid
principal amount of the mortgage debt on one owned property. |
We initially evaluate these guarantees to determine if the guarantee meets the criteria
required to record a liability in accordance with the requirements of ASC Topic 460, Guarantees,
(Guarantees Topic). Any such liabilities were insignificant as of June 30, 2010 and December 31,
2009. In addition, on an ongoing basis, we evaluate the need to record an additional liability in
accordance with the requirements of ASC Topic 450, Contingencies, (Contingencies Topic). As of
June 30, 2010 and December 31, 2009, we had recourse guarantees of $25.9 million and $33.9 million,
respectively, relating to debt of properties under management. As of June 30, 2010 and December 31,
2009, approximately $6.6 million and $9.8 million, respectively, of these recourse guarantees
relate to debt that has matured or is not currently in compliance with certain loan covenants. In
addition, we had a recourse guarantee related to a property that was previously under management,
but was sold during the year ended December 31, 2009. In connection with the sale of the property,
we entered into a promissory note with the lender to repay the outstanding principal balance on the
mortgage loan of $4.2 million. As of June 30, 2010, the remaining outstanding principal balance on
the mortgage loan was $1.6 million. In evaluating the potential liability relating to such
guarantees, we consider factors such as the value of the properties secured by the debt, the
likelihood that the lender will call the guarantee in light of the current debt service and other
factors. As of June 30, 2010 and December 31, 2009, we recorded a liability of $2.6 million and
$3.8 million, respectively, which is included in other current liabilities, related to our estimate
of probable loss related to recourse guarantees of debt of properties under management and
previously under management.
Investment Program Commitments In 2009, we revised the offering terms related to certain
investment programs which we sponsor, including the commitment to fund additional property reserves
and the waiver or reduction of future management fees and disposition fees. Such future funding
commitments have been made in the form of guaranteeing the collectability of advances that one of
our consolidated VIEs has made to these investment programs. As of June 30, 2010 and December 31,
2009, the future funding commitments totaled approximately $2.1 million and $1.3 million,
respectively.
Environmental Obligations In our role as property manager, we could incur liabilities for
the investigation or remediation of hazardous or toxic substances or wastes at properties we
currently or formerly managed or at off-site locations where wastes were disposed of. Similarly,
under debt financing arrangements on properties owned by sponsored programs, we have agreed to
indemnify the lenders for environmental liabilities and to remediate any environmental problems
that may arise. We are not aware of any environmental liability or unasserted claim or assessment
relating to an environmental liability that we believe would require disclosure or the recording of
a loss contingency.
Alesco Seed Capital On November 16, 2007, we completed the acquisition of a 51.0% membership
interest in Grubb & Ellis Alesco Global Advisors, LLC (Alesco). Pursuant to the Intercompany
Agreement between us and Alesco, dated as of November 16, 2007, we committed to invest $20.0
million in seed capital into certain real estate funds that Alesco expects to launch. Additionally,
upon achievement of certain earn-out targets, we are required to purchase up to an additional
27% interest in Alesco for $15.0 million. We are allowed to use $15.0 million of seed capital to
fund the earn-out payments. As of June 30, 2010, we have invested $1.5 million into the Alesco
funds.
22
GRUBB & ELLIS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
Deferred Compensation Plan During 2008, we implemented a deferred compensation plan that
permits employees and independent contractors to defer portions of their compensation, subject to
annual deferral limits, and have it credited to one or more investment options in the plan. As of
June 30, 2010 and December 31, 2009, $4.1 million and $3.3 million, respectively, reflecting the
non-stock liability under this plan were included in Accounts payable and accrued expenses. We have
purchased whole-life insurance contracts on certain employee participants to recover distributions
made or to be made under this plan and as of June 30, 2010 and December 31, 2009 have recorded the
cash surrender value of the policies of $1.0 million and
$1.0 million, respectively, in prepaid
expenses and other assets.
In addition, we award phantom shares of our stock to participants under the deferred
compensation plan. As of June 30, 2010 and December 31, 2009, we awarded an aggregate of
approximately 6.0 million phantom shares to certain employees with an aggregate value on the
various grant dates of $23.0 million. As of June 30, 2010 and December 31, 2009, an aggregate of
5.3 million and 5.6 million phantom share grants were outstanding, respectively. Generally, upon
vesting, recipients of the grants are entitled to receive the number of phantom shares granted,
regardless of the value of the shares upon the date of vesting; provided, however, grants with
respect to 900,000 phantom shares had a guaranteed minimum share price ($3.1 million in the
aggregate) that will result in us paying additional compensation to the participants should the
value of the shares upon vesting be less than the grant date value of the shares. We account for
additional compensation relating to the guarantee portion of the awards by measuring at each
reporting date the additional payment that would be due to the participant based on the difference
between the then current value of the shares awarded and the guaranteed value. This award is then
amortized on a straight-line basis as compensation expense over the requisite service (vesting)
period, with an offset to deferred compensation liability.
16. PREFERRED STOCK
On October 2, 2009, we issued a $5.0 million senior subordinated convertible note (the Note)
to Kojaian Management Corporation, which is an affiliate of one of our directors. The Note (i) bore
interest at twelve percent (12%) per annum, (ii) was co-terminus with the term of the Credit
Facility, (iii) was unsecured and fully subordinate to the Credit Facility, and (iv) in the event
we issued or sold equity securities in connection with or pursuant to a transaction with a
non-affiliate while the Note was outstanding, at the option of the holder of the Note, the
principal amount of the Note then outstanding was convertible into those equity securities issued
or sold in such non-affiliate transaction. In connection with the issuance of the Note, we entered
into a subordination agreement with Kojaian Management Corporation and the lenders to the Credit
Facility.
During the fourth quarter of 2009, we completed a private placement of 965,700 shares of 12%
cumulative participating perpetual convertible preferred stock, par value $0.01 per share
(Preferred Stock), to qualified institutional buyers and other accredited investors, including
our directors and management. In conjunction with the offering, the entire $5.0 million principal
balance of the Note was converted into Preferred Stock at the offering price and the holder of the
Note received accrued interest of approximately $57,000. In addition, the holder of the Note also
purchased an additional $5.0 million of Preferred Stock at the offering price.
Each share of Preferred Stock is convertible, at the holders option, into our common stock,
par value $.01 per share at a conversion rate of 60.606 shares of common stock for each share of
Preferred Stock, which represents a conversion price of approximately $1.65 per share of common
stock, a 10.0% premium to the closing price of the common stock on October 22, 2009.
Upon the closing of the sale of the Preferred Stock, we received net cash proceeds of
approximately $90.1 million after deducting the initial purchasers discounts and certain offering
expenses and after giving effect to the conversion of the $5.0 million subordinated note. A portion
of proceeds were used to pay in full borrowings under the Credit Facility then outstanding of $66.8
million for a reduced amount equal to $43.4 million, with the balance of the proceeds to be used
for general corporate purposes.
The terms of the Preferred Stock provide for cumulative dividends from and including the date
of original issuance in the amount of $12.00 per share each year. Dividends on the Preferred Stock
will be payable when, as and if declared, quarterly in arrears, on March 31, June 30, September 30
and December 31, beginning on December 31, 2009. In addition, in the event of any cash distribution
to holders of the Common Stock, holders of Preferred Stock will be entitled to participate in such
distribution as if such holders had converted their shares of Preferred Stock into Common Stock.
On March 4, 2010, the Board of Directors declared a dividend of $3.00 per share on our
Preferred Stock to shareowners of record as of March 19, 2010, that was paid on March 31, 2010. On
June 4, 2010, the Board of Directors declared a dividend of $3.00 per share on our Preferred Stock
to shareowners of record as of June 18, 2010, that was paid on June 30, 2010.
We accounted for the Preferred Stock transaction in accordance with the requirements of ASC
815, Derivatives and Hedging, (Derivatives and Hedging Topic) and ASC Topic 480, Distinguishing
Liabilities from Equity, (Distinguishing Liabilities from Equity Topic). Pursuant to those
topics, we determined that the Preferred Stock should be accounted for as a single instrument as
the terms of the Preferred Stock do not include any embedded derivatives that would require
bifurcation from the host instrument. Pursuant to the Distinguishing Liabilities from Equity Topic,
we determined that the Preferred Stock should not be classified as a liability as the
characteristics of the Preferred Stock are more closely related to equity as there is no mandatory
redemption date. According to the terms of the Preferred Stock, the Preferred Stock will only
become redeemable at the option of the holder upon a Fundamental Change. In addition, we determined
that there are various events and circumstances that would allow for redemption of the Preferred
Stock at the option of the holders, however, several of these redemption events are not within our
control and, therefore, the Preferred Stock should be classified outside of permanent equity in
accordance with the Distinguishing Liabilities from Equity Topic as these events were assessed as
not probable of becoming redeemable.
23
GRUBB & ELLIS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
17. EARNINGS (LOSS) PER SHARE
We compute earnings (loss) per share in accordance with the requirements of the Earnings Per
Share Topic. Under the Earnings Per Share Topic, basic earnings (loss) per share is computed using
the weighted-average number of common shares outstanding during the period. Diluted earnings (loss)
per share is computed using the weighted-average number of common and common equivalent shares of
stock outstanding during the periods utilizing the treasury stock method for stock options and
unvested restricted stock.
The following is a reconciliation between weighted-average shares used in the basic and
diluted earnings (loss) per share calculations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
June 30, |
|
(In thousands, except per share amounts) |
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
Numerator for loss per share basic: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations |
|
$ |
(19,195 |
) |
|
$ |
(31,657 |
) |
|
$ |
(43,247 |
) |
|
$ |
(75,428 |
) |
Less: Net loss (income) attributable to noncontrolling interests |
|
|
1,736 |
|
|
|
(190 |
) |
|
|
2,007 |
|
|
|
1,588 |
|
Less: Preferred dividends |
|
|
(2,897 |
) |
|
|
|
|
|
|
(5,794 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations attributable to Grubb & Ellis
Company common shareowners |
|
$ |
(20,356 |
) |
|
$ |
(31,847 |
) |
|
$ |
(47,034 |
) |
|
$ |
(73,840 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from discontinued operations attributable to Grubb & Ellis
Company common shareowners |
|
$ |
|
|
|
$ |
(961 |
) |
|
$ |
|
|
|
$ |
(470 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to Grubb & Ellis Company common shareowners |
|
$ |
(20,356 |
) |
|
$ |
(32,808 |
) |
|
$ |
(47,034 |
) |
|
$ |
(74,310 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
June 30, |
|
(In thousands, except per share amounts) |
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
Denominator for loss per share basic: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average number of common shares outstanding |
|
|
64,644 |
|
|
|
63,587 |
|
|
|
64,503 |
|
|
|
63,557 |
|
Loss per share basic: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations attributable to Grubb & Ellis Company
common shareowners |
|
$ |
(0.31 |
) |
|
$ |
(0.50 |
) |
|
$ |
(0.73 |
) |
|
$ |
(1.16 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from discontinued operations attributable to Grubb & Ellis Company
common shareowners |
|
$ |
|
|
|
$ |
(0.02 |
) |
|
$ |
|
|
|
$ |
(0.01 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per share attributable to Grubb & Ellis Company common shareowners |
|
$ |
(0.31 |
) |
|
$ |
(0.52 |
) |
|
$ |
(0.73 |
) |
|
$ |
(1.17 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss per share diluted(1): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations attributable to Grubb & Ellis Company
common shareowners |
|
$ |
(0.31 |
) |
|
$ |
(0.50 |
) |
|
$ |
(0.73 |
) |
|
$ |
(1.16 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from discontinued operations attributable to Grubb & Ellis Company
common shareowners |
|
$ |
|
|
|
$ |
(0.02 |
) |
|
$ |
|
|
|
$ |
(0.01 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per share attributable to Grubb & Ellis Company common shareowners |
|
$ |
(0.31 |
) |
|
$ |
(0.52 |
) |
|
$ |
(0.73 |
) |
|
$ |
(1.17 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total participating shareowners: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(as of the end of the period used to allocate earnings) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred shares (as if converted to common shares) |
|
|
58,527 |
|
|
|
|
|
|
|
58,527 |
|
|
|
|
|
Convertible notes (as if converted to common shares) |
|
|
14,036 |
|
|
|
|
|
|
|
14,036 |
|
|
|
|
|
Unvested restricted stock |
|
|
5,184 |
|
|
|
1,566 |
|
|
|
5,184 |
|
|
|
1,566 |
|
Unvested phantom stock |
|
|
4,839 |
|
|
|
5,704 |
|
|
|
4,839 |
|
|
|
5,704 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total participating shares |
|
|
82,586 |
|
|
|
7,270 |
|
|
|
82,586 |
|
|
|
7,270 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total vested common shares outstanding |
|
|
64,741 |
|
|
|
63,653 |
|
|
|
64,741 |
|
|
|
63,653 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Outstanding unvested restricted stock and options to purchase shares
of common stock and restricted stock, the effect of which would be
anti-dilutive, were approximately 5.6 million and 2.6 million shares
as of June 30, 2010 and 2009, respectively. These shares were not
included in the computation of diluted earnings per share because an
operating loss was reported or the option exercise price was greater
than the average market price of the common shares for the respective
periods. In addition, excluded from the calculation of diluted
weighted-average common shares as of June 30, 2010 and 2009 were
approximately 4.8 million and 5.7 million unvested shares of phantom
stock, respectively, that may be awarded to employees related to the
deferred compensation plan. |
24
GRUBB & ELLIS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
18. COMPREHENSIVE LOSS
The components of comprehensive loss, net of tax, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
June 30, |
|
(In thousands) |
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
Net loss |
|
$ |
(19,195 |
) |
|
$ |
(32,618 |
) |
|
$ |
(43,247 |
) |
|
$ |
(75,898 |
) |
Other comprehensive (loss) income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net unrealized (loss) gain on investments |
|
|
(46 |
) |
|
|
(135 |
) |
|
|
80 |
|
|
|
(135 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive loss |
|
|
(19,241 |
) |
|
|
(32,753 |
) |
|
|
(43,167 |
) |
|
|
(76,033 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive (loss) income attributable to noncontrolling interests |
|
|
(1,736 |
) |
|
|
190 |
|
|
|
(2,007 |
) |
|
|
(1,588 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss attributable to Grubb & Ellis Company |
|
$ |
(17,505 |
) |
|
$ |
(32,943 |
) |
|
$ |
(41,160 |
) |
|
$ |
(74,445 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
19. CHANGES IN EQUITY
The following is a reconciliation of total equity, equity attributable to Grubb & Ellis
Company and equity attributable to noncontrolling interests from December 31, 2009 to June 30,
2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
Grubb & Ellis |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional |
|
|
Other |
|
|
|
|
|
|
Company |
|
|
|
|
|
Total |
|
|
|
Common Stock |
|
|
Paid-In |
|
|
Comprehensive |
|
|
Accumulated |
|
|
Shareowners |
|
|
Noncontrolling |
|
|
Equity |
|
|
|
Shares |
|
|
Amount |
|
|
Capital |
|
|
Income |
|
|
Deficit |
|
|
Equity (Deficit) |
|
|
Interests |
|
|
(Deficit) |
|
Balance as of December 31, 2009 |
|
|
67,352 |
|
|
$ |
674 |
|
|
$ |
412,754 |
|
|
$ |
|
|
|
$ |
(412,101 |
) |
|
$ |
1,327 |
|
|
$ |
(151 |
) |
|
$ |
1,176 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vesting of share-based compensation |
|
|
|
|
|
|
|
|
|
|
5,797 |
|
|
|
|
|
|
|
|
|
|
|
5,797 |
|
|
|
|
|
|
|
5,797 |
|
Preferred dividend declared |
|
|
|
|
|
|
|
|
|
|
(5,794 |
) |
|
|
|
|
|
|
|
|
|
|
(5,794 |
) |
|
|
|
|
|
|
(5,794 |
) |
Issuance of non-vested restricted shares
to directors, officers and employees |
|
|
2,225 |
|
|
|
22 |
|
|
|
(22 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeiture of non-vested restricted shares |
|
|
(70 |
) |
|
|
(1 |
) |
|
|
(149 |
) |
|
|
|
|
|
|
|
|
|
|
(150 |
) |
|
|
|
|
|
|
(150 |
) |
Consolidation of VIEs |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14,740 |
|
|
|
14,740 |
|
Deconsolidation of VIEs |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
73 |
|
|
|
73 |
|
Consolidation of sponsored mutual fund |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
823 |
|
|
|
823 |
|
Contributions from noncontrolling
interests |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
321 |
|
|
|
321 |
|
Distributions to noncontrolling interests |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,244 |
) |
|
|
(3,244 |
) |
Compensation expense on profit sharing
arrangements |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
194 |
|
|
|
194 |
|
Change in unrealized gain on marketable
securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
80 |
|
|
|
|
|
|
|
80 |
|
|
|
|
|
|
|
80 |
|
Net loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(41,240 |
) |
|
|
(41,240 |
) |
|
|
(2,007 |
) |
|
|
(43,247 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(41,160 |
) |
|
|
(2,007 |
) |
|
|
(43,167 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of June 30, 2010 |
|
|
69,507 |
|
|
$ |
695 |
|
|
$ |
412,586 |
|
|
$ |
80 |
|
|
$ |
(453,341 |
) |
|
$ |
(39,980 |
) |
|
$ |
(10,749 |
) |
|
$ |
(29,231 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During the six months ended June 30, 2010 and 2009, we granted 2,225,000 and 411,000
restricted shares of common stock, respectively.
25
GRUBB & ELLIS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
20. OTHER RELATED PARTY TRANSACTIONS
Offering Costs and Other Expenses Related to Public Non-Traded REITs We, through our
consolidated subsidiaries Grubb & Ellis Apartment REIT Advisor, LLC, Grubb & Ellis Healthcare REIT
Advisor, LLC, and Grubb & Ellis Healthcare REIT II Advisor, LLC, bear certain general and
administrative expenses in our capacity as advisor of Apartment REIT, Grubb & Ellis Healthcare
REIT, Inc. (Healthcare REIT) (now known as Healthcare Trust of America, Inc.) (through September
20, 2009 when its advisory agreement terminated) and Grubb & Ellis Healthcare REIT II, Inc.
(Healthcare REIT II), respectively, and are reimbursed for these expenses. However, Apartment
REIT, Healthcare REIT and Healthcare REIT II will not reimburse us for any operating expenses that,
in any four consecutive fiscal quarters, exceed the greater of 2.0% of average invested assets (as
defined in their respective advisory agreements) or 25.0% of the respective REITs net income for
such year, unless the board of directors of the respective REITs approve such excess as justified
based on unusual or nonrecurring factors. All unreimbursable amounts are expensed by us.
We also paid for the organizational, offering and related expenses on behalf of Apartment REIT
for its initial offering that ended July 17, 2009 and Healthcare REIT for its initial offering
(through August 28, 2009 when its dealer manager agreement terminated). These organizational,
offering and related expenses include all expenses (other than selling commissions and the
marketing support fee which generally represent 7.0% and 2.5% of the gross offering proceeds,
respectively) to be paid by Apartment REIT and Healthcare REIT in connection with their initial
offerings. These expenses only become the liability of Apartment REIT and Healthcare REIT to the
extent other organizational and offering expenses do not exceed 1.5% of the gross proceeds of the
initial offerings. As of December 31, 2009, we incurred expenses of $4.3 million in excess of 1.5%
of the gross proceeds of the Apartment REIT offering. We wrote off the total expenses of $4.3
million incurred during the year ended December 31, 2009. We will not incur any additional expenses
related to the Apartment REIT initial offering as the offering ended July 17, 2009. As of December
31, 2009, we did not incur expenses in excess of 1.5% of the gross proceeds of the Healthcare REIT
offering. We will not incur any additional expenses related to the Healthcare REIT initial offering
as the dealer manager agreement terminated on August 28, 2009.
We also pay for the organizational, offering and related expenses on behalf of Apartment
REITs follow-on offering and Healthcare REIT IIs initial offering. These organizational and
offering expenses include all expenses (other than selling commissions and a dealer manager fee
which represent 7.0% and 3.0% of the gross offering proceeds, respectively) to be paid by Apartment
REIT and Healthcare REIT II in connection with these offerings. These expenses only become a
liability of Apartment REIT and Healthcare REIT II to the extent other organizational and offering
expenses do not exceed 1.0% of the gross proceeds of the offerings. As of June 30, 2010 and
December 31, 2009, we have incurred expenses of $2.2 million and $1.6 million, respectively, in
excess of 1.0% of the gross proceeds of the Apartment REIT follow-on offering. As of June 30, 2010
and December 31, 2009, we have incurred expenses of $2.4 million and $2.0 million, respectively, in
excess of 1.0% of the gross proceeds of the Healthcare REIT II initial offering. We anticipate that
such amounts will be reimbursed in the future from the offering proceeds of Apartment REIT and
Healthcare REIT II.
Management Fees We provide both transaction and management services to parties, which are
related to one of our principal shareowners and directors (collectively, Kojaian Companies). In
addition, we also pay asset management fees to Kojaian Companies related to properties we manage on
their behalf. Revenue, including reimbursable expenses related to salaries, wages and benefits,
earned by us for services rendered to Kojaian Companies, including joint ventures, officers and
directors and their affiliates, net of asset management fees paid to
Kojaian Companies, was $1.3 million and $1.7 million for the three months ended June
30, 2010 and 2009, respectively, and $2.5 million and $3.4 million for the six months ended June
30, 2010 and 2009, respectively.
Other Related Party Grubb & Ellis Realty Investors, LLC (GERI), which is wholly owned by
us, owns a 50.0% managing member interest in Grubb & Ellis Apartment REIT Advisor, LLC and each of
Grubb & Ellis Apartment Management, LLC and ROC REIT Advisors, LLC own a 25.0% equity interest in
Grubb & Ellis Apartment REIT Advisor, LLC. As of June 30, 2010 and
December 31, 2009, Andrea R. Biller, our General Counsel, Executive Vice President and
Secretary, owned an equity interest of 18.0% of Grubb & Ellis Apartment Management, LLC and GERI
owned an 82.0% interest. As of June 30, 2010 and December 31, 2009, Stanley J. Olander, our
Executive Vice President Multifamily, owned an equity interest of 33.3% of ROC REIT Advisors,
LLC.
26
GRUBB & ELLIS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
GERI owns a 75.0% managing member interest in Grubb & Ellis Healthcare REIT Advisor, LLC and,
therefore, consolidates Grubb & Ellis Healthcare REIT Advisor, LLC. Grubb & Ellis Healthcare
Management, LLC owns a 25.0% equity interest in Grubb & Ellis Healthcare REIT Advisor, LLC. As of
June 30, 2010 and December 31, 2009, each of Ms. Biller and Mr. Hanson, our Chief Investment
Officer and GERIs President, owned an equity interest of 18.0% of Grubb & Ellis Healthcare
Management, LLC and GERI owned a 64.0% interest.
The grants of membership interests in Grubb & Ellis Apartment Management, LLC and Grubb &
Ellis Healthcare Management, LLC to certain executives are being accounted for by us as a profit
sharing arrangement. We record compensation expense when the likelihood of payment is probable and
the amount of such payment is estimable, which generally coincides with Grubb & Ellis Apartment
REIT Advisor, LLC and Grubb & Ellis Healthcare REIT Advisor, LLC recording its revenue.
Compensation expense related to this profit sharing arrangement associated with Grubb & Ellis
Apartment Management, LLC, includes distributions earned of $18,000 and $0 for the six months ended
June 30, 2010 and 2009. Compensation expense related to this profit sharing arrangement associated
with Grubb & Ellis Healthcare Management, LLC includes distributions earned of $88,000 and $65,000,
respectively, to Ms. Biller, and $88,000 and $65,000, respectively, to Mr. Hanson, and $0 and
$88,000, respectively, to Mr. Thompson, for the six months ended June 30, 2010 and 2009,
respectively. Any allocable earnings attributable to GERIs ownership interests are paid to GERI on
a quarterly basis.
Our directors and officers, as well as officers, managers and employees have purchased, and
may continue to purchase, interests in offerings made by our programs at a discount. The purchase
price for these interests reflects the fact that selling commissions and marketing allowances will
not be paid in connection with these sales. Our net proceeds from these sales made, net of
commissions, will be substantially the same as the net proceeds received from other sales.
In the fourth quarter of 2009, we effected the private placement of an aggregate of 965,700
shares of our Preferred Stock, to qualified institutional buyers and other accredited investors. In
conjunction with the offering, the entire $5.0 million principal balance of the Note was converted
into the 12% Preferred Stock at the offering price and the holder of the Note received accrued
interest of approximately $57,000 and the holder of the Note also purchased an additional $5.0
million of Preferred Stock at the offering price. In addition, certain of our directors and
management also purchased an aggregate of an additional $1,985,000 of Preferred Stock in the
private placement at the offering price.
21. INCOME TAXES
The components of income tax (provision) benefit from continuing operations for the three
months ended June 30, 2010 and 2009 consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
June 30, |
|
(In thousands) |
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
Current: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
State |
|
|
(92 |
) |
|
|
(9 |
) |
|
|
(161 |
) |
|
|
(6 |
) |
Foreign |
|
|
(12 |
) |
|
|
|
|
|
|
(89 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(104 |
) |
|
|
(9 |
) |
|
|
(250 |
) |
|
|
(6 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
|
|
|
|
|
(1,119 |
) |
|
|
|
|
|
|
(258 |
) |
State |
|
|
|
|
|
|
499 |
|
|
|
|
|
|
|
(46 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(620 |
) |
|
|
|
|
|
|
(304 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(104 |
) |
|
$ |
(629 |
) |
|
$ |
(250 |
) |
|
$ |
(310 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
27
GRUBB & ELLIS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
We recorded net prepaid taxes totaling approximately $1.1 million as of June 30, 2010,
comprised primarily of state tax refunds receivable and state prepaid taxes.
As of December 31, 2009, federal net operating loss carryforwards in the amount of
approximately $75.5 million were available to us, translating to a deferred tax asset before
valuation allowance of $26.5 million. These NOLs will expire between 2027 and 2030. The increase in
deferred tax assets in 2009 related to the federal net operating loss has been offset by an
increase in the valuation allowance of $25.3 million as the future utilization of the NOL is
uncertain. On April 27, 2010, we elected to carry back approximately $14.5 million of our 2009
federal loss to 2006 and 2007 to claim a refund of taxes paid of $5.0 million. We received $4.991
million of this refund during the quarter and have a nine thousand
dollar remaining refund claim.
We also have state net operating loss carryforwards from December 31, 2009 and previous
periods totaling $185.3 million, translating to a deferred tax asset of $13.1 million before
valuation allowances. These state NOLs will begin to expire in 2017. The increase in deferred tax
assets in 2009 related to state net operating losses has been offset by an increase in the
valuation allowances of $5.2 million as the future utilization of these state NOLs is uncertain.
We regularly review our deferred tax assets for recoverability and establish a valuation
allowance based upon historical taxable income, projected future taxable income and the expected
timing of the reversals of existing temporary differences to reduce our deferred tax assets to the
amount that we believe is more likely than not to be realized. Due to the cumulative pre-tax book
loss in the past three years and the inherent volatility of our business in recent years, we
believe that this negative evidence supports the position that a valuation allowance is required
pursuant to ASC 740, Income Taxes, (Income Taxes Topic). As of June 30, 2010, $100.4 million of
deferred tax assets do not satisfy the recognition criteria set forth in the Income Taxes Topic.
Accordingly, a valuation allowance has been recorded for this amount. If released, the entire
amount would result in a benefit to continuing operations. During the six months ended June 30,
2010, our valuation allowances increased by approximately $14.7 million.
The differences between the total income tax (provision) benefit from continuing operations
for financial statement purposes and the income taxes computed using the applicable federal income
tax rate of 35% for the three and six months ended June 30, 2010 and 2009 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
June 30, |
|
(In thousands) |
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
Federal income taxes at the statutory rate |
|
$ |
6,075 |
|
|
$ |
10,926 |
|
|
$ |
14,347 |
|
|
$ |
25,735 |
|
State income taxes net of federal benefit |
|
|
212 |
|
|
|
1,302 |
|
|
|
961 |
|
|
|
3,001 |
|
Non-deductible expenses |
|
|
(429 |
) |
|
|
(35 |
) |
|
|
(743 |
) |
|
|
(1,019 |
) |
Change in valuation allowance |
|
|
(5,950 |
) |
|
|
(13,018 |
) |
|
|
(14,726 |
) |
|
|
(28,224 |
) |
Other |
|
|
(12 |
) |
|
|
196 |
|
|
|
(89 |
) |
|
|
197 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for income taxes |
|
$ |
(104 |
) |
|
$ |
(629 |
) |
|
$ |
(250 |
) |
|
$ |
(310 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
22. SUBSEQUENT EVENTS
Departure of Directors or Certain Officers; Election of Directors; Appointment of Certain
Officers
On August 9, 2010, we announced the appointment of Michael J. Rispoli as executive vice
president and chief financial officer of the Company, effective immediately.
28
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations.
Forward-Looking Statements
This Interim Report contains statements that are not historical facts and constitute
projections, forecasts or forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. The statements are not guarantees of performance. They involve known
and unknown risks, uncertainties and other factors that may cause the actual results, performance
or achievements of the Company (as defined below) in future periods to be materially different from
any future results, performance or achievements expressed or suggested by these statements. You can
identify such statements by the fact that they do not relate strictly to historical or current
facts. These statements use words such as believe, expect, should, strive, plan,
intend, estimate and anticipate or similar expressions. When we discuss strategy or plans, we
are making projections, forecasts or forward-looking statements. Actual results and stockholders
value will be affected by a variety of risks and factors, including, without limitation,
international, national and local economic conditions and real estate risks and financing risks and
acts of terror or war. Many of the risks and factors that will determine these results and values
are beyond the Companys ability to control or predict. These statements are necessarily based upon
various assumptions involving judgment with respect to the future. All such forward-looking
statements speak only as of the date of this Report. The Company expressly disclaims any obligation
or undertaking to release publicly any updates of revisions to any forward-looking statements
contained herein to reflect any change in the Companys expectations with regard thereto or any
change in events, conditions or circumstances on which any such statement is based. Factors that
could adversely affect the Companys ability to obtain these results and value include, among other
things: (i) the slowdown in the volume and the decline in the transaction values of sales and
leasing transactions, (ii) the general economic downturn and recessionary pressures on business in
general, (iii) a prolonged and pronounced recession in real estate markets and values, (iv) the
unavailability of credit to finance real estate transactions in general, and the Companys
tenant-in-common programs in particular, (v) an increase in expenses related to new initiatives,
investments in people, technology, and service improvements, (vi) the success of current and new
investment programs, (vii) the success of new initiatives and investments, (viii) an unfavorable
outcome in the amount the Company may be required to pay in any known or unknown litigation
dispute; (ix) the inability to attain expected levels of revenue, performance, brand equity in
general, and in the current macroeconomic and credit environment in particular, and (x) other
factors described in the Companys Annual Report on Form 10-K/A for the fiscal year ended December
31, 2009, filed on April 30, 2010.
Overview and Background
We report our revenue by three operating business segments in accordance with the provisions
of the Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC)
Topic 280, Segment Reporting, (Segment Reporting Topic). Management Services, which includes
property management, corporate facilities management, project management, client accounting,
business services and engineering services for unrelated third parties and the properties owned by
the programs we sponsors; Transaction Services, which comprises our real estate brokerage
operations; and Investment Management, which includes providing acquisition, financing, disposition
and asset management services with respect to our investment programs and dealer-manager services
by our securities broker-dealer, which facilitates capital raising transactions for our REIT, TIC
and other investment programs. Additional information on these business segments can be found in
Note 13 of Notes to Consolidated Financial Statements in Item 1 of this Report.
Critical Accounting Policies
A discussion of our critical accounting policies, which include principles of consolidation,
revenue recognition, impairment of long-lived assets, deferred taxes, and insurance and claims
reserves, can be found in our Annual Report on Form 10-K/A for the year ended December 31, 2009.
There have been no material changes to these policies in 2010, except for those disclosed below.
Pursuant to the requirements of ASC Topic 810, Consolidation, (Consolidation Topic) that
existed prior to January 1, 2010, we consolidated VIEs if we determined if we were the primary
beneficiary of the VIE. We were deemed to be the primary beneficiary of the VIE if we were to
absorb a majority of the entitys expected losses, receive a majority of the entitys expected
residual returns or both. However, under the requirements that exist subsequent to January 1, 2010,
we are deemed to be the primary beneficiary of the VIE if we have a variable interest in the VIE
that provides us with a controlling financial interest. Our variable interest provides us with a
controlling financial interest if we have both (i) the power to direct the activities of the VIE
that most significantly impact the entitys economic performance and (ii) the obligation to absorb
losses of the entity that could potentially be significant to the VIE or the right to receive
benefits from the entity that could potentially be significant to the VIE. As reconsideration
events occur, we will
reconsider our determination of whether an entity is a VIE and who the primary beneficiary is
to determine if there is a change in the original determinations and will report such changes on a
quarterly basis. In addition, we will continuously evaluate our VIEs primary beneficiary as facts
and circumstances change to determine if such changes warrant a change in an enterprises status as
primary beneficiary of our VIEs.
29
Recently Issued Accounting Pronouncements
For a discussion of recently issued accounting pronouncements, see Note 1, Summary of
Significant Accounting Policies Recently Issued Accounting Pronouncements, to the Consolidated
Financial Statements that are a part of this Quarterly Report on Form 10-Q.
RESULTS OF OPERATIONS
Overview
We reported revenue of $140.7 million for the three months ended June 30, 2010, compared with
revenue of $126.8 million for the same period in 2009. The increase in revenue as compared to the
prior year period can be attributed to increased sales and leasing transactions from Transaction
Services and increased reimbursable property management fees from Management Services. The decrease
in Investment Management business revenue resulted in a reduction of our asset and property
management fees resulting from a reduction in our assets under management by approximately 20.3%
from $6.9 billion as of June 30, 2009 to $5.5 billion as of June 30, 2010.
The net loss attributable to Grubb & Ellis Company common shareowners for the second quarter
of 2010 was $20.4 million, or $0.31 per diluted share, and included non-cash charges of $1.6
million for real estate related impairments and $1.0 million for intangible asset impairment and a
$1.6 million charge, which includes an allowance for bad debt primarily on related party
receivables and advances. In addition, the three-month results included approximately $2.8 million
of share-based compensation and $0.9 million for amortization of identified intangible assets.
We reported revenue of $273.2 million for the six months ended June 30, 2010, compared with
revenue of $249.0 million for the same period in 2009. The increase in revenue as compared to the
prior year period can be attributed to increased sales and leasing transactions from Transaction
Services and increased reimbursable property management fees from Management Services. The decrease
in Investment Management business revenue resulted in a reduction of our asset and property
management fees resulting from a reduction in our assets under management by approximately 20.3%
from $6.9 billion as of June 30, 2009 to $5.5 billion as of June 30, 2010.
The net loss attributable to Grubb & Ellis Company common shareowners for the first six months
of 2010 was $47.0 million, or $0.73 per diluted share, and included non-cash charges of $1.8
million for real estate related impairments and $1.6 million for intangible asset impairment and a
$3.3 million charge, which includes an allowance for bad debt primarily on related party
receivables and advances. In addition, the six-month results included approximately $5.8 million of
share-based compensation and $1.7 million for amortization of identified intangible assets.
30
Three Months Ended June 30, 2010 Compared to Three Months Ended June 30, 2009
The following summarizes comparative results of operations for the periods indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
|
|
|
June 30, |
|
|
Change |
|
(In thousands) |
|
2010 |
|
|
2009 |
|
|
$ |
|
|
% |
|
Revenue |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Management services |
|
$ |
69,911 |
|
|
$ |
66,649 |
|
|
$ |
3,262 |
|
|
|
4.9 |
% |
Transaction services |
|
|
54,684 |
|
|
|
38,939 |
|
|
|
15,745 |
|
|
|
40.4 |
|
Investment management |
|
|
8,566 |
|
|
|
13,426 |
|
|
|
(4,860 |
) |
|
|
(36.2 |
) |
Rental related |
|
|
7,585 |
|
|
|
7,823 |
|
|
|
(238 |
) |
|
|
(3.0 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue |
|
|
140,746 |
|
|
|
126,837 |
|
|
|
13,909 |
|
|
|
11.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation costs |
|
|
124,588 |
|
|
|
112,462 |
|
|
|
12,126 |
|
|
|
10.8 |
|
General and administrative |
|
|
18,961 |
|
|
|
20,082 |
|
|
|
(1,121 |
) |
|
|
(5.6 |
) |
Provision for doubtful accounts |
|
|
1,634 |
|
|
|
11,059 |
|
|
|
(9,425 |
) |
|
|
(85.2 |
) |
Depreciation and amortization |
|
|
3,370 |
|
|
|
2,423 |
|
|
|
947 |
|
|
|
39.1 |
|
Rental related |
|
|
5,418 |
|
|
|
5,582 |
|
|
|
(164 |
) |
|
|
(2.9 |
) |
Interest |
|
|
2,729 |
|
|
|
5,113 |
|
|
|
(2,384 |
) |
|
|
(46.6 |
) |
Real estate related impairments |
|
|
1,553 |
|
|
|
1,950 |
|
|
|
(397 |
) |
|
|
(20.4 |
) |
Intangible asset impairment |
|
|
1,025 |
|
|
|
|
|
|
|
1,025 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expense |
|
|
159,278 |
|
|
|
158,671 |
|
|
|
607 |
|
|
|
0.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Loss |
|
|
(18,532 |
) |
|
|
(31,834 |
) |
|
|
13,302 |
|
|
|
41.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other (Expense) Income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity in losses of unconsolidated entities |
|
|
(392 |
) |
|
|
(180 |
) |
|
|
(212 |
) |
|
|
(117.8 |
) |
Interest income |
|
|
116 |
|
|
|
139 |
|
|
|
(23 |
) |
|
|
(16.5 |
) |
Other (expense) income |
|
|
(283 |
) |
|
|
847 |
|
|
|
(1,130 |
) |
|
|
(133.4 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other (expense) income |
|
|
(559 |
) |
|
|
806 |
|
|
|
(1,365 |
) |
|
|
(169.4 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations before income tax provision |
|
|
(19,091 |
) |
|
|
(31,028 |
) |
|
|
11,937 |
|
|
|
38.5 |
|
Income tax provision |
|
|
(104 |
) |
|
|
(629 |
) |
|
|
525 |
|
|
|
83.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations |
|
|
(19,195 |
) |
|
|
(31,657 |
) |
|
|
12,462 |
|
|
|
39.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from discontinued operations net of taxes |
|
|
|
|
|
|
(335 |
) |
|
|
335 |
|
|
|
100.0 |
|
Loss on disposal of discontinued operations net of taxes |
|
|
|
|
|
|
(626 |
) |
|
|
626 |
|
|
|
100.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loss from discontinued operations |
|
|
|
|
|
|
(961 |
) |
|
|
961 |
|
|
|
100.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
|
(19,195 |
) |
|
|
(32,618 |
) |
|
|
13,423 |
|
|
|
41.2 |
|
Net (loss) income attributable to noncontrolling interests |
|
|
(1,736 |
) |
|
|
190 |
|
|
|
(1,926 |
) |
|
|
(1,013.7 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to Grubb & Ellis Company |
|
|
(17,459 |
) |
|
|
(32,808 |
) |
|
|
15,349 |
|
|
|
46.8 |
|
Preferred stock dividends |
|
|
(2,897 |
) |
|
|
|
|
|
|
(2,897 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to Grubb & Ellis Company common
shareowners |
|
$ |
(20,356 |
) |
|
$ |
(32,808 |
) |
|
$ |
12,452 |
|
|
|
38.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
Management Services Revenue
Management Services revenue increased $3.3 million, or 4.9%, to $69.9 million for the three
months ended June 30, 2010, compared to approximately $66.6 million for the same period in 2009,
which reflects a shift in the composition of the portfolio from 2009. As of June 30, 2010, we
managed approximately 240.1 million square feet of commercial real estate and multifamily property,
including 22.2 million square feet of our Investment Management portfolio compared to 241.8 million
square feet of property as of June 30, 2009.
31
Transaction Services Revenue
Transaction Services revenue increased $15.7 million, or 40.4%, to $54.7 million for the three
months ended June 30, 2010, compared to approximately $38.9 million for the same period in 2009 due
to increased sales and leasing transaction volume and values. Leasing activity represented
approximately 73% of the total sales and leasing transaction revenue in 2010, while sales accounted
for 27% of sales and leasing transaction revenue. In 2009, the revenue breakdown was 81% leasing
and 19% sales. As of June 30, 2010, we had 880 brokers, up from 824 as of December 31, 2009.
Investment Management Revenue
Investment Management revenue decreased $4.9 million, or 36.2%, to $8.6 million for the three
months ended June 30, 2010, compared to approximately $13.4 million for the same period in 2009.
Investment Management revenue reflects revenue generated through the fee structure of the various
investment products which includes acquisition and loan fees of approximately $1.3 million
and management fees from sponsored programs of $5.8 million. Key drivers of this business are
the dollar value of equity raised, the amount of transactions that are generated in the investment
product platforms and the amount of assets under management.
In total, $38.7 million in equity was raised for our investment programs for the three months
ended June 30, 2010, compared with $210.9 million in the same period in 2009. The decrease was
driven by a decrease in equity raised by our public non-traded REITs. During the three months ended
June 30, 2010, our public non-traded REIT programs raised $38.7 million, a decrease of 81.5% from
the $208.7 million equity raised in the same period in 2009. The decrease in equity raised by our
public non-traded REITs is a result of the termination of the dealer-manager agreement of our first
sponsored healthcare REIT in August 2009 and the start-up of our new Healthcare REIT II program
which commenced sales on September 21, 2009.
Acquisition and loan fees increased approximately $0.5 million, or 62.5%, to approximately
$1.3 million for the three months ended June 30, 2010, compared to approximately $0.8 million for
the same period in 2009. The quarter-over-quarter increase in acquisition and loan fees was
primarily attributed to an increase of $0.3 million in fees earned from our REIT programs.
Management fees from sponsored programs decreased approximately $2.8 million, or 32.9%, to
$5.8 million for the three months ended June 30, 2010, compared to approximately $8.5 million for
the same period in 2009, which primarily reflects lower average fees on TIC programs and a
reduction in square feet under management.
Broker dealer revenue decreased approximately $2.4 million, or 75.0%, to $0.8 million for the
three months ended June 30, 2010, compared to approximately $3.2 million for the same period in
2009, as a result of lower equity raised by our public non-traded REITs.
Rental Revenue
Rental revenue includes pass-through revenue for the master lease accommodations related to
our TIC programs. Rental revenue also includes revenue from two properties held for investment.
Operating Expense Overview
Operating expenses increased approximately $0.6 million, or 0.4%, to $159.3 million for the
three months ended June 30, 2010, compared to approximately $158.7 million for the same period in
2009. This increase reflects an increase in compensation costs of $12.1 million, an increase in
depreciation and amortization of $0.9 million and an increase in intangible asset impairment of
$1.0 million offset by decreases in general and administrative expense of $1.1 million, a decrease
in provision for doubtful accounts of $9.4 million, and a decrease in interest expense of $2.4
million.
32
Compensation Costs
Compensation costs increased approximately $12.1 million, or 10.8%, to $124.6 million for the
three months ended June 30, 2010, compared to approximately $112.5 million for the same period in
2009 due to increases in transaction commissions and related costs of $11.7 million as a result of
increased sales and leasing activity and increases in reimbursable salaries, wages and benefits of
$2.2 million related to an increase in management services revenue. Decreases in other compensation
costs of $1.8 million relate to a reduction in headcount. The following table summarizes
compensation costs by segment for the periods indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
|
|
|
June 30, |
|
|
Change |
|
|
|
2010 |
|
|
2009 |
|
|
$ |
|
MANAGEMENT SERVICES |
|
|
|
|
|
|
|
|
|
|
|
|
Compensation costs |
|
$ |
9,756 |
|
|
$ |
8,779 |
|
|
$ |
977 |
|
Transaction commissions and related costs |
|
|
4,212 |
|
|
|
2,244 |
|
|
|
1,968 |
|
Reimbursable salaries, wages and benefits |
|
|
49,021 |
|
|
|
46,975 |
|
|
|
2,046 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
62,989 |
|
|
|
57,998 |
|
|
|
4,991 |
|
TRANSACTION SERVICES |
|
|
|
|
|
|
|
|
|
|
|
|
Compensation costs |
|
|
11,210 |
|
|
|
10,180 |
|
|
|
1,030 |
|
Transaction commissions and related costs |
|
|
35,399 |
|
|
|
25,723 |
|
|
|
9,676 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
46,609 |
|
|
|
35,903 |
|
|
|
10,706 |
|
INVESTMENT MANAGEMENT |
|
|
|
|
|
|
|
|
|
|
|
|
Compensation costs |
|
|
5,085 |
|
|
|
6,706 |
|
|
|
(1,621 |
) |
Transaction commissions and related costs |
|
|
113 |
|
|
|
18 |
|
|
|
95 |
|
Reimbursable salaries, wages and benefits |
|
|
2,639 |
|
|
|
2,530 |
|
|
|
109 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
7,837 |
|
|
|
9,254 |
|
|
|
(1,417 |
) |
Compensation costs related to corporate overhead |
|
|
4,235 |
|
|
|
6,090 |
|
|
|
(1,855 |
) |
Severance costs |
|
|
140 |
|
|
|
|
|
|
|
140 |
|
Stock based compensation |
|
|
2,778 |
|
|
|
3,217 |
|
|
|
(439 |
) |
|
|
|
|
|
|
|
|
|
|
Total compensation costs |
|
$ |
124,588 |
|
|
$ |
112,462 |
|
|
$ |
12,126 |
|
|
|
|
|
|
|
|
|
|
|
General and Administrative
General and administrative expense decreased approximately $1.1 million, or 5.6%, to $19.0
million for the three months ended June 30, 2010, compared to approximately $20.1 million for the
same period in 2009 and includes decreases related to managements cost saving efforts.
General and administrative expense was 13.5% of total revenue for the three months ended June
30, 2010, compared with 15.8% for the same period in 2009.
Provision for Doubtful Accounts
Provision for doubtful accounts decreased approximately $9.4 million, or 85.2%, to $1.6
million for the three months ended June 30, 2010, compared to $11.0 million for the same period in
2009 primarily due to a decrease in the provision for reserves on related party receivables and
advances to sponsored investment programs. The decrease in the provision for doubtful accounts in
the current year reflects the stabilization of real estate pricing. Significant reserves were
recorded in the prior year as a result of the deterioration in the real estate market.
Depreciation and Amortization
Depreciation and amortization expense increased approximately $0.9 million, or 39.1%, to $3.4
million for the three months ended June 30, 2010, compared to approximately $2.4 million for the
same period in 2009 due to increases in depreciation and amortization of approximately $1.3 million
related to two properties held for investment as of June 30, 2010, which were previously held for
sale in 2009. There was no depreciation and amortization recorded for these two properties when
they were held for sale in 2009. Offsetting the increase in depreciation and amortization was a
decrease of $0.4 million related to fixed assets that had been fully depreciated in the prior year.
Included in depreciation and amortization expense for the three months ended June 30, 2010 and 2009
was $0.9 million and $0.8 million, respectively, for amortization of identified intangible assets.
Rental Expense
Rental expense includes pass-through expenses for master lease accommodations related to our
TIC programs. Rental expense also includes expense from two properties held for investment.
33
Interest Expense
Interest expense decreased approximately $2.4 million, or 46.6%, to $2.7 million for the three
months ended June 30, 2010, compared to $5.1 million for the same period in 2009. The decrease in
interest expense is primarily due to the repayment in full of our line of credit in November 2009,
partially offset by interest expense related to our Convertible Notes issued in May 2010.
Real Estate Related Impairments
We recognized impairment charges of approximately $1.6 million during the three months ended
June 30, 2010 related to certain unconsolidated real estate investments and funding commitments for
obligations related to certain of the Companys sponsored real
estate programs. During the three months ended June 30, 2009, we recognized impairment charges
of approximately $2.0 million related to certain unconsolidated real estate investments.
Intangible Asset Impairment
We recognized intangible asset impairment charges related to the impairment of intangible
contract rights of approximately $1.0 million during the three months ended June 30, 2010. The
intangible contract rights represent the legal right to future disposition fees of a portfolio of
real estate properties under contract. As a result of the current economic environment, a portion
of these disposition fees may not be recoverable. Based on our analysis for the current and
projected property values, condition of the properties and status of mortgage loans payable
associated with these contract rights, we determined that there are certain properties for which
receipt of disposition fees are improbable. As a result, we recorded an impairment charge of
approximately $1.0 million related to the impaired intangible contract rights during the three
months ended June 30, 2010. There were no charges to impairments during the three months ended June
30, 2009 related to intangible contract rights.
Equity in Losses of Unconsolidated Entities
Equity in losses includes $0.4 million and $0.2 million for the three months ended June 30,
2010 and 2009, respectively, related to our investment in five joint ventures and certain LLCs and
other LLCs that are consolidated pursuant to the requirements of the Consolidation Topic. Equity in
earnings (losses) are recorded based on the pro rata ownership interest in the underlying
unconsolidated properties.
Other (Expense) Income
Other (expense) income of ($0.3) million and $0.8 million for the three months ended June 30,
2010 and 2009, respectively, includes investment (losses) income related to Alesco of ($0.2)
million and $0.8 million for the three months ended June 30, 2010 and 2009, respectively.
Discontinued Operations
In accordance with the requirements of ASC Topic 360, Property, Plant, and Equipment,
(Property, Plant, and Equipment Topic), for the three months ended June 30, 2009, discontinued
operations primarily includes the net income (loss) of two properties that were sold and two
properties that were abandoned under the accounting standards during the year ended December 31,
2009. There was no income (loss) from discontinued operations for the three months ended June 30,
2010.
Income Tax
The Company recognized a tax expense from continuing operations of approximately $0.1 million
for the three months ended June 30, 2010, compared to a tax expense of $0.6 million for the same
period in 2009. In 2010 and 2009, the reported effective income tax rates were 0.5% and 2.0%,
respectively. The 2010 and 2009 effective tax rates include the effect of valuation allowances
recorded against deferred tax assets to reflect our assessment that it is more likely than not that
some portion of the deferred tax assets will not be realized. Our deferred tax assets are primarily
attributable to impairments of various real estate holdings, net operating losses and share-based
compensation. (See Note 21 of the Notes to Consolidated Financial Statements in Item 1 of this
Report for additional information.)
34
Net
(Loss) Income Attributable to Noncontrolling Interests
Net loss attributable to noncontrolling interests increased by $1.9 million, or 1,013.7%, to
$1.7 million during the three months ended June 30, 2010, compared to net income attributable to
noncontrolling interests of $0.2 million for the same period in 2009. The increase in net loss
attributable to noncontrolling interests includes $0.6 million in provision for doubtful accounts
related to a reserve on an outstanding advance at one of our consolidated VIEs and $0.6 million in
real estate related impairments recorded at one of our consolidated VIEs related to the investment
in the underlying property.
Net Loss Attributable to Grubb & Ellis Company
As a result of the above items, we recognized a net loss of $17.5 million for the three months
ended June 30, 2010, compared to a net loss of $32.8 million for the same period in 2009.
Net Loss Attributable to Grubb & Ellis Company Common Shareowners
We paid $2.9 million in preferred stock dividends during the three months ended June 30, 2010
resulting in a net loss attributable to our common shareowners of $20.4 million, or $0.31 per
diluted share, compared to a net loss attributable to our common shareowners of $32.8 million, or
$0.52 per diluted share, for the same period in 2009.
Six Months Ended June 30, 2010 Compared to Six Months Ended June 30, 2009
The following summarizes comparative results of operations for the periods indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended |
|
|
|
|
|
|
June 30, |
|
|
Change |
|
(In thousands) |
|
2010 |
|
|
2009 |
|
|
$ |
|
|
% |
|
Revenue |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Management services |
|
$ |
142,327 |
|
|
$ |
132,180 |
|
|
$ |
10,147 |
|
|
|
7.7 |
% |
Transaction services |
|
|
96,917 |
|
|
|
72,472 |
|
|
|
24,445 |
|
|
|
33.7 |
|
Investment management |
|
|
18,668 |
|
|
|
29,083 |
|
|
|
(10,415 |
) |
|
|
(35.8 |
) |
Rental related |
|
|
15,299 |
|
|
|
15,255 |
|
|
|
44 |
|
|
|
0.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue |
|
|
273,211 |
|
|
|
248,990 |
|
|
|
24,221 |
|
|
|
9.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation costs |
|
|
248,902 |
|
|
|
225,733 |
|
|
|
23,169 |
|
|
|
10.3 |
|
General and administrative |
|
|
37,400 |
|
|
|
41,860 |
|
|
|
(4,460 |
) |
|
|
(10.7 |
) |
Provision for doubtful accounts |
|
|
3,301 |
|
|
|
16,477 |
|
|
|
(13,176 |
) |
|
|
(80.0 |
) |
Depreciation and amortization |
|
|
6,628 |
|
|
|
4,864 |
|
|
|
1,764 |
|
|
|
36.3 |
|
Rental related |
|
|
10,785 |
|
|
|
11,198 |
|
|
|
(413 |
) |
|
|
(3.7 |
) |
Interest |
|
|
5,048 |
|
|
|
8,749 |
|
|
|
(3,701 |
) |
|
|
(42.3 |
) |
Real estate related impairments |
|
|
1,823 |
|
|
|
14,222 |
|
|
|
(12,399 |
) |
|
|
(87.2 |
) |
Intangible asset impairment |
|
|
1,639 |
|
|
|
|
|
|
|
1,639 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expense |
|
|
315,526 |
|
|
|
323,103 |
|
|
|
(7,577 |
) |
|
|
(2.3 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Loss |
|
|
(42,315 |
) |
|
|
(74,113 |
) |
|
|
31,798 |
|
|
|
42.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other (Expense) Income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity in losses of unconsolidated entities |
|
|
(606 |
) |
|
|
(1,411 |
) |
|
|
805 |
|
|
|
57.1 |
|
Interest income |
|
|
162 |
|
|
|
284 |
|
|
|
(122 |
) |
|
|
(43.0 |
) |
Other (expense) income |
|
|
(238 |
) |
|
|
122 |
|
|
|
(360 |
) |
|
|
(295.1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other expense |
|
|
(682 |
) |
|
|
(1,005 |
) |
|
|
323 |
|
|
|
32.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations before income tax provision |
|
|
(42,997 |
) |
|
|
(75,118 |
) |
|
|
32,121 |
|
|
|
42.8 |
|
Income tax provision |
|
|
(250 |
) |
|
|
(310 |
) |
|
|
60 |
|
|
|
19.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations |
|
|
(43,247 |
) |
|
|
(75,428 |
) |
|
|
32,181 |
|
|
|
42.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from discontinued operations net of taxes |
|
|
|
|
|
|
156 |
|
|
|
(156 |
) |
|
|
(100.0 |
) |
Loss on disposal of discontinued operations net of taxes |
|
|
|
|
|
|
(626 |
) |
|
|
626 |
|
|
|
100.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loss from discontinued operations |
|
|
|
|
|
|
(470 |
) |
|
|
470 |
|
|
|
100.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
|
(43,247 |
) |
|
|
(75,898 |
) |
|
|
32,651 |
|
|
|
43.0 |
|
Net loss attributable to noncontrolling interests |
|
|
(2,007 |
) |
|
|
(1,588 |
) |
|
|
(419 |
) |
|
|
(26.4 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to Grubb & Ellis Company |
|
|
(41,240 |
) |
|
|
(74,310 |
) |
|
|
33,070 |
|
|
|
44.5 |
|
Preferred stock dividends |
|
|
(5,794 |
) |
|
|
|
|
|
|
(5,794 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to Grubb & Ellis Company common shareowners |
|
$ |
(47,034 |
) |
|
$ |
(74,310 |
) |
|
$ |
27,276 |
|
|
|
36.7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
35
Revenue
Management Services Revenue
Management Services revenue increased $10.1 million, or 7.7%, to $142.3 million for the six
months ended June 30, 2010, compared to approximately $132.2 million for the same period in 2009,
which reflects a shift in the composition of the portfolio from 2009. As of June 30, 2010, we
managed approximately 240.1 million square feet of commercial real estate and multifamily property,
including 22.2 million square feet of our Investment Management portfolio compared to 241.8 million
square feet of property as of June 30, 2009.
Transaction Services Revenue
Transaction Services revenue increased $24.4 million, or 33.7%, to $96.9 million for the six
months ended June 30, 2010, compared to approximately $72.5 million for the same period in 2009 due
to increased sales and leasing transaction volume and values. Leasing activity represented
approximately 74% of the total sales and leasing transaction revenue in 2010, while sales accounted
for 26% of sales and leasing transaction revenue. In 2009, the revenue breakdown was 80% leasing
and 20% sales. As of June 30, 2010, we had 880 brokers, up from 824 as of December 31, 2009.
Investment Management Revenue
Investment Management revenue decreased $10.4 million, or 35.8%, to $18.7 million for the six
months ended June 30, 2010, compared to approximately $29.1 million for the same period in 2009.
Investment Management revenue reflects revenue generated through the fee structure of the various
investment products which includes acquisition and loan fees of approximately $5.2 million and
management fees from sponsored programs of $10.4 million. Key drivers of this business are the
dollar value of equity raised, the amount of transactions that are generated in the investment
product platforms and the amount of assets under management.
In total, $69.5 million in equity was raised for our investment programs for the six months
ended June 30, 2010, compared with $421.0 million in the same period in 2009. The decrease was
driven by a decrease in equity raised by our public non-traded REITs. During the six months ended
June 30, 2010, our public non-traded REIT programs raised $68.6 million, a decrease of 83.1% from
the $406.5 million equity raised in the same period in 2009. The decrease in equity raised by our
public non-traded REITs is a result of the termination of the dealer-manager agreement of our first
sponsored healthcare REIT in August 2009 and the start-up of our new Healthcare REIT II program
which commenced sales on September 21, 2009.
Acquisition and loan fees increased approximately $2.2 million, or 73.3%, to approximately
$5.2 million for the six months ended June 30, 2010, compared to approximately $3.0 million for the
same period in 2009. The increase in acquisition and loan fees was primarily attributed to an
increase of $2.9 million in fees earned from our REIT programs partially offset by a decrease in
fees earned from our TIC programs of $1.0 million.
Management fees from sponsored programs decreased approximately $6.6 million, or 38.8%, to
$10.4 million for the six months ended June 30, 2010, compared to approximately $17.0 million for
the same period in 2009, which primarily reflects lower average fees on TIC programs and a
reduction in square feet under management.
Broker dealer revenue decreased approximately $5.0 million, or 76.9%, to $1.5 million for the
six months ended June 30, 2010, compared to approximately $6.5 million for the same period in 2009,
as a result of lower equity raised by our public non-traded REITs.
Rental Revenue
Rental revenue includes pass-through revenue for the master lease accommodations related to
our TIC programs. Rental revenue also includes revenue from two properties held for investment.
Operating Expense Overview
Operating expenses decreased approximately $7.6 million, or 2.3%, to $315.5 million for the
six months ended June 30, 2010, compared to approximately $323.1 million for the same period in
2009. This decrease reflects a decrease in general and administrative expense of $4.5 million, a
decrease in provision for doubtful accounts of $13.2 million, a decrease in real estate related
impairments of
$12.4 million and a decrease in interest expense of $3.7 million offset by an increase in
compensation costs of $23.2 million, an increase in depreciation and amortization of $1.8 million
and an increase in intangible asset impairment of $1.6 million.
36
Compensation Costs
Compensation costs increased approximately $23.2 million, or 10.3%, to $248.9 million for the
six months ended June 30, 2010, compared to approximately $225.7 million for the same period in
2009 due to increases in transaction commissions and related costs of $19.4 million as a result of
increased sales and leasing activity and increases in reimbursable salaries, wages and benefits of
$5.4 million related to an increase in management services revenue. Decreases in other compensation
costs of $4.5 million related to a reduction in headcount and decreases in salaries offset by costs
incurred of $2.9 million for severance costs for a net decrease of $1.6 million. The following
table summarizes compensation costs by segment for the periods indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended |
|
|
|
|
|
|
June
30, |
|
|
Change |
|
|
|
2010 |
|
|
2009 |
|
|
$ |
|
MANAGEMENT SERVICES |
|
|
|
|
|
|
|
|
|
|
|
|
Compensation costs |
|
$ |
19,310 |
|
|
$ |
18,387 |
|
|
$ |
923 |
|
Transaction commissions and related costs |
|
|
10,395 |
|
|
|
5,155 |
|
|
|
5,240 |
|
Reimbursable salaries, wages and benefits |
|
|
99,379 |
|
|
|
94,268 |
|
|
|
5,111 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
129,084 |
|
|
|
117,810 |
|
|
|
11,274 |
|
TRANSACTION SERVICES |
|
|
|
|
|
|
|
|
|
|
|
|
Compensation costs |
|
|
22,175 |
|
|
|
21,769 |
|
|
|
406 |
|
Transaction commissions and related costs |
|
|
62,398 |
|
|
|
48,361 |
|
|
|
14,037 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
84,573 |
|
|
|
70,130 |
|
|
|
14,443 |
|
INVESTMENT MANAGEMENT |
|
|
|
|
|
|
|
|
|
|
|
|
Compensation costs |
|
|
11,089 |
|
|
|
14,502 |
|
|
|
(3,413 |
) |
Transaction commissions and related costs |
|
|
152 |
|
|
|
25 |
|
|
|
127 |
|
Reimbursable salaries, wages and benefits |
|
|
4,964 |
|
|
|
4,701 |
|
|
|
263 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
16,205 |
|
|
|
19,228 |
|
|
|
(3,023 |
) |
Compensation costs related to corporate overhead |
|
|
10,373 |
|
|
|
12,384 |
|
|
|
(2,011 |
) |
Severance costs |
|
|
2,870 |
|
|
|
|
|
|
|
2,870 |
|
Stock based compensation |
|
|
5,797 |
|
|
|
6,181 |
|
|
|
(384 |
) |
|
|
|
|
|
|
|
|
|
|
Total compensation costs |
|
$ |
248,902 |
|
|
$ |
225,733 |
|
|
$ |
23,169 |
|
|
|
|
|
|
|
|
|
|
|
General and Administrative
General and administrative expense decreased approximately $4.5 million, or 10.7%, to $37.4
million for the six months ended June 30, 2010, compared to approximately $41.9 million for the
same period in 2009 and includes decreases in audit fees as the prior year included fees due to the
restatement of prior year financials and decreases related to managements cost saving efforts.
General and administrative expense was 13.7% of total revenue for the six months ended June
30, 2010, compared with 16.8% for the same period in 2009.
Provision for Doubtful Accounts
Provision for doubtful accounts decreased approximately $13.2 million, or 80.0%, to $3.3
million for the six months ended June 30, 2010, compared to $16.5 million for the same period in
2009 primarily due to a decrease in the provision for reserves on related party receivables and
advances to sponsored investment programs. The decrease in the provision for doubtful accounts in
the current year reflects the stabilization of real estate pricing. Significant reserves were
recorded in the prior year as a result of the deterioration in the real estate market.
37
Depreciation and Amortization
Depreciation and amortization expense increased approximately $1.8 million, or 36.3%, to $6.6
million for the six months ended June 30, 2010, compared to approximately $4.9 million for the same
period in 2009 due to increases in depreciation and amortization
of approximately $2.5 million related to two properties held for investment as of June 30,
2010 which were previously held for sale in 2009. There was no depreciation and amortization
recorded for these two properties when they were held for sale in 2009. Partially offsetting the
increase in depreciation and amortization was a decrease of $0.7 million related to fixed assets
that had been fully depreciated in the prior year. Included in depreciation and amortization
expense for the six months ended June 30, 2010 and 2009 was $1.7 million and $1.6 million,
respectively, for amortization of identified intangible assets.
Rental Expense
Rental expense includes pass-through expenses for master lease accommodations related to our
TIC programs. Rental expense also includes expense from two properties held for investment.
Interest Expense
Interest expense decreased approximately $3.7 million, or 42.3%, to $5.0 million for the six
months ended June 30, 2010, compared to $8.7 million for the same period in 2009. The decrease in
interest expense is primarily due to the repayment in full of our line of credit in November 2009.
Real Estate Related Impairments
We recognized impairment charges of approximately $1.8 million during the six months ended
June 30, 2010 related to certain unconsolidated real estate investments and funding commitments for
obligations related to certain of the Companys sponsored real estate programs. During the six
months ended June 30, 2009, we recognized impairment charges of approximately $14.2 million which
includes $7.2 million related to certain unconsolidated real estate investments and $7.0 million
related to two properties held for investment.
Intangible Asset Impairment
We recognized intangible asset impairment charges related to the impairment of intangible
contract rights of approximately $1.6 million during the six months ended June 30, 2010. The
intangible contract rights represent the legal right to future disposition fees of a portfolio of
real estate properties under contract. As a result of the current economic environment, a portion
of these disposition fees may not be recoverable. Based on our analysis for the current and
projected property values, condition of the properties and status of mortgage loans payable
associated with these contract rights, we determined that there are certain properties for which
receipt of disposition fees are improbable. As a result, we recorded an impairment charge of
approximately $1.6 million related to the impaired intangible contract rights during the six months
ended June 30, 2010. There were no charges to impairments during the six months ended June 30, 2009
related to intangible contract rights.
Equity in Losses of Unconsolidated Entities
Equity in losses includes $0.6 million and $1.4 million for the six months ended June 30, 2010
and 2009, respectively, related to our investment in five joint ventures and certain LLCs and other
LLCs that are consolidated pursuant to the requirements of the Consolidation Topic. Equity in
earnings (losses) are recorded based on the pro rata ownership interest in the underlying
unconsolidated properties.
38
Discontinued Operations
In accordance with the requirements of the Property, Plant, and Equipment Topic, for the six
months ended June 30, 2009, discontinued operations primarily includes the net income (loss) of two
properties that were sold and two properties that were abandoned under the accounting standards
during the year ended December 31, 2009. There was no income (loss) from discontinued operations
for the six months ended June 30, 2010.
Income Tax
The Company recognized a tax expense from continuing operations of approximately $0.2 million
for the six months ended June 30, 2010, compared to a tax expense of $0.3 million for the same
period in 2009. In 2010 and 2009, the reported effective income tax rates were 0.6% and 0.4%,
respectively. The 2010 and 2009 effective tax rates include the effect of valuation allowances
recorded against deferred tax assets to reflect our assessment that it is more likely than not that
some portion of the deferred tax assets will not be realized. Our deferred tax assets are primarily
attributable to impairments of various real estate holdings, net operating losses and share-based
compensation. (See Note 21 of the Notes to Consolidated Financial Statements in Item 1 of this
Report for additional information.)
Net Loss Attributable to Noncontrolling Interests
Net loss attributable to noncontrolling interests increased by $0.4 million, or 26.4%, to $2.0
million during the six months ended June 30, 2010, compared to net loss attributable to
noncontrolling interests of $1.6 million for the same period in 2009.
Net Loss Attributable to Grubb & Ellis Company
As a result of the above items, we recognized a net loss of $41.2 million for the six months
ended June 30, 2010, compared to a net loss of $74.3 million for the same period in 2009.
Net Loss Attributable to Grubb & Ellis Company Common Shareowners
We paid $5.8 million in preferred stock dividends during the six months ended June 30, 2010
resulting in a net loss attributable to our common shareowners of $47.0 million, or $0.73 per
diluted share, compared to a net loss attributable to our common shareowners of $74.3 million, or
$1.17 per diluted share, for the same period in 2009.
Non-GAAP Financial Measures
EBITDA and Adjusted EBITDA are non-GAAP measures of performance. EBITDA provides an indicator
of economic performance that is unaffected by debt structure, changes in interest rates, changes in
effective tax rates or the accounting effects of capital expenditures and acquisitions because
EBITDA excludes net interest expense, interest income, income taxes, depreciation, amortization,
discontinued operations and impairments related to goodwill and intangible assets.
We use Adjusted EBITDA as an internal management measure for evaluating performance and as a
significant component when measuring performance under employee incentive programs. Management
considers Adjusted EBITDA an important supplemental measure of our performance and believes that it
is frequently used by securities analysts, investors and other interested parties in the evaluation
of companies in our industry, some of which present Adjusted EBITDA when reporting their results.
Management also believes that Adjusted EBITDA is a useful tool for measuring our ability to meet
its future capital expenditures and working capital requirements.
39
EBITDA and Adjusted EBITDA are not a substitute for GAAP net income or cash flow and do not
provide a measure of our ability to fund future cash requirements. Other companies may calculate
EBITDA and Adjusted EBITDA differently than we have and, therefore, EBITDA and Adjusted EBITDA have
material limitations as a comparative performance measure. The following tables reconcile EBITDA
and Adjusted EBITDA with the net loss attributable to Grubb & Ellis Company for the three and six
months ended June 30, 2010 and 2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
|
|
|
June 30, |
|
|
June 30, |
|
|
Change |
|
|
|
2010 |
|
|
2009 |
|
|
$ |
|
|
% |
|
Net loss attributable to Grubb & Ellis Company |
|
$ |
(17,459 |
) |
|
$ |
(32,808 |
) |
|
$ |
15,349 |
|
|
|
46.8 |
% |
Discontinued operations |
|
|
|
|
|
|
961 |
|
|
|
(961 |
) |
|
|
(100.0 |
) |
Interest expense |
|
|
2,729 |
|
|
|
5,113 |
|
|
|
(2,384 |
) |
|
|
(46.6 |
) |
Interest income |
|
|
(116 |
) |
|
|
(139 |
) |
|
|
23 |
|
|
|
16.5 |
|
Depreciation and amortization |
|
|
3,370 |
|
|
|
2,423 |
|
|
|
947 |
|
|
|
39.1 |
|
Intangible asset impairment |
|
|
1,025 |
|
|
|
|
|
|
|
1,025 |
|
|
|
|
|
Taxes |
|
|
104 |
|
|
|
629 |
|
|
|
(525 |
) |
|
|
(83.5 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA |
|
|
(10,347 |
) |
|
|
(23,821 |
) |
|
|
13,474 |
|
|
|
56.6 |
|
Charges related to sponsored programs |
|
|
1,068 |
|
|
|
9,744 |
|
|
|
(8,676 |
) |
|
|
(89.0 |
) |
Real estate related impairment |
|
|
1,553 |
|
|
|
1,950 |
|
|
|
(397 |
) |
|
|
(20.4 |
) |
Stock based compensation |
|
|
2,778 |
|
|
|
3,217 |
|
|
|
(439 |
) |
|
|
(13.6 |
) |
Amortization of signing bonuses |
|
|
1,742 |
|
|
|
1,862 |
|
|
|
(120 |
) |
|
|
(6.4 |
) |
Severance and other charges |
|
|
297 |
|
|
|
|
|
|
|
297 |
|
|
|
|
|
Real estate operations |
|
|
(1,945 |
) |
|
|
(2,335 |
) |
|
|
390 |
|
|
|
16.7 |
|
Other |
|
|
(462 |
) |
|
|
94 |
|
|
|
(556 |
) |
|
|
(591.5 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA |
|
$ |
(5,316 |
) |
|
$ |
(9,289 |
) |
|
$ |
3,973 |
|
|
|
42.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended |
|
|
|
|
|
|
June 30, |
|
|
June 30, |
|
|
Change |
|
|
|
2010 |
|
|
2009 |
|
|
$ |
|
|
% |
|
Net loss attributable to Grubb & Ellis Company |
|
$ |
(41,240 |
) |
|
$ |
(74,310 |
) |
|
$ |
33,070 |
|
|
|
44.5 |
% |
Discontinued operations |
|
|
|
|
|
|
470 |
|
|
|
(470 |
) |
|
|
(100.0 |
) |
Interest expense |
|
|
5,048 |
|
|
|
8,749 |
|
|
|
(3,701 |
) |
|
|
(42.3 |
) |
Interest income |
|
|
(162 |
) |
|
|
(284 |
) |
|
|
122 |
|
|
|
43.0 |
|
Depreciation and amortization |
|
|
6,628 |
|
|
|
4,864 |
|
|
|
1,764 |
|
|
|
36.3 |
|
Intangible asset impairment |
|
|
1,639 |
|
|
|
|
|
|
|
1,639 |
|
|
|
|
|
Taxes |
|
|
250 |
|
|
|
310 |
|
|
|
(60 |
) |
|
|
(19.4 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA |
|
|
(27,837 |
) |
|
|
(60,201 |
) |
|
|
32,364 |
|
|
|
53.8 |
|
Charges related to sponsored programs |
|
|
1,687 |
|
|
|
14,421 |
|
|
|
(12,734 |
) |
|
|
(88.3 |
) |
Real estate related impairment |
|
|
1,823 |
|
|
|
14,222 |
|
|
|
(12,399 |
) |
|
|
(87.2 |
) |
Stock based compensation |
|
|
5,797 |
|
|
|
6,181 |
|
|
|
(384 |
) |
|
|
(6.2 |
) |
Amortization of signing bonuses |
|
|
3,549 |
|
|
|
3,815 |
|
|
|
(266 |
) |
|
|
(7.0 |
) |
Severance and other charges |
|
|
3,027 |
|
|
|
|
|
|
|
3,027 |
|
|
|
|
|
Real estate operations |
|
|
(4,011 |
) |
|
|
(4,300 |
) |
|
|
289 |
|
|
|
6.7 |
|
Other |
|
|
(462 |
) |
|
|
94 |
|
|
|
(556 |
) |
|
|
(591.5 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA |
|
$ |
(16,427 |
) |
|
$ |
(25,768 |
) |
|
$ |
9,341 |
|
|
|
36.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liquidity and Capital Resources
We expect to meet our long-term liquidity needs, which may include principal repayments of
debt obligations and capital expenditures, through current and retained cash flow earnings, the
sale of real estate properties and proceeds from the potential issuance of debt or equity
securities and the potential sale of other assets. We may seek to obtain new secured or unsecured
lines of credit in the future.
Cash Flow
Six Months Ended June 30, 2010 Compared to Six Months Ended June 30, 2009
Net cash used in operating activities improved by $9.5 million to $20.0 million for the six
months ended June 30, 2010, compared to net cash used in operating activities of $29.5 million for
the same period in 2009. Net cash used in operating activities included a decrease in net loss of
$32.7 million adjusted for decreases in non-cash reconciling items, the most significant of which
included a $12.1 million decrease in real estate related impairments, a $2.3 million decrease in
allowance for doubtful accounts and a $0.8 million decrease in equity in losses of unconsolidated
entities.
40
Net cash provided by investing activities was $2.8 million and $84.5 million for the six
months ended June 30, 2010 and 2009, respectively. For the six months ended June 30, 2010, net cash
provided by investing activities related primarily to proceeds from the repayment of advances to
related parties net of advances to related parties of $4.2 million offset by purchases of
marketable equity securities of $1.0 million and purchases of property and equipment of $1.3
million. For the six months ended June 30, 2009, net cash provided by investing activities related
primarily to proceeds from sale of properties of $93.5 million offset by purchases of property and
equipment of $2.0 million, tenant improvement and capital expenditures of $1.7 million and
purchases of marketable equity securities of $3.4 million.
Net cash provided by (used in) financing activities was $20.2 million and ($73.1) million for
the six months ended June 30, 2010 and 2009, respectively. For the six months ended June 30, 2010,
net cash provided by financing activities related primarily to the net cash proceeds of $29.9
million from the issuance of convertible notes offset by the payment of preferred dividends of $5.8
million and distributions to noncontrolling interests of $3.2 million. For the six months ended
June 30, 2009, net cash used in financing activities related primarily to the repayment of mortgage
notes and capital lease obligations of $77.9 million offset by contributions from noncontrolling
interests of $4.6 million.
Commitments, Contingencies and Other Contractual Obligations
Contractual Obligations We lease office space throughout the United States through
non-cancelable operating leases, which expire at various dates through June 30, 2020.
During the second quarter of 2010, we completed the offering (Offering) of $31.5 million
unsecured convertible notes (Convertible Notes) to qualified institutional buyers pursuant to
Section 144A of the Securities Act of 1933, as amended. The Convertible Notes shall pay interest at
a rate of 7.95% per year payable semiannually in arrears on May 1 and November 1 of each year,
beginning November 1, 2010. The Convertible Notes mature on May 1, 2015. The Convertible Notes are
convertible into common stock at an initial conversion price of approximately $2.24 per share, or a
17.5% premium above the closing price of our common stock on May 3, 2010. The conversion rate is
subject to adjustment in certain circumstances. We may not redeem the Convertible Notes prior to
May 6, 2013. On or after May 6, 2013 and prior to the maturity date, we may redeem for cash all or
part of the Convertible Notes at 100% of the principal amount of the Convertible Notes to be
redeemed, plus accrued and unpaid interest, including any additional interest, to but excluding the
redemption date.
Other than the $31.5 million note offering described above, there have been no significant
changes in our contractual obligations since December 31, 2009.
TIC Program Exchange Provision Prior to the Merger, NNN entered into agreements in which NNN
agreed to provide certain investors with a right to exchange their investment in certain TIC
Programs for an investment in a different TIC program. NNN also entered into an agreement with
another investor that provided the investor with certain repurchase rights under certain
circumstances with respect to their investment. The agreements containing such rights of exchange
and repurchase rights pertain to initial investments in TIC programs totaling $31.6 million. In
July 2009 we received notice from an investor of their intent to exercise such rights of exchange
and repurchase with respect to an initial investment totaling $4.5 million. We are currently
evaluating such notice to determine the nature and extent of the right of such exchange and
repurchase, if any.
We deferred revenues relating to these agreements of $0.1 million and $0.1 million for the
three months ended June 30, 2010 and 2009, respectively. We deferred revenues relating to these
agreements of $0.1 million and $0.2 million for the six months ended June 30, 2010 and 2009,
respectively. Additional losses of $0 and $1.5 million related to these agreements were recorded
for the three months ended June 30, 2010 and 2009, respectively, and additional losses of $0.2
million and $4.4 million related to these agreements were recorded for the six months ended June
30, 2010 and 2009, respectively, to reflect the decline in value of properties underlying the
agreements with investors. As of June 30, 2010, we recorded liabilities totaling $22.9 million
related to such agreements, which is included in other current liabilities, consisting of $3.8
million of cumulative deferred revenues and $19.1 million of additional losses related to these
agreements.
Guarantees We previously provided guarantees from time to time of loans for properties under
management (including properties we own). As of June 30, 2010, there were 141 properties under
management with loan guarantees of approximately $3.4 billion in total principal outstanding with
terms ranging from one to 10 years, secured by properties with a total aggregate purchase price of
approximately $4.4 billion. As of December 31, 2009, there were 146 properties under management
with loan guarantees of approximately $3.6 billion in total principal outstanding with terms
ranging from one to 10 years, secured by properties with a total aggregate purchase price of
approximately $4.8 billion. In addition, the consolidated VIEs and unconsolidated VIEs are joint
and severally liable on the non-recourse mortgage debt related to the interests in our TIC
investments as further described in Note 4 of the Notes to Consolidated Financial Statements.
41
Our guarantees consisted of the following as of June 30, 2010 and December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
December 31, |
|
(In thousands) |
|
2010 |
|
|
2009 |
|
Non-recourse/carve-out guarantees of debt of properties under management(1) |
|
$ |
3,339,099 |
|
|
$ |
3,416,849 |
|
Non-recourse/carve-out guarantees of our debt(1) |
|
$ |
97,000 |
|
|
$ |
97,000 |
|
Recourse guarantees of debt of properties under management |
|
$ |
25,898 |
|
|
$ |
33,898 |
|
Recourse guarantees of our debt(2) |
|
$ |
10,000 |
|
|
$ |
10,000 |
|
|
|
|
(1) |
|
A non-recourse/carve-out guarantee imposes liability on the
guarantor in the event the borrower engages in certain acts prohibited
by the loan documents. Each non-recourse carve-out guarantee is an
individual document entered into with the mortgage lender in
connection with the purchase or refinance of an individual property. |
|
(2) |
|
In addition to the $10.0 million principal guarantee, we have
guaranteed any shortfall in the payment of interest on the unpaid
principal amount of the mortgage debt on one owned property. |
We initially evaluate these guarantees to determine if the guarantee meets the criteria
required to record a liability in accordance with the requirements of ASC Topic 460, Guarantees,
(Guarantees Topic). Any such liabilities were insignificant as of June 30, 2010 and December 31,
2009. In addition, on an ongoing basis, we evaluate the need to record an additional liability in
accordance with the requirements of ASC Topic 450, Contingencies, (Contingencies Topic). As of
June 30, 2010 and December 31, 2009, we had recourse guarantees of $25.9 million and $33.9 million,
respectively, relating to debt of properties under management. As of June 30, 2010 and December 31,
2009, approximately $6.6 million and $9.8 million, respectively, of these recourse guarantees
relate to debt that has matured or is not currently in compliance with certain loan covenants. In
addition, we had a recourse guarantee related to a property that was previously under management,
but was sold during the year ended December 31, 2009. In connection with the sale of the property,
we entered into a promissory note with the lender to repay the outstanding principal balance on the
mortgage loan of $4.2 million. As of June 30, 2010, the remaining outstanding principal balance on
the mortgage loan was $1.6 million. In evaluating the potential liability relating to such
guarantees, we consider factors such as the value of the properties secured by the debt, the
likelihood that the lender will call the guarantee in light of the current debt service and other
factors. As of June 30, 2010 and December 31, 2009, we recorded a liability of $2.6 million and
$3.8 million, respectively, which is included in other current liabilities, related to our estimate
of probable loss related to recourse guarantees of debt of properties under management and
previously under management.
Deferred Compensation Plan During 2008, we implemented a deferred compensation plan that
permits employees and independent contractors to defer portions of their compensation, subject to
annual deferral limits, and have it credited to one or more investment options in the plan. As of
June 30, 2010 and December 31, 2008, $4.1 million and $3.3 million, respectively, reflecting the
non-stock liability under this plan were included in Accounts payable and accrued expenses. We have
purchased whole-life insurance contracts on certain employee participants to recover distributions
made or to be made under this plan and as of June 30, 2010 and December 31, 2009 have recorded the
cash surrender value of the policies of $1.0 million and $1.0 million, respectively, in prepaid
expenses and other assets.
In addition, we award phantom shares of our stock to participants under the deferred
compensation plan. As of June 30, 2010 and December 31, 2009, we awarded an aggregate of 6.0
million phantom shares to certain employees with an aggregate value on the various grant dates of
$23.0 million. As of June 30, 2010 and December 31, 2009, an aggregate of 5.3 million and 5.6
million phantom share grants were outstanding, respectively. Generally, upon vesting, recipients of
the grants are entitled to receive the number of phantom shares granted, regardless of the value of
the shares upon the date of vesting; provided, however, grants with respect to 900,000 phantom
shares had a guaranteed minimum share price ($3.1 million in the aggregate) that will result in us
paying additional compensation to the participants should the value of the shares upon vesting be
less than the grant date value of the shares. We account for additional compensation relating to
the guarantee portion of the awards by measuring at each reporting date the additional payment
that would be due to the participant based on the difference between the then current value of the
shares awarded and the guaranteed value. This award is then amortized on a straight-line basis as
compensation expense over the requisite service (vesting) period, with an offset to deferred
compensation liability.
42
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Interest Rate Risk
Market risks include risks that arise from changes in interest rates, foreign currency
exchange rates, commodity prices, equity prices and other market changes that affect market
sensitive instruments. We believe that the primary market risk to which we would be exposed would
be interest rate risk. As of June 30, 2010, we had no outstanding variable rate debt; therefore we
believe we have no
interest rate risk. The interest rate risk management objective is to limit the impact of
interest rate changes on earnings and cash flows and to lower the overall borrowing costs. To
achieve this objective, in the past we had entered into derivative financial instruments such as
interest rate swap and cap agreements when appropriate and may do so in the future. We had no such
agreements outstanding as of June 30, 2010.
In addition to interest rate risk, the value of our real estate investments is subject to
fluctuations based on changes in local and regional economic conditions and changes in the
creditworthiness of tenants, which may affect our ability to refinance our outstanding mortgage
debt, if necessary.
Except for the acquisition of Grubb & Ellis Alesco Global Advisors, LLC, as previously
described, we do not utilize financial instruments for trading or other speculative purposes, nor
do we utilize leveraged financial instruments.
The table below presents, as of June 30, 2010, the principal amounts and weighted average
interest rates by year of expected maturity to evaluate the expected cash flows and sensitivity to
interest rate changes.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected Maturity Date |
|
|
|
2010 |
|
|
2011 |
|
|
2012 |
|
|
2013 |
|
|
2014 |
|
|
Thereafter |
|
|
Total |
|
|
Fair Value |
|
Fixed rate debt principal payments |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
16,277 |
(1) |
|
$ |
37,000 |
|
|
$ |
101,500 |
(2) |
|
$ |
154,777 |
|
|
$ |
142,346 |
|
Weighted average interest rate on
maturing debt |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8.75 |
% |
|
|
6.32 |
% |
|
|
6.81 |
% |
|
|
6.89 |
% |
|
|
|
|
|
|
|
(1) |
|
Assumes the exercise of two one-year extension options, extending the
maturity date on the senior notes to August 1, 2013. The interest rate
will increase to 9.25% per annum during any extension. |
|
(2) |
|
Excludes unamortized debt discount of $1.5 million on convertible notes. |
Mortgage notes were $107.0 million as of June 30, 2010 and December 31, 2009 and had a fair
value of $94.9 million and $94.5 million, respectively. As of June 30, 2010 and December 31, 2009,
we had $16.3 million in senior notes outstanding with a fair value of $15.9 million and $15.8
million, respectively. As of June 30, 2010, we had $30.0 million in convertible notes outstanding
(which includes an unamortized debt discount of $1.5 million) with a fair value of $25.9 million.
We did not have any convertible notes outstanding as of December 31, 2009. As of June 30, 2010 and
December 31, 2009, the effective interest rates on our fixed rate mortgage loans, senior notes and
convertible notes ranged from 6.29% to 8.75% and a weighted average effective interest rate of
6.89% per annum.
Item 4. Controls and Procedures.
Evaluation of disclosure controls and procedures
We maintain disclosure controls and procedures that are designed to ensure that information
required to be disclosed in our reports pursuant to the Securities Exchange Act of 1934, as
amended, or the Exchange Act, is recorded, processed, summarized and reported within the time
periods specified in the SEC rules and regulations, and that such information is accumulated and
communicated to management, including our Chief Executive Officer and Chief Financial Officer, as
appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating
the disclosure controls and procedures, we recognize that any controls and procedures, no matter
how well designed and operated, can provide only reasonable assurance of achieving the desired
control objectives, as ours are designed to do, and we necessarily were required to apply our
judgment in evaluating whether the benefits of the controls and procedures that we adopt outweigh
their costs.
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Our Management, including our Chief Executive Officer and our Chief Financial Officer
evaluated the effectiveness of our disclosure controls and procedures pursuant to SEC Rule
13a-15(e) and 15d-15(e) under the Exchange Act as of June 30, 2010, the end of the period covered
by this report. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer
concluded that our disclosure controls and procedures were effective.
Changes in Internal Control over Financial Reporting
Our Management has evaluated, with the participation of our Chief Executive Officer and Chief
Financial Officer, whether any changes in our internal control over financial reporting that
occurred during our last fiscal quarter have materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting. There were no changes in our
internal control over financial reporting during the fiscal quarter ended June 30, 2010 that have
materially affected, or are reasonably likely to materially affect, our internal control over
financial reporting.
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PART II
OTHER INFORMATION1
Item 1. Legal Proceedings.
None.
Item 1A. Risk Factors.
There were no material changes from the risk factors previously disclosed in our Annual Report
on Form 10-K/A for the fiscal year ended December 31, 2009, filed on April 30, 2010, except as
noted below.
There are risks associated with our outstanding indebtedness.
During the second quarter of 2010, we issued $31.5 million of senior unsecured notes due 2015
which are convertible into shares of our common stock (the Convertible Notes), and we may incur
additional indebtedness in the future. Our ability to pay interest and repay the principal on our
indebtedness is dependent upon our ability to manage our business operations. There can be no
assurance that we will be able to manage any of these risks successfully. In addition, changes by
any rating agency to our outlook or credit rating could negatively affect the value and liquidity
of both our debt and equity securities.
The Convertible Notes are subject to customary events of default.
The indenture governing the Convertible Notes contains customary events of default, including
but not limited to a default in the event of our failure to pay any indebtedness for borrowed money
in excess of $1.0 million, other than non-recourse mortgage debt. A default would result in
acceleration of our repayment obligations under the indenture, which we may not be able to meet or
refinance at such time. Even if new financing were available, it may not be on commercially
reasonable terms or acceptable terms. Accordingly, if we are in default of our Convertible Notes,
our business, financial condition and results of operations could be materially and adversely
affected.
We may not have the funds, or the ability to raise the funds, necessary to repurchase the
Convertible Notes upon a fundamental change or to repay the Convertible Notes at maturity.
Holders of the Convertible Notes have the right to require us to repurchase the Convertible
Notes at par, plus any accrued interest, in cash upon the occurrence of a fundamental change and at
maturity of the Convertible Notes. The Convertible Notes will mature on May 1, 2015 and a
fundamental change is generally deemed to have occurred:
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when a person or group becomes the beneficial owner, directly or indirectly, of 50% or
more of the total voting power of the Company; or |
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upon the consummation of (i) any recapitalization, reclassification or change of our
common stock; (ii) any statutory share exchange consolidation or merger pursuant to which
our common stock is converted into cash, securities or other property; (iii) any
disposition, directly or indirectly, of all or substantially all our assets and the assets
of our subsidiaries, considered as a whole; or |
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during any period of two consecutive years, individuals who at the beginning of such
period constituted our Board cease for any reason to constitute 50% or more of our Board
then in office; or |
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our shareowners shall have approved any plan of liquidation or dissolution; or |
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our common stock ceases to be listed on the NYSE, the Nasdaq Global Select Market, the
Nasdaq Global Market or the NYSE Amex (or their respective successors). |
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We may not have sufficient funds to repurchase the Convertible Notes at such time, and may not
have the ability to arrange necessary financing on acceptable terms. In addition, the Companys
ability to purchase the Convertible Notes may be limited by law or the terms of other agreements
outstanding at such time.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
Deferred Compensation Plan During 2008, we implemented a deferred compensation plan that
permits employees and independent contractors to defer portions of their compensation, subject to
annual deferral limits, and have it credited to one or more investment options in the plan. As of
June 30, 2010 and December 31, 2009, $4.1 million and $3.3 million, respectively, reflecting the
non-stock liability under this plan were included in accounts payable and accrued expenses. We have
purchased whole-life insurance contracts on certain employee participants to recover distributions
made or to be made under this plan and as of June 30, 2010 and December 31, 2009 have recorded the
cash surrender value of the policies of $1.0 million and $1.0 million, respectively, in prepaid
expenses and other assets.
In addition, we award phantom shares of our stock to participants under the deferred
compensation plan. As of June 30, 2010 and December 31, 2009, we awarded an aggregate of 6.0
million phantom shares to certain employees with an aggregate value on the various grant dates of
$23.0 million. As of June 30, 2010 and December 31, 2009, an aggregate of 5.3 million and 5.6
million phantom share grants were outstanding, respectively. Generally, upon vesting, recipients of
the grants are entitled to receive the number of phantom shares granted, regardless of the value of
the shares upon the date of vesting; provided, however, grants with respect to 900,000 phantom
shares had a guaranteed minimum share price ($3.1 million in the aggregate) that will result in us
paying additional compensation to the participants should the value of the shares upon vesting be
less than the grant date value of the shares.
On May 20, 2010,
pursuant to our 2006 Omnibus Equity Plan, we granted an employee an aggregate
of 100,000 restricted shares of our common stock which vest in equal one-third
installments on each of the next three anniversaries of the date of grant and
had an aggregate fair market value of $135,000 on the date of grant.
The issuance of
restricted shares in the transaction described above were exempt from the
registration requirements of Section 5 of the Securities Act pursuant to
Section 4(2) of the Securities Act, as amended, as such transaction did
not involve a public offering by the Company.
During the second quarter of 2010, we completed our offering (Offering) of $31.5 million of
unsecured convertible notes (Convertible Notes) to qualified institutional buyers pursuant to
Section 144A of the Securities Act of 1933, as amended. The Convertible Notes shall pay interest at
a rate of 7.95% per year semiannually in arrears on May 1 and November 1 of each year, beginning
November 1, 2010. The Convertible Notes mature on May 1, 2015. The Convertible Notes are
convertible into common stock at an initial conversion price of approximately $2.24 per share, or a
17.5% premium above the closing price of our common stock on May 3, 2010. The conversion rate is
subject to adjustment in certain circumstances.
We received net proceeds from the Offering of approximately $29.4 million after deducting all
estimated offering expenses. We intend to use the net proceeds from the Offering to fund growth
initiatives, short-term working capital and for general corporate purposes.
We may not redeem the Convertible Notes prior to May 6, 2013. On or after May 6, 2013 and
prior to the maturity date, we may redeem for cash all or part of the Convertible Notes at 100% of
the principal amount of the Convertible Notes to be redeemed, plus accrued and unpaid interest,
including any additional interest, to but excluding the redemption date.
Under certain circumstances following a fundamental change, which is substantially similar to
a Fundamental Change with respect to the Preferred Stock, we will be required to make an offer to
purchase all of the Convertible Notes at a purchase price of 100% of their principal amount, plus
accrued and unpaid interest, if any, to the date of repurchase.
The Convertible Notes will be our unsecured senior obligations that:
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rank equally with all of our other unsecured senior indebtedness; |
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effectively rank junior to any of our existing and future secured indebtedness to the
extent of the assets securing such indebtedness; and |
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will be structurally subordinated to any indebtedness and other liabilities of our
subsidiaries. |
The Indenture provides for customary events of default, including our failure to pay any
indebtedness for borrowed money, other than non-recourse mortgage debt, when due in excess of $1.0
million.
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Registration Rights Agreement
In connection with the Offering, we have entered into a registration rights agreement pursuant to
which we have agreed to file with the SEC a shelf registration statement registering the resale of
the notes and the shares of common stock issuable upon conversion of the Convertible Notes no later
than June 30, 2010, and to use commercially reasonable efforts to cause the shelf registration
statement to become effective within 85 days of May 7, 2010, or within 115 days of the closing date
of the Offering if the registration statement is reviewed by the SEC. The shelf registration
statement was filed on June 25, 2010 and became effective on July 19, 2010.
We have an obligation to continue to keep the shelf registration statement effective for a
certain period of time, subject to certain suspension periods under certain circumstances. In the
event that we fail to keep the registration statement effective in excess of such permissible
suspension periods, we will be obligated to pay additional interest to holders of the Convertible
Notes in an amount equal to 0.25% of the principal amount of the outstanding Convertible Notes to
and including the 90th day following any such registration default and 0.50% of the
principal amount of the outstanding Convertible Notes from and after the 91st day following any
such registration default. Such additional interest will accrue until the date prior to the day the
default is cured, or until the Convertible Notes are converted.
Item 4. [Removed and Reserved.]
Item 6. Exhibits.
The exhibits listed on the Exhibit Index (following the signatures section of this report) are
included, or incorporated by reference, in this quarterly report.
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1 |
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Items 3 and 5 are not applicable for the six months ended June 30, 2010. |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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GRUBB & ELLIS COMPANY
(Registrant)
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/s/ Michael J. Rispoli
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Michael J. Rispoli |
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Chief Financial Officer
(Principal Financial Officer) |
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Date: August 12, 2010
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Grubb & Ellis Company
EXHIBIT INDEX
For the quarter ended June 30, 2010
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Exhibit |
(31)
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Section 302 Certifications |
(32)
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Section 906 Certification |
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