INDUS REALTY TRUST, INC. - Quarter Report: 2013 August (Form 10-Q)

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10-Q

 

x      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

FOR THE QUARTERLY PERIOD ENDED August 31, 2013

 

o         TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

FOR THE TRANSITION PERIOD FROM              TO             

 

Commission File No. 1-12879

 

GRIFFIN LAND & NURSERIES, INC.

(Exact name of registrant as specified in its charter)

 

 

Registrant’s Telephone Number including Area Code  (212) 218-7910

 

 

(Former name, former address and former fiscal year, if changed since last report)

 

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 x  No ¨

 

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 (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes x  No ¨

 

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.

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o  No x

 

Number of shares of Common Stock outstanding at October 4, 2013: 5,146,366

 

 

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GRIFFIN LAND & NURSERIES, INC.

FORM 10-Q

Index

 

PART I -		FINANCIAL INFORMATION
	ITEM 1	Financial Statements
		Consolidated Balance Sheets (unaudited) August 31, 2013 and December 1, 2012	3
		Consolidated Statements of Operations (unaudited) 13 and 39 Weeks Ended August 31, 2013 and September 1, 2012	4
		Consolidated Statements of Comprehensive Income (Loss) (unaudited) 13 and 39 Weeks Ended August 31, 2013 and September 1, 2012	5
		Consolidated Statements of Changes in Stockholders’ Equity (unaudited) 39 Weeks Ended August 31, 2013 and September 1, 2012	6
		Consolidated Statements of Cash Flows (unaudited) 39 Weeks Ended August 31, 2013 and September 1, 2012	7
		Notes to Consolidated Financial Statements (unaudited)	8-25
	ITEM 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations	26-40
	ITEM 3	Quantitative and Qualitative Disclosures About Market Risk	40
	ITEM 4	Controls and Procedures	41
PART II -		OTHER INFORMATION
	ITEM 1	Not Applicable
	ITEM 1A	Risk Factors	42
	ITEMS 2-5	Not Applicable
	ITEM 6	Exhibits	42-45
		SIGNATURES	46

 

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PART I                                                     FINANCIAL INFORMATION

 

ITEM 1.                                                  FINANCIAL STATEMENTS

 

GRIFFIN LAND & NURSERIES, INC.

Consolidated Balance Sheets

(dollars in thousands, except per share data)

(unaudited)

 

		August 31, 2013			December 1, 2012
ASSETS
Current Assets:
Cash and cash equivalents		$	15,185		$	10,181
Accounts receivable, less allowance of $144 and $128		2,702			1,846
Inventories, net		14,639			14,206
Deferred income taxes		39			525
Other current assets		4,184			3,564
Total current assets		36,749			30,322
Real estate assets, net		130,721			123,927
Available for sale securities - Investment in Centaur Media plc		2,526			4,226
Deferred income taxes		2,345			2,222
Property and equipment, net		2,020			2,125
Real estate held for sale, net		1,632			1,186
Proceeds held in escrow		—			6,934
Other assets		8,636			9,172
Total assets		$	184,629		$	180,114
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities:
Current portion of long-term debt		$	2,104		$	1,869
Accounts payable and accrued liabilities		3,838			4,904
Deferred revenue		1,582			3,742
Total current liabilities		7,524			10,515
Long-term debt		65,203			57,692
Other noncurrent liabilities		6,753			7,761
Total liabilities		79,480			75,968
Commitments and contingencies (Note 12)
Stockholders’ Equity:
Common stock, par value $0.01 per share, 10,000,000 shares authorized, 5,534,687 and 5,527,911 shares issued, respectively, and 5,146,366 and 5,139,590 shares outstanding, respectively		55			55
Additional paid-in capital		107,494			107,056
Retained earnings		11,491			11,222
Accumulated other comprehensive loss, net of tax		(425		)	(721		)
Treasury stock, at cost, 388,321 shares		(13,466		)	(13,466		)
Total stockholders’ equity		105,149			104,146
Total liabilities and stockholders’ equity		$	184,629		$	180,114

 

See Notes to Consolidated Financial Statements.

 

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GRIFFIN LAND & NURSERIES, INC.

Consolidated Statements of Operations

(dollars in thousands, except per share data)

(unaudited)

 

		For the 13 Weeks Ended,						For the 39 Weeks Ended,
		August 31, 2013			September 1, 2012			August 31, 2013			September 1, 2012
Rental revenue and property sales		$	5,387		$	9,866		$	17,166		$	18,755
Landscape nursery net sales and other revenue		2,844			2,681			12,018			11,139
Total revenue		8,231			12,547			29,184			29,894
Costs related to rental revenue and property sales		3,364			3,747			10,422			9,669
Costs of landscape nursery net sales and other revenue		2,801			2,434			10,606			9,769
Total costs of goods sold and costs related to rental revenue and property sales		6,165			6,181			21,028			19,438
Gross profit		2,066			6,366			8,156			10,456
Selling, general and administrative expenses		2,424			2,354			8,518			7,774
Operating (loss) profit		(358		)	4,012			(362		)	2,682
Gain on sale of investment in Shemin Nurseries Holding Corporation		—			—			3,397			—
Gain on sale of common stock in Centaur Media plc		—			—			504			—
Interest expense		(938		)	(817		)	(2,881		)	(2,522		)
Loss on debt extinguishment		—			—			(286		)	—
Investment income		—			10			51			479
Income (loss) before income tax (provision) benefit		(1,296		)	3,205			423			639
Income tax (provision) benefit		367			(1,323		)	(154		)	(294		)
Income (loss) from continuing operations		(929		)	1,882			269			345
Discontinued operation, net of tax:
Income from operations, net of tax		—			—			—			117
Gain on sale of warehouse, net of tax		—			—			—			1,530
Total discontinued operation, net of tax		—			—			—			1,647
Net income (loss)		$	(929	)	$	1,882		$	269		$	1,992
Basic net income (loss) per common share:
Income (loss) from continuing operations		$	(0.18	)	$	0.37		$	0.05		$	0.07
Income from discontinued operation		—			—			—			0.32
Basic net income (loss) per common share		$	(0.18	)	$	0.37		$	0.05		$	0.39
Diluted net income (loss) per common share:
Income (loss) from continuing operations		$	(0.18	)	$	0.37		$	0.05		$	0.07
Income from discontinued operation		—			—			—			0.32
Diluted net income (loss) per common share		$	(0.18	)	$	0.37		$	0.05		$	0.39

 

See Notes to Consolidated Financial Statements.

 

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GRIFFIN LAND & NURSERIES, INC.

Consolidated Statements of Comprehensive Income (Loss)

(dollars in thousands)

(unaudited)

 

		For the 13 Weeks Ended,						For the 39 Weeks Ended,
		August 31, 2013			September 1, 2012			August 31, 2013			September 1, 2012
Net income (loss)		$	(929	)	$	1,882		$	269		$	1,992
Other comprehensive income (loss), net of tax:
Reclassifications included in net income (loss)		122			105			20			312
Increase (decrease) in fair value of Centaur Media plc		324			257			(348		)	61
Unrealized gain (loss) on cash flow hedges		357			(249		)	624			(804		)
Total other comprehensive income (loss), net of tax		803			113			296			(431		)
Total comprehensive income (loss)		$	(126	)	$	1,995		$	565		$	1,561

 

See Notes to Consolidated Financial Statements.

 

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GRIFFIN LAND & NURSERIES, INC.

Consolidated Statements of Changes in Stockholders’ Equity

For the Thirty-Nine Weeks Ended August 31, 2013 and September 1, 2012

(dollars in thousands)

(unaudited)

 

		Shares of Common Stock Issued		Common Stock			Additional Paid-in Capital			Retained Earnings			Accumulated Other Comprehensive Loss			Treasury Stock			Total
Balance at December 3, 2011		5,521,170		$	55		$	106,370		$	11,284		$	(978	)	$	(13,426	)	$	103,305
Stock-based compensation expense		—		—			428			—			—			—			428
Exercise of stock options		5,322		—			80			—			—			—			80
Net income		—		—			—			1,992			—			—			1,992
Total reclassifications included in net income		—		—			—			—			312			—			312
Other comprehensive loss from cash flow hedging transactions, net of tax		—		—			—			—			(804		)	—			(804		)
Other comprehensive income from Centaur Media plc, net of tax		—		—			—			—			61			—			61
Balance at September 1, 2012		5,526,492		$	55		$	106,878		$	13,276		$	(1,409	)	$	(13,426	)	$	105,374
Balance at December 1, 2012		5,527,911		$	55		$	107,056		$	11,222		$	(721	)	$	(13,466	)	$	104,146
Stock-based compensation expense		—		—			358			—			—			—			358
Exercise of stock options		6,776		—			80			—			—			—			80
Net income		—		—			—			269			—			—			269
Total reclassifications included in net income		—		—			—			—			20			—			20
Other comprehensive income from cash flow hedging transactions, net of tax		—		—			—			—			624			—			624
Other comprehensive loss from Centaur Media plc, net of tax		—		—			—			—			(348		)	—			(348		)
Balance at August 31, 2013		5,534,687		$	55		$	107,494		$	11,491		$	(425	)	$	(13,466	)	$	105,149

 

See Notes to Consolidated Financial Statements.

 

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GRIFFIN LAND & NURSERIES, INC.

Consolidated Statements of Cash Flows

(dollars in thousands)

(unaudited)

 

		For the 39 Weeks Ended,
		August 31, 2013			September 1, 2012
Operating activities:
Net income		$	269		$	1,992
Adjustments to reconcile net income to net cash (used in) provided by operating activities:
Depreciation and amortization		4,984			4,593
Gain on sale of investment in Shemin Nurseries Holding Corporation		(3,397		)	—
Gain on sales of properties		(2,312		)	(7,510		)
Gain on sale of common stock in Centaur Media plc		(504		)	—
Stock-based compensation expense		358			428
Provision for inventory losses		300			250
Loss on debt extinguishment		286			—
Amortization of debt issuance costs		205			222
Deferred income taxes		154			1,115
Provision for bad debts		35			17
Income from equity investments		(4		)	(6		)
Changes in assets and liabilities:
Accounts receivable		(891		)	(764		)
Inventories		(733		)	(97		)
Other current assets		(620		)	73
Accounts payable and accrued liabilities		733			648
Deferred revenue		208			217
Other noncurrent assets and noncurrent liabilities, net		38			340
Net cash (used in) provided by operating activities		(891		)	1,518
Investing activities:
Additions to real estate assets		(12,262		)	(12,330		)
Proceeds from property sale returned from escrow		6,934			—
Proceeds from the sale of investment in Shemin Nurseries Holding Corporation		3,418			—
Proceeds from the sale of common stock in Centaur Media plc		1,160			—
Proceeds from sales of properties, net of expenses		505			22,466
Additions to property and equipment		(104		)	(130		)
Proceeds from property sale deposited in escrow		—			(6,931		)
Return of capital from Shemin Nurseries Holding Corporation		—			309
Net cash (used in) provided by investing activities		(349		)	3,384
Financing activities:
Proceeds from debt		9,100			—
Payments of debt		(1,402		)	(1,233		)
Dividends paid to stockholders		(1,028		)	(513		)
Debt issuance costs		(436		)	—
Exercise of stock options		80			80
Debt modification costs		(70		)	—
Net cash provided by (used in) financing activities		6,244			(1,666		)
Net increase in cash and cash equivalents		5,004			3,236
Cash and cash equivalents at beginning of period		10,181			7,431
Cash and cash equivalents at end of period		$	15,185		$	10,667

 

See Notes to Consolidated Financial Statements.

 

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GRIFFIN LAND & NURSERIES, INC.

Notes to Consolidated Financial Statements

(dollars in thousands unless otherwise noted, except per share data)

(unaudited)

 

1.              Summary of Significant Accounting Policies

 

Basis of Presentation

 

The accompanying unaudited consolidated financial statements of Griffin Land & Nurseries, Inc. (“Griffin”) include the accounts of Griffin’s real estate business (“Griffin Land”) which is conducted through several subsidiaries and Griffin’s wholly-owned subsidiary in the landscape nursery business, Imperial Nurseries, Inc. (“Imperial”), and have been prepared in conformity with the standards of accounting measurement set forth by the Financial Accounting Standards Board (“FASB”) ASC 270, “Interim Reporting.”

 

The accompanying financial statements have been prepared in accordance with the accounting policies stated in Griffin’s audited financial statements for the fiscal year ended December 1, 2012 (“fiscal 2012”) included in Griffin’s Annual Report on Form 10-K as filed with the Securities and Exchange Commission, and should be read in conjunction with the Notes to Consolidated Financial Statements appearing in that report. All adjustments, comprising only normal recurring adjustments, which are, in the opinion of management, necessary for a fair presentation of results for the interim periods, have been reflected and all intercompany transactions have been eliminated.  The consolidated balance sheet data as of December 1, 2012 was derived from Griffin’s audited financial statements but does not include all disclosures required by accounting principles generally accepted in the United States of America (“U.S. GAAP”).

 

The preparation of financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses in the reporting period.  Griffin regularly evaluates estimates and assumptions related to the useful life and recoverability of long-lived assets, stock-based compensation expense, deferred income tax asset valuations, valuation of derivative instruments, the allowance for doubtful accounts receivable, the estimated costs to complete required offsite improvements to land sold and the adequacy of inventory reserves.  Griffin bases its estimates and assumptions on current facts, historical experience and various other factors that it believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities and the accrual of costs and expenses that are not readily apparent from other sources. The actual results experienced by Griffin may differ materially and adversely from Griffin’s estimates.  To the extent there are material differences between the estimates and the actual results, future results of operations will be affected.

 

As of August 31, 2013, Griffin was a party to several interest rate swap agreements to hedge its interest rate exposures.  Griffin does not use derivatives for speculative purposes.  Griffin applies FASB ASC 815-10, “Derivatives and Hedging,” (“ASC 815-10”) as amended, which establishes accounting and reporting standards for derivative instruments and hedging activities.  ASC 815-10 requires Griffin to recognize all derivatives as either assets or liabilities on its consolidated balance sheet and measure those instruments at fair value.  The changes in the fair values of the interest rate swap agreements are assessed in accordance with ASC 815-10 and reflected in the carrying values of the interest rate swap agreements on Griffin’s consolidated balance sheet.  The estimated fair values are based primarily on projected future swap rates.

 

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Griffin applies cash flow hedge accounting to its interest rate swap agreements that are designated as hedges of the variability of future cash flows from floating rate liabilities based on the benchmark interest rates.  The change in fair values of Griffin’s interest rate swap agreements are recorded as components of accumulated other comprehensive income in stockholders’ equity to the extent they are effective.  Any ineffective portion of the change in fair value of these instruments would be recorded as interest expense.

 

The results of operations for the thirteen weeks ended August 31, 2013 (the “2013 third quarter”) and the thirty-nine weeks ended August 31, 2013 (the “2013 nine month period”) are not necessarily indicative of the results to be expected for the full year. The thirteen weeks ended September 1, 2012 is referred to herein as the “2012 third quarter” and the thirty-nine weeks ended September 1, 2012 is referred to herein as the “2012 nine month period.”

 

Recent Accounting Pronouncements

 

In February 2013, the FASB issued Accounting Standards Update No. 2013-02, “Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income,” which amends the presentation of comprehensive income.  This update does not require new disclosures but creates new presentation requirements related to amounts reclassified out of accumulated other comprehensive income.  More specifically, this update requires: (a) disclosure of the changes in the components of accumulated other comprehensive income; (b) disclosure of the effects on the individual line items in net income for each item of accumulated other comprehensive income that is reclassified in its entirety to net income; and (c) cross-references to other disclosures that provide additional details for other comprehensive income items that are not reclassified in their entirety to net income.  For items that are required to be reclassified to net income in their entirety, this new guidance requires an entity to present this information either on the face of the statement where net income is presented or in the footnotes to the financial statements.  For items that are not required to be reclassified in their entirety to net income, this new guidance requires cross-references to other disclosures that provide additional information about those amounts.  This update was required to be adopted by Griffin no later than the 2013 second quarter; however, Griffin adopted the new presentation requirements in the 2013 first quarter.  The adoption of this guidance requires new disclosures related to amounts reclassified out of accumulated other comprehensive income but did not have an impact on Griffin’s financial position or results of operations.

 

In July 2013, the FASB issued Accounting Standards Update No. 2013-10, “Inclusion of the Fed Funds Effective Swap Rate (or Overnight Index Swap Rate) as a Benchmark Interest Rate for Hedge Accounting Purposes,” which permits the Fed Funds Effective Swap Rate (also referred to as the Overnight Index Swap Rate) to be used as a U.S. benchmark interest rate for hedge accounting purposes, in addition to interest rates on direct Treasury obligations of the U.S. government and the London Interbank Offered Rate (“LIBOR”).  This update also removes the restriction on using different benchmark rates for similar hedges.  This update is required prospectively for qualifying new or redesignated hedging relationships entered into on or after July 17, 2013.  The adoption of this guidance did not have an impact on Griffin’s financial position or results of operations.

 

In July 2013, the FASB issued Accounting Standards Update No. 2013-11, “Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists,” which provides guidance on the financial statement presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists.  Specifically, this update requires that an unrecognized tax benefit, or a portion of an unrecognized tax benefit, be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward, with certain exceptions.

 

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This update will be effective for Griffin in the 2014 second quarter.  Griffin is evaluating the impact that the application of this update will have on its consolidated financial statements.

 

2.              Discontinued Operation

 

On January 31, 2012, Griffin Land closed on the sale of its Manchester, Connecticut warehouse to its full building tenant in that building.  Net cash proceeds from the sale, after selling expenses of $438 paid out of the proceeds at closing and $25 paid separately, were $15,537, and a pretax gain of $2,886 is included in the results for discontinued operation in the 2012 nine month period.  Upon completion of the sale, Griffin Land deposited the cash of $15,562 received from the sale at closing into an escrow account for the potential purchase of a replacement property under a Section 1031 like-kind exchange.  Because Griffin Land did not identify a replacement property within the time frame required under the tax rules and regulations governing a Section 1031 like-kind exchange, on March 19, 2012 the cash that was being held in escrow was released to Griffin Land.

 

The operating results of the Manchester warehouse prior to its sale are reflected as a discontinued operation in Griffin’s consolidated statement of operations for the 2012 nine month period.  Rental revenue and pretax operating profit from the Manchester warehouse in the 2012 nine month period were $273 and $221, respectively.

 

3.              Industry Segment Information

 

Griffin defines its reportable segments by their products and services, which are comprised of the real estate and landscape nursery segments.  Management operates and receives reporting based upon these segments.  Griffin has no operations outside the United States.  Griffin’s export sales and transactions between segments are not material.

 

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		For the 13 Weeks Ended,						For the 39 Weeks Ended,
		August 31, 2013			September 1, 2012			August 31, 2013			September 1, 2012
Total net sales and other revenue:
Rental revenue and property sales		$	5,387		$	9,866		$	17,166		$	18,755
Landscape nursery net sales and other revenue		2,844			2,681			12,018			11,139
		$	8,231		$	12,547		$	29,184		$	29,894
Operating profit (loss):
Real estate		$	1,393		$	5,498		$	4,604		$	7,138
Landscape nursery		(703		)	(468		)	(1,112		)	(1,075		)
Industry segment totals		690			5,030			3,492			6,063
General corporate expense		(1,048		)	(1,018		)	(3,854		)	(3,381		)
Operating (loss) profit		(358		)	4,012			(362		)	2,682
Gain on sale of investment in Shemin Nurseries Holding Corporation		—			—			3,397			—
Gain on sale of common stock in Centaur Media plc		—			—			504			—
Interest expense		(938		)	(817		)	(2,881		)	(2,522		)
Loss on debt extinguishment		—			—			(286		)	—
Investment income		—			10			51			479
Income (loss) before income tax (provision) benefit		$	(1,296	)	$	3,205		$	423		$	639

 

The above table reflects the net sales and other revenue and operating profit (loss) included in continuing operations on Griffin’s consolidated statements of operations.  Operating results of the Manchester, Connecticut warehouse and the gain on the sale of that building are included in the results of the discontinued operation on Griffin’s consolidated statements of operations (see Note 2).

 

Continuing operations of the real estate segment include property sales revenue of $331 and $2,805 in the 2013 third quarter and 2013 nine month period, respectively.  The 2013 nine month period primarily includes the recognition of previously deferred revenue on a land sale that was completed in the 2012 third quarter (see Note 11).  Included in property sales revenue in the 2013 nine month period is $177 from an amended agreement related to that 2012 land sale.  Continuing operations of the real estate segment in the 2012 third quarter and 2012 nine month period include property sales revenue of $5,360 which was also related to that same land sale.

 

In fiscal 2009, Imperial shut down operations on its Florida farm and entered into a lease with another landscape nursery grower for that property.  Other revenue of the landscape nursery segment includes revenue from the rental of Imperial’s Florida farm as follows:

 

		For the 13 Weeks Ended,						For the 39 Weeks Ended,
		August 31, 2013			September 1, 2012			August 31, 2013			September 1, 2012
Rental revenue from Imperial’s Florida farm		$	117		$	117		$	351		$	352

 

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Identifiable assets:		August 31, 2013			December 1, 2012
Real estate		$	141,354		$	142,440
Landscape nursery		21,769			20,693
Industry segment totals		163,123			163,133
General corporate		21,506			16,981
Total assets		$	184,629		$	180,114

 

4.              Fair Value

 

Griffin applies the provisions of FASB ASC 820, “Fair Value Measurements and Disclosures” (“ASC 820”), which establishes a fair value hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.  An asset or liability’s categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement.  ASC 820 establishes three levels of inputs that may be used to measure fair value, as follows:

 

Level 1 applies to assets or liabilities for which there are quoted market prices in active markets for identical assets or liabilities.  Griffin’s available-for-sale securities are considered Level 1 within the fair value hierarchy.

 

Level 2 applies to assets or liabilities for which there are inputs other than quoted prices included within Level 1 that are observable for the asset or liability, such as quoted prices for similar assets or liabilities in active markets; quoted prices for assets or liabilities in markets with insufficient volume or infrequent transactions (less active markets); or model-derived valuations in which significant inputs are observable or can be derived principally from, or corroborated by, observable market data.  Level 2 liabilities include Griffin’s interest rate swap derivatives (see Note 9).  Beginning in the 2013 first quarter, the fair values of Griffin’s interest rate swap derivative instruments were based on discounted cash flow models that incorporate the cash flows of the derivatives as well as the current Overnight Indexed Swap (“OIS”) rate and swap curve along with other market data.  Prior to the beginning of fiscal 2013, the fair values of Griffin’s interest rate swap derivative instruments were based on discounted cash flow models that incorporated the cash flows of the derivatives as well as the current LIBOR rate and swap curve along with other market data.  The change to using the OIS rate from the LIBOR rate is consistent with current industry best practices.  The OIS rate is now considered the best discount rate to utilize since it is the best proxy for the risk-free rate.  These inputs are readily available in public markets or can be derived from information available in publicly quoted markets, therefore, Griffin has categorized these derivative instruments as Level 2 within the fair value hierarchy.

 

Level 3 applies to assets or liabilities for which there are unobservable inputs to the valuation methodology that are significant to the measurement of the fair value of the assets or liabilities.

 

During the 2013 nine month period, Griffin did not transfer any assets or liabilities in or out of Levels 1 or 2.  The following are Griffin’s financial assets and liabilities carried at fair value and measured at fair value on a recurring basis:

 

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Table of Contents

 

		August 31, 2013
		Quoted Prices in			Significant			Significant
		Active Markets for			Observable			Unobservable
		Identical Assets			Inputs			Inputs
		(Level 1)			(Level 2)			(Level 3)
Marketable equity securities		$	2,526		$	—		$	—
Interest rate swap liabilities		$	—		$	1,642		$	—

 

		December 1, 2012
		Quoted Prices in			Significant			Significant
		Active Markets for			Observable			Unobservable
		Identical Assets			Inputs			Inputs
		(Level 1)			(Level 2)			(Level 3)
Marketable equity securities		$	4,226		$	—		$	—
Interest rate swap liabilities		$	—		$	3,191		$	—

 

The carrying and estimated fair values of Griffin’s financial instruments are as follows:

 

		Fair Value		August 31, 2013						December 1, 2012
		Hierarchy		Carrying			Estimated			Carrying			Estimated
		Level		Value			Fair Value			Value			Fair Value
Financial assets:
Cash and cash equivalents		1		$	15,185		$	15,185		$	10,181		$	10,181
Available-for-sale securities		1		2,526			2,526			4,226			4,226
Financial liabilities:
Mortgage debt		2		67,213			68,552			59,489			61,781
Interest rate swaps		2		1,642			1,642			3,191			3,191

 

The fair values of the available-for-sale securities are based on quoted market prices.  The fair values of the mortgage debt are estimated based on current rates offered to Griffin for similar debt of the same remaining maturities, and additionally, Griffin considers its credit worthiness in determining the fair value of its debt.  The fair values of the interest rate swaps (used for purposes other than trading) are determined based on discounted cash flow models that incorporate the cash flows of the derivatives as well as the current OIS rate and swap curve along with other market data, taking into account current interest rates and the credit worthiness of the counterparty for assets and the credit worthiness of Griffin for liabilities.

 

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