INDUS REALTY TRUST, INC. - Quarter Report: 2015 May (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 May 31, 2015

 

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 INDUSTRIAL REALTY, 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 July 2, 2015:  5,152,708

 

 

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GRIFFIN INDUSTRIAL REALTY, INC.

FORM 10-Q

Index

 

PART I -		FINANCIAL INFORMATION
	ITEM 1	Financial Statements
		Consolidated Balance Sheets (unaudited) May 31, 2015 and November 30, 2014	3
		Consolidated Statements of Operations (unaudited) Three Months and Six Months Ended May 31, 2015 and 2014	4
		Consolidated Statements of Comprehensive Income (Loss) (unaudited) Three Months and Six Months Ended May 31, 2015 and 2014	5
		Consolidated Statements of Changes in Stockholders’ Equity (unaudited) Six Months Ended May 31, 2015 and 2014	6
		Consolidated Statements of Cash Flows (unaudited) Six Months Ended May 31, 2015 and 2014	7
		Notes to Consolidated Financial Statements (unaudited)	8-25
	ITEM 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations	26-36
	ITEM 3	Quantitative and Qualitative Disclosures About Market Risk	37
	ITEM 4	Controls and Procedures	38
PART II -		OTHER INFORMATION
	ITEM 1	Not Applicable
	ITEM 1A	Risk Factors	39
	ITEMS 2-5	Not Applicable
	ITEM 6	Exhibits	39-42
		SIGNATURES	43

 

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PART I                                                FINANCIAL INFORMATION

 

ITEM 1.                                             FINANCIAL STATEMENTS

 

GRIFFIN INDUSTRIAL REALTY, INC.

Consolidated Balance Sheets

(dollars in thousands, except per share data)

(unaudited)

 

		May 31, 2015			Nov. 30, 2014
ASSETS
Real estate assets at cost, net		$	146,429		$	134,522
Real estate held for sale, net		11,414			9,943
Cash and cash equivalents		18,777			17,059
Deferred income taxes		6,428			5,996
Available for sale securities - Investment in Centaur Media plc		2,373			1,924
Note receivable		1,500			1,451
Proceeds held in escrow		1,000			1,000
Other assets		13,426			14,446
Assets of discontinued operation		36			36
Total assets		$	201,383		$	186,377
LIABILITIES AND STOCKHOLDERS’ EQUITY
Mortgage loans		$	79,965		$	70,168
Deferred revenue		11,763			8,349
Accounts payable and accrued liabilities		6,315			3,505
Dividend payable		—			1,030
Other liabilities		7,960			7,438
Liabilities of discontinued operation		—			8
Total liabilities		106,003			90,498
Commitments and Contingencies (Note 10)
Stockholders’ Equity
Common stock, par value $0.01 per share, 10,000,000 shares authorized, 5,541,029 and 5,537,895 shares issued, respectively and 5,152,708 and 5,149,574 shares outstanding, respectively		55			55
Additional paid-in capital		108,129			107,887
Retained earnings		1,296			2,238
Accumulated other comprehensive loss, net of tax		(634		)	(835		)
Treasury stock, at cost, 388,321 shares		(13,466		)	(13,466		)
Total stockholders’ equity		95,380			95,879
Total liabilities and stockholders’ equity		$	201,383		$	186,377

 

 See Notes to Consolidated Financial Statements.

 

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GRIFFIN INDUSTRIAL REALTY, INC.

Consolidated Statements of Operations

(dollars in thousands, except per share data)

(unaudited)

 

		For the Three Months Ended,						For the Six Months Ended,
		May 31, 2015			May 31, 2014			May 31, 2015			May 31, 2014
Rental revenue		$	5,951		$	5,064		$	11,358		$	10,030
Revenue from property sales		245			277			1,071			370
Total revenue		6,196			5,341			12,429			10,400
Operating expenses of rental properties		1,872			1,747			4,285			4,198
Depreciation and amortization expense		1,886			1,638			3,704			3,279
Costs related to property sales		118			70			322			94
General and administrative expenses		1,847			1,696			3,858			3,880
Total expenses		5,723			5,151			12,169			11,451
Operating income (loss)		473			190			260			(1,051		)
Interest expense		(917		)	(774		)	(1,844		)	(1,678		)
Investment income		71			141			105			188
Gain on sale of common stock in Centaur Media plc		—			—			—			318
Loss before income tax benefit		(373		)	(443		)	(1,479		)	(2,223		)
Income tax benefit		139			218			537			900
Loss from continuing operations		(234		)	(225		)	(942		)	(1,323		)
Discontinued operations, net of tax:
Gain from landscape nursery business, including the gain (loss) on sale of assets of $3 and ($28), net of tax, in the 2014 three month and six month periods, respectively		—			390			—			118
Net (loss) income		$	(234	)	$	165		$	(942	)	$	(1,205	)
Basic net (loss) income per common share:
Loss from continuing operations		$	(0.05	)	$	(0.04	)	$	(0.18	)	$	(0.26	)
Income from discontinued operations		—			0.07			—			0.03
Basic net (loss) income per common share		$	(0.05	)	$	0.03		$	(0.18	)	$	(0.23	)
Diluted net (loss) income per common share:
Loss from continuing operations		$	(0.05	)	$	(0.04	)	$	(0.18	)	$	(0.26	)
Income from discontinued operations		—			0.07			—			0.03
Diluted net (loss) income per common share		$	(0.05	)	$	0.03		$	(0.18	)	$	(0.23	)

 

See Notes to Consolidated Financial Statements.

 

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GRIFFIN INDUSTRIAL REALTY, INC.

Consolidated Statements of Comprehensive Income (Loss)

(dollars in thousands)

(unaudited)

 

		For the Three Months Ended,						For the Six Months Ended,
		May 31, 2015			May 31, 2014			May 31, 2015			May 31, 2014
Net (loss) income		$	(234	)	$	165		$	(942	)	$	(1,205	)
Other comprehensive income (loss), net of tax:
Reclassifications included in net (loss) income		191			(144		)	368			(191		)
Increase (decrease) in fair value of Centaur Media plc		276			(212		)	291			327
Unrealized loss on cash flow hedges		(132		)	(221		)	(458		)	(332		)
Total other comprehensive income (loss), net of tax		335			(577		)	201			(196		)
Total comprehensive income (loss)		$	101		$	(412	)	$	(741	)	$	(1,401	)

 

See Notes to Consolidated Financial Statements.

 

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GRIFFIN INDUSTRIAL REALTY, INC.

Consolidated Statements of Changes in Stockholders’ Equity

For the Six Months Ended May 31, 2015 and May 31, 2014

(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 November 30, 2013		5,534,687		$	55		$	107,603		$	4,372		$	(449	)	$	(13,466	)	$	98,115
Stock-based compensation		—		—			83			—			—			—			83
Exercise of stock options		3,208		—			80			—			—			—			80
Net loss		—		—			—			(1,205		)	—			—			(1,205		)
Total other comprehensive loss, net of tax		—		—			—			—			(196		)	—			(196		)
Balance at May 31, 2014		5,537,895		$	55		$	107,766		$	3,167		$	(645	)	$	(13,466	)	$	96,877
Balance at November 30, 2014		5,537,895		$	55		$	107,887		$	2,238		$	(835	)	$	(13,466	)	$	95,879
Stock-based compensation		—		—			162			—			—			—			162
Exercise of stock options		3,134		—			80			—			—			—			80
Net loss		—		—			—			(942		)	—			—			(942		)
Total other comprehensive income, net of tax		—		—			—			—			201			—			201
Balance at May 31, 2015		5,541,029		$	55		$	108,129		$	1,296		$	(634	)	$	(13,466	)	$	95,380

 

See Notes to Consolidated Financial Statements.

 

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GRIFFIN INDUSTRIAL REALTY, INC.

Consolidated Statements of Cash Flows

(dollars in thousands)

(unaudited)

 

		For the Six Months Ended,
		May 31, 2015			May 31, 2014
Operating activities:
Net loss		$	(942	)	$	(1,205	)
(Income) from discontinued operations		—			(118		)
Loss from continuing operations		(942		)	(1,323		)
Adjustments to reconcile loss from continuing operations to net cash provided by operating activities of continuing operations:
Depreciation and amortization		3,704			3,279
Gain on sales of property		(749		)	(276		)
Deferred income taxes		(537		)	(900		)
Stock-based compensation expense		162			213
Amortization of debt issuance costs		126			131
Accretion of discount on note receivable		(49		)	(115		)
Gain on sale of common stock in Centaur Media plc		—			(318		)
Changes in assets and liabilities:
Other assets		1,172			872
Accounts payable and accrued liabilities		43			(70		)
Deferred revenue		4,485			(625		)
Other liabilities		379			106
Net cash provided by operating activities of continuing operations		7,794			974
Net cash used in operating activities of discontinued operations		—			(511		)
Net cash provided by operating activities		7,794			463
Investing activities:
Additions to real estate assets		(14,080		)	(8,927		)
Deferred leasing costs and other		(669		)	(127		)
Proceeds from property sales returned from escrow		—			8,864
Proceeds from sales of common stock in Centaur Media plc		—			566
Proceeds from sale of business		—			169
Net cash (used in) provided by investing activities		(14,749		)	545
Financing activities:
Proceeds from debt		10,891			—
Payments of debt		(1,094		)	(1,069		)
Dividends paid to stockholders		(1,030		)	(1,029		)
Debt issuance costs		(174		)	(102		)
Exercise of stock options		80			80
Net cash provided by (used in) financing activities		8,673			(2,120		)
Net increase (decrease) in cash and cash equivalents		1,718			(1,112		)
Cash and cash equivalents at beginning of period		17,059			14,179
Cash and cash equivalents at end of period		$	18,777		$	13,067

 

See Notes to Consolidated Financial Statements.

 

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GRIFFIN INDUSTRIAL REALTY, 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

 

On May 13, 2015, Griffin Land & Nurseries, Inc. changed its name to Griffin Industrial Realty, Inc. (“Griffin”) to reflect better Griffin’s ongoing real estate business that is principally engaged in developing, managing and leasing industrial and, to a lesser extent, commercial properties.  Periodically, Griffin may also sell certain portions of its undeveloped land that it has owned for an extended time period and the use of which is not consistent with Griffin’s core development and leasing strategy.  The accompanying unaudited consolidated financial statements of Griffin reflect its real estate business after Griffin sold its landscape nursery business in January 2014 (see below).

 

The growing operations of Griffin’s landscape nursery business, previously conducted through its wholly-owned subsidiary, Imperial Nurseries, Inc. (“Imperial”), is reported as a discontinued operation due to the sale, effective January 8, 2014, of its inventory and certain of its assets (the “Imperial Sale”) to Monrovia Connecticut LLC (“Monrovia”), a subsidiary of Monrovia Nursery Company (see Note 8). Concurrent with the Imperial Sale, a subsidiary of Griffin and Imperial entered into a long-term lease with Monrovia for Imperial’s Connecticut production nursery. Imperial was engaged in growing landscape nursery plants in containers for sale to independent retail garden centers and rewholesalers, whose main customers were landscape contractors. As the growing operations of Imperial are reflected as a discontinued operation in Griffin’s unaudited consolidated financial statements, Griffin’s continuing operations presented in the accompanying financial statements solely reflect its real estate business and, therefore, industry segment information is not presented.

 

These financial statements have been prepared in conformity with the standards of accounting measurement set forth by Financial Accounting Standards Board (“FASB”) ASC 270, “Interim Reporting” and in accordance with the accounting policies stated in Griffin’s audited consolidated financial statements for the fiscal year ended November 30, 2014 (“fiscal 2014”) included in Griffin’s Annual Report on Form 10-K as filed with the Securities and Exchange Commission on February 13, 2015. These financial statements 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 November 30, 2014 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 and the estimated costs to complete required offsite improvements to land sold. 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

 

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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 May 31, 2015, Griffin was a party to several interest rate swap agreements to hedge its interest rate exposure. 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 measured 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.

 

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. Changes in the fair values of Griffin’s interest rate swap agreements are recorded as components of accumulated other comprehensive income (loss) in stockholders’ equity to the extent they are effective. Any ineffective portions of the changes in fair values of these instruments would be recorded as interest expense or interest income.

 

The results of operations for the three months ended May 31, 2015 (the “2015 second quarter”) and the six months ended May 31, 2015 (the “2015 six month period”) are not necessarily indicative of the results to be expected for the full year. The three months and six months ended May 31, 2014 are referred to herein as the “2014 second quarter” and “2014 six month period,” respectively.  Certain amounts from the 2014 periods have been reclassified to conform to the current presentation.

 

Recent Accounting Pronouncements

 

In April 2015, the FASB issued Accounting Standards Update No. 2015-03, “Interest-Imputation of Interest,” which requires that debt issuance costs related to a recognized liability be presented in the balance sheet as a direct reduction from the carrying amount of the associated debt liability, consistent with debt discounts. The guidance must be applied on a retrospective basis and will be effective for Griffin in fiscal 2017. Early adoption is permitted. The adoption of this guidance is not expected to have a material impact on Griffin’s financial position or results of operations.

 

In May 2014, the FASB issued Accounting Standards Update No. 2014-09, “Revenue from Contracts with Customers,” which outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry specific guidance. This standard requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. Additionally, the update requires improved disclosures to help users of financial statements better understand the nature, amount, timing and uncertainty of revenue that is recognized. The update permits the use of either the retrospective or cumulative effect transition method. This update will be effective for Griffin in fiscal 2018 and early adoption is not permitted. Certain aspects of this new standard may affect revenue recognition of Griffin. Griffin is evaluating the impact that the application of this update will have on its consolidated financial statements.

 

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2.              Real Estate Assets

 

Real estate assets, net consist of:

 

		Estimated Useful Lives		May 31, 2015			Nov. 30, 2014
Land				$	17,676		$	17,955
Land improvements		10 to 30 years		14,500			18,527
Buildings and improvements		10 to 40 years		136,556			135,857
Tenant improvements		Shorter of useful life or terms of related lease		17,804			14,820
Machinery and equipment		3 to 20 years		7,622			11,810
Construction in progress				14,418			3,829
Development costs				6,999			6,486
				215,575			209,284
Accumulated depreciation				(69,146		)	(74,762		)
				$	146,429		$	134,522

 

During the 2015 second quarter, land, land improvements, buildings and improvements and machinery and equipment of the Florida farm previously used by Imperial were reclassified into real estate assets held for sale as a result of the tenant leasing the Florida farm notifying Griffin of its intent to purchase the Florida farm under the purchase option in its lease (see below).

 

Total depreciation expense and capitalized interest related to real estate assets, net were as follows:

 

		For the Three Months Ended,						For the Six Months Ended,
		May 31, 2015			May 31, 2014			May 31, 2015			May 31, 2014
Depreciation expense		$	1,596		$	1,374		$	3,146		$	2,798
Capitalized interest		$	204		$	251		$	367		$	375

 

In the 2013 fourth quarter, Griffin completed the sale of approximately 90 acres of undeveloped land for approximately $9,000 in cash, before transaction costs (the “Windsor Land Sale”). The land sold is located in Windsor, Connecticut and is part of an approximately 253 acre parcel of undeveloped land that straddles the town line between Windsor and Bloomfield, Connecticut. Under the terms of the Windsor Land Sale, Griffin and the buyer are each constructing roadways connecting the land parcel sold with existing town roads. The roads being built will become new town roads, providing public access to the remaining acreage in Griffin’s land parcel. As a result of Griffin’s continuing involvement with the land sold, the Windsor Land Sale is being accounted for under the percentage of completion method. Accordingly, the revenue and pretax gain on the sale are being recognized on a pro rata basis in a ratio equal to the percentage of the total costs incurred to the total anticipated costs of sale, including costs of the required roadwork. Costs included in determining the percentage of completion include the cost of the

 

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land sold, allocated master planning costs and the cost of road construction. At the closing of the Windsor Land Sale, cash proceeds of $8,860 were placed in escrow for the potential purchase of a replacement property in a like-kind exchange under Section 1031 of the Internal Revenue Code of 1986, as amended. The proceeds held in escrow were returned to Griffin in the 2014 second quarter, as a replacement property was not acquired.

 

As of May 31, 2015, approximately 76% of the total costs related to the Windsor Land Sale have been incurred; therefore, from the date of the Windsor Land Sale through May 31, 2015, approximately 76% of the total revenue and pretax gain on the sale have been recognized in Griffin’s consolidated statements of operations. Griffin’s consolidated statements of operations for the 2015 second quarter and 2015 six month period include revenue of $245 and $1,071, respectively, and a pretax gain of $127 and $749, respectively, from the Windsor Land Sale. Griffin’s consolidated statements of operations for the 2014 second quarter and 2014 six month period include revenue of $277 and $370, respectively, and a pretax gain of $207 and $276, respectively, from the Windsor Land Sale. As of May 31, 2015, Griffin has recognized total revenue of $6,844 and a total pretax gain of $5,097 from the Windsor Land Sale. The balance of the revenue and pretax gain on sale will be recognized when the remaining costs are incurred, which is expected to take place in the third and fourth quarters of fiscal 2015. Deferred revenue on Griffin’s consolidated balance sheet as of May 31, 2015, includes $2,124 related to the Windsor Land Sale that will be recognized as the remaining costs are incurred. Including the pretax gain on sale recognized in the 2015 six month period, fiscal 2014 and fiscal 2013, the total pretax gain on the Windsor Land Sale is expected to be approximately $6,678 after all revenue is recognized and all costs are incurred. While management has used its best estimates, based on industry knowledge and experience, in projecting the total costs of the required roadways being constructed, increases or decreases in future costs as compared with current estimated amounts would reduce or increase the gain recognized in future periods.

 

Real estate assets held for sale, net consist of:

 

		May 31, 2015			Nov. 30, 2014
Land		$	565		$	286
Land improvements		4,089			—
Building and improvements		1,207			—
Machinery and equipment		4,188			—
Development costs		9,677			9,657
		19,726			9,943
Accumulated depreciation		(8,312		)	—
		$	11,414		$	9,943

 

Included in real estate assets held for sale, net as of May 31, 2015 are land, land improvements, buildings and improvements and machinery and equipment with a net book value of $1,451 reflecting the reclassification of the Florida farm assets from real estate assets, net in the 2015 second quarter.  The Florida farm had been used by Imperial prior to being shut down in fiscal 2008 and has been leased to a private company grower of landscape nursery products since fiscal 2009.  In the 2015 second quarter, the tenant that leases the Florida farm gave notice of its intent to exercise the purchase option for the Florida farm under the terms of its lease. The purchase price is approximately $4,100 and the sale is expected to close by the end of the fiscal 2015 third quarter. On June 1, 2015, Griffin received a deposit of $400 as required under the terms of the lease agreement.  There is no guarantee that this transaction will be completed based on its current terms, or at all.

 

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3.              Fair Value

 

Griffin applies the provisions of FASB ASC 820, “Fair Value Measurement” (“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’s 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 assets include Griffin’s note receivable from Monrovia (see Note 8).  Level 2 liabilities include Griffin’s interest rate swap derivatives (see Note 5). 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 2015 six 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:

 

		May 31, 2015
		Quoted Prices in			Significant			Significant
		Active Markets for			Observable			Unobservable
		Identical Assets			Inputs			Inputs
		(Level 1)			(Level 2)			(Level 3)
Marketable equity securities		$	2,373		$	—		$	—
Interest rate swap liabilities		$	—		$	2,465		$	—

 

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		November 30, 2014
		Quoted Prices in			Significant			Significant
		Active Markets for			Observable			Unobservable
		Identical Assets			Inputs			Inputs
		(Level 1)			(Level 2)			(Level 3)
Marketable equity securities		$	1,924		$	—		$	—
Interest rate swap asset		$	—		$	8		$	—
Interest rate swap liabilities		$	—		$	2,330		$	—

 

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

 

		Fair Value		May 31, 2015						November 30, 2014
		Hierarchy		Carrying			Estimated			Carrying			Estimated
		Level		Value			Fair Value			Value			Fair Value
Financial assets:
Cash and cash equivalents		1		$	18,777		$	18,777		$	17,059		$	17,059
Available-for-sale securities		1		2,373			2,373			1,924			1,924
Note receivable		2		1,500			1,500			1,451			1,451
Interest rate swap		2		—			—			8			8
Financial liabilities:
Mortgage loans		2		79,965			80,909			70,168			71,014
Interest rate swaps		2		2,465			2,465			2,330			2,330

 

The amounts included in the financial statements for cash and cash equivalents, note receivable, leasing receivables and accounts payable and accrued liabilities approximate their fair values because of the short-term maturity of these instruments. The fair values of the available-for-sale securities are based on quoted market prices. The fair values of the mortgage loans 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 mortgage loans. 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.

 

4.              Investment in Centaur Media plc

 

As of May 31, 2015, Griffin held 1,952,462 shares of common stock in Centaur Media plc (“Centaur Media”). Griffin’s investment in the common stock of Centaur Media is accounted for as an available-for-sale security under ASC 320-10, “Investments — Debt and Equity Securities.” Accordingly, changes in the fair value of Centaur Media, reflecting both changes in the stock price and changes in the foreign currency exchange rate, are included, net of income taxes, in accumulated other comprehensive income (see Note 7). In the 2014 six month period, Griffin had a pretax gain of $318 from the sale of 500,000 shares of its Centaur Media common stock, which generated total cash proceeds of $566, after transaction costs. Griffin has not sold any of its Centaur Media common stock since the sale in the 2014 six month period.

 

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The fair value, cost and unrealized gain of Griffin’s investment in Centaur Media are as follows:

 

		May 31, 2015			Nov. 30, 2014
Fair value		$	2,373		$	1,924
Cost		1,014			1,014
Unrealized gain		$	1,359		$	910

 

5.              Mortgage Loans

 

Griffin’s mortgage loans, which are nonrecourse, consist of:

 

		May 31, 2015			Nov. 30, 2014
5.73%, due August 1, 2015		$	17,966		$	18,189
Variable rate mortgage, due October 2, 2017*		6,306			6,394
Variable rate mortgage, due February 1, 2019*		10,751			10,888
Variable rate mortgage, due August 1, 2019*		7,598			7,691
Variable rate mortgage, due January 27, 2020*		3,789			3,848
Variable rate mortgage, due September 1, 2023*		—			8,875
Variable rate mortgage, due January 2, 2025*		19,604			—
5.09%, due July 1, 2029		7,570			7,750
5.09%, due July 1, 2029		6,381			6,533
Total nonrecourse mortgages		$	79,965		$	70,168

 

*       Griffin entered into interest rate swap agreements effectively to fix the interest rates on these loans (see below).

 

On December 31, 2014, two subsidiaries of Griffin closed on a new nonrecourse mortgage (“the 2025 First Niagara Mortgage”) for $21,600. The 2025 First Niagara Mortgage refinanced an existing mortgage with First Niagara Bank (“First Niagara”) which was due on September 1, 2023 and was collateralized by an approximately 228,000 square foot industrial building (“4275 Fritch Drive”) in Lower Nazareth, Pennsylvania. The 2025 First Niagara Mortgage is collateralized by 4275 Fritch Drive along with an adjacent approximately 303,000 square foot industrial building (“4270 Fritch Drive”). Griffin received net proceeds of $10,891 at closing (before transaction costs), in addition to $8,859 used to refinance the existing mortgage with First Niagara.  The remaining $1,850 of loan proceeds will not be advanced until a portion of the remaining vacant space in 4270 Fritch Drive is leased. The 2025 First Niagara Mortgage has a ten-year term with monthly payments based on a twenty-five year amortization schedule. The interest rate for the 2025 First Niagara Mortgage is a floating rate of the one month LIBOR rate plus 1.95%. At the time the 2025 First Niagara Mortgage closed, Griffin entered into an interest rate swap agreement with First Niagara that, combined with an existing interest rate swap agreement with First Niagara, effectively fixes the rate of the 2025 First Niagara Mortgage at 4.43% over the mortgage loan’s ten-year term.

 

As of May 31, 2015, Griffin was a party to several interest rate swap agreements related to its variable rate nonrecourse mortgages on certain of its real estate assets. Griffin accounts for its interest rate

 

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swap agreements as effective cash flow hedges (see Note 3). No ineffectiveness on the cash flow hedges was recognized as of May 31, 2015 and none is anticipated over the term of the agreements. Amounts in accumulated other comprehensive income (loss) will be reclassified into interest expense over the term of the swap agreements to achieve fixed rates on each mortgage. None of the interest rate swap agreements contain any credit risk related contingent features. In the 2015 and 2014 six month periods, Griffin recognized losses (included in other comprehensive loss) before taxes of $727 and $526, respectively, on its interest rate swap agreements.

 

As of May 31, 2015, $1,115 was expected to be reclassified over the next twelve months from accumulated other comprehensive loss to interest expense. As of May 31, 2015, the net fair value of Griffin’s interest rate swap agreements was $2,465 and is included in other liabilities on Griffin’s consolidated balance sheet.

 

Griffin’s 5.73% nonrecourse mortgage loan on three industrial buildings in Tradeport with an aggregate of approximately 392,000 square feet matures on August 1, 2015 with a payment of $17,891 due on that date.  On June 9, 2015, a subsidiary of Griffin agreed to terms with 40|86 Mortgage Capital, Inc. (“40|86 Mortgage Capital”) on a nonrecourse mortgage loan of up to $18,000 (subject to certain limitations based on the loan to value percentage).  As per the terms of the proposed mortgage loan, $2,500 of the mortgage proceeds would be deposited into an escrow account that would become available to Griffin when a lease of approximately 88,000 square feet, currently on a month-to-month basis in one of the buildings that collateralizes the mortgage loan, is extended.  The proposed mortgage loan would have an interest rate of 4.33% and a fifteen year term with payments based on a thirty year amortization schedule. The mortgage proceeds would be used to refinance the mortgage loan on the three industrial buildings in Tradeport that matures on August 1, 2015. Closing on this proposed mortgage loan is subject to completion of a definitive mortgage agreement. There is no guarantee that the proposed mortgage loan with 40|86 Mortgage Capital will be completed on its current terms, or at all.

 

On June 3, 2015, a subsidiary of Griffin and Webster Bank agreed to terms on a nonrecourse mortgage loan of up to $14,100 (subject to certain limitations based on the loan to value percentage) on an approximately 280,000 square foot industrial building under construction in the Lehigh Valley (“5220 Jaindl Boulevard”) that is expected to be completed and placed in service in the 2015 third quarter.  The proposed mortgage loan with Webster Bank would have a floating interest rate of the one month LIBOR rate plus 1.65%, but Griffin would enter into an interest rate swap agreement with Webster Bank at closing to fix the rate for the entire loan term. The proposed mortgage loan with Webster Bank would have an initial funding of $11,500, with an additional $2,600 funded when the tenant that has leased approximately 196,000 square feet in 5220 Jaindl Boulevard exercises its option to lease the balance of the building or when another tenant leases the currently unleased space.  The proposed mortgage loan with Webster Bank would have a ten year term with payments based on a twenty-five year amortization schedule and is expected to close in the fiscal 2015 third quarter. Closing on this proposed mortgage loan is subject to completion of a definitive mortgage agreement. There is no guarantee that the proposed mortgage loan with Webster Bank will be completed on its current terms, or at all.

 

6.              Revolving Credit Agreement

 

Griffin has a $12,500 revolving credit line with Webster Bank (the “Webster Credit Line”) that expires May 1, 2016. The Webster Credit Line was scheduled to expire on May 1, 2015, however, prior to that date Griffin exercised its option to extend the Webster Credit Line for one year. Interest on borrowings under the Webster Credit Line is at the one month LIBOR rate plus 2.75%. The Webster Credit Line is collateralized by Griffin’s properties in Griffin Center South, aggregating approximately 235,000 square feet, and an approximately 48,000 square foot single-story office building in Griffin Center. There have been no borrowings under the Webster Credit Line since its inception.

 

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7.              Stockholders’ Equity

 

Per Share Results

 

Basic and diluted per share results were based on the following:

 

		For the Three Months Ended,						For the Six Months Ended,
		May 31, 2015			May 31, 2014			May 31, 2015			May 31, 2014
Loss from continuing operations for computation of basic and diluted per share results, net of tax		$	(234	)	$	(225	)	$	(942	)	$	(1,323	)
Income from discontinued operations for computation of basic and diluted per share results, net of tax		—			390			—			118
Net (loss) income		$	(234	)	$	165		$	(942	)	$	(1,205	)
Weighted average shares outstanding for computation of basic per share results		5,150,000			5,147,000			5,150,000			5,147,000
Incremental shares from assumed exercise of Griffin stock options (a)		—			—			—			—
Adjusted weighted average shares for computation of diluted per share results		5,150,000			5,147,000			5,150,000			5,147,000

 

(a)                Incremental shares from the assumed exercise of Griffin stock options are not included in periods where the inclusion of such shares would be anti-dilutive. Such assessment is based on income (loss) from continuing operations when net income includes discontinued operations. The incremental shares from the assumed exercise of stock options for the three months and six months ended May 31, 2015 would have been 23,000 and 19,000, respectively.  The incremental shares from the assumed exercise of stock options for the three months and six months ended May 31, 2014 would have been 12,000 and 13,000, respectively.

 

Griffin Stock Option Plan

 

Stock options are granted by Griffin under the Griffin Industrial Realty, Inc. 2009 Stock Option Plan (the “2009 Stock Option Plan”). Options granted under the 2009 Stock Option Plan may be either incentive stock options or non-qualified stock options issued at fair market value on the date approved by Griffin’s Compensation Committee. Vesting of all of Griffin’s previously issued stock options is solely based upon service requirements and does not contain market or performance conditions. Stock options issued will expire ten years from the grant date. In accordance with the 2009 Stock Option Plan, stock options issued to non-employee directors upon their initial election to the board of directors are fully exercisable immediately upon the date of the option grant. Stock options issued to non-employee directors upon their re-election to the board of directors vest on the second anniversary from the date of grant.

 

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