1
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
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 1996
Commission File Number 0-13647*
GRUBB & ELLIS REALTY INCOME TRUST, LIQUIDATING TRUST
(Exact name of registrant as specified in its charter)
California (94-6649376)
(State or Other Jurisdiction (I.R.S. Employer Identification No.)
of Incorporation or Organization)
351 California Street
Suite 1150
San Francisco, California 94104
(Address of Principal Executive Offices) (Zip Code)
(415) 391-9800
Registrant's Telephone Number, including Area Code
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
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The number of units outstanding of the registrant's units of beneficial interest
November 8, 1996 was 2,803,169 units.
GRUBB & ELLIS REALTY COMPANY TRUST LIQUIDATING TRUST IS THE DISTRIBUTEE OF THE
ASSETS OF GRUBB & ELLIS REALTY INCOME TRUST, AND FILES REPORTS UNDER GRUBB &
ELLIS REALTY INCOME TRUST'S FORMER COMMISSION FILE NUMBER
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GRUBB & ELLIS REALTY INCOME TRUST, LIQUIDATING TRUST
FORM 10-Q
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I N D E X
Page
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited):
Condensed Statements of Assets and Liabilities as of September 30, 1996
and December 31, 1995 3
Statements of Income and Expense for the quarters ended September 30, 1996 and
1995. 4
Statements of Cash Flows for the three-month periods ended
September 30, 1996 and 1995 5
Notes to Financial Statements 6-9
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 10-12
PART II - OTHER INFORMATION
Item 1: Legal Proceedings 13
Item 2: Change of Securities 13
Item 3: Defaults Upon Senior Securities 13
Item 4: Submission of Mattes to a Vote of Security Holders 13
Item 5: Other Information 13
Item 6: Exhibits and Reports on Form 8-K 13
Signatures 14
Page 2 of 14
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GRUBB & ELLIS REALTY INCOME TRUST, LIQUIDATING TRUST
CONDENSED STATEMENTS OF ASSETS AND LIABILITIES
(UNAUDITED)
September 30, December 31,
1996 1995
------------- ------------
(unaudited)
ASSETS
Net investment in real estate held for sale $ 0 $ 8,441,000
Cash and cash equivalents 2,637,000 64,000
Restricted Cash 1,841,000 --
Prepaid expense and other assets 27,000 10,000
------------ ------------
Total assets $ 4,505,000 $ 8,515,000
============ ============
LIABILITIES AND
BENEFICIARIES' EQUITY
Liabilities:
Participating Mortgage Loan payable (Note 4) $ 0 $ 4,172,000
Project Development costs payable 1,258,000 --
Security deposits and other liabilities 246,000 56,000
------------ ------------
Total liabilities 1,504,000 4,228,000
------------ ------------
Commitments (Note 5)
Beneficiaries' equity:
Units of beneficial interest 12,737,000 12,737,000
Notes receivable from beneficiaries (Note 6) (338,000) (338,000)
Distributions in excess of accumulated earnings (9,398,000) (8,112,000)
------------ ------------
Total beneficiaries' equity 3,001,000 4,287,000
------------ ------------
Total liabilities and beneficiaries' equity $ 4,505,000 $ 8,515,000
============ ============
The accompanying notes are an integral part of
these financial statements.
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GRUBB & ELLIS REALTY INCOME TRUST, LIQUIDATING TRUST
STATEMENTS OF INCOME AND EXPENSE
(UNAUDITED)
-------
Quarter Ended Nine Months Ended
------------------------------- --------------------------------
September 30, September 30, September 30, September 30,
1996 1995 1996 1995
------------- ------------- ------------- -------------
Income:
Rental income $ 318,000 $ 165,000 $ 712,000 $ 682,000
Gain on Sale of Investment 491,000 -- 491,000 --
Short-term investment interest
and other income 0 11,000 -- 33,000
----------- ----------- ----------- -----------
809,000 176,000 1,203,000 715,000
----------- ----------- ----------- -----------
Expenses:
Real estate investment reserves -- 2,600,000 -- 2,600,000
Rental operating expenses 126,000 55,000 279,000 231,000
Interest on mortgage loan 1,709,000 0 1,998,000 154,000
Mortgage Loan Discount Amortization 0 29,000 0 29,000
Depreciation 39,000 41,000 133,000 121,000
Liquidating agent fee -- 0 -- 24,000
Directors' fees and expenses 4,000 4,000 12,000 12,000
General and administrative expenses 26,000 20,000 55,000 86,000
----------- ----------- ----------- -----------
Total expenses 1,904,000 149,000 2,477,000 3,257,000
----------- ----------- ----------- -----------
Net income (loss) before
extraordinary item (1,095,000) (27,000) (1,274,000) (2,542,000)
----------- ----------- ----------- -----------
Extraordinary Item (Note 7) (12,000) -- (12,000) --
----------- ----------- ----------- -----------
Net income (loss) $(1,107,000) $ -- $(1,286,000) $
=========== =========== =========== ===========
Net income (loss) per unit $ (.39) $ (.01) $ (.46) $ (.91)
=========== =========== =========== ===========
Average number of units utilized in
net income (loss) per unit 2,803,169 2,803,169 2,803,169 2,803,169
=========== =========== =========== ===========
The accompanying notes are an integral part of
these financial statements.
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GRUBB & ELLIS REALTY INCOME TRUST, LIQUIDATING TRUST
STATEMENTS OF CASH FLOWS
(UNAUDITED)
-------
For the Nine months
Ending
-------------------------------
September 30, September 30,
1996 1995
------------ ------------
Cash flows from operating activities:
Net income (Loss): $ (1,286,000) $ (2,542,000)
Adjustments to reconcile net income (Loss):
Real Estate Investment Reserves -- 2,600,000
Depreciation and amortization 133,000 150,000
Increase (decrease) in accounts payable and security deposits 190,000 43,000
Increase in project development costs payable 1,258,000 --
Decrease (increase) in prepaid expenses and other assets (17,000) (92,000)
------------ ------------
Net cash provided by operating activities 278,000 159,000
Cash flows from investing activities:
Increase in restricted cash (1,841,000) --
Proceeds from sale 12,697,000 --
Property development costs (4,389,000) (2,474,000)
------------ ------------
Net cash provided by (used in) investing activities 6,467,000 (2,474,000)
Cash flows from financing activities:
Principal payments on mortgage loan payable (7,770,000) (2,648,000)
Construction loan proceeds 3,598,000 3,264,000
------------ ------------
Net cash used in financing activities (4,172,000) (616,000)
------------ ------------
Net increase (decrease) in cash and cash equivalents 2,573,000 (1,699,000)
Cash and cash equivalents, beginning of period 64,000 1,790,060
------------ ------------
Cash and cash equivalents, end of period $ 2,637,000 $ 91,000
============ ============
Supplementary information:
Cash paid for interest $ 1,992,000 $ 271,000
============ ============
The accompanying notes are an integral part of
these financial statements.
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GRUBB & ELLIS REALTY INCOME TRUST, LIQUIDATING TRUST
NOTES TO CONDENSED FINANCIAL STATEMENTS
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1. Organization of the Trust:
Grubb & Ellis Realty Income Trust, Liquidating Trust (the Trust), a
California trust, was organized under an agreement dated May 14, 1992,
between the Trustees and Grubb & Ellis Realty Income Trust (the Company)
whereby the trustees received all of the assets and assumed all of the
liabilities of the Company, which was subsequently dissolved. The purpose
of the Trust was to liquidate the remaining Trust property in a manner to
conserve and protect the liquidating trust estate, and to collect and
distribute the income and proceeds to the beneficiaries of the Trust by
May 15, 1995, the date of intended termination. As further explained in
Note 3, although the purpose of the Trust remained the same, the
disposition of the Trust's remaining property, the Vintner Square Shopping
Center (formerly the Livermore Arcade Shopping Center), extended the
Trust's liquidation period beyond May 1995.
2. Basis of Presentation:
The financial statements included herein have been prepared by the Trust,
without audit, pursuant to the rules and regulation of the Securities and
Exchange Commission for reporting on Form 10-Q. Certain information and
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been
condensed or omitted pursuant to such rules and regulations. In addition,
certain reclassifications have been made to the prior year financial
statements to conform to the current year's presentation. The statements
should be read in conjunction with the Company's report on Form 10-K for
the year ended December 31, 1995 and the audited financial statements
included therein.
In the opinion of the Trustees, the financial statements reflect all
adjustments necessary for a fair presentation of financial position,
results of operations, and cash flows for the interim period presented.
The results of operations for the nine month period ended September 30,
1996, are not necessarily indicative of the results to be expected for the
full year.
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3. Net Real Estate Investment
THE TRUST SOLD ITS REMAINING REAL ESTATE ASSET, THE VINTNER SQUARE
SHOPPING CENTER, ON SEPTEMBER 18, 1996.
Prior to the inception of the Trust, the Vintner Square Shopping Center
property became subject to an environmental clean-up and remediation
program to remedy soil contamination caused by a former tenant. As of May
15, 1992 (date of inception of the Liquidating Trust) $241,000 had been
paid in connection with the testing and remediation program. During 1993,
the procedures required to complete the remediation were approved by the
Regional Water Quality Control Board (RWCB). The Trust had taken legal
action against the former tenant, previous owners and other related
parties of the property in order to recover all costs of the clean-up
program. A settlement agreement and general release was executed on
January 18, 1994 which shifted the liability for the clean-up to a
separate entity and incorporated the RWCB's plan approval. On April 30,
1996 the Trust received a No Further Action Letter from the Regional Water
Quality Control Board indicating that the clean-up requirements imposed by
the RWCB have been satisfied and that a monitoring program will be
required for a period of approximately 24 months.
Due to the environmental clean-up program, plans to expand and ultimately
sell the Vintner Square Shopping Center were delayed. However, on July 7,
1995, the Trust executed a loan agreement which provided funds for
financing the rehabilitation and expansion of the shopping center (see
Note 4). In addition, the Trust finalized lease renewals with the three
major tenants in the center, Orchard Supply Hardware, Long's Drugs and
Safeway Stores. The renewed leases result in increased annual rental
income and expire in the years 2011 and 2016.
The Orchard Supply lease involved a build-to-suit agreement for a new
building. Construction activities started in July, 1995 and included the
demolition of a portion of the shopping center. The Trust recorded a
reserve approximating $1,300,000 in the quarter ended June 30, 1995, to
reflect a reduction in the net book value of buildings and improvements
for those assets being demolished. The new Orchard Supply building was
completed on April 1, 1996. The construction schedule, including several
revisions, also calls for the completion of 20,000 sq. ft of new shop
space at various intervals from May 24, 1996 to November 15, 1996. The
rehabilitation of the original undemolished shop space and the existing
Safeway and Long's stores was completed in mid August, 1996.
Upon completion of the major lease revisions and finalization of
construction financing, the Trust developed an estimate of the shopping
center's future market value upon completion of the rehabilitation and
expansion, and taking into account the repayment terms of the loan (Note
4). Based on that estimate, the Trust recorded an additional net
realizable value reserve allowance of $1,300,000 as of June 30, 1995 and
increased the reserve to $1,500,000 as of December 31, 1995.
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3. Net Real Estate Investment, continued:
As of September 30, 1996 and 1995, net real estate investment consisted of
the following:
1996 1995
------------ ------------
Land $ 0 $ 5,975,000
Buildings and improvements 0 4,514,000
Development costs 0 204,000
------------ ------------
0 10,693,000
Less: Accumulated depreciation 0 (1,120,000)
------------ ------------
0 9,753,000
Less:
Buildings demolition reserve 0 (1,300,000)
Realizable value reserve 0 (1,300,000)
------------ ------------
$ 0 $ 6,973,000
============ ============
4. Participating Mortgage Loan Payable:
On July 7, 1995, the Trust entered into a new loan agreement in the
aggregate amount of $8,500,000. A portion of the proceeds were used to
retire the existing mortgage loan payable and the remainder up to a
total of $7,450,000 was used to fund the development of the Vintner
Square Shopping Center. The entire principal amount of this loan was
paid on September 18, 1996 from proceeds from the sale of the property.
The financing agreement extended through June 1, 1998 and required
interest payments at a rate equal to 11% per annum, plus an additional
2% per annum if target net operating income levels are achieved during
the first 18 months of the loan term. The note terms required a
preferred return payable to the lender from excess Cash Flows, as
defined, including a specified participation and rate of return
associated with any sale or refinancing of the property. The note
stipulated that the lender was to participate in sale proceeds in
excess of certain stated amounts. Restrictive covenants associated with
the financing precluded the payment of dividends until the loan was
repaid.
5. Commitments:
In connection with the rehabilitation and expansion of the shopping
center (see Note 4), the Trust entered into construction contracts with
three general contractors aggregating approximately $4,650,000.
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6. Notes Receivable from Beneficiaries:
These are four notes from former officers of the Trust that are secured
by the Certificates of Beneficial Interest. All liquidating distributions
are applied directly to the balances of these notes, however, the
remaining distributions will not be sufficient to retire the remaining
balances. The notes are with full recourse to the makers.
7. Extraordinary Item:
The Trust paid a $12,000 pre-payment penalty in connection with the
satisfaction of a $300,000 second mortgage loan secured by the property.
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ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Changes in Financial Condition:
Net investment in real estate decreased from December 31, 1995 to September 30,
1996 by $8,441,000 resulting from the sale of the Vintner Square Shopping
Center.
Cash and cash equivalents increased from December 31, 1996 to September 30, 1996
by $2,573,000 resulting from cash received in the sale of the Shopping Center.
A total of $1,841,000 of restricted cash was held on September which included a
hold-back of $1,233,000 by the new lender for the Buyer of the Shopping Center
until the final completion of construction of the improvements and $492,000 in
dispute on the calculation of the construction lender's participation in sales
proceeds.
Participating mortgage loan payable decreased from December 31, 1995 to
September 30 by $4,172,000 resulting from the sale of the Vintner Square
Shopping Center.
Project development costs payable of $1,258,000 were outstanding as of September
30, 1996. These costs were comprised of remaining construction costs for two new
buildings totaling 11,500 square feet to accommodate four tenants and a retained
amount due the general contractor upon completion of "punch list" items on a
third new building, remodeling of the original buildings and sitework. These
costs also include tenant improvements and leasing commissions. Total costs of
renovation of the structures, construction of new buildings and on and off-site
costs such as utilities, landscaping, lighting, traffic signalization and
parking lot improvements exceeded the original budget for the project by
approximately $750,000. The majority of the costs for the project were included
in "hard construction bids", however the remodeling cost budget was based on the
contractor's estimate because of the difficulty of predetermining detailed costs
in executing a remodeling project. The costs of the 11,500 square feet of new
buildings were also initially determined by contractor's estimate because the
final working architectural drawings and specifications were not completed at
the time of initial project cost estimates.
Results of Operations:
Nine months Ended September 30, 1996 Compared to the Nine Months Ended
September 30, 1995:
A $1,274,000 loss was recorded in the nine months ended September 30, 1996
as compared with a loss of $2,542,000 in the comparable period in 1995.
The difference was due to the reserves described above which were taken in
the second quarter, 1995.
Rental income increased during the period as did rental operating expenses
due to the commencement of the higher rent from Orchard Supply Hardware
new facility.
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The sale of the Shopping Center in the third quarter, 1996 resulted in a
gain on the sale of $491,000.
Mortgage loan interest increased during the period by $1,838,000 from
increases in the construction loan for the Shopping Center and the
participating interest charges realized upon the closing of its sale on
September 18, 1996.
Three Months Ended September 30, 1996 compared to the Three Months Ended
September 30, 1995:
A $1,107,000 loss was recorded in the three months ended September 30,
1996 as compared with a loss of $27,000 in the comparable period in 1995.
The difference was due to the interest charges from the construction loan
balance carried during the quarter and the participating interest
recognized upon closing of the sale of the shopping center.
Rental income increased over the previous period by $153,000 resulting
from a higher rent from Orchard Supply Hardware.
The $491,000 gain on sale of investment was a result of the sale of the
Shopping Center.
The $1,709,000 increase in mortgage loan interest resulted from increases
in the construction loan commencing with loan draws in the fourth quarter,
1995 and the additional participating interest charged upon closing of the
sale of the shopping center.
Potential Factors Affecting Future Operating Results:
ON JUNE 28, 1996 THE TRUST ENTERED INTO AN AGREEMENT TO SELL THE SHOPPING CENTER
PROVIDING FOR THE CLOSE OF ESCROW NOT LATER THAN AUGUST 30, 1996. THE PURCHASE
AND SALE AGREEMENT WAS CONDITIONED UPON THE BUYER OBTAINING A FINANCING
COMMITMENT BY JULY 29, 1996. THIS COMMITMENT WAS SECURED AND THE BUYER PLACED A
$414,00 NON-REFUNDABLE DEPOSIT IN ESCROW. THE TRANSACTION WAS COMPLETED WITH THE
ESCROW CLOSING ON SEPTEMBER 18, 1996.
The Purchase and Sale Agreement provided for the sale to close before the
completion of all of the improvements to the property. The Buyer's lender
required a hold-back of $1,233,000 until those improvements were completed and
rental commences from the tenants taking occupancy. The improvements required to
be completed pursuant to the hold-back are anticipated to be completed by
December 1, 1996. A portion of this hold-back amount may be retained by the
lender until all of the tenants taking occupancy commence rental payment. The
Trust expects to receive the entire amount of this hold-back from which the
remaining construction costs will be deducted.
In addition to the lender hold-back there is a $65,000 hold-back by the Buyer to
be released to the Trust upon rental commencement of the tenants in the
buildings that will be fully completed December 1, 1996. It is anticipated that
a portion of this hold-back will not be recovered by the Trust.
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The remaining costs to finish the construction and the installation of tenants
will be determined during the fourth quarter, 1996. The results for the balance
of 1996 will be impacted by the amount of these costs as will the final
distribution amount to the unitholders.
The construction loan for the Shopping Center had a participation formula that
provides for the payment of an additional six percent interest to the lender and
a division of the proceeds of sale in accordance with an agreed-upon formula.
The Trust and the lender are in dispute over the calculation of the additional
interest participation and a mediation meeting with a third party mediator has
been scheduled for December 20, 1996. The disputed amount is $492,000. The
results of the attempt to settle this dispute will impact the performance in the
fourth quarter, 1996.
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PART II - OTHER INFORMATION
Items 1 through 5 are not applicable.
Item 6 Exhibits and Reports on Form 8-K:
None
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
GRUBB & ELLIS REALTY INCOME
TRUST, LIQUIDATING TRUST
By: /s/ HAROLD A. ELLIS, JR.
-------------------------------------
Harold A. Ellis, Jr., Trustee
Dated: November 8, 1996
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