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 June 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
August 1, 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 June 30, 1996
and December 31, 1995 3
Statements of Income and Expense for the quarters ended June 30, 1996 and
1995. 4
Statements of Cash Flows for the three-month periods ended
June 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 10-11
PART II - OTHER INFORMATION
Item 1: Legal Proceedings 12
Item 2: Change of Securities 12
Item 3: Defaults Upon Senior Securities 12
Item 4: Submission of Mattes to a Vote of Security Holders 12
Item 5: Other Information 12
Item 6: Exhibits and Reports on Form 8-K 12
Signatures 13
3
GRUBB & ELLIS REALTY INCOME TRUST, LIQUIDATING TRUST
CONDENSED STATEMENTS OF ASSETS AND LIABILITIES
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June 30, December 31,
1996 1995
------------ ------------
(unaudited)
ASSETS
Net investment in real estate held for sale $ 10,869,000 8,441,000
Cash and cash equivalents 29,000 64,000
Prepaid expense and other assets 154,000 10,000
------------ ------------
Total assets $ 11,052,000 $ 8,515,000
============ ============
LIABILITIES AND
BENEFICIARIES' EQUITY
Liabilities:
Mortgage loan payable $ 6,760,000 $ 4,172,000
Security deposits and other liabilities 184,000 56,000
------------ ------------
Total liabilities 6,944,000 4,228,000
------------ ------------
Commitments (Note 5)
Beneficiaries' equity:
Units of beneficial interest 12,737,000 12,737,000
Notes receivable from beneficiaries (338,000) (338,000)
Distributions in excess of accumulated earnings (8,291,000) (8,112,000)
------------ ------------
Total beneficiaries' equity 4,108,000 4,287,000
------------ ------------
Total liabilities and beneficiaries' equity $ 11,052,000 $ 8,515,000
============ ============
The accompanying notes are an integral part of
these financial statements.
Page 3 of 13
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GRUBB & ELLIS REALTY INCOME TRUST, LIQUIDATING TRUST
STATEMENTS OF INCOME AND EXPENSE
(UNAUDITED)
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Quarter Ended Six Months Ended
----------------------------- -----------------------------
June 30, June 30, June 30, June 30,
1996 1995 1996 1995
----------- ----------- ----------- -----------
Income :
Rental income $ 197,000 $ 273,000 $ 394,000 $ 517,000
Short-term investment interest
and other income 0 9,000 -- 22,000
----------- ----------- ----------- -----------
197,000 282,000 394,000 539,000
----------- ----------- ----------- -----------
Expenses:
Real estate investment reserves -- 2,600,000 -- 2,600,000
Rental operating expenses 61,000 67,000 153,000 176,000
Interest on mortgage loan 159,000 67,000 289,000 154,000
Depreciation 47,000 40,000 94,000 80,000
Liquidating agent fee -- 12,000 -- 24,000
Directors' fees and expenses 4,000 4,000 8,000 8,000
General and administrative expenses 16,000 28,000 29,000 66,000
----------- ----------- ----------- -----------
Total expenses 287,000 2,818,000 573,000 3,108,000
----------- ----------- ----------- -----------
Net income (loss) $ (90,000) $(2,536,000) (179,000) $(2,569,000)
=========== =========== =========== ===========
Net income (loss) per unit $ (.03) $ (.90) $ (.06) $ (.92)
=========== =========== =========== ===========
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.
Page 4 of 13
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GRUBB & ELLIS REALTY INCOME TRUST, LIQUIDATING TRUST
STATEMENTS OF CASH FLOWS
(UNAUDITED)
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For the Six Months
Ending
-----------------------------
June 30, June 30,
1996 1995
----------- -----------
Cash flows from operating activities:
Net income (Loss): $ (179,000) $(2,569,000)
Adjustments to reconcile net income (Loss):
Real Estate Investment Reserves -- 2,600,000
Depreciation and amortization 47,000 80,000
Increase (decrease) in accounts payable and security deposits 128,000 37,000
Decrease (increase) in prepaid expenses and other assets (144,000) (29,000)
----------- -----------
Net cash provided by operating activities (148,000) 119,000
Cash flows from investing activities:
Property development costs (2,475,000) (1,690,000)
----------- -----------
Net cash provided by (used in) investing activities (2,475,000) (1,690,000)
Cash flows from financing activities:
Principal payments on mortgage loan payable -- (63,000)
Construction loan proceeds 2,588,000 -- __
----------- -----------
Net cash used in financing activities 2,588,000 (63,000)
----------- -----------
Net increase (decrease) in cash and cash equivalents (35,000) (1,634,000)
Cash and cash equivalents, beginning of period 64,000 1,790,000
----------- -----------
Cash and cash equivalents, end of period $ 29,000 $ 156,000
=========== ===========
Supplementary information:
Cash paid for interest $ 136,000 $ 123,000
=========== ===========
The accompanying notes are an integral part of
these financial statements.
Page 5 of 13
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GRUBB & ELLIS REALTY INCOME TRUST, LIQUIDATING TRUST
NOTES CONDENSED TO 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 remains the same, the
disposition plans for the Trust's remaining property, the Vintner Square
Shopping Center (formerly the Livermore Arcade Shopping Center), are such
that the Trust's liquidation period has extended beyond May 1995, for a
period of approximately one year.
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 six-month period ended June 30, 1996 are
not necessarily indicative of the results to be expected for the full
year.
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GRUBB & ELLIS REALTY INCOME TRUST, LIQUIDATING TRUST
NOTES CONDENSED TO FINANCIAL STATEMENTS
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3. Net Real Estate Investment:
As of June 30, 1996, the Trust's remaining real estate asset is the
Vintner Square Shopping Center.
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) $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 provides 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 include 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 calls for the
completion of 20,000 sq. ft of new shop space at various intervals from
May 24, 1996 to October 7, 1996. The rehabilitation of the original
undemolished shop space and the existing Safeway and Long's stores is
anticipated to be completed by July 31, 1996.
The Trust has also developed an estimate of the shopping center's future
market value after 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.
Page 7 of 13
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GRUBB & ELLIS REALTY INCOME TRUST, LIQUIDATING TRUST
NOTES CONDENSED TO FINANCIAL STATEMENTS
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3. Net Real Estate Investment, continued:
As of June 30, 1996 and 1995, net real estate investment consisted of the
following:
1996 1995
------------ ------------
Land $ 5,795,000 $ 5,975,000
Buildings and improvements 4,026,000 4,514,000
Development costs 4,395,000 204,000
------------ ------------
14,216,000 10,693,000
Less: Accumulated depreciation (1,308,000) (1,120,000)
------------ ------------
12,908,000 9,753,000
Less:
Buildings demolition reserve (539,000) (1,300,000)
Realizable value reserve (1,556,000) (1,300,000)
------------ ------------
$ 10,869,000 $ 6,973,000
============ ============
4. 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 is being
used to fund the development of the Vintner Square Shopping Center. The
new financing agreement extends through June 1, 1998 and requires
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 loan is collateralized by the
shopping center real property and the rents derived therefrom.
Additionally, certain reserve accounts are to be established including
an interest reserve and a working capital reserve which further
collateralize the loan. The note terms require 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 stipulates that the lender will
participate in sale proceeds in excess of certain stated amounts.
Restrictive covenants associated with the financing preclude the payment
of dividends until the loan is repaid.
Page 8 of 13
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GRUBB & ELLIS REALTY INCOME TRUST, LIQUIDATING TRUST
NOTES CONDENSED TO FINANCIAL STATEMENTS
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5. Commitments:
In connection with the rehabilitation and expansion of the shopping
center (see Note 4), the Company has entered into a construction
contract with a general contractor aggregating approximately $2,232,000.
The Trust also entered into another contract with a separate general
contractor in the amount of $1,878,000 for additional construction
related to the rehabilitation and expansion project.
Page 9 of 13
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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 increased from December 31, 1995 to June 30, 1996
by $2,428,000 from construction improvements to the Vintner Square Shopping
Center.
Mortgage loan payable increased from December 31, 1995 to June 30 by $2,588,000
resulting from construction loan draws to pay for previously incurred
development costs for the shopping center redevelopment project.
Results of Operations:
Six Months Ended June 30, 1996 Compared to the Six Months Ended June 30,
1995:
A $179,000 loss was recorded in the six months ended June 30, 1996 as
compared with a loss of $2,569,000 in the comparable period in 1995,
primarily because of the reserves described above which were taken in the
second quarter, 1995.
Rental income decreased during the period as did rental operating expenses
due to the decrease in occupancy in the Center resulting from lease
terminations from tenants that had occupied space that was demolished in
the redevelopment program.
General and administrative expenses continued to declined as a result of
effort to eliminate all but absolutely essential legal, accounting,
management and reporting expenses.
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Three Months Ended June 30, 1996 compared to the Three Months Ended June 30,
1995:
A $89,000 loss was recorded in the three months ended June 30, 1996 as compared
with a loss of $2,536,000 in the comparable period in 1995, as a result of
reserves described above that were taken in the second quarter, 1995.
Mortgage loan interest increased $92,000 during the period resulting from
additional interest expense from construction loan draws taken for the
redevelopment program.
General and administrative expenses continued to declined as a result of effort
to eliminate all but absolutely essential legal, accounting, management and
reporting expenses.
Potential Factors Affecting Future Operating Results:
Pursuant to the plan of liquidation, the Trust intends to sell the Shopping
Center, and distribute all remaining assets as soon as it is possible to do so.
Completion of the new construction and the renovation of existing space is
anticipated to be October, 1996 and environmental clearance has been received
from the Regional Water Quality Control Board. The environmental issue has
impacted the sale of the property since 1990 and now that it is resolved the
completion of the sale is possible. In anticipation of WQCB clearance an
aggressive sales effort was undertaken commencing in January, 1996. Prospective
purchasers were contacted and given detailed information enabling them to
analyze the property's value in order to make purchase proposals.
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 HAS
PLACED A $414,00 NON-REFUNDABLE DEPOSIT IN ESCROW.
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PART II - OTHER INFORMATION
Items 1 through 4 are not applicable.
Item 5, Other Information
On July 7, 1995, the Trust entered into a new loan agreement in the amount of
$8,500,000 for the purpose of retiring the existing first mortgage loan payable
and to fund the redevelopment of the Shopping Center. This agreement extends
through June 1, 1998 and requires interest payments of 11% per annum, plus an
additional 2% per annum if certain target net operating income levels are
achieved during the first 18 months of the loan term. The loan is collateralized
by the Shopping Center real property and the rents derived therefrom.
Additionally, certain reserve accounts are to be established including an
interest reserve and a working capital reserve which further collateralize the
loan. The note terms require a preferred return payable to the lender from
excess cash flows as defined, including a specified participation and rate of
return associated with the sale or refinancing of the property. The note
stipulates that the lender will participate in the sale proceeds in excess of
certain stated amounts. Restrictive covenants associated with the financing
precluded distributions to unitholders.
In April, 1996 the Trustees determined that it would be necessary to provide
additional financing over the $8,500,000 construction loan in the amount of
$350,000 in order to pay for the costs of the project which have increased by
that amount due to unanticipated cost overruns in the demolition of portions of
the original buildings and increases in the cost of the 20,000 sq. ft of new
shop space. In April, 1996 the Trustees loaned $100,000 to the Trust for this
purpose and additional financing is being negotiated with the existing
construction lender for the balance. The Trustees believe sufficient funds are
available to complete the entire project including the cost of installing
improvements for the tenants.
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:
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Harold A. Ellis, Jr., Trustee
Dated: August 1, 1996