UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

 

Commission file number 1-12879

GRIFFIN INDUSTRIAL REALTY, INC.

(Exact name of registrant as specified in its charter)

 

(212) 218-7910

(Registrant’s telephone number, including area code)

SECURITIES REGISTERED PURSUANT TO SECTION 12 (b) OF THE ACT:

 

SECURITIES REGISTERED PURSUANT TO SECTION 12 (g) OF THE ACT: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined by Rule 405 of the Securities Act. Yes ☐  No ☒

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐  No ☒

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 ☒  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 during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒  No ☐

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  ☒

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 Act). Yes ☐  No ☒

The aggregate market value of the Common Stock held by non-affiliates of the registrant was approximately $86,495,000 based on the closing sales price on The NASDAQ Stock Market LLC on May 31, 2016, the last business day of the registrant’s most recently completed second quarter. Shares of Common Stock held by each executive officer, director and persons or entities known to the registrant to be affiliates of the foregoing have been excluded in that such persons may be deemed to be affiliates. This assumption regarding affiliate status is not necessarily a conclusive determination for other purposes.

As of February 6, 2017, 5,028,535 shares of common stock were outstanding.

 

 

FORWARD‑LOOKING STATEMENTS

This Annual Report on Form 10‑K (the “Annual Report”) contains forward‑looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). For this purpose, any statements contained in this Annual Report that relate to future events or conditions, including without limitation, the statements in Part I, Item 1. “Business” and Item 1A. “Risk Factors” and in Part II Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” as well as located elsewhere in this Annual Report regarding industry prospects or Griffin Industrial Realty, Inc.’s (“Griffin”) plans, expectations, or prospective results of operations or financial position, may be deemed to be forward‑looking statements. Without limiting the foregoing, the words “believes,” “anticipates,” “plans,” “expects,” and similar expressions are intended to identify forward‑looking statements. Such forward‑looking statements represent management’s current expectations and are inherently uncertain. There are a number of important factors that could materially impact the value of Griffin’s common stock or cause actual results to differ materially from those indicated by such forward‑looking statements. Such factors include: adverse economic conditions and credit markets; a downturn in the commercial and residential real estate markets; risks associated with concentration of real estate holdings; risks associated with entering new real estate markets; risks associated with competition with other parties for acquisition of properties; risks associated with the use of third-party managers for day-to-day property management; risks relating to reliance on lease revenues; risks associated with nonrecourse mortgage loans; risks of financing arrangements that include balloon payment obligations; risks associated with failure to effectively hedge against interest rate changes; risks associated with volatility in the capital markets; risks associated with increased operating expenses; potential environmental liabilities; governmental regulations; inadequate insurance coverage; risks of environmental factors; risks associated with the cost of raw materials or energy costs; risks of investing in a foreign company; risks associated with deficiencies in disclosure controls and procedures or internal control over financial reporting; risks associated with information technology security breaches; litigation risks; and the concentrated ownership of Griffin common stock by members of the Cullman and Ernst families. These and the important factors discussed under the caption “Risk Factors” in Part I, Item 1A of this Annual Report for the fiscal year ended November 30, 2016, among others, could cause actual results to differ materially from those indicated by forward‑looking statements made in this Annual Report and presented elsewhere by management from time to time. Any such forward‑looking statements represent management’s estimates as of the date of this Annual Report. While Griffin may elect to update such forward‑looking statements at some point in the future, Griffin disclaims any obligation to do so, even if subsequent events cause Griffin’s views to change. These forward‑looking statements should not be relied upon as representing Griffin’s views as of any date subsequent to the date of this Annual Report.

PART I

ITEM 1.  BUSINESS.

Griffin Industrial Realty, Inc. (“Griffin”) is a real estate business principally engaged in developing, managing and leasing industrial/warehouse properties, and to a lesser extent, office/flex properties. Periodically, Griffin may 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. Griffin seeks to add to its property portfolio through the acquisition and development of land or the purchase of buildings. Prior to May 13, 2015, Griffin was known as Griffin Land & Nurseries, Inc. On May 13, 2015, Griffin changed its name to better reflect its ongoing real estate business and focus on industrial/warehouse properties after the sale in fiscal 2014 of the landscape nursery business that Griffin had operated through its wholly owned subsidiary, Imperial Nurseries, Inc. (see Landscape Nursery Business on page 10).

As of November 30, 2016, Griffin owned thirty‑three buildings comprising approximately 3,297,000 square feet that was 93% leased. Approximately 87% of Griffin’s currently owned square footage is industrial/warehouse space, with the balance principally being office/flex space. As of November 30, 2016, approximately 96% of Griffin’s industrial/warehouse space was leased and approximately 74% of Griffin’s office/flex space was leased. Subsequent to November 30, 2016, Griffin completed the signing of two leases for industrial/warehouse space aggregating approximately 104,000 square feet, resulting in Griffin’s total portfolio being approximately 96% leased, with industrial/warehouse space being approximately 99% leased. As stated in “Item 2. Properties” below, Griffin uses nonrecourse mortgages to finance some of its real estate development activities, and as of November 30, 2016, approximately $111.1 million was outstanding under such loans. In fiscal 2016, Griffin’s profit from leasing activities (which Griffin defines as rental revenue less operating expenses of rental properties) was approximately $18.2 million, while debt service on Griffin’s nonrecourse mortgages was approximately $7.3 million.

Through fiscal 2009, all of Griffin’s buildings were located in the north submarket of Hartford, Connecticut. In fiscal 2010, Griffin started the expansion of its real estate holdings to areas outside of Hartford by purchasing an industrial building and undeveloped land in the Lehigh Valley of Pennsylvania (see Lehigh Valley on page 7). Griffin expects to continue to seek to acquire and develop properties that are consistent with its core strategy of developing and leasing industrial properties. Griffin expects that most of such potential acquisitions of either undeveloped land or land and buildings will likely be located outside of the Hartford area.

A national real estate services company reported that as of December 31, 2016, there was approximately 73.5 million square feet of industrial/warehouse space in the greater Hartford market and that the overall vacancy rate in the greater Hartford industrial market decreased from 12.3% at the end of 2014 to 9.2% at the end of 2016, with approximately 1.0 million square feet of net absorption in 2016. The greater Hartford industrial market had been stagnant in the years 2012 through 2014, but improved in 2015 and 2016. In the greater Hartford area, there are a number of fully or partially vacant industrial/warehouse buildings that are competitive with Griffin’s industrial/warehouse buildings. Griffin believes that it benefits from its reputation as a stable landlord with sufficient resources to meet its obligations and deliver space to tenants timely and in accordance with the terms of their lease agreements.

A national real estate services company reported that as of December 31, 2016, there was approximately 74.2 million square feet of industrial/warehouse space in the Lehigh Valley region of Pennsylvania, and that the vacancy rate in that market was 5.2% at that date, with a net absorption of approximately 7.6 million square feet in 2016. The Lehigh Valley industrial market has experienced strong growth and leasing activity during the past two years with an increase of approximately 11.5 million square feet of industrial/warehouse space.

All of Griffin’s office/flex space is in the north submarket of Hartford. A national real estate services company reported that as of December 31, 2016, there was approximately 24.6 million square feet of office space in the greater Hartford market, including approximately 14.9 million square feet of suburban office space. They also reported that the overall vacancy rate has remained at approximately 16% over the past two years, with the vacancy rate in the north submarket being 21% during that period. As of November 30, 2016, square footage of office/flex buildings comprised approximately 13% of Griffin’s total square footage, and Griffin expects that its office/flex space will continue to

become a smaller percentage of its total space as Griffin expects to focus on the growth of its industrial/warehouse building portfolio either through acquisition of fully or partially leased buildings, development of buildings on land currently owned or to be acquired, or both.

Additional capacity or an increase in vacancies in either the industrial or office markets could adversely affect Griffin’s operating results by potentially resulting in longer times to lease vacant space, eroding lease rates in Griffin’s properties or hindering renewals by existing tenants. There can be no assurances as to the directions of the Hartford and Lehigh Valley real estate markets in the near future.

In fiscal 2016, Griffin completed and placed in service an approximately 252,000 square foot industrial building (“5210 Jaindl”) in the Lehigh Valley of Pennsylvania, thus completing the development of an approximately 50 acre parcel of undeveloped land acquired in December 2013. As of November 30, 2016, Griffin had entered into two leases for 5210 Jaindl resulting in that building being fully leased. Both of those leases are expected to become effective in the first half of fiscal 2017. In addition to the two leases at 5210 Jaindl, Griffin entered into several other leases aggregating approximately 240,000 square feet in fiscal 2016, all but approximately 21,000 square feet of which was for industrial/warehouse space. Included in the fiscal 2016 leasing activity was a lease for approximately 101,000 square feet in 4270 Fritch Drive (“4270 Fritch”), an approximately 303,000 square foot industrial/warehouse building in the Lehigh Valley built in fiscal 2014. As of November 30, 2016, Griffin’s five Lehigh Valley industrial/warehouse buildings aggregating approximately 1,183,000 square feet were fully leased. In addition to the Lehigh Valley leasing, Griffin completed several leases aggregating approximately 139,000 square feet for its Connecticut properties, including approximately 118,000 square feet of industrial/warehouse space, mostly in New England Tradeport (“NE Tradeport”), Griffin’s master‑planned industrial park near Bradley International Airport and Interstate 91, located in Windsor and East Granby, Connecticut. In fiscal 2016, Griffin also extended leases aggregating approximately 248,000 square feet, most of which was NE Tradeport industrial/warehouse space. Also in fiscal 2016, leases for approximately 132,000 square feet expired, which included a lease for an entire approximately 57,000 square foot NE Tradeport industrial/warehouse building that was subsequently re-leased during the year. The net effect of these transactions was an increase of approximately 410,000 square feet in industrial/warehouse space under lease as of November 30, 2016 as compared to November 30, 2015 and a decrease of approximately 51,000 square feet in office/flex space under lease as of November 30, 2016 as compared to November 30, 2015.

In fiscal 2015, Griffin completed and placed in service an approximately 280,000 square foot industrial building (“5220 Jaindl”) in the Lehigh Valley of Pennsylvania. The tenant that initially leased approximately 196,000 square feet in 5220 Jaindl when the building was placed in service subsequently exercised its option under the lease to lease the balance of the building. Rental revenue on the additional space commenced in fiscal 2016. In addition to fully leasing 5220 Jaindl in fiscal 2015, Griffin completed several other leases aggregating approximately 191,000 square feet, of which approximately 90% was for industrial/warehouse space and approximately 10% was for office/flex space. In fiscal 2015, several leases aggregating approximately 52,000 square feet of office/flex space expired and were not renewed and a lease of approximately 31,000 square feet of industrial/warehouse space was terminated early for which Griffin received a lease termination fee. The net effect of these transactions was an increase of approximately 421,000 square feet in industrial/warehouse space under lease as of November 30, 2015 as compared to November 30, 2014 and a decrease of approximately 33,000 square feet in office/flex space under lease as of November 30, 2015 as compared to November 30, 2014. In fiscal 2015, Griffin also renewed and extended several leases aggregating approximately 326,000 square feet of industrial/warehouse space and approximately 71,000 square feet of office/flex space.

In fiscal 2014, Griffin entered into three new leases of industrial/warehouse space for an aggregate of approximately 371,000 square feet and three new leases of office/flex space for an aggregate of approximately 38,000 square feet. The leasing of industrial/warehouse space in fiscal 2014 included a five year lease for approximately 202,000 square feet at 4270 Fritch. In fiscal 2014, Griffin also entered into a ten year full building lease for approximately 138,000 square feet in one of its industrial buildings in NE Tradeport. In fiscal 2014, leases of industrial/warehouse space aggregating approximately 43,000 square feet expired and were not renewed, and a lease of industrial/warehouse space increased by approximately 47,000 square feet as the remaining vacant space in the building was added to the leased space in accordance with the lease terms. The net effect of these transactions was an increase of approximately 374,000 square feet in industrial/warehouse space under lease during fiscal 2014, while office/flex space under lease was essentially unchanged during fiscal 2014. Griffin also renewed and extended several leases aggregating approximately 27,000 square feet of office/flex space and approximately 11,000 square feet of industrial/warehouse space in fiscal 2014.

Periodically, Griffin may sell certain portions of its undeveloped land that it has owned for an extended time period and the use of which does not fit into Griffin’s core strategy of developing and leasing industrial and commercial properties. Such sale transactions may take place either before or after obtaining development approvals and building basic infrastructure.

In fiscal 2016, Griffin completed one land sale for approximately $3.8 million. In each of fiscal 2015 and fiscal 2014, Griffin completed one land sale for approximately $0.6 million. In fiscal 2013, Griffin completed a sale of approximately 90 acres of undeveloped land in Windsor, Connecticut (the “Windsor Land Sale”) for cash proceeds of approximately $9.0 million, before transaction expenses. The land sold under the Windsor Land Sale is part of an approximately 268 acre parcel of undeveloped land in Bloomfield and Windsor, Connecticut known as Phoenix Crossing that has been held by Griffin for an extended time period. Under the terms of the Windsor Land Sale, Griffin and the buyer were each required to construct roadways connecting the land parcel that was sold to existing town roads. The roads constructed by the buyer and the road being constructed by Griffin will become new town roads, thereby providing 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, under which the revenue and gain on sale are recognized as the costs related to the property sold are incurred. Griffin recognized revenue of approximately $0.6 million, approximately $2.5 million and approximately $3.1 million from the Windsor Land Sale in fiscal 2016, fiscal 2015 and fiscal 2014, respectively. As of November 30, 2016, approximately $0.1 million of revenue from the Windsor Land Sale remains to be recognized.

The weakness in the residential real estate market has adversely affected Griffin’s residential real estate development activities. The continued weakness of the residential real estate market could result in lower selling prices for Griffin’s land intended for residential use or delay the sale of such land.

Griffin’s development of its land is affected by regulatory and other constraints. Subdivision and other residential development may also be affected by the potential adoption of initiatives meant to limit or concentrate residential growth. Industrial/warehouse development activities on Griffin’s undeveloped land may also be affected by traffic considerations, potential environmental issues, community opposition and other restrictions to development imposed by governmental agencies.

Griffin maintains a corporate website at www.griffinindustrial.com. Griffin’s Annual Report on Form 10‑K, quarterly reports on Form 10‑Q, current reports on Form 8‑K and the proxy statement for Griffin’s Annual Meeting of Stockholders can be accessed through Griffin’s website or through the SEC website at www.sec.gov. Griffin will provide electronic or paper copies of its foregoing filings free of charge upon request. Griffin was incorporated in 1970.

Industrial/Warehouse Properties

Connecticut

A significant portion of Griffin’s industrial development in Connecticut has been focused on NE Tradeport, where Griffin has built and currently owns thirteen industrial/warehouse buildings aggregating approximately 1,466,000 square feet, of which approximately 92% was leased as of November 30, 2016. Subsequent to November 30, 2016, Griffin entered into two leases in NE Tradeport for industrial/warehouse space aggregating approximately 104,000 square feet, resulting in Griffin’s portfolio of industrial/warehouse space in Connecticut being approximately 99% leased.

In NE Tradeport, Griffin holds the rights to 795,000 square feet available for development under the State Traffic Certificate (“STC”) which relates to four approved building sites on approximately 70 acres and an approved addition to one of Griffin’s existing buildings. Griffin owns an additional 95 acres of undeveloped land within NE Tradeport, 60 acres of which are located in Windsor and the abutting 35 acres of which are located in East Granby. There are no STC or other approvals currently in place (other than zoning in the case of Windsor) for the development of this remaining land for industrial use. Griffin believes that additional infrastructure improvements, which may be significant, may be required to obtain approvals to develop portions of this land, particularly the portions in East Granby. Griffin expects to continue to direct much of its real estate efforts in Connecticut on the construction and leasing of its industrial/warehouse facilities at NE Tradeport.

In fiscal 2016, Griffin leased approximately 87,000 square feet in NE Tradeport, including a new full building lease of approximately 57,000 square feet that replaced an existing full building lease that expired and was not renewed during fiscal 2016. Also in fiscal 2016, Griffin renewed several leases aggregating approximately 222,000 square feet. The rental rates for leases in NE Tradeport that were renewed in fiscal 2016 were, on average, essentially unchanged from the rental rates of the expiring leases. Management believes that the rental rates on the two NE Tradeport leases aggregating approximately 33,000 square feet that are scheduled to expire in fiscal 2017 are slightly above the market rates for similar space.

In addition to its industrial/warehouse buildings in NE Tradeport, Griffin owns a 165,000 square foot industrial building (“1985 Blue Hills”) in Griffin Center, Griffin’s office park in Windsor and Bloomfield, Connecticut, that is being used principally as a data center and call center, an approximately 31,000 square foot industrial/warehouse building (“131 Phoenix”) in Bloomfield, Connecticut that is being used principally as a research and development facility and an approximately 18,000 square foot industrial/warehouse building (“210 West Newberry”) in Griffin Center South, Griffin’s office/flex park in Bloomfield, Connecticut. 131 Phoenix is on an approximately 5 acre site that is part of Phoenix Crossing. In fiscal 2013, Griffin sold approximately 90 acres of undeveloped Phoenix Crossing land in the Windsor Land Sale. As of November 30, 2016, Griffin owns approximately 159 acres of undeveloped land in Phoenix Crossing that is zoned for industrial and commercial development. On December 23, 2016, Griffin entered into an agreement to sell approximately 67 acres of its undeveloped land in Phoenix Crossing for approximately $10.25 million. Completion of this transaction is subject to a number of factors, including the buyer obtaining all necessary final permits from governmental authorities for development plans of the site and the buyer receiving municipal and state economic development incentives it deems adequate. There is no guarantee that this transaction will be completed under its current terms, or at all.

As of November 30, 2016, approximately $66.2 million was invested (net book value) by Griffin in its Connecticut industrial/warehouse buildings, approximately $4.4 million was invested (net book value) by Griffin in the undeveloped NE Tradeport land and approximately $4.2 million was invested in the undeveloped Phoenix Crossing land, including the acreage under contract to be sold (see above). As of November 30, 2016, twelve of Griffin’s Connecticut industrial/warehouse buildings were mortgaged for an aggregate of approximately $54.0 million and 210 West Newberry was included in the collateral for Griffin’s $15.0 million revolving line of credit (see below). Subsequent to November 30, 2016, Griffin agreed to terms on a nonrecourse mortgage loan on two NE Tradeport industrial/warehouse buildings aggregating approximately 275,000 square feet that were not mortgaged as of November 30, 2016. Completion of this proposed new mortgage loan is subject to a number of contingencies, including the entry into a definitive loan agreement. There is no guarantee that this transaction will be completed under its current terms, or at all.

A summary of Griffin’s Connecticut industrial/warehouse square footage owned and leased at the end of each of the past three fiscal years and leases in Griffin’s Connecticut industrial/warehouse buildings scheduled to expire during each of the next three fiscal years are as follows:

 

 

 

Lehigh Valley

In fiscal 2010, Griffin completed its first acquisition of property outside of the Hartford, Connecticut area, when it acquired a fully leased approximately 120,000 square foot industrial building at 871 Nestle Way (“871 Nestle”) in Breinigsville, Pennsylvania, which is located in the Lehigh Valley. Also in fiscal 2010, Griffin acquired approximately 51 acres of undeveloped land in Lower Nazareth, Pennsylvania, a major industrial area of the Lehigh Valley, which Griffin named Lehigh Valley Tradeport I. In fiscal 2012, Griffin completed construction, on speculation, of 4275 Fritch Drive (“4275 Fritch”), an approximately 228,000 square foot industrial building, the first of the two buildings built in Lehigh Valley Tradeport I. In fiscal 2013, Griffin entered into a five‑year full building lease of this building. In fiscal 2014, Griffin completed construction, also on speculation, of 4270 Fritch, an approximately 303,000 square foot industrial building, that was the second of two buildings built in Lehigh Valley Tradeport I. In fiscal 2014, Griffin entered into a five year lease of approximately 201,000 square feet of 4270 Fritch and the lease became effective in the fiscal 2015 second quarter upon completion of tenant improvements. In fiscal 2016, Griffin leased the remaining approximately 102,000 square feet of 4270 Fritch. In fiscal 2015, Griffin completed construction of 5220 Jaindl, the first of the two industrial/warehouse buildings built on the undeveloped land in Hanover Township of the Lehigh Valley acquired in December 2013, known as Lehigh Valley Tradeport II. In fiscal 2015, Griffin leased approximately 196,000 square feet of 5220 Jaindl. The lease commenced at the beginning of the fiscal 2015 fourth quarter, and in November 2015, the tenant exercised its option to lease the balance of the building. Rental revenue for the remaining space in 5220 Jaindl commenced in fiscal 2016. In fiscal 2016, Griffin completed construction of 5210 Jaindl, an approximately 252,000 square foot industrial/warehouse building that was the second building built in Lehigh Valley Tradeport II. Griffin leased 5210 Jaindl in fiscal 2016, with rental revenue on the leases for 5210 Jaindl expected to begin in the first half of fiscal 2017.

As of November 30, 2016, Griffin owned five fully leased industrial/warehouse buildings in the Lehigh Valley aggregating approximately 1,183,000 square feet. Approximately $65.5 million was invested (net book value) in these buildings as of November 30, 2016. All five Lehigh Valley industrial/warehouse buildings are mortgaged under three separate nonrecourse mortgage loans for a total of approximately $51.1 million as of November 30, 2016.

A summary of Griffin’s Lehigh Valley industrial/warehouse square footage owned and leased at the end of each of the past three fiscal years and leases in Griffin’s Lehigh Valley industrial/warehouse buildings scheduled to expire during each of the next three fiscal years are as follows:

 

 

On March 23, 2016, Griffin entered into an Agreement of Sale and Purchase (the “East Allen Purchase Agreement”) to acquire an approximately 31 acre site in East Allen Township, Northampton County, Pennsylvania for development of an industrial/warehouse building. Subsequently, Griffin exercised its right to terminate the East Allen Purchase Agreement based on its due diligence findings. After the East Allen Purchase Agreement was terminated, Griffin has continued negotiations with the seller to reach a new agreement. Completion of a new purchase agreement is uncertain at this time.

On May 4, 2016, Griffin entered into an Agreement of Sale and Purchase, as amended (the “Macungie Purchase Agreement”), to acquire, for a purchase price of $1.8 million, an approximately 14 acre site in Upper Macungie Township, Lehigh County, Pennsylvania for development of an approximately 134,000 square foot industrial/warehouse building. A closing on the land acquisition contemplated by the Macungie Purchase Agreement is subject to significant contingencies, including Griffin obtaining all governmental approvals for its planned development of the land that would be acquired. There is no guarantee that the land acquisition as contemplated under the Macungie Purchase Agreement will be completed under its current terms, or at all.

Griffin may seek to acquire additional properties and/or undeveloped land parcels to expand the industrial/warehouse portion of its real estate business. Griffin continues to examine potential properties for acquisition in New England, the Mid‑Atlantic states and other areas.

Office/Flex Properties

Griffin’s office/flex properties are located in Griffin Center in Windsor and Bloomfield, Connecticut and Griffin Center South in Bloomfield. In Griffin Center, Griffin currently owns two multi‑story office buildings that have an aggregate of approximately 161,000 square feet, a single story office building of approximately 48,000 square feet and a small restaurant building of approximately 7,000 square feet. In Griffin Center South, Griffin currently owns eight office/flex buildings with an aggregate of approximately 217,000 square feet of single story office/flex space. As of November 30, 2016, approximately 319,000 square feet of Griffin’s office/flex square footage was leased, comprising approximately 74% of Griffin’s total office/flex space.

In fiscal 2016, Griffin entered into two new leases for office/flex space aggregating approximately 21,000 square feet, including a lease for approximately 16,000 square feet in the single story Griffin Center office building that resulted in that building becoming fully leased. Also in fiscal 2016, two leases of office/flex space aggregating approximately 26,000 square feet were renewed, while leases aggregating approximately 72,000 square feet of office/flex space expired. The tenant of one of the expired office/flex leases (approximately 21,000 square feet) did not renew because they entered into a full building lease for 131 Phoenix, Griffin’s approximately 31,000 square foot industrial/warehouse building in Phoenix Crossing. The rental rates for office/flex leases that were renewed in fiscal 2016 were, on average, approximately 5% lower than the rental rates of the expiring leases. Management believes that the rental rates on the three leases of office/flex space aggregating approximately 49,000 square feet that are scheduled to expire in fiscal 2017 are slightly above the market rates for similar space. Subsequent to November 30, 2016, Griffin entered into a ten year full building lease for the approximately 23,000 square feet at 206 West Newberry Road. The full building tenant there had previously informed Griffin that it would not be renewing its lease when it expires in fiscal 2017. The rental rate of the new lease is equivalent to the rate on the expiring lease; however, Griffin expects to incur higher operating expenses in servicing the new tenant than have been incurred in servicing the existing tenant.

In the fiscal 2016 fourth quarter, Griffin closed on the sale of approximately 29 acres of an approximately 45 acre parcel of the undeveloped land in Griffin Center for approximately $3.8 million. An additional approximately 15 acres of that land parcel, much of which is wetlands with very limited development potential, was donated to an affiliate of the purchaser at the time of the closing.

Currently there are approximately 162 acres of undeveloped land in Griffin Center and approximately 68 acres of undeveloped land in Griffin Center South that are owned by Griffin. As of November 30, 2016, approximately $18.4 million was invested (net book value) in Griffin’s office/flex buildings and approximately $1.6 million was invested by Griffin in the undeveloped land in Griffin Center and Griffin Center South. Griffin’s two multi‑story office buildings in Griffin Center are mortgaged for approximately $6.0 million as of November 30, 2016, and Griffin’s single story office building in Griffin Center and the eight single-story office/flex buildings and industrial/warehouse building in Griffin Center South are the collateral for Griffin’s $15.0 million revolving line of credit. There were no borrowings under the revolving line of credit as of November 30, 2016.

A summary of Griffin’s office/flex square footage owned and leased at the end of each of the past three fiscal years and leases in Griffin’s office/flex buildings scheduled to expire (excluding the space where a replacement lease has been secured) during each of the next three fiscal years are as follows:

 

 

Residential Developments

Simsbury, Connecticut

Several years ago, Griffin filed plans for the creation of a residential community, called Meadowood, on a 363 acre site in the Town of Simsbury, Connecticut (“Simsbury”). After several years of litigation with the town regarding this proposed residential development, a settlement was reached. The settlement terms included, among other things, approval for up to 296 homes, certain remediation measures and offsite road improvements to be performed by Griffin and the purchase by Simsbury of a portion of the Meadowood land for open space. The sale of land to Simsbury closed in fiscal 2008. In fiscal 2012, Griffin performed a portion of the required remediation work on the site and completed the required offsite road improvements. In fiscal 2014, Griffin completed the required remediation work. As of November 30, 2016, the book value of the land for this development, including design, development and legal costs, was approximately $8.5 million. Griffin is continuing to evaluate its plans for Meadowood.

Griffin owns another approximate 432 acres of undeveloped land in Simsbury, portions of which are zoned for residential use and other portions of which are zoned for industrial use. Not all of this land is developable. The land currently zoned for industrial use is probably more suited to commercial or mixed‑use development. Griffin may seek to develop or sell such land.

Suffield, Connecticut

In fiscal 2006, Griffin completed the infrastructure for a fifty lot residential subdivision in Suffield, Connecticut called Stratton Farms. Griffin sold twenty‑five residential lots in Stratton Farms to a local homebuilder in fiscal 2006 and fiscal 2007. In fiscal 2010, Griffin entered into an agreement with a privately owned regional homebuilder under which in exchange for a payment of $100,000, the homebuilder obtained an option to purchase the remaining twenty‑five residential lots of Stratton Farms. The option agreement terminated after four lots were sold. Subsequently, Griffin sold one Stratton Farms residential lot in fiscal 2013. As of November 30, 2016, Griffin held twenty Stratton Farms residential lots. The book value for Griffin’s Stratton Farms holdings was approximately $1.1 million at November 30, 2016.

Other

Concurrently with the sale of the landscape nursery business effective January 8, 2014, Imperial Nurseries, Inc. (“Imperial”), Griffin and Monrovia Connecticut LLC (“Monrovia”) entered into a Lease and Option Agreement, which was amended in fiscal 2016 (as amended, the “Imperial Lease”) pursuant to which Monrovia leased Imperial’s production nursery located in Granby and East Granby, Connecticut (the “Connecticut Farm”) for a ten year period, with

options to extend for up to an additional fifteen years exercisable by Monrovia. The Imperial Lease also grants Monrovia an option to purchase the land, land improvements and other operating assets that were used by Imperial on the Connecticut Farm during the first thirteen years of the lease period for $9.5 million, or $7.0 million if only a certain portion of the Connecticut Farm is purchased, subject in each case to certain adjustments as provided for in the Imperial Lease.

Prior to the fiscal 2009 third quarter, Imperial operated a production nursery in Quincy, Florida (the “Florida Farm”). In fiscal 2009, Imperial shut down its growing operations on the Florida Farm and leased that facility to a grower of landscape nursery plants. In fiscal 2015, the tenant exercised its option to acquire the Florida Farm, but subsequently informed Imperial that it would not close the acquisition. As a result, Griffin retained the tenant’s deposit of $400,000 and the Florida Farm lease was extended through April 30, 2016. After the expiration of that lease, Griffin then entered into a new lease of the Florida Farm with another grower of landscape nursery plants that started July 1, 2016. The new lease of the Florida Farm has a three year term and contains an option for the tenant to purchase the Florida Farm at any time during the lease period for a purchase price between $3.4 million and $3.9 million depending upon the date of sale.

In fiscal 2016, Griffin leased approximately 650 acres of undeveloped land in Connecticut and Massachusetts to local farmers. Approximately 550 acres and 485 acres were leased to local farmers in fiscal 2015 and fiscal 2014, respectively. The revenue generated from the leasing of farmland is not material to Griffin’s total revenue.

On January 25, 2016, Griffin entered into an Option Purchase Agreement (the “Option Agreement”) whereby Griffin granted the buyer an exclusive option, in exchange for a nominal fee, to purchase approximately 280 acres of undeveloped land in Simsbury for approximately $7.7 million. The buyer may extend the option period up to three years upon payment of additional option fees. Subsequent to November 30, 2016, the buyer paid Griffin to extend the option period. The land subject to the Option Agreement does not have any of the approvals that would be required for the buyer’s planned use of the land. A closing on the land sale contemplated by the Option Agreement is subject to several significant contingencies, including the buyer securing contracts under a competitive bidding process that would require changes in the use of the land and obtaining local and state approvals for that planned use. There is no guarantee that the sale of undeveloped land as contemplated under the Option Agreement will be completed under its current terms, or at all.

Griffin is evaluating its other properties for development or sale in the future. Griffin anticipates that obtaining subdivision approvals for residential development in many of the towns where it owns residentially‑zoned land will be an extended process.

Landscape Nursery Business

Through January 7, 2014, Imperial operated a landscape nursery business that grew containerized plants on the Connecticut Farm for sale to independent retail garden centers and rewholesalers, whose main customers are landscape contractors. Imperial discontinued its nursery operations on January 8, 2014, when Griffin, Imperial and Monrovia entered into an Asset Purchase Agreement whereby Imperial’s inventory and certain of its assets were sold to Monrovia for approximately $0.7 million in cash, before transaction and severance costs, and a non‑interest bearing note receivable (which Griffin subsequently collected) of $4.25 million (the “Imperial Sale”). Pursuant to the terms of the Imperial Sale, Griffin and Imperial agreed to indemnify Monrovia for any potential environmental liabilities on the Connecticut Farm relating to periods prior to the effective date of the Imperial Sale.

Investments

Centaur Media plc

Centaur Media plc (“Centaur Media”) is a publicly traded company listed on the London Stock Exchange. As of November 30, 2016, Griffin held 1,952,462 shares of Centaur Media and accounts for its investment in Centaur Media as an available‑for‑sale security. Accordingly, changes in the fair value of Griffin’s investment in Centaur Media, including both changes in the stock price and changes in the foreign currency exchange rate, are not included in Griffin’s net income but are included in Griffin’s other comprehensive income. As of November 30, 2016, the fair value of Griffin’s investment in Centaur was approximately $1.0 million. In fiscal 2014, Griffin sold 500,000 shares of its Centaur Media common stock for total cash proceeds of approximately $566,000, net of transaction costs. Griffin did not sell any of its

stock in Centaur Media in fiscal 2015 and fiscal 2016. Griffin expects that it will sell its Centaur Media common stock when it believes sales terms are favorable.

Employees

As of November 30, 2016, Griffin employed 33 people on a full‑time basis. Presently, none of Griffin’s employees are represented by a union. Griffin believes that its relations with its employees are satisfactory.

Competition

The market for leasing industrial/warehouse space and office/flex space is highly competitive. Griffin competes for tenants with owners of numerous properties located in the portions of Connecticut, Massachusetts and the Lehigh Valley region of Pennsylvania in which Griffin’s real estate holdings are concentrated. Some of these competitors have greater financial resources than Griffin. Griffin’s real estate business competes on the bases of location, price, availability of space, convenience and amenities.

There is a great amount of competition for the acquisition of industrial/warehouse buildings and for the acquisition of undeveloped land for construction of such buildings. Griffin competes for the acquisition of industrial/warehouse properties with real estate investment trusts (“REITs”) and institutional investors, such as pension funds, private real estate investment funds, insurance company investment accounts, public and private investment companies, individuals and other entities engaged in real estate investment activities. Some of these competitors have greater financial resources than Griffin, and may be able to accept more risk, including risk related to the creditworthiness of tenants or the degree of leverage they may be willing to take on. Competitors for acquisitions may also have advantages from a lower cost of capital or greater operating efficiencies associated with being a larger entity.

Regulation: Environmental Matters

Under various federal, state and local laws, ordinances and regulations, an owner or operator of real estate may be required to investigate and clean up hazardous or toxic substances or petroleum product releases at such property and may be held liable to a governmental entity or to third parties for property damage and for investigation and cleanup costs incurred by such parties in connection with contamination. The cost of investigation, remediation or removal of such substances may be substantial, and the presence of such substances, or the failure to remediate properly such substances, may adversely affect the owner’s ability to sell or rent such property or to borrow using such property as collateral. In connection with the ownership (direct or indirect), operation, management and development of real estate properties, Griffin may be considered an owner or operator of such properties or as having arranged for the disposal or treatment of hazardous or toxic substances and, therefore, potentially liable for removal or remediation costs, as well as certain other related costs, including governmental fines and injuries to persons and property. The value of Griffin’s land may be affected by the presence of residual chemicals from the prior use of the land for farming, principally on a portion of the land that is intended for residential use. In the event that Griffin is unable to remediate adequately any of its land intended for residential use, Griffin’s ability to develop such property for its intended purposes would be materially affected.

Griffin periodically reviews its properties for the purpose of evaluating such properties’ compliance with applicable state and federal environmental laws. In connection with the Imperial Sale, Griffin has incurred a small amount of costs to remediate a small area of the Connecticut Farm that is leased to Monrovia under the Imperial Lease. As of the date of this Annual Report on Form 10‑K, Griffin is in discussions with the Connecticut Department of Energy and Environmental Protection (“DEEP”) regarding the recent findings of exceedances of certain residual pesticides on a limited portion of the Connecticut Farm being leased to Monrovia. At this time, Griffin does not anticipate experiencing, in the next twelve months, any material expense in complying with such laws. Griffin may incur remediation costs in the future in connection with its development operations. Such costs are not expected to be significant as compared to expected proceeds from development projects or property sales.

 

ITEM 1A.  RISK FACTORS.

Griffin’s real estate business has a number of risk factors. The risk factors discussed below are those that management deems to be material, but they may not be the only risks facing Griffin. Additional risks not currently known or currently deemed not to be material may also impact Griffin. If any of the following risks occur, Griffin’s

business, financial condition, operating results and cash flows could be adversely affected. Investors should also refer to Griffin’s quarterly reports on Form 10-Q for any material updates to these risk factors.

Adverse Economic Conditions and Credit Markets

Griffin’s real estate business may be affected by market conditions and economic challenges experienced by the U.S. economy as a whole, conditions in the credit markets or by local economic conditions in the markets in which its properties are located. Such conditions may impact Griffin’s results of operations, financial condition or ability to expand its operations as a result of the following:

Downturn in the Residential Real Estate Market

Weakness in the residential real estate market may adversely affect Griffin’s residential real estate development activities, including lowering selling prices and/or delaying the development and/or sale of Griffin’s undeveloped land intended for residential use.

Risks Associated with Concentration of Real Estate Holdings

Griffin’s real estate holdings are concentrated in the Hartford, Connecticut area and the Lehigh Valley of Pennsylvania. Adverse changes in the local economies, state or local governmental regulations or real estate markets, including the market’s ability to absorb newly constructed space, could impact Griffin’s real estate operations, including Griffin’s ability to re‑lease vacant space and have an adverse effect on rental rates.

Griffin’s real estate properties compete with other properties in the areas where it operates. The construction of new facilities by competitors would increase capacity in the marketplace, and an increase in the amount of vacancies in competitors’ properties and negative absorption of space could result in Griffin experiencing longer times to lease vacant space, eroding lease rates or hindering renewals by existing tenants.

Additionally, real estate properties are not as liquid as other types of investments and this lack of liquidity could limit Griffin’s ability to react promptly to changes in economic, financial, investment or other conditions.

Risks Associated with Entering New Real Estate Markets

Griffin expects to continue to seek to acquire properties either in the Lehigh Valley or other markets outside of the Hartford, Connecticut area. Operating in a real estate market that is new for Griffin creates additional risks and uncertainties to Griffin’s operations.

Competition with Other Parties for Property Investments

There is a great amount of competition for the acquisition of industrial/warehouse buildings and for the acquisition of undeveloped land for construction of such buildings. Griffin competes for the acquisition of industrial/warehouse properties with REITs and institutional investors, such as pension funds, private real estate investment funds, insurance company investment accounts, public and private investment companies, individuals and other entities engaged in real estate investment activities. Some of these competitors have greater financial resources than Griffin, and may be able to accept more risk, including risk related to the creditworthiness of tenants or the degree of leverage they may be willing to take on. Competitors for acquisitions may also have advantages from a lower cost of capital or greater operating efficiencies associated with being a larger entity.

Risks Associated with the Use of Third Party Managers for Day-to-Day Property Management

Griffin currently utilizes a local third party manager for the day-to-day management of its Lehigh Valley properties. To the extent that Griffin uses a third party manager, the cash flows from its Lehigh Valley properties may be adversely affected if the property manager fails to provide quality services. Additionally, the third party manager manages and owns other properties that may compete with Griffin’s properties, which may result in conflicts of interest and decisions regarding the operation of Griffin’s properties that are not in Griffin’s best interests.

Risks Relating to Reliance on Lease Revenue

The substantial majority of Griffin’s revenue is derived from lease revenue from its industrial/warehouse and office/flex buildings. Griffin’s revenue would be adversely affected if a significant number of Griffin’s tenants were unable to meet their obligations to Griffin or if Griffin were unable to lease a significant amount of space in its properties on economically favorable lease terms. In addition, there can be no assurance that any tenant whose lease expires in the future will renew such lease or that Griffin will be able to re‑lease space on economically favorable terms. Griffin’s inability to re‑lease space on economically favorable terms could adversely affect its financial condition and results of operations.

Risks Associated with Nonrecourse Mortgage Loans

As of November 30, 2016, Griffin had indebtedness under nonrecourse mortgage loans of approximately $111.1 million, collateralized by approximately 82% of the total square footage of its industrial/warehouse and office/flex buildings. If a significant number of Griffin’s tenants were unable to meet their obligations to Griffin or if Griffin were unable to lease a significant amount of space in its properties on economically favorable lease terms, there would be a risk that Griffin would not have sufficient cash flow from operations for payments of required principal and interest on these loans. If Griffin were unable to make such payments and were to default, the property collateralizing the mortgage loan could be foreclosed upon, and Griffin’s financial condition and results of operations would be adversely affected. In addition, two of Griffin’s nonrecourse mortgage loans contain cross default provisions. A default under a mortgage loan that has cross default provisions may cause Griffin to automatically default on another loan.

Risks Associated with Financing Arrangements that Include Balloon Payment Obligations

Certain of Griffin’s nonrecourse mortgage loans require a lump-sum or “balloon” payment at maturity. Griffin’s ability to make a balloon payment at maturity may be uncertain and may depend upon its ability to obtain additional financing. At the time the balloon payment is due, Griffin may or may not be able to refinance the balloon payment on terms as favorable as the original mortgage terms.

Risks Associated with Failure to Effectively Hedge Against Interest Rate Fluctuation

Griffin has entered into several interest rate swap agreements to hedge its interest rate exposures related to its variable rate nonrecourse mortgages on certain of its industrial/warehouse and office/flex buildings. These agreements have costs and involve the risks that these arrangements may not be effective in reducing Griffin’s exposure to interest rate fluctuations and that a court could rule that such agreements are not legally enforceable. The failure to hedge effectively against interest rate fluctuations may materially and adversely affect Griffin’s results of operations. Additionally, any settlement charges incurred to terminate an interest rate swap agreement may result in increased interest expense, which may also have an adverse effect on Griffin’s results of operations.

Risks Associated with Volatility in the Capital and Credit Markets

Volatility and disruption in the capital and credit markets could make it more difficult to borrow money. Market volatility could hinder Griffin’s ability to obtain new debt financing or refinance maturing debt on favorable terms, or at all. Any financing or refinancing issues could materially and adversely affect Griffin. Market turmoil and the tightening of credit can lead to an increased lack of consumer confidence and widespread reduction of business activity in general, which also could materially and adversely impact Griffin, including its ability to acquire and dispose of assets on favorable terms, or at all.

Risks Associated with Increased Operating Expenses

Operating expenses such as real estate taxes, fuel, utilities, labor, repairs and maintenance, building materials and insurance, are not fixed and may increase in the future. Griffin may not be able to pass these costs on to its tenants and, therefore, any such increases could have an adverse effect on Griffin’s results of operations and cash flow.

Potential Environmental Liabilities

Griffin has extensive land holdings in Connecticut and Massachusetts and in fiscal 2010 started acquiring properties in the Lehigh Valley of Pennsylvania. Under federal, state and local environmental laws, ordinances and regulations, Griffin may be required to investigate and clean up the effects of releases of hazardous substances or petroleum products at its properties because of its current or past ownership or operation of the real estate. If previously unidentified environmental problems arise, Griffin may have to make substantial payments, which could adversely affect its cash flow. As an owner or operator of properties, Griffin may have to pay for property damage and for investigation and clean‑up costs incurred in connection with a contamination. The law typically imposes cleanup responsibility and liability regardless of whether the owner or operator knew of or caused the contamination. Changes in environmental regulations may impact the development potential of Griffin’s undeveloped land or could increase operating costs due to the cost of complying with new regulations.

Governmental Regulations

Griffin’s operations are subject to governmental regulations that affect real estate development, such as local zoning ordinances. Any changes in such regulations may impact the ability of Griffin to develop its properties or increase Griffin’s costs of development. Subdivision and other residential development may also be affected by the potential adoption of initiatives meant to limit or concentrate residential growth. Commercial and industrial development activities of Griffin’s undeveloped land may also be affected by traffic considerations, potential environmental issues, community opposition and other restrictions to development imposed by governmental agencies.

Insurance Coverage Does Not Include All Potential Losses in the Real Estate Business

Griffin carries comprehensive insurance coverage, including property, fire, terrorism and loss of rental revenue. The insurance coverage contains policy specifications and insured limits. However, there are certain losses that are not generally insured against or that are not fully insured against. If an uninsured loss or a loss in excess of insured limits occurs with respect to one or more of Griffin’s properties, Griffin could experience a significant loss of capital invested and potential revenue from the properties affected.

Risks Associated with the Cost of Raw Materials and Energy Costs

Griffin’s construction activities and maintenance of its current portfolio could be adversely affected by increases in raw materials or energy costs. As petroleum and other energy costs increase, products used in the construction of Griffin’s facilities, such as steel, masonry, asphalt, cement and building products may increase. An increase in the cost of building new facilities could negatively impact Griffin’s future operating results through increased depreciation expense. An increase in construction costs would also require increased investment in Griffin’s real estate assets, which may lower the return on investment in new facilities. An increase in energy costs could increase Griffin’s building operating expenses and thereby lower Griffin’s operating results.

Investment in a Foreign Company

Griffin has an investment in Centaur Media plc, a public company based in the United Kingdom. The ultimate liquidation of that investment and conversion of proceeds into United States currency is subject to future foreign currency exchange rates.

Risks Associated with Deficiencies in Disclosure Controls and Procedures or Internal Control over Financial Reporting

Griffin’s design and effectiveness of disclosure controls and procedures and internal controls over financial reporting may not prevent all errors, misstatements or misrepresentations. While Griffin continues to review the effectiveness of its disclosure controls and procedures and internal controls over financial reporting, there can be no guarantee that its internal controls over financial reporting will be effective in accomplishing all control objectives all of the time. Deficiencies, including any material weakness or significant deficiency, in its internal controls over financial reporting which may occur in the future could result in misstatements of Griffin’s results of operations, restatements of its financial statements and a decline in its stock price, or otherwise materially adversely affect Griffin’s business, reputation, results of operations, financial condition or liquidity.

Risks Associated with Information Technology (“IT”) Security Breaches

As part of Griffin’s normal business activities, it uses information technology and other computer resources to carry out important operational activities and to maintain its business records. Griffin’s computer systems, including its backup systems, are subject to interruption or damage from power outages, computers and telecommunications failures, computer viruses, security breaches (including through cyber-attack and data theft), usage errors and catastrophic events, such as fires, floods, tornadoes and hurricanes. If Griffin’s computer systems and its backup systems are compromised, degraded, damaged or breached, or otherwise cease to function properly, Griffin could suffer interruptions in its operations or unintentionally allow misappropriation of proprietary or confidential information, which could damage its reputation and require Griffin to incur significant costs to remediate or otherwise resolve these issues. Although Griffin makes efforts to maintain the security and integrity of its IT networks and related systems, there can be no assurance that the security efforts and measures will be effective or that attempted security breaches or disruptions would not be successful or damaging.

Griffin is Subject to Litigation That May Adversely Impact Operating Results

Griffin is, and may in the future be, a party to a number of legal proceedings and claims arising in the ordinary course of business which could become significant. Given the inherent uncertainty of litigation, Griffin can offer no assurance that a future adverse development related to existing litigation or any future litigation will not have a material adverse impact on its business, consolidated financial position, results of operations or cash flows.

The Concentrated Ownership of Griffin Common Stock by Members of the Cullman and Ernst Families

Members of the Cullman and Ernst families (the “Cullman and Ernst Group”), which include Frederick M. Danziger, Griffin’s Executive Chairman, Michael S. Gamzon, a director and Griffin’s President and Chief Executive Officer and Edgar M. Cullman, Jr., a director of Griffin, members of their families and trusts for their benefit, partnerships in which they own substantial interests and charitable foundations on whose boards of directors they sit, owned, directly or indirectly, approximately 46.2% of the outstanding common stock of Griffin as of November 30, 2016. There is an informal understanding that the persons and entities included in the Cullman and Ernst Group will vote together the shares owned by each of them. As a result, the Cullman and Ernst Group may effectively control the determination of Griffin’s corporate and management policies and may limit other Griffin stockholders’ ability to influence Griffin’s corporate and management policies.

 

ITEM 1B.  UNRESOLVED STAFF COMMENTS.

Not applicable.

 

 

ITEM 2.  PROPERTIES.

Land Holdings

Griffin is a major landholder in the state of Connecticut, owning approximately 2,907 acres. Griffin also owns approximately 422 acres of land in Massachusetts, approximately 117 acres of land in Pennsylvania and approximately 1,066 acres in northern Florida. Griffin believes the fair market value of such land is substantially in excess of its book value.

Listings of the locations of Griffin’s land holdings, a portion of which, principally in Bloomfield, East Granby and Windsor, Connecticut and Breinigsville, Lower Nazareth Township and Hanover Township, Pennsylvania have been developed, are as follows:

Developed Properties

As of November 30, 2016, Griffin owned thirty‑three buildings, comprised of twenty-one industrial/warehouse buildings, eleven office/flex buildings and a small restaurant building. A listing of those facilities is as follows:

 

 

 

 

 

 

 

 

 

*     Included as collateral under one of Griffin’s nonrecourse mortgage loans or Griffin’s revolving line of credit as of November 30, 2016.

**    Subsequent to November 30, 2016, Griffin agreed to terms on a nonrecourse mortgage loan on these buildings. Completion of this proposed new mortgage loan is subject to a number of contingencies, including entry into a definitive loan agreement. There is no guarantee that this transaction will be completed under its current terms, or at all.

Griffin subleases approximately 1,920 square feet in New York City for its executive offices from Bloomingdale Properties, Inc. (“Bloomingdale Properties”), an entity that is controlled by certain members of the

Cullman and Ernst Group. The sublease with Bloomingdale Properties was approved by Griffin’s Audit Committee and the lease rates under the sublease were at market rate at the time the sublease was signed.

As with many companies engaged in real estate investment and development, Griffin holds its real estate portfolio subject to mortgage debt. See Note 5 to Griffin’s consolidated financial statements for information concerning the mortgage debt associated with Griffin’s properties.

 

 

ITEM 3.  LEGAL PROCEEDINGS.

Griffin is involved, as a defendant, in various litigation matters arising in the ordinary course of business. In the opinion of management, based on the advice of legal counsel, the ultimate liability, if any, with respect to these matters is not expected to be material to Griffin’s financial position, results of operations or cash flows.

 

 

ITEM 4.  MINE SAFETY DISCLOSURES.

Not applicable.

PART II

ITEM 5.  MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.

Market Information

The following are the high and low prices of Griffin’s common stock as traded on The NASDAQ Stock Market LLC:

On February 6, 2017, the number of record holders of common stock of Griffin was approximately 174 which does not include beneficial owners whose shares are held of record in the names of brokers or nominees. The closing market price as quoted on The NASDAQ Stock Market LLC on such date was $31.26 per share.

Dividend Policy

Griffin’s dividend policy is to consider the payment of an annual dividend at the end of its fiscal year, which enables the Board of Directors to evaluate both Griffin’s prior full year results and its cash needs for the succeeding year when determining whether to declare an annual dividend. In fiscal 2016 and fiscal 2015, Griffin declared an annual dividend of $0.30 per share.

Issuer Purchases of Equity Securities

 

On March 31, 2016, Griffin’s Board of Directors authorized a stock repurchase program whereby Griffin may repurchase up to $5.0 million in outstanding shares of its common stock in privately negotiated transactions. The repurchase program expires on May 10, 2017. The repurchase program does not obligate Griffin to repurchase any specific number of shares, and may be suspended at any time at management’s discretion.

Stock Performance Graph

The following graph compares the total percentage changes in the cumulative total stockholder return (assuming the reinvestment of dividends) on Griffin’s common stock with the cumulative total return of the Russell 2000 Index and the Russell Microcap Index from December 3, 2011 to November 30, 2016. It is assumed in the graph that the value of each investment was $100 at December 3, 2011. Griffin has selected an index of companies with a similar market capitalization because, for the period from December 3, 2011 to January 8, 2014, when Griffin sold its landscape nursery business, Griffin is not aware of any other company that substantially participated in both the landscape nursery and real estate businesses, and would therefore be suitable for comparison to Griffin as a “peer issuer” within Griffin’s lines of business. In addition, following the sale of the landscape nursery business, Griffin has not been able to identify issuers in the real estate business that are comparable peers, as most of those companies are significantly larger in size or have real estate holdings that either differ geographically or by type of property from Griffin’s holdings. Accordingly, Griffin selected an index of companies with a similar market capitalization.

 

 

ITEM 6.  SELECTED FINANCIAL DATA.

The following table sets forth selected statement of operations data for fiscal years 2012 through 2016 and balance sheet data as of the end of each fiscal year. The selected statement of operations data for fiscal 2014, fiscal 2015 and fiscal 2016 and the selected balance sheet data for fiscal 2015 and fiscal 2016 are derived from the audited consolidated financial statements included in Item 8 of this Annual Report. The selected statement of operations data for fiscal 2012 and fiscal 2013 and the balance sheet data for fiscal 2012, fiscal 2013 and fiscal 2014 were derived from the audited consolidated financial statements for those years. This selected financial data should be read in conjunction with the consolidated financial statements and accompanying notes, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and other financial information included elsewhere in this Annual Report. Historical results are not necessarily indicative of future performance.

ITEM 7.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

Overview

Griffin Industrial Realty, Inc. (“Griffin”) is a real estate business principally engaged in developing, managing and leasing industrial/warehouse properties, and to a lesser extent, office/flex properties. Periodically, Griffin may 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. Griffin seeks to add to its property portfolio through the acquisition and development of land or the purchase of buildings. Prior to May 13, 2015, Griffin was known as Griffin Land & Nurseries, Inc. On May 13, 2015, Griffin changed its name to better reflect its ongoing real estate business and focus on industrial/warehouse properties after the sale in fiscal 2014 of the landscape nursery business that Griffin had operated through its wholly owned subsidiary, Imperial Nurseries, Inc. (“Imperial”). Effective January 8, 2014, Griffin, Imperial and Monrovia Connecticut LLC (“Monrovia”) entered into an Asset Purchase Agreement whereby Imperial’s inventory and certain of its assets were sold to Monrovia for approximately $0.7 million in cash, before transaction and severance costs, and a non‑interest bearing note receivable (which Griffin subsequently collected) of $4.25 million (the “Imperial Sale”).

The notes to Griffin’s consolidated financial statements included in Item 8 of this Annual Report contain a summary of the significant accounting policies and methods used in the preparation of Griffin’s consolidated financial statements. In the opinion of management, because of the relative magnitude of Griffin’s real estate assets, accounting methods and estimates related to those assets are critical to the preparation of Griffin’s consolidated financial statements. Griffin uses accounting policies and methods under accounting principles generally accepted in the United States of America (“U.S. GAAP”). The following are the critical accounting estimates and methods used by Griffin:

Income taxes: In accounting for income taxes under Financial Accounting Standards Board (“FASB”) ASC 740, “Income Taxes,” management estimates future taxable income from operations, the sale of appreciated assets, the remaining years before the expiration of loss credit carryforwards, future reversals of existing temporary differences and tax planning strategies in determining if it is more likely than not that Griffin will realize the benefits of its deferred tax assets.

Impairment of long‑lived assets: Griffin reviews annually, as well as when conditions may indicate, its long‑lived assets to determine if there are any indications of impairment, such as a prolonged vacancy in one of Griffin’s rental properties. If indications of impairment are present, Griffin evaluates the carrying value of the assets in relation to undiscounted cash flows or the estimated fair value of the underlying assets. Development costs that have been capitalized are reviewed periodically for future recoverability.

Revenue and gain recognition: Revenue includes rental revenue from Griffin’s industrial and commercial properties and proceeds from property sales. Rental revenue is accounted for on a straight‑line basis over the applicable lease term in accordance with the FASB ASC 840, “Leases.” Gains on property sales are recognized in accordance with FASB ASC 360‑20 “Property, Plant and Equipment‑Real Estate Sales” based on the specific terms of each sale. When the percentage of completion method is used to account for a sale of real estate, costs included in determining the percentage of completion include the costs of the land sold, allocated master planning costs, selling and transaction costs and estimated future costs related to the land sold.

Stock based compensation: Griffin determines stock based compensation based on the estimated fair values of stock options as determined on their grant dates using the Black‑Scholes option‑pricing model. In determining the estimated fair values of stock options issued, Griffin makes assumptions on expected volatility, risk free interest rates, expected option terms and dividend yields.

Derivative instruments: Griffin evaluates each interest rate swap agreement to determine if it qualifies as an effective cash flow hedge. Changes in the fair value of each interest rate swap agreement that management determines to be an effective cash flow hedge are recorded as a component of other comprehensive income. The fair value of each interest rate swap agreement is determined based on observable market participant data, such as yield curves, as of the fair value measurement date.

 

Summary

In the fiscal year ended November 30, 2016 (“fiscal 2016”), Griffin had net income of approximately $0.6 million as compared to net income of approximately $0.4 million in the fiscal year ended November 30, 2015 (“fiscal 2015”). The slightly higher net income in fiscal 2016 as compared to fiscal 2015 principally reflects an increase of approximately $1.3 million in operating income in fiscal 2016 as compared to fiscal 2015 partially offset by an increase of approximately $0.8 million in interest expense and an increase of approximately $0.3 million in income taxes in fiscal 2016 as compared to fiscal 2015.

The approximately $1.3 million increase in operating income in fiscal 2016, as compared to fiscal 2015, principally reflects an increase of approximately $2.0 million in profit from leasing activities (which Griffin defines as rental revenue less operating expenses of rental properties) and an increase of approximately $0.7 million in gain on property sales (revenue from property sales less costs related to property sales), partially offset by increases in depreciation and amortization expense and general and administrative expenses of approximately $1.1 million and approximately $0.3 million, respectively. The increase in profit from leasing activities in fiscal 2016, as compared to fiscal 2015, was driven by an increase in rental revenue from more space being leased in fiscal 2016 than fiscal 2015. The higher gain on property sales in fiscal 2016, as compared to fiscal 2015, principally reflects the gain of approximately $3.2 million from the sale of undeveloped Griffin Center land that closed in fiscal 2016. The increase in depreciation and amortization expense in fiscal 2016, as compared to fiscal 2015, principally reflects a full year of depreciation expense in fiscal 2016, as compared to a partial year in fiscal 2015, on 5220 Jaindl Boulevard (“5220 Jaindl”), an approximately 280,000 square foot industrial/warehouse building in the Lehigh Valley of Pennsylvania that was completed and placed in service at the end of the fiscal 2015 third quarter and depreciation expense on tenant improvements related to new leases being higher in fiscal 2016 than fiscal 2015. The increase in general and administrative expenses in fiscal 2016, as compared to fiscal 2015, principally reflects higher expenses related to Griffin’s non-qualified deferred compensation plan.

The higher interest expense in fiscal 2016, as compared to fiscal 2015, principally reflects less interest capitalized in fiscal 2016 than in fiscal 2015 and the higher amount of mortgage loans outstanding in fiscal 2016 as compared to fiscal 2015. The higher income tax expense in fiscal 2016 as compared to fiscal 2015 reflects the higher pretax income in fiscal 2016, as compared to fiscal 2015, and an increase in income tax expense related to the higher pretax income in fiscal 2016 and a reduction in the valuation of certain state deferred tax assets.

 

Results of Operations

Fiscal 2016 Compared to Fiscal 2015

Total revenue increased to approximately $30.9 million in fiscal 2016 from approximately $28.1 million in fiscal 2015, reflecting an increase of approximately $1.9 million in rental revenue and approximately $0.9 million in revenue from property sales. Rental revenue increased to approximately $26.5 million in fiscal 2016 from approximately $24.6 million in fiscal 2015 principally reflecting: (a) an increase of approximately $1.9 million from leasing previously vacant space; and (b) an increase of approximately $1.6 million from leasing space in 5220 Jaindl, which was completed and placed in service at the start of the fiscal 2015 fourth quarter; partially offset by (c) a decrease of approximately $1.5 million from leases that expired; and (d) a decrease of approximately $0.2 million of rental revenue from lower expense reimbursements from tenants and other changes.

A summary of the total square footage and leased square footage of the buildings in Griffin’s real estate portfolio is as follows:

 

 

The increase in total square footage as of November 30, 2016, as compared to November 30, 2015, reflects the construction in fiscal 2016 of 5210 Jaindl Boulevard (“5210 Jaindl”), an approximately 252,000 square foot industrial/warehouse building which is the second of the two buildings built on an approximately 50 acre parcel of land known as Lehigh Valley Tradeport II. 5210 Jaindl was completed in the 2016 third quarter and Griffin entered into two leases for that building, resulting in 5210 Jaindl being fully leased as of November 30, 2016. Both of the new leases at 5210 Jaindl will become effective upon completion of tenant improvements, which are expected to be completed in the first half of fiscal 2017. As a result of leasing 5210 Jaindl, Griffin now has five fully leased industrial/warehouse buildings in the Lehigh Valley aggregating approximately 1,183,000 square feet.

The net increase of approximately 360,000 square feet leased as of November 30, 2016, as compared to November 30, 2015, reflects the approximately 252,000 square feet leased at 5210 Jaindl and several new leases aggregating approximately 240,000 square feet in other buildings, partially offset by several leases aggregating approximately 132,000 square feet that expired. Included in the approximately 240,000 square feet of new leasing in fiscal 2016 are a lease of approximately 101,000 square feet in 4270 Fritch Drive (“4270 Fritch”), one of Griffin’s other industrial/warehouse buildings in the Lehigh Valley, a full building lease of 25 International Drive (“25 International”), an approximately 57,000 square foot industrial/warehouse building in New England Tradeport (“NE Tradeport”), Griffin’s industrial park in Windsor and East Granby, Connecticut, a full building lease of an approximately 31,000 square foot industrial/warehouse building in Bloomfield, Connecticut, and a lease of approximately 16,000 square feet in a single story office building in Griffin Center. The new lease of 25 International replaced a lease that expired earlier in the year. The tenant of the expired lease had, in fiscal 2014, entered into a ten year full building lease of 758 Rainbow Road (“758 Rainbow”), an approximately 138,000 square foot building in NE Tradeport, while remaining in 25 International during its period of transition to the larger facility.

Also in the third quarter of fiscal 2016, Griffin entered into a new three year lease of its production nursery in Quincy, Florida (the “Florida Farm”). The Florida Farm had been leased to a nursery grower since fiscal 2009, but that lease ended in the fiscal 2016 second quarter. The new lease contains an option for the tenant to purchase the Florida Farm for a purchase price between $3.4 million and $3.9 million depending upon the date of sale.

All of Griffin’s Connecticut industrial/warehouse and office/flex buildings are in the north submarket of Hartford. The real estate market for industrial/warehouse space in the Hartford, Connecticut area has improved over the last two years. A national real estate services company reported that the overall vacancy rate in the greater Hartford industrial market decreased from 12.3% at the end of 2014 to 9.2% at the end of 2016, with approximately 1.0 million square feet of net absorption in 2016. The Hartford office/flex market remained weak in 2016, with a national real estate services company reporting that the overall vacancy rate has remained at approximately 16% over the past two years, with vacancy in the north submarket of Hartford at approximately 21% over the past two years. Griffin’s office/flex space was approximately 13% of Griffin’s total square footage as of November 30, 2016. Griffin expects that its office/flex buildings will continue to become a smaller percentage of its total real estate portfolio as Griffin expects to focus on the growth of its industrial/warehouse building portfolio either through acquisition of fully or partially leased buildings, development of buildings on land currently owned or to be acquired or both. The real estate market for industrial/warehouse space in the Lehigh Valley has experienced strong growth and leasing activity during the past two years. The vacancy rate of Lehigh Valley industrial/warehouse properties as reported by a national real estate services company was 5.2% at the end of the 2016, with a net absorption of approximately 7.6 million square feet in 2016. There is no guarantee that an active or strong real estate market or an increase in inquiries from prospective tenants will result in leasing space that was vacant as of November 30, 2016.

Griffin’s revenue from property sales increased to approximately $4.4 million in fiscal 2016 from approximately $3.5 million in fiscal 2015. In fiscal 2016, Griffin completed one property sale of approximately 29 acres of undeveloped land in Griffin Center (the “Griffin Center Land Sale”) for approximately $3.8 million in cash and a pretax gain of approximately $3.2 million. In fiscal 2016, in addition to the Griffin Center Land Sale, Griffin recognized revenue of approximately $0.6 million and a gain of approximately $0.4 million from the sale of approximately 90 acres of undeveloped land in Windsor, Connecticut (the “Windsor Land Sale”) that closed in the fiscal year ended November 30, 2013 (“fiscal 2013”). Under the terms of the Windsor Land Sale, Griffin is required to construct roadways to connect the land sold to existing town roadways. Accordingly, because of Griffin’s continuing involvement with the land that was sold, the Windsor Land Sale is being accounted for under the percentage of completion method. From the closing of the Windsor Land Sale in fiscal 2013 through November 30, 2016, Griffin has recognized approximately $8.8 million of

revenue from the Windsor Land Sale, reflecting approximately 99% of the total revenue to be recognized from such sale. The balance of the revenue from the Windsor Land Sale, approximately $0.1 million, will be recognized as the remaining costs, expected to be less than $0.1 million, of the required roadway construction are incurred, which is expected to be in fiscal 2017. 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.

The approximately $3.5 million of revenue from property sales in fiscal 2015 reflected: (a) approximately $2.5 million from the recognition of revenue related to the Windsor Land Sale; (b) approximately $0.6 million from the sale of land that had been part of the Connecticut farm used by Imperial but not part of the long‑term lease to Monrovia; and (c) $0.4 million from the retention of a deposit (the “Florida Farm Deposit”) related to the sale of the Florida Farm, which did not close. Griffin received the Florida Farm Deposit in fiscal 2015 from the tenant that leased the Florida Farm at that time in connection with the tenant giving notice to Griffin that it was exercising its option under the lease to purchase the Florida Farm. The tenant subsequently notified Griffin that it would not close on the purchase and Griffin retained the Florida Farm Deposit and entered into an agreement with the tenant to extend its lease through April 30, 2016. Property sales occur periodically, and changes in revenue from year to year from those transactions may not be indicative of any trends in Griffin’s real estate business.

Operating expenses of rental properties decreased to approximately $8.2 million in fiscal 2016 from approximately $8.4 million in fiscal 2015. The slight decrease of approximately $0.2 million in operating expenses of rental properties in fiscal 2016, as compared to fiscal 2015, principally reflects decreases of approximately $0.4 million in snow removal expenses, due to less severe winter weather in fiscal 2016 than fiscal 2015, and approximately $0.3 million in utility expenses, partially offset by operating expense increases of approximately $0.3 million at 5220 Jaindl, which was in service for the entire year in fiscal 2016 versus three months in fiscal 2015, approximately $0.1 million of operating expenses at 5210 Jaindl, which was placed in service in fiscal 2016, and approximately $0.1 million for real estate taxes.

Depreciation and amortization expense increased to approximately $8.8 million in fiscal 2016 from approximately $7.7 million in fiscal 2015. The increase of approximately $1.1 million in depreciation and amortization expense in fiscal 2016, as compared to fiscal 2015, reflects increases in depreciation and amortization expense of approximately $0.6 million related to 5220 Jaindl, which was in service for the entire year in fiscal 2016 versus three months in fiscal 2015, approximately $0.2 million related to 5210 Jaindl, which was placed in service in fiscal 2016, and approximately $0.5 million for tenant improvements related to new leases, offset by lower depreciation expense of approximately $0.2 million due to assets becoming fully depreciated.

Griffin’s general and administrative expenses increased to approximately $7.4 million in fiscal 2016 from approximately $7.1 million in fiscal 2015. The increase of approximately $0.3 million in general and administrative expenses in fiscal 2016, as compared to fiscal 2015, principally reflects an increase of approximately $0.2 million related to Griffin’s non-qualified deferred compensation plan and approximately $0.1 million for an increase in incentive compensation expense. The expense increase related to the non-qualified deferred compensation plan reflects the effect of higher stock market performance on participant balances in fiscal 2016, as compared to fiscal 2015, that resulted in a greater increase in Griffin’s non-qualified deferred compensation plan liability in fiscal 2016 as compared to fiscal 2015. The increase in incentive compensation expense reflects Griffin’s improved results in fiscal 2016 with regards to profit from leasing activities and gain on property sales as measured under Griffin’s incentive compensation plan.

Griffin’s interest expense increased to approximately $4.5 million in fiscal 2016 from approximately $3.7 million in fiscal 2015. The increase of approximately $0.8 million in interest expense in fiscal 2016, as compared to fiscal 2015, principally reflects approximately $0.5 million less interest capitalized in fiscal 2016 than fiscal 2015 and an increase in interest expense of approximately $0.4 million due to the increase in the amount of nonrecourse mortgage loans in fiscal 2016 as compared to fiscal 2015. The lower amount of capitalized interest in fiscal 2016, as compared to fiscal 2015, reflects the higher amount of construction activity in fiscal 2015 than fiscal 2016. The increase in nonrecourse mortgage loans in fiscal 2016, as compared to fiscal 2015, reflects borrowings completed in the fiscal 2015 fourth quarter that were outstanding for the entire year in fiscal 2016, a new borrowing in fiscal 2016 on 5210 Jaindl, and adding a previously unleveraged NE Tradeport building to a mortgage on several other NE Tradeport buildings in fiscal 2016.

Griffin’s income tax provision increased to approximately $0.7 million in fiscal 2016 from approximately $0.4 million in fiscal 2015. The increase of approximately $0.3 million reflects approximately $0.2 million as a result of the higher pretax income in fiscal 2016 than fiscal 2015 and approximately $0.1 million related to decreases in the valuation of certain state income tax benefits in fiscal 2016. In fiscal 2016, Griffin’s income tax provision included a charge of approximately $0.2 million for the reduction of the expected realization rate of tax benefits from Connecticut state net operating loss carryforwards as a result of a change in Connecticut tax law, effective for Griffin beginning in fiscal 2016, that limits the future usage of loss carryforwards to 50% of taxable income. In fiscal 2015, Griffin’s income tax provision included a charge of approximately $0.1 million for the reduction of the expected realization rate of tax benefits from certain state net operating loss carryforwards and other temporary differences as a result of changes in the expected utilization of such benefits. Griffin’s effective income tax rate increased to 56.1% in fiscal 2016 from 47.2% in fiscal 2015. The higher effective tax rate in fiscal 2016, as compared to fiscal 2015, principally reflects the effect in fiscal 2016 of a higher charge related to the reduction of certain state tax benefits.

Fiscal 2015 Compared to Fiscal 2014

Total revenue increased to approximately $28.1 million in fiscal 2015 from approximately $24.2 million in fiscal 2014, reflecting an increase of approximately $4.1 million in rental revenue, partially offset by a decrease of approximately $0.2 million in revenue from property sales. Rental revenue increased to approximately $24.6 million in fiscal 2015 from approximately $20.5 million in fiscal 2014 principally due to an increase in space leased in Griffin’s buildings. The increase in rental revenue principally reflected: (a) an increase of approximately $2.9 million of rental revenue from leasing previously vacant space; (b) approximately $1.4 million of rental revenue from leasing space in two Lehigh Valley industrial/warehouse buildings that were placed in service in fiscal 2014 and fiscal 2015; (c) an increase of approximately $0.4 million of rental revenue in connection with agreements to terminate leases before their scheduled termination dates; and (d) an increase in rental revenue of approximately $0.3 million from all other leases; partially offset by (e) a decrease of approximately $0.9 million of rental revenue from leases that expired and were not renewed.

A summary of the square footage of the buildings in Griffin’s real estate portfolio is as follows:

The increase in total square footage as of November 30, 2015 as compared to November 30, 2014 reflected 5220 Jaindl, the approximately 280,000 square foot industrial building completed and placed in service at the end of the fiscal 2015 third quarter. 5220 Jaindl, located in the Lehigh Valley, was the first of two industrial buildings constructed on Lehigh Valley Tradeport II, the approximately 50 acre parcel of undeveloped land acquired mostly in fiscal 2013.

The net increase of approximately 389,000 square feet in space leased as of November 30, 2015 as compared to November 30, 2014 reflects leasing the entire approximately 280,000 square feet of 5220 Jaindl and several new leases in other buildings aggregating approximately 191,000 square feet of previously vacant space, partially offset by several leases aggregating approximately 52,000 square feet that expired and were not renewed and a lease of approximately 31,000 square feet that was terminated prior to its scheduled expiration date for which Griffin received a payment of approximately $0.2 million. The leasing of 5220 Jaindl reflected a five year lease for approximately 196,000 square feet that became effective at the start of the fiscal 2015 fourth quarter. In November 2015, the tenant in 5220 Jaindl exercised its option to lease the balance of the building. Rental revenue on the additional space started in fiscal 2016. Most of the approximately 191,000 square feet of previously vacant space that was leased in fiscal 2015 was industrial/warehouse space in NE Tradeport. Griffin also extended several leases aggregating approximately 397,000 square feet that included approximately 326,000 square feet of industrial/warehouse space in NE Tradeport and approximately 71,000 square feet of office/flex space in Griffin Center and Griffin Center South. Subsequent to November 30, 2015, Griffin leased approximately 102,000 square feet in 4270 Fritch. Had that lease been completed as of November 30, 2015, the percentage of square footage leased in Griffin’s buildings as of that date would have been 92%.

Activity by prospective tenants where Griffin’s Connecticut properties are located (the north submarket of Hartford) was muted in fiscal 2014; however, there was an increase in inquiries from prospective tenants, mostly for

industrial/warehouse space, in the latter part of fiscal 2014 that continued through fiscal 2015. Leasing activity in the Lehigh Valley in fiscal 2015 was somewhat slower than the previous year; however, the reported overall vacancy rate there continued to remain low in fiscal 2015.

Revenue from property sales decreased to approximately $3.5 million in fiscal 2015 from approximately $3.7 million in fiscal 2014. Revenue from property sales in fiscal 2015 reflects: (a) the recognition of approximately $2.5 million of revenue from the Windsor Land Sale; (b) approximately $0.6 million from the sale of land that had been part of the Connecticut farm used by Imperial but not part of the long‑term lease to Monrovia; and (c) $0.4 million from the Florida Farm Deposit (see below). Property sales occur periodically, and changes in revenue from year to year from those transactions may not be indicative of any trends in Griffin’s real estate business.

Under the terms of the Windsor Land Sale, Griffin is required to construct roadways that will connect the land sold to existing town roadways. Accordingly, because of Griffin’s continuing involvement with the land that was sold, the Windsor Land Sale is being accounted for under the percentage of completion method. Through November 30, 2015, Griffin had recognized approximately $8.3 million of revenue from the Windsor Land Sale.

In the fiscal 2015 third quarter, Griffin received the Florida Farm Deposit from the tenant that leased the Florida Farm in connection with the tenant giving notice to Griffin at that time that it was exercising its option under the lease to purchase the Florida Farm. The tenant subsequently notified Griffin that it would not close on the purchase of the Florida Farm. Griffin retained the Florida Farm Deposit and entered into an agreement with the tenant to extend the lease of the Florida Farm through April 30, 2016.

Operating expenses of rental properties increased to approximately $8.4 million in fiscal 2015 from approximately $7.8 million in fiscal 2014. The increase in operating expenses of rental properties of approximately $0.6 million was due to a full year of operating expenses of 4270 Fritch in fiscal 2015 as compared to a partial year of such expenses in fiscal 2014, as that building was placed in service in the fiscal 2014 third quarter, and operating expenses of 5220 Jaindl, which was placed in service at the end of the fiscal 2015 third quarter. Operating expenses of all other rental properties were essentially unchanged in fiscal 2015 as compared to fiscal 2014.

Depreciation and amortization expense increased to approximately $7.7 million in fiscal 2015 from approximately $6.7 million in fiscal 2014. The increase of approximately $1.0 million in depreciation and amortization expense in fiscal 2015 as compared to fiscal 2014 reflects approximately $0.4 million related to 4270 Fritch, approximately $0.2 million related to 5220 Jaindl and an increase of approximately $0.3 million related to building improvements and tenant improvements in Griffin’s other properties.

Griffin’s general and administrative expenses were essentially unchanged at approximately $7.1 million in both fiscal 2015 and fiscal 2014. Increases of approximately $0.3 million of incentive compensation expense and approximately $0.2 million in expenses in real estate taxes and other expenses related to Griffin’s undeveloped land, which are included in general and administrative expenses, were essentially offset by decreases of approximately $0.2 million in expenses related to Griffin’s non‑qualified deferred compensation plan, approximately $0.2 million in audit fee expenses and approximately $0.1 million in all other general and administrative expenses. The lower expense related to Griffin’s non‑qualified deferred compensation plan reflects lower stock market performance in fiscal 2015, as compared to fiscal 2014, that resulted in a lower increase on participant balances in fiscal 2015 as compared to fiscal 2014.

Griffin’s interest expense increased to approximately $3.7 million in fiscal 2015 from approximately $3.5 million in fiscal 2014. An increase in interest expense of approximately $0.5 million as a result of new mortgage loans in fiscal 2015 was partially offset by decreases in interest expense of approximately $0.2 million due to a higher amount of interest capitalized in fiscal 2015 as compared to fiscal 2014 and approximately $0.1 million from refinancing a mortgage loan on three NE Tradeport buildings at a lower interest rate in fiscal 2015. The increase in the amount of interest capitalized in fiscal 2015 as compared to fiscal 2014 principally reflects an increase in construction activities in fiscal 2015 as compared to fiscal 2014, including the construction of 5220 Jaindl, which was completed and placed in service at the end of the fiscal 2015 third quarter.

Investment income decreased to approximately $0.2 million in fiscal 2015 from approximately $0.3 million in fiscal 2014. The decrease of approximately $0.1 million principally reflects lower interest income from the amortization

of the discount on the note receivable from Monrovia related to the Imperial Sale that closed in January 2014. The note receivable from Monrovia was fully paid on June 1, 2015.

In fiscal 2014, Griffin reported an approximately $0.3 million gain from the sale of 500,000 shares of its common stock in Centaur Media for cash proceeds of approximately $0.6 million. Griffin did not sell any of its Centaur Media common stock in fiscal 2015. Griffin holds 1,952,462 shares of Centaur Media common stock and has not sold any Centaur Media common stock subsequent to the end of fiscal 2014. Management expects that it will continue to sell its Centaur Media common stock when it believes that sales terms are favorable. Also in fiscal 2014, Griffin incurred a loss on debt extinguishment of approximately $0.1 million related to the refinancing of two mortgage loans.

Griffin’s effective income tax rate was 47.2% in fiscal 2015 as compared to 8.3% in fiscal 2014. The fiscal 2015 effective income tax rate reflects the federal statutory rate of 35% and state income taxes, including adjustments to the expected realization rate that certain state tax benefits will provide to Griffin in future years. To the extent that actual results differ from current projections, the projected realization rate would be different than the rate presently being used. In fiscal 2014 there was an income tax provision as compared to a pretax loss because the effect of reductions to certain state income tax benefits exceeded the federal income tax benefit, resulting in an overall income tax provision. The reductions to certain state income tax benefits were based on management’s projections of the expected realization rate that those state tax benefits will provide to Griffin.

Income from discontinued operations of approximately $0.1 million, net of tax, in fiscal 2014 reflected approximately $0.3 million, net of tax, for the effect of the termination of Griffin’s postretirement benefits program and reclassification of actuarial gains previously reflected in other comprehensive income into net income, partially offset by approximately $0.2 million, net of tax, for the loss from the growing operations of the landscape nursery business through the date of the Imperial Sale. As substantially all of the former participants in Griffin’s postretirement benefits program had been employed in the growing operations of the landscape nursery business that was reported as a discontinued operation, the reclassification of the actuarial gains is mostly included in the results of discontinued operations in fiscal 2014.

Off Balance Sheet Arrangements

Griffin does not have any off balance sheet arrangements.

Liquidity and Capital Resources

Net cash provided by operating activities was approximately $7.2 million in fiscal 2016 as compared to approximately $13.0 million in fiscal 2015. The approximately $5.8 million decrease in net cash provided by operating activities in fiscal 2016, as compared to fiscal 2015, principally reflects a decrease of approximately $6.8 million of cash from changes in assets and liabilities in fiscal 2016 as compared to fiscal 2015, partially offset by an increase of approximately $1.1 million in cash generated from the increase in net income as adjusted for noncash expenses and credits and gain on sale of properties in fiscal 2016 as compared to fiscal 2015, which principally reflects the increase in profit from leasing activities in fiscal 2016, driven by the increase in rental revenue.

The decrease in cash from changes in assets and liabilities in fiscal 2016, as compared to fiscal 2015, principally reflects fiscal 2016 having an approximately $0.7 million decrease in cash from the change in deferred revenue as compared to an approximately $4.9 million increase in cash from the change in deferred revenue in fiscal 2015 and fiscal 2016 having an approximately $0.1 million increase in cash from the change in other assets as compared to an approximately $1.1 million increase in cash from the change in other assets in fiscal 2015. The change in deferred revenue of approximately $0.7 million in fiscal 2016 principally reflects the recognition of revenue from the Windsor Land Sale. The change in deferred revenue in fiscal 2015 principally reflects approximately $6.4 million of cash received from the tenant in 758 Rainbow for building and tenant improvements that is being recognized as additional rental revenue over the lease term, offset by the reduction of deferred revenue from the recognition of approximately $2.5 million of revenue from the Windsor Land Sale. The cash received by Griffin from the tenant in fiscal 2015 was related to building and tenant improvements in connection with a ten year full building lease of 758 Rainbow that commenced in the fourth quarter of fiscal 2014. The increase in cash from the change in other assets in fiscal 2015 principally reflected approximately $0.9 million from a reduction in lease receivables.

Net cash provided by operating activities increased to approximately $13.0 million in fiscal 2015 from approximately $5.4 million in fiscal 2014. The approximately $7.6 million increase in net cash provided by operating activities in fiscal 2015, as compared to fiscal 2014, principally reflects: (a) an increase of approximately $4.6 million of cash generated from changes in assets and liabilities in fiscal 2015 as compared to fiscal 2014; and (b) an increase of approximately $3.0 million in cash generated from continuing operations, including adjustments to reconcile income (loss) from continuing operations to net cash provided by operating activities of continuing operations. The increase in cash from changes in assets and liabilities in fiscal 2015, as compared to fiscal 2014, principally reflects approximately $4.9 million of cash from an increase in deferred revenue in fiscal 2015 as compared to approximately $3.0 million of cash in fiscal 2014 and approximately $1.1 million of cash from a change in other assets in fiscal 2015 as compared to an approximately $0.6 million decrease in cash in fiscal 2014. The change in deferred revenue in fiscal 2015 includes cash of approximately $6.4 million received from the tenant in 758 Rainbow for building and tenant improvements that is being recognized as additional rental revenue over the lease term, offset principally by the reduction of deferred revenue from the recognition of approximately $2.5 million of revenue from the Windsor Land Sale. The increase in cash from the change in other assets in fiscal 2015 principally reflects approximately $0.9 million from a reduction in lease receivables and approximately $0.4 million from a reduction in escrows related to Griffin’s mortgage loans.

Net cash used in investing activities was approximately $16.6 million in fiscal 2016 as compared to approximately $29.7 million in fiscal 2015 and approximately $3.9 million in fiscal 2014. The net cash used in investing activities in fiscal 2016 reflects cash payments of approximately $15.7 million for additions to real estate assets and approximately $0.9 million for deferred leasing costs and other uses. The cash spent on deferred leasing costs and other in fiscal 2016 principally reflects lease commissions paid to real estate brokers for new leases. The approximately $3.5 million of proceeds, net of transaction expenses, received from the Griffin Center Land Sale were placed in escrow for potential acquisition of a replacement property in a like-kind exchange under Section 1031 of the Internal Revenue Code of 1986, as amended.

Cash payments for additions to real estate assets in fiscal 2016 reflect the following:

 

Cash payments in fiscal 2016 for new building construction reflect the construction, on speculation, of 5210 Jaindl, which was started in the fiscal 2015 fourth quarter and completed in fiscal 2016. Through November 30, 2016, Griffin has made total cash payments of approximately $12.0 million for the direct site work and building shell for 5210 Jaindl. Cash payments in fiscal 2016 for tenant and building improvements principally reflect tenant improvement work related to leases signed in the latter part of fiscal 2015 and fiscal 2016. The cash spent on development costs and infrastructure improvements in fiscal 2016 principally reflects road improvements related to the Windsor Land Sale.

The net cash used in investing activities of approximately $29.7 million in fiscal 2015 reflects cash payments of approximately $31.2 million for additions to real estate assets and approximately $1.0 million for deferred leasing costs and other uses, partially offset by $1.5 million of cash received from the second and final payment under the note receivable from Monrovia and approximately $1.0 million of cash proceeds from property sales.

Cash payments for additions to real estate assets in fiscal 2015 reflect the following:

Fiscal 2015 cash payments for new building construction, including site work, principally reflected the construction, on speculation, of 5220 Jaindl and the start of site work for 5210 Jaindl. The fiscal 2015 cash payments for tenant and building improvements related to leasing include approximately $7.8 million for improvements in connection with the ten year full building lease of 758 Rainbow and approximately $2.9 million of improvements at 5220 Jaindl.

The cash payments for development costs and infrastructure improvements primarily reflected ongoing road construction and other offsite improvements required under the terms of the Windsor Land Sale.

Proceeds from property sales in fiscal 2015 reflect approximately $0.6 million from the sale of land that had been part of the Connecticut farm used by Imperial but not part of the long-term lease to Monrovia and approximately $0.4 million from the deposit retained on the sale of the Florida Farm that did not close.

The net cash used in investing activities of approximately $3.9 million in fiscal 2014 reflects cash payments of approximately $15.6 million for additions to real estate assets and approximately $1.2 million for deferred leasing costs and other uses, substantially offset by: (a) cash proceeds of approximately $8.9 million from the Windsor Land Sale that were returned from escrow; (b) cash proceeds of $2.75 million received from the first payment under the note receivable from Monrovia; (c) cash proceeds of approximately $0.6 million from sales of Centaur Media common stock; (d) cash proceeds of approximately $0.6 million, net of expenses, from property sales; and (e) cash proceeds of approximately $0.2 million from the Imperial Sale. At the closing of the Windsor Land Sale in the fiscal 2013 fourth quarter, the proceeds of approximately $8.9 million were placed in escrow for a potential acquisition of a replacement property in a like‑kind exchange under Section 1031 of the Internal Revenue Code of 1986, as amended. As Griffin did not acquire a replacement property, the cash proceeds were returned to Griffin in fiscal 2014.

Cash payments for additions to real estate assets in fiscal 2014 reflect the following:

Fiscal 2014 cash payments for new building construction principally reflected the completion of construction of 4270 Fritch. Cash payments for development costs and infrastructure improvements in fiscal 2014 included approximately $2.0 million for site work on a residential project and approximately $1.0 million for road construction required under the terms of the Windsor Land Sale.

Net cash provided by financing activities was approximately $15.8 million in fiscal 2016 as compared to approximately $18.0 million in fiscal 2015 and approximately $1.4 million in fiscal 2014. The net cash provided by financing activities in fiscal 2016 reflects $45.5 million of proceeds from new mortgage debt (see below) and $0.6 million of mortgage proceeds released from escrow, partially offset by: (a) approximately $24.8 million of principal payments on mortgage loans; (b) approximately $3.4 million paid for the repurchase of common stock (see below); (c) a payment of approximately $1.5 million for a dividend on Griffin’s common stock that was declared in the fiscal 2015 fourth quarter and paid in fiscal 2016; and (d) approximately $0.6 million of payments for debt issuance costs. The principal payments on mortgage loans include approximately $21.1 million for the repayment of two mortgage loans that were refinanced (see below), approximately $2.7 million of recurring principal payments and a $1.0 million principal repayment from mortgage proceeds that had been held in escrow.

The net cash of approximately $18.0 million provided by financing activities in fiscal 2015 reflected net proceeds of approximately $40.4 million from three mortgage loans (see below) and approximately $0.1 million received from the exercise of stock options, partially offset by: (a) approximately $20.1 million of payments of principal on Griffin’s mortgage loans; (b) a payment of approximately $1.0 million for a dividend on Griffin’s common stock that was declared in the fiscal 2014 fourth quarter and paid in fiscal 2015; (c) approximately $0.8 million of payments for debt issuance costs related to the mortgage loans completed in fiscal 2015; and (d) approximately $0.6 million of mortgage proceeds placed in escrow. The principal payments on mortgage loans included approximately $17.9 million for the repayment of a mortgage loan that was refinanced (see below) and approximately $2.2 million of recurring principal payments.

The net cash of approximately $1.4 million provided by financing activities in fiscal 2014 reflected proceeds of approximately $5.5 million from a mortgage loan and approximately $0.1 million received from the exercise of stock options, partially offset by: (a) approximately $2.0 million for recurring payments of principal on Griffin’s mortgage loans; (b) a payment of approximately $1.0 million for a dividend on Griffin’s common stock that was declared in the fiscal 2013 fourth quarter and paid in fiscal 2014; (c) $1.0 million of mortgage proceeds placed in escrow; and (d) approximately $0.1 million of payments for debt issuance costs.

On November 17, 2016, Griffin closed on a nonrecourse mortgage (the “2016 Webster Mortgage”) for approximately $26.7 million. The 2016 Webster Mortgage refinanced an existing mortgage with Webster Bank, N.A. (“Webster”) which was due on September 1, 2025 and was collateralized by 5220 Jaindl (see below). The 2016 Webster Mortgage is collateralized by the approximately 280,000 square foot industrial/warehouse building, 5220 Jaindl, along with 5210 Jaindl, the adjacent approximately 252,000 square foot industrial building. Griffin received net proceeds of $13.0 million (before transaction costs), net of approximately $13.7 million used to refinance the existing mortgage with Webster. The 2016 Webster Mortgage has a ten year term with monthly principal payments based on a twenty-five year amortization schedule. The interest rate for the 2016 Webster Mortgage is a floating rate of the one month LIBOR rate plus 1.70%. At the time the 2016 Webster Mortgage closed, Griffin entered into an interest rate swap agreement with Webster that, combined with two existing swap agreements with Webster, effectively fixes the rate of the 2016 Webster Mortgage at 3.79% over the mortgage loan’s ten year term. 

On September 1, 2015, Griffin closed on a $14.1 million nonrecourse mortgage loan (the “Webster Mortgage Loan”) with Webster. The Webster Mortgage Loan was collateralized by 5220 Jaindl. At closing, Griffin received cash proceeds from the Webster Mortgage Loan (before transaction costs) of $11.5 million. Subsequent to the closing of this loan, the tenant that was leasing approximately 196,000 square feet in 5220 Jaindl exercised its option to lease the balance of the building and Webster advanced the balance of the mortgage loan proceeds ($2.6 million) to Griffin on December 10, 2015. The Webster Mortgage Loan had a floating interest rate of the one month LIBOR rate plus 1.65%, but Griffin entered into an interest rate swap agreement with Webster Bank at closing to effectively fix the interest rate at 3.77% over the loan term on the loan proceeds received at closing. At the time Griffin received the additional proceeds of $2.6 million, Griffin entered into a second interest rate swap agreement with Webster to effectively fix the interest rate on those loan proceeds at 3.67% for the balance of the term of the loan.

On April 26, 2016, Griffin closed on a nonrecourse mortgage (the “2016 PUB Mortgage”) with People’s United Bank, N.A. (“PUB”) and received mortgage proceeds of $14.35 million, before transaction costs. The 2016 PUB Mortgage refinanced an existing mortgage (the “2009 PUB Mortgage”) with PUB that was due on August 1, 2019 and was collateralized by four of Griffin’s NE Tradeport industrial/warehouse buildings totaling approximately 240,000 square feet (14, 15, 16 and 40 International Drive). The 2009 PUB Mortgage had a balance of approximately $7.4 million at the time of the refinancing and a floating interest rate of the one month LIBOR rate plus 3.08%. Griffin had entered into an interest rate swap agreement with PUB to effectively fix the rate on the 2009 PUB Mortgage at 6.58% for the term of that loan. The 2016 PUB Mortgage is collateralized by the same four properties as the 2009 PUB Mortgage along with another approximately 98,000 square foot industrial/warehouse building (35 International Drive) in NE Tradeport. At the closing of the 2016 PUB Mortgage, Griffin used a portion of the proceeds to repay the 2009 PUB Mortgage. The 2016 PUB Mortgage has a ten year term with monthly principal payments based on a twenty-five year amortization schedule. The interest rate for the 2016 PUB Mortgage is a floating rate of the one month LIBOR rate plus 2.0%. At the time the 2016 PUB Mortgage closed, Griffin entered into a second interest rate swap agreement with PUB that, combined with the existing interest rate swap agreement with PUB, effectively fixes the interest rate of the 2016 PUB Mortgage at 4.17% over the loan term. The terms of the 2016 PUB Mortgage require that if either the tenant that leases approximately 58,000 square feet in 40 International Drive or the tenant that leases approximately 40,000 square feet in 14 International Drive does not extend its respective lease when it expires in fiscal 2021, a subsidiary of Griffin will enter into a master lease of the vacated space. The master lease would be guaranteed by Griffin and be in effect until either the space is re-leased to a new tenant or the due date of the 2016 PUB Mortgage Loan, whichever occurs first.

On December 31, 2014, Griffin closed on a nonrecourse mortgage loan (the “2025 KeyBank Mortgage”) on 4275 Fritch Drive (“4275 Fritch”) with First Niagara Bank, which was subsequently acquired by KeyBank. The 2025 KeyBank Mortgage refinanced an existing mortgage loan on 4275 Fritch and added 4270 Fritch to the collateral. Griffin received mortgage proceeds of approximately $10.9 million (before transaction costs) in addition to approximately $8.9 million used to refinance the existing mortgage on 4275 Fritch. The 2025 KeyBank Mortgage is collateralized by 4270 Fritch, an approximately 303,000 square foot industrial/warehouse building, and 4275 Fritch, an adjacent approximately 228,000 square foot industrial/warehouse building. At the time of the mortgage closing, approximately 201,000 square feet of 4270 Fritch was leased. On December 11, 2015, Griffin received additional mortgage proceeds of $1.85 million (the “KeyBank Earn-Out”) when the remaining vacant space of approximately 102,000 square feet was leased. Griffin agreed that it would enter into a master lease with its subsidiaries that own 4270 Fritch and 4275 Fritch in order to maintain a minimum net rent equal to the debt service on the 2025 KeyBank Mortgage. The master lease would be co-terminus with the 2025 KeyBank Mortgage. The 2025 KeyBank Mortgage has a ten year term with monthly

principal payments based on a twenty-five year amortization schedule. The interest rate for the 2025 KeyBank Mortgage is a floating rate of the one month LIBOR rate plus 1.95%. At the time the 2025 KeyBank Mortgage closed, Griffin entered into an interest rate swap agreement that, combined with an existing interest rate swap agreement, effectively fixed the rate of the 2025 KeyBank Mortgage at 4.43% over the mortgage loan’s ten year term. At the time the KeyBank Earn-Out was received, Griffin entered into another interest rate swap agreement for a notional principal amount of $1.85 million to fix the interest rate on the KeyBank Earn-Out at 3.88%. The combination of the three interest rate swap agreements effectively fixes the interest rate on the 2025 KeyBank Mortgage at 4.39% over the remainder of the mortgage loan’s ten year term.

On July 29, 2015, a subsidiary of Griffin closed on a new $18.0 million nonrecourse mortgage loan (the “40|86 Mortgage Loan”) with 40|86 Mortgage Capital, Inc. The 40|86 Mortgage Loan is collateralized by three industrial buildings in NE Tradeport (75 International Drive, 754 and 758 Rainbow Road) aggregating approximately 392,000 square feet, has a fixed interest rate of 4.33% and a fifteen year term, with payments based on a thirty year amortization schedule. At closing, Griffin received cash proceeds from the 40|86 Mortgage Loan (before financing costs) of approximately $14.9 million, which were used in refinancing the maturing mortgage that had a principal balance of approximately $17.9 million and an interest rate of 5.73%. The remaining approximately $3.1 million of mortgage proceeds were deposited into escrow. As per the terms of the 40|86 Mortgage Loan, $2.5 million of the escrowed proceeds were released to Griffin in fiscal 2015 when the tenant that was leasing approximately 88,000 square feet on a month‑to‑month basis in 754 Rainbow entered into a long‑term lease for that space and the remaining $0.6 million of escrowed proceeds were released to Griffin in fiscal 2016 when tenant improvements for the full building tenant in 758 Rainbow was completed.

On July 22, 2016, Griffin entered into a two-year extension to its revolving credit line with Webster (the “Webster Credit Line”) that was scheduled to expire on August 1, 2016. The terms of the extension increased the amount of the credit line from $12.5 million to $15.0 million and Griffin has the option to further extend the credit line for an additional year provided there is no default at the time such extension is requested. The interest rate on the credit line extension remained at the one month LIBOR rate plus 2.75% and the collateral for the Webster Credit Line, Griffin’s eight single-story office/flex buildings aggregating approximately 217,000 square feet in Griffin Center South, an approximately 48,000 square foot single-story office building in Griffin Center, and an approximately 18,000 square foot industrial/warehouse building in Griffin Center South also remained the same. There have been no borrowings under the Webster Credit Line since its inception, however, the Webster Credit Line does secure certain unused standby letters of credit aggregating approximately $1.8 million that are related to Griffin's development activities.

On March 31, 2016, Griffin’s Board of Directors authorized a program under which Griffin may repurchase up to $5.0 million in outstanding shares of its common stock over a twelve month period in privately negotiated transactions. The repurchase program does not obligate Griffin to repurchase any specific number of shares, and may be suspended at any time at management’s discretion. In fiscal 2016, Griffin repurchased 105,000 shares of its common stock for approximately $3.4 million. Subsequent to November 30, 2016, Griffin repurchased an additional 19,173 shares of its common stock for approximately $0.6 million, resulting in approximately $1.0 million available for additional stock repurchases under the current repurchase program.

Griffin’s payments (including principal and interest) under contractual obligations as of November 30, 2016 are as follows:

On January 25, 2016, Griffin entered into an Option Purchase Agreement (the “Option Agreement”) whereby Griffin granted the buyer an exclusive option, in exchange for a nominal fee, to purchase approximately 280 acres of undeveloped land in Simsbury for approximately $7.7 million. The buyer may extend the option period up to three years upon payment of additional option fees. Subsequent to November 30, 2016, the buyer paid Griffin to extend the option period. The land subject to the Option Agreement does not have any of the approvals that would be required for the buyer’s planned use of the land. A closing on the land sale contemplated by the Option Agreement is subject to several significant contingencies, including the buyer securing contracts under a competitive bidding process that would require changes in the use of the land and obtaining local and state approvals for that planned use. There is no guarantee that the sale of undeveloped land as contemplated under the Option Agreement will be completed under its current terms, or at all.

On March 23, 2016, Griffin entered into an Agreement of Sale and Purchase (the “East Allen Purchase Agreement”) to acquire an approximately 31 acre site in East Allen Township, Northampton County, Pennsylvania for development of an industrial/warehouse building. Subsequently, Griffin exercised its right to terminate the East Allen Purchase Agreement based on its due diligence findings. After the East Allen Purchase Agreement was terminated, Griffin has continued negotiations with the seller to reach a new agreement. Completion of a new purchase agreement is uncertain at this time.

On May 4, 2016, Griffin entered into an Agreement of Sale and Purchase, as amended (the “Macungie Purchase Agreement”), to acquire, for a purchase price of $1.8 million, an approximately 14 acre site in Upper Macungie Township, Lehigh County, Pennsylvania for development of an approximately 134,000 square foot industrial/warehouse building. A closing on the land acquisition contemplated by the Macungie Purchase Agreement is subject to several significant contingencies, including Griffin obtaining all governmental approvals for its planned development of the land that would be acquired. There is no guarantee that the land acquisition as contemplated under the Macungie Purchase Agreement will be completed under its current terms, or at all.

On December 23, 2016, Griffin entered into an agreement to sell approximately 67 acres of its undeveloped land in Phoenix Crossing for approximately $10.25 million. Completion of this transaction is subject to a number of factors, including the buyer obtaining all necessary final permits from governmental authorities for development plans of the site it would acquire and the buyer receiving municipal and state economic development incentives it deems adequate. There is no guarantee that this transaction will be completed under its current terms, or at all.

On January 20, 2017, Griffin agreed to terms on a nonrecourse mortgage loan of up to $12.0 million on two NE Tradeport industrial/warehouse buildings aggregating approximately 275,000 square feet. Completion of this proposed new mortgage loan is subject to a number of contingencies, including the entry into a definitive loan agreement. There is no guarantee that this transaction will be completed under its current terms, or at all.

In the near‑term, Griffin plans to continue to invest in its real estate business, including the construction of additional buildings on its undeveloped land, expenditures for tenant improvements as new leases are signed,

infrastructure improvements required for future development of its real estate holdings and the potential acquisition of additional properties and/or undeveloped land parcels in New England, the Mid‑Atlantic states and other areas to expand the industrial/warehouse portion of its real estate portfolio. Real estate acquisitions may or may not occur based on many factors, including real estate pricing. Griffin may commence speculative construction projects on its undeveloped land that is either currently owned or acquired in the future if it believes market conditions are favorable for such development. Griffin may also construct a build‑to‑suit facility on its undeveloped land if lease terms are favorable.

As of November 30, 2016, Griffin had cash and cash equivalents of approximately $24.7 million. Management believes that its cash and cash equivalents as of November 30, 2016, cash generated from operations, and borrowing capacity under its $15.0 million revolving credit agreement with Webster will be sufficient to meet its working capital requirements, the continued investment in real estate assets, completion of the acquisition of undeveloped land in Upper Macungie Township, the repurchase of its common stock under the stock repurchase program currently in place, and the payment of dividends on its common stock, when and if declared by the Board of Directors, for at least the next twelve months. Griffin may also continue to seek additional financing secured by nonrecourse mortgage loans on its properties. Griffin’s real estate portfolio currently includes four Connecticut buildings aggregating approximately 314,000 square feet that are not mortgaged, however, Griffin has agreed to terms for a nonrecourse mortgage loan on two of those buildings that combined are approximately 275,000 square feet. Completion of this proposed new mortgage loan is subject to a number of contingencies, including the entry into a definitive loan agreement. There is no guarantee that this transaction will be completed under its current terms, or at all.

Forward‑Looking Information

The above information in Management’s Discussion and Analysis of Financial Condition and Results of Operations includes “forward‑looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Exchange Act of 1934, as amended. These forward‑looking statements include, but are not limited to, Griffin’s expectations regarding the leasing of currently vacant space, the acquisition of additional properties and/or undeveloped land parcels, the commencement of speculative construction, the ability to obtain mortgage financing on Griffin’s unleveraged properties, completion of the acquisition of land in Upper Macungie Township, completion of a new agreement to acquire land in East Allen Township, completion of the sale of approximately 280 acres of undeveloped land in Simsbury, completion of the sale of approximately 67 acres of undeveloped land in Phoenix Crossing, completion of a mortgage loan on two NE Tradeport buildings aggregating approximately 275,000 square feet, Griffin’s anticipated future liquidity, and other statements with the words “believes,” “anticipates,” “plans,” “expects” or similar expressions. Although Griffin believes that its plans, intentions and expectations reflected in such forward‑looking statements are reasonable, it can give no assurance that such plans, intentions or expectations will be achieved. The forward‑looking statements made herein are based on assumptions and estimates that, while considered reasonable by Griffin as of the date hereof, are inherently subject to significant business, economic, competitive and regulatory uncertainties and contingencies, many of which are beyond the control of Griffin. Griffin’s actual results could differ materially from those anticipated in these forward‑looking statements as a result of various important factors, including those set forth under the heading Item 1A “Risk Factors” and elsewhere in this Annual Report.

 

 

ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

Market risk represents the risk of changes in the value of a financial instrument, derivative or non‑derivative, caused by fluctuations in interest rates, foreign exchange rates and equity prices. Changes in these factors could cause fluctuations in earnings and cash flows.

For fixed rate mortgage debt, changes in interest rates generally affect the fair market value of the debt instrument, but not earnings or cash flows. Griffin does not have an obligation to prepay any fixed rate debt prior to maturity and, therefore, interest rate risk and changes in the fair market value of fixed rate debt should not have a significant impact on earnings or cash flows until such debt is refinanced, if necessary. Griffin’s mortgage interest rates and related principal payment requirements are described in Note 5 to the consolidated financial statements included in Item 8. “Financial Statements and Supplementary Data.”

For variable rate debt, changes in interest rates generally do not impact the fair market value of the debt instrument, but do affect future earnings and cash flows. As of November 30, 2016, Griffin had a total of approximately

$81.6 million of variable rate debt outstanding, for which Griffin has entered into interest rate swap agreements which effectively fix the interest rates on that debt. There were no other variable rate borrowings outstanding as of November 30, 2016.

Griffin is exposed to market risks from fluctuations in interest rates and the effects of those fluctuations on the market values of Griffin’s cash equivalents. These investments generally consist of overnight investments that are not significantly exposed to interest rate risk.

Griffin does not have foreign currency exposure in operations. However, Griffin does have an investment in a public company, Centaur Media plc, based in the United Kingdom. The ultimate liquidation of that investment and conversion of proceeds into United States currency is subject to future foreign currency exchange rates involving the UK pound sterling. A 10% decrease in the foreign currency exchange rate at November 30, 2016 would have resulted in an approximately $0.1 million reduction of the fair value of that investment.

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

GRIFFIN INDUSTRIAL REALTY, INC.

Consolidated Balance Sheets

(dollars in thousands, except per share data)

See Notes to Consolidated Financial Statements.

GRIFFIN INDUSTRIAL REALTY, INC.

Consolidated Statements of Operations

(dollars in thousands, except per share data)

See Notes to Consolidated Financial Statements.

GRIFFIN INDUSTRIAL REALTY, INC.

Consolidated Statements of Comprehensive Income (Loss)

(dollars in thousands)

See Notes to Consolidated Financial Statements.