GAV Grubb & Ellis Realty Advisors,

 

 

FORM 10-Q

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

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

For the quarterly period ended December 31, 2007

OR

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

For the transition period from                      to                     

Commission File Number: 001-32753

500 West Monroe Street, Suite 2800,
Chicago, IL 60661

(Address of principal executive offices)
(Zip Code)

(312) 698-6700

(Registrant’s telephone number, including area code)

No Change

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes þ     No o

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. (Check one):

o Large accelerated filer       þ Accelerated filer       o Non-accelerated filer       o Smaller reporting company

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

 

 

TABLE OF CONTENTS

Item 1. Financial Statements

See notes to financial statements.

See notes to financial statements.

See notes to financial statements

GRUBB & ELLIS REALTY ADVISORS, INC.
(a corporation in the development stage)

GRUBB & ELLIS REALTY ADVISORS, INC.
(a corporation in the development stage)

NOTES TO FINANCIAL STATEMENTS

2. New Accounting Standard

     The Financial Accounting Standards Board issued Interpretation No. 48, “Accounting for Uncertainty in Income Taxes (“FIN 48”)”. FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on accounting for derecognition, interest, penalties, accounting in interim periods, disclosure and classifications of matters related to uncertainty in income taxes, and transitional requirements upon adoption of FIN 48. The Company adopted FIN 48 as required effective July 1, 2007. The adoption of FIN 48 did not have a material impact on its financial position or results of operations.

3. Interim Period Reporting

     The accompanying unaudited financial statements include the accounts of Grubb & Ellis Realty Advisors, Inc. and are prepared in accordance with U.S. generally accepted accounting principles for interim financial information and the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. generally accepted accounting principles for complete financial statements and, therefore, should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended June 30, 2007.

     The financial statements have been prepared in conformity with U.S. generally accepted accounting principles, which require management to make estimates and assumptions that affect the reported amounts of assets and liabilities (including disclosure of contingent assets and liabilities) at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

     In the opinion of management, all adjustments necessary for a fair statement of the financial position and results of operations for the interim periods presented have been included in these financial statements and are of a normal and recurring nature.

     Operating results for the three months and six months ended December 31, 2007 are not necessarily indicative of the results that may be achieved in future periods.

4. Initial Public Offering

     As of March 3, 2006, the Company had sold 23,958,334 units (“Units”), which includes 3,125,000 additional Units sold to cover over-allotments pursuant to a public offering. Of the 23,958,334 Units offered, 22,291,667 Units were sold to the public and 1,666,667 Units were sold to Kojaian Holdings, L.L.C., an entity affiliated with the Chairman of the Board of both the Company and corporate sponsor. Each Unit consists of one share of common stock and two warrants. Each warrant will entitle the holder to purchase one share of common stock for $5.00. Warrants become exercisable on the later of (a) one year from the effective date of the registration statement, or (b) the completion of a Business Combination. The warrants expire four years from the effective date of the registration statement. The warrants will be redeemable at a price of $0.01 per warrant upon 30 days prior notice and after the warrants become exercisable, only in the event the last sales price of the common stock is at least $8.50 per share for any 20 trading days within a 30 day trading period ending on the third day prior to the date on which notice of redemption is given.

GRUBB & ELLIS REALTY ADVISORS, INC.
(a corporation in the development stage)

NOTES TO FINANCIAL STATEMENTS

5. Stockholders’ Equity

     The Company has authorized 120,000,000 shares of common stock at a par value of $0.0001 per share and 5,000,000 shares of preferred stock with a par value of $0.0001 per share. There are 29,834,403 shares of common stock issued and outstanding as of December 31, 2007 after giving effect to the stock splits noted below. There are no shares of preferred stock outstanding as of December 31, 2007. The Company sold to Deutsche Bank Securities Inc. (“Underwriter”) for $100, as additional compensation, an option to purchase up to 958,333 Units at $6.60 per Unit, with warrants issued as part of the units exercisable at $6.25 per share. The Company determined, based upon a Black-Scholes model, that the fair value of the option on the date of sale was approximately $1.4 million using an expected life of five years, volatility of 20.9% and a risk-free interest rate of 4.51%. At that time, the Company had no trading history, and as a result it was not possible to value this option based on historical trades. To estimate the value of this option, the Company considered a basket of U.S. commercial real estate companies. Management believes that this volatility is a reasonable benchmark to use in estimating the value of this option. The actual volatility of this option depended on many factors that cannot be precisely valued. The Company accounted for the fair value of the option, inclusive of the receipt of the $100 cash payment, as a cost of the public offering resulting in a charge directly to stockholders’ equity.

     All common stock and common stock related information has been adjusted to give retroactive effect to a 1 for 1.441932 reverse stock split of the Company’s common stock effected February 3, 2006 and subsequent retroactive effect to a 1.25 for 1 forward stock split of the Company’s common stock effected February 23, 2006.

6. Income Taxes

     The provision for federal and state income taxes for the three months ended December 31, 2007 and December 31, 2006, for the six months ended December 31, 2007 and December 31, 2006 and for the period from September 7, 2005 (date of inception) through December 31, 2007 is as follows:

     The Company has recorded a deferred tax asset in the amount of $162,217 as of December 31, 2007 related to state net operating loss carry forwards, which expire through 2019; however, the Company fully reserved this deferred tax asset due to the uncertainty in regards to the realization of this asset in future periods.

     The Company has approximately 47.9 million warrants outstanding, which are not reflected as dilutive securities since their exercisability is contingent upon a successful Business Combination.

GRUBB & ELLIS REALTY ADVISORS, INC.
(a corporation in the development stage)

NOTES TO FINANCIAL STATEMENTS

8. Related Party Transactions

     Grubb & Ellis is the Company’s corporate sponsor. For an initial investment of $2,500,000, Grubb & Ellis, on behalf of itself and all directors, purchased an aggregate 5,876,069 shares of common stock. (Also see Note 10 — Subsequent Events for further information related to shares owned by Grubb & Ellis.) Pursuant to an agreement with Deutsche Bank Securities Inc., Grubb & Ellis also agreed to purchase, in the public marketplace, up to $3,500,000 of warrants in the open market place if the market price was less than $0.70 during the period commencing May 3, 2006 through June 28, 2006. Grubb & Ellis agreed to purchase such warrants pursuant to an agreement in accordance with the guidelines specified by Rule 10b5-1 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), through an independent broker-dealer registered under Section 15 of the Exchange Act that did not participate in the Company’s public offering. In addition, Grubb & Ellis further agreed that any such warrants purchased by it will not be sold or transferred until the completion of a Business Combination. On June 28, 2006, the Company agreed to a sixty-day extension of this agreement. Pursuant to this warrant purchase program, Grubb & Ellis purchased an aggregate of 4,645,521 warrants through August 27, 2006, the extended date of the agreement, for an aggregate purchase price excluding commissions of $2,178,297, or approximately $0.47 per warrant. As of March 2, 2006, Grubb & Ellis had advanced to the Company approximately $511,000 during its initial phase through direct payment of certain costs associated with the Offering. The advance was repaid without interest on March 3, 2006 from net proceeds upon the closing of the Offering. In addition, as of December 31, 2007, Grubb & Ellis advanced on the Company’s behalf approximately $1,142,830 through direct payment of certain costs associated with the pursuit of target acquisitions. These costs are included in accounts payable in the December 31, 2007 balance sheet.

     All of the officers of the Company are also officers of Grubb & Ellis. The officers and directors of the Company will not initially receive compensation from the Company; however, each of the directors of the Company received 41,670 shares from the initial shares purchased by Grubb & Ellis.

     Grubb & Ellis has agreed that, commencing on February 27, 2006, the effective date of the registration statement, it will make available to the Company a small amount of office space and certain office and secretarial services, as may be required from time to time. GERA considers its current office space adequate for current operations. Upon consummation of the acquisition, the principal executive offices of GERA will continue to be located at 500 West Monroe Street, Suite 2800, Chicago, Illinois 60661.

     The Company pays Grubb & Ellis $7,500 per month for these services. This arrangement is solely for the Company’s benefit and is not intended to provide compensation in lieu of fees. As of December 31, 2007, the Company had paid cumulative such fees totaling $157,500 to Grubb & Ellis. The Company will reimburse certain out of pocket expenses incurred by Grubb & Ellis in connection with seeking to effect a Business Combination.

     The Company has entered into a Master Agreement for Services (“MSA”) with Grubb & Ellis, whereby Grubb & Ellis will serve as the exclusive agent with respect to commercial real estate brokerage and consulting services relating to real property acquisitions, dispositions as well as agency leasing. The initial term of the MSA is five years and is cancelable based on certain conditions as defined. The Company also entered into a Property Management Agreement (“PMA”) with Grubb & Ellis’ wholly owned subsidiary, Grubb & Ellis Management Services (“GEMS”), whereby GEMS will serve as sole exclusive managing agent for all real property acquired. The initial term of the PMA is 12 months and will automatically renew unless notice is given within 30 days prior to the end of the term. Either party can terminate with 60 days notice and based on various conditions as defined within the PMA. Finally, the Company has entered into a Master Agreement for Project Management Services with GEMS. The Project Management Agreement contains a 60-day cancellation provision by either party.

GRUBB & ELLIS REALTY ADVISORS, INC.
(a corporation in the development stage)

NOTES TO FINANCIAL STATEMENTS

9. Material Contract

     On October 2, 2006, GBE formed GERA Property Acquisition, LLC (“Property Acquisition”), a wholly owned subsidiary of GBE. GBE formed Property Acquisition as a holding company, which in turn established three separate wholly owned special purpose entities (the “SPE’s”), to acquire Abrams Centre located in Dallas, Texas (“Abrams Centre”), 6400 Shafer Court located in Rosemont, Illinois (“6400 Shafer”), and Danbury Corporate Center located in Danbury, Connecticut (the “Corporate Center”) (collectively the “Properties”) with the intention of selling them to the Company on a basis that is cost neutral to GBE.

     On June 18, 2007, the Company entered into a membership interest purchase agreement (the “LLC Acquisition Agreement”) pursuant to which the Company will acquire from Grubb & Ellis Company (“Grubb & Ellis” or “GBE”) all of the membership interests of Property Acquisition, LLC which, through its wholly-owned subsidiaries, owns three properties — Abrams Centre located in Dallas, Texas, 6400 Shafer Court located in Rosemont, Illinois, and Danbury Corporate Center located in Danbury, Connecticut. The aggregate value of the properties is sufficient for the Company’s acquisition of Property Acquisition LLC to constitute the Business Combination, if the transaction is approved by the holders of a majority of GERA common stock issued in the IPO and the holders of 20% or more of the common stock issued in the IPO do not vote against the Business Combination and exercise their conversion rights. On June 18, 2007, the Company filed a preliminary proxy statement with the SEC pursuant to which it will seek stockholder approval of the Business Combination and certain other matters.

10. Subsequent Events

     On January 25, 2008, GBE agreed, simultaneously upon the closing of the LLC Acquisition Agreement, to reduce its stock ownership interest of the issued and outstanding shares in the Company from 5,667,719 shares, or approximately 19% of the issued and outstanding shares, to 1,271,931 shares, or 5%, of the Company after giving effect to such share reduction. This reduction in stock ownership would be effected by the redemption by the Company of 4,395,788 of GBE’s Original Shares for the par value thereof ($.0001 per share), or an aggregate redemption price of approximately $440.

      Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

      NOTE REGARDING FORWARD-LOOKING STATEMENTS

     This Report contains statements that are forward looking and as such are not historical facts. Rather, these statements constitute projections, forecasts or forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. The statements are not guarantees of performance. They involve known and unknown risks, uncertainties, assumptions and other factors which may cause the actual results, performance or achievements of the Company to be materially different from any future results, performance or achievements expressed or implied by these statements. Such statements can be identified by the fact that they do not relate strictly to historical or current facts. These statements use words such as “believe,” “expect,” “should,” “strive,” “plan,” “intend,” “estimate,” “anticipate” or similar expressions. When the Company discusses its strategies or plans, it is making projections, forecasts or forward-looking statements. Actual results and stockholders’ value will be affected by a variety of risks and factors, including, without limitation, international, national and local economic conditions and real estate risks and financing risks and acts of terror or war. Many of the risks and factors that will determine these results and stockholder values are beyond the Company’s ability to control or predict. These statements are necessarily based upon various assumptions involving judgment with respect to the future.

     All such forward-looking statements speak only as of the date of this Report. The Company expressly disclaims any obligation or undertaking to release publicly any updates or revisions to any forward-looking statements contained herein to reflect any change in the Company’s expectations with regard thereto or any change in events, conditions or circumstances on which any such statement is based.

      CRITICAL ACCOUNTING POLICIES AND ESTIMATES

     A discussion of the Company’s critical accounting policies, which include the basis of presentation and investments held in trust, can be found in the Annual Report on Form 10-K for the fiscal year ended June 30, 2007. There have been no material changes to these policies in fiscal 2008.

      RESULTS OF OPERATIONS

     For the six months ended December 31, 2007, the Company generated net income of approximately $1,124,000, due to interest earned on investments held in trust. This income was partially offset by operating expenses incurred, which consisted primarily of professional fees, the monthly fee paid to Grubb & Ellis Company, insurance expense and franchise taxes, and the provision for income taxes.

     For the six months ended December 31, 2006, the Company generated net income of approximately $2,135,000, due to interest earned on investments held in trust. This income was partially offset by operating expenses incurred, which consisted primarily of professional fees, the monthly fee paid to Grubb & Ellis Company, insurance expense, and the provision for income taxes.

     For the period from September 7, 2005 (inception) through December 31, 2007, the Company generated net income of approximately $5,978,000 due to interest earned on investments held in trust. This income was also partially offset by operating expenses incurred which consisted primarily of professional fees, stock-based compensation expense and insurance expense, and the provision for income taxes.

      LIQUIDITY AND CAPITAL RESOURCES

     For the six months ended December 31, 2007, cash and cash equivalents decreased by approximately $45,000 due to the payment of operating expenses which consisted primarily of professional fees and the annual franchise tax. Net cash provided by operating activities was generated primarily from interest income received on the Company’s investments held in trust less estimated federal tax payments. This income, less the estimated tax payments, along with the proceeds from investment maturities was reinvested in short-term U.S. Treasury Bills during the quarter.

     For the six months ended December 31, 2006, cash and cash equivalents decreased by approximately $134,000 due to the payment of operating expenses which consisted primarily of professional fees and the monthly fee paid to Grubb & Ellis Company. Net cash provided by operating activities was generated primarily from interest income received on the Company’s investments held in trust less estimated federal tax payments. This income, less the estimated tax payments, along with the proceeds from investment maturities was reinvested in short-term U.S. Treasury Bills during the quarter.

PART II

OTHER INFORMATION

(Items 1, 2, 3, 4 and 5 are not applicable
for the quarter ended December 31, 2007)

Item 1A. Risk Factors

     A discussion of the factors that could adversely affect the Company’s ability to obtain favorable results and maintain or increase stockholder value, among other things, can be found in the Annual Report on Form 10-K for the fiscal year ended June 30, 2007. The risks described in the Company’s Annual Report on Form 10-K are not the only risks facing the Company. Additional risks and uncertainties not currently known to the Company or that the Company deems to be immaterial may also materially adversely affect the Company’s business financial condition and/or operating results.

Item 6. Exhibits

(31)		Section 302 Certifications
(32)		Section 906 Certification

SIGNATURE

     Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Grubb & Ellis Realty Advisors, Inc.

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