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History and Structure
The GCEAR platform was founded in 2009 with the launch of Griffin Capital Essential Asset REIT, Inc. (“EA-1”), a publicly-registered, non-traded REIT that acquired a geographically diversified portfolio of strategically-located, high-quality corporate office and industrial properties primarily net-leased to single tenants. By the end of 2014, EA-1 had reached its maximum primary offering amount in its follow-on offering, having raised approximately $1.3 billion in gross equity proceeds in its public and private offerings. By the end of 2018, the EA-1 portfolio had grown to 74 properties encompassing 19.9 million square feet with an acquisition value of approximately $3.0 billion. This growth was supported by significant strategic transactions, including a $521.5 million portfolio acquisition of 18 office properties from Columbia Property Trust, Inc. and an approximately $624.8 million stock-for-stock merger pursuant to which EA-1 acquired all of the ownership interests in Signature Office REIT, Inc.
As EA-1 completed its primary offering, Griffin Capital Essential Asset REIT II, Inc., a Maryland corporation (“EA-2”) was formed on November 20, 2013 under the Maryland General Corporation Law and qualified as a real estate investment trust ("REIT") commencinglaunched with the year endedsame focus and strategy as EA-1. By the end of 2018, EA-2 had raised approximately $734 million in gross equity proceeds and had a portfolio of 27 properties with an acquisition value of approximately $1.12 billion.
On December 31, 2015. We were organized primarily14, 2018, EA-1 further aligned management with investors by internalizing management in a transaction whereby the purposeformer sponsor of acquiring single tenant net lease properties that are considered essentialEA-1 and EA-2, Griffin Capital Company, LLC (“GCC”), and Griffin Capital, LLC sold the advisory, asset management and property management business of Griffin Capital Real Estate Company, LLC to EA-1 for GCEAR OP Units (as defined below). Also, on December 14, 2018, EA-1, EA-2 and certain other related entities entered into a merger agreement pursuant to which, on April 30, 2019, EA-1 and EA-2 combined operations (the “EA Merger”). The internalization and EA Merger generated significant benefits for stockholders, including a material improvement in combined cash flows and earnings, superior alignment of interests, increased size and scale, improved portfolio demographics and significant operating efficiencies. Following the occupying tenant, and have used a substantial amount ofEA Merger, the net proceeds from our initial public offering ("IPO") to invest in these properties. We have no employees and are externally advised and managed by an affiliate,surviving company was renamed Griffin Capital Essential Asset, AdvisorREIT, Inc.
We utilize a structure known as an “UPREIT” structure, pursuant to which we conduct all of our business through the GCEAR Operating Partnership, with the GCEAR Operating Partnership, directly or indirectly through subsidiaries, owning all of our assets and liabilities. As of December 31, 2020, GCEAR, as the sole general partner, controlled the GCEAR Operating Partnership and owned approximately 87.8% of its outstanding common limited partnership units (“GCEAR OP Units”). The remaining 12.2% of GCEAR OP Units are owned by GCC and other affiliates of the Company, as well as unaffiliated, third-party limited partners.
Our Competitive Strengths
We believe the following competitive strengths distinguish us from other owners and operators of net-leased office and industrial properties:
•Diverse, High-Quality Property Portfolio: As of December 31, 2020, our portfolio was comprised of 98 properties (including one land parcel held for future development) located in 25 states with 113 tenants throughout the United States, and after the closing of the CCIT II LLC, (the "Advisor")Merger, we expect to have a combined portfolio consisting of 123 properties in 26 states with approximately 136 tenants throughout the United States. As of December 31, 2020, our portfolio was approximately 88.5% leased (based on square footage). Our year endproperties offer strong geographic distribution, with no state accounting for more than approximately 11.8% of our portfolio, measured by percentage of our contractual net rent for the 12-month period subsequent to December 31, 2020.
•Diverse Portfolio of Creditworthy Tenants: We have a diverse tenant base, with no single tenant accounting for more than approximately 4.1% of our contractual net rent for the 12-month period subsequent to December 31, 2020 and our ten largest tenants accounting for approximately 28.7% of our contractual net rent for the 12-month period subsequent to December 31, 2020. Further, no single industry represents more than approximately 14.1% of our contractual net rent for the 12-month period subsequent to December 31, 2020. As of December 31, 2020, our portfolio had a weighted average remaining lease term of 6.83 years, with weighted average annual rent increases of approximately 2.1% through the remainder of the lease terms. Our contractual net rent for the 12-month period subsequent to December 31, 2020 is December 31.expected to be approximately $289.3 million, with approximately 64.3% to be generated by properties leased and/or guaranteed, directly or indirectly, by companies we have determined to be creditworthy.
•Proactive, Hands-On Portfolio and Asset Management: We employ a follow-on offering of upproactive and diligent approach to $2.2 billion of shares, consisting of upmanaging our assets in order to $2.0 billion of shares (the "Follow-On Offering") inmitigate risks and identify opportunities to maintain and/or add value to our primary offering and $0.2 billion of shares pursuantportfolio. We believe this focus allows us to generate superior risk-adjusted returns from our assets when compared to the distribution reinvestment plan ("DRP"). We reclassified all Class Ttypical passive net-lease strategy.
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•Proven and Class I shares soldExperienced Management Team: Our senior management team has an average of approximately 30 years of commercial real estate experience and a proven ability to acquire and proactively manage properties in the IPO as "Class AA" and "Class AAA" shares, respectively. order to maximize their value.
Our charter authorizes up to 1,000,000,000 shares of stock, of which 800,000,000 shares are designated as common stock at $0.001 par value per share and 200,000,000 shares are designated as preferred stock at $0.001 par value per share. Our 800,000,000 shares of common stock are authorized as follows: 150,000,000 shares are classified as Class T shares, 150,000,000 shares are classified as Class S shares, 150,000,000 shares are classified as Class D shares, 150,000,000 shares are classified as Class I shares, 70,000,000 shares are classified as Class A shares, 120,000,000 shares are classified as Class AA shares and 10,000,000 shares are classified as Class AAA shares.Business Strategy
Our primary investmentbusiness objectives are to:
distributions over time while maximizing stockholder value. We seek to acquire a portfolio consisting primarily of single tenantachieve these objectives by pursuing the following business and growth strategies:
•Own and Operate Well-Located, Business-Essential, Single-Tenant Assets Leased to High-Quality Tenants: We seek to own properties that are essential properties throughout the United States diversified by corporate credit, physical geography, product typeto our tenants’ business operations and lease duration. Althoughare leased to tenants that we have no current intentiondetermined to do so,be creditworthy, as we may also invest a portion of the net investment proceeds in single tenant business essentialbelieve such assets offer greater relative default protection. Our properties outside the United States. We acquire assets consistent with our single tenant acquisition philosophy by focusing primarily on properties:
areas. They are typically subject to long-term leases with defined rental rate increases, offering a consistent and predictable income stream across market cycles, or with short-term leases with high-probabilitythat we have determined have a high probability of renewal and potential for increasing rent.rent, offering income appreciation upon renewal.
•Achieve Stable and Predictable Cash Flows: We focus on generating durable cash flows for our investors. We seek to achieve this by focusing on high-quality properties and tenants that are subject to “net” leases with primarily annual contractual rental rate increases. When acquiring properties or entering into any new leases, we generally seek “net” leases, which mitigate cash flow volatility arising from fluctuations in property operating expenses and capital expenditure requirements. Under a “net” lease, the tenant pays certain operating expenses of the property in addition to “base rent,” which may include real estate taxes, special assessments, sales and use taxes, utilities, insurance, common area maintenance charges and building repairs. Additionally, in many of our leases, tenants are responsible for all or a portion of the costs of capital repairs and replacements. However, in some instances, we are responsible for some or all of these costs, which may include replacement and repair of the roof, structure, parking lots, and certain other major repairs and replacements with respect to the property. Our leases typically provide contractual rent increases, enabling potential distribution growth and a potential hedge against inflation, insulation from short-term economic cycles resulting from the long-term nature of the underlying leases, enhanced stability resulting from diversified credit characteristics of corporate credits and portfolio stability promoted through geographic and product type investment diversification.
•Provide Proactive Portfolio and Asset Management Services: Our management team believes that a proactive approach to portfolio and asset management is essential for maximizing risk-adjusted returns for our stockholders. This focus often allows us to pre-identify risks in our portfolio and take appropriate steps to mitigate them. Examples of ways in which we proactively manage risks include engaging in stringent property and lease compliance oversight, making regular on-site visits, developing deep tenant relationships and continuously monitoring tenant credit. We also proactively seek to add value to our portfolio through strategic property improvements, dynamic re-leasing strategies and other value-add strategies.
•Utilize Highly Selective Acquisition and Investment Policies
Criteria for Income-Producing Properties with Potential for Future Appreciation: We seek to make investments that satisfy the primary investment objective of providing regular cash distributions to our stockholders. However, because a significant factor in the valuation of income-producing real property is its potential for future appreciation, some properties we acquire may have the potential both for growth in value and for providing regular cash distributions to our stockholders.
•tenant creditworthiness;
•whether a property is essential to the business operations of the tenant;tenant(s);
•historical financial performance;
•geographic location and property type;
•projected demand in the area;
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•potential for capital appreciation;
demographics of the area, neighborhood growth patterns, economic conditions, and local market conditions;
•the potential for the construction of new properties in the area;
•new or recent Class A construction quality and condition;
•physical location, visibility, curb appeal and access;
•potential capital and tenant improvements and reserves required to maintain the property;
•proposed purchase price, terms and conditions;
•projected net cash flow yield and internal rates of return;
•potential for capital appreciation;
•prospects for liquidity through sale, financing or refinancing of the property;
•the potential for the construction of new properties in the area;ascertainable physical condition risks, such as environmental contamination; and
•treatment under applicable federal, state and local tax and other laws and regulations;
We make acquisitions directly or indirectly through the GCEAR Operating Partnership. We may issue GCEAR OP Units as consideration in transactions, which may facilitate more tax efficient transactions for sellers.
•Prudent Use of insurance to our Advisor on an annual basis. The insurance certificates are tracked and reviewed for compliance by our property manager.
Leverage: We may incur our indebtedness in the form of bank borrowings, purchase money obligations to the sellers of properties and publicly-or privately-placedpublicly or privately placed debt instruments or financing from institutional investors or other lenders. We may obtain ahave an existing credit facility (the “Credit Facility”), which we may amend, modify, or replace from time to time. We may borrow using our Credit Facility or obtain separate loans for each acquisition. Our indebtedness may be unsecured or may be secured by mortgages, or other interests in our properties, and by guarantees and/or pledges of membership interests. We may use borrowing proceeds to finance acquisitions of new properties, to pay for capital improvements, repairs or buildouts, to refinance existing indebtedness, to pay distributions, to fund redemptions of our shares or to provide working capital. To the extent we borrow on a short-term basis, we may refinance such short-term debt into long-term, amortizing mortgages once a critical mass of properties has been acquired and
We plan to the extent such debt is available at terms that are favorable to the then in-place debt.
We may borrow amounts from our Advisor or its affiliates only if such loan is approved by a majority of our directors, including a majority of our independent directors, not otherwise interested in the transaction, as fair, competitive, commercially reasonable and no less favorable to us than comparable loans between unaffiliated parties under the circumstances.
•Use of Joint Ventures: We have acquired and may continue to acquire some of our properties through joint ventures, including general partnerships, co-tenancies and other participations with real estate developers, owners and others. We may enter into joint ventures for a variety of reasons, including to own and lease real properties that would not otherwise be available to us, to diversify our sources of equity, to create income streams that would not otherwise be available to us, to facilitate strategic transactions with unaffiliated third parties, and/or to further diversify our portfolio by geographic region or property type. These joint ventures may be programmatic relationships with domestic or international institutional sources of capital. In determining whether to invest in a particular joint venture, we will evaluate the interests in real property that such joint venture owns or is being formed to own under the same criteria that we use to evaluate other real estate investments.
•Value Creation Through Strategic Capital Recycling: We pursue an efficient capital allocation strategy that maximizes the value of our portfolio. We may also seek to make significant improvements to our properties if we believe such investments will generate an attractive return on our capital. For example, from time to time we will have tenants that elect to vacate our properties. While we will typically seek to immediately re-lease the property to a new tenant, there may be times where physical investment is necessary to maximize potential tenant demand. In such instances, we may elect to make such investments, but only if we believe both market demand and the increase in prospective rental rates justifies our investment on a risk-adjusted basis. If they do not, then we may elect to sell the asset and redeploy the proceeds into opportunities with superior risk-adjusted return prospects, in each case in a manner that is consistent with our qualification as a REIT. We determine whether a particular property should be sold or otherwise disposed of based on factors including prevailing economic conditions, other investment opportunities and considerations specific to the condition, value and financial performance of the property and our portfolio. As of
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December 31, 2017,2020, we had sold 14 properties and one land parcel since our leverage ratio (definedinception, including two properties during the year ended December 31, 2020.
Investment Policies and our Organizational Documents
Our charter currently requires that we invest our funds, in the manner required by various provisions of the Statement of Policy Regarding Real Estate Investment Trusts published by the North American Securities Administrators Association. The following is a summary of certain provisions of our charter and does not purport to be a complete description of each of the provisions and limitations contained therein. A complete copy of our charter can be found in the exhibit list to this Annual Report on Form 10-K.
Our charter requires that our independent directors review our investment policies at least annually to determine that our policies are in the best interests of our stockholders. Each determination and the basis therefor is required to be set forth in the applicable meeting minutes. The methods of implementing our investment policies may also vary as new investment techniques are developed.
A majority of the directors on our Board of Directors (the “Board”), including a majority of our independent directors, may alter the methods of implementing our investment objectives and policies, except as otherwise provided in our credit agreement as debt to total asset value) was approximately 45.6%.charter, without the approval of our stockholders. Certain investment policies and limitations specifically set forth in our charter, however, may only be amended by a vote of the stockholders holding a majority of our outstanding shares.
Although we have no plans at this time to change any of our investment objectives or policies, our Board may change any and all such investment objectives or policies, including our focus on single-tenant, business-essential office and industrial properties, if it believes such changes are in the best interests of our stockholders. We intend to notify our stockholders of any change to our investment policies by disclosing such changes in a public filing.
Our organizational documents do not impose limitations on the number, size or type of properties that we may acquire or on the amount that may be invested in any particular property type or single property, though each acquisition is required to be approved by our Board.
Our organizational documents also do not impose limitations on the amount we can borrow for the purchase of any property. These documents provide that our aggregate borrowings, secured and unsecured, must be reasonable in relation to our net assets and must be reviewed by our Board at least quarterly. Our charter currently limits our borrowing to 300% of our net assets (equivalent to approximately 75% of the cost of our assets) unless any excess borrowing is approved by a majority of our independent directors and is disclosed to our stockholders in our next quarterly report, along with the justification for such excess.
We do not expect to engage in any significant lending and have not engaged in significant lending over the past three years. Certain of our corporate governance policies limit our ability to make loans to directors, executive officers and certain other related persons. However, we do not otherwise have a policy limiting our ability to make loans to other persons, although our ability to do so may be limited by applicable law, such as the Sarbanes-Oxley Act.
Our charter restricts us from engaging in various types of transactions with affiliates. A majority of our directors (including the independent directors) must generally approve any such transactions, as detailed further in our charter.
Exchange Listing and Other Strategic Transactions
While we are currently operating as a perpetual-life REIT, we may consider a potential liquidity event in the future (e.g., a merger, listing of our shares on a national securities exchange, sale of assets, etc.) (a “Strategic Transaction”). We are not limitedprohibited by our charter or otherwise from engaging in such a Strategic Transaction at any time. Subject to certain significant transactions that require stockholder approval, such as todissolution, merger into another entity in which we are not the form our investments may take, our investments in real estate will generally constitute acquiring fee titlesurviving entity, consolidation or interests in joint venturesthe sale or similar entities that own and operate real estate.
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Competition
The commercial real estate markets in which we operate are highly competitive. As we purchaseevaluate new properties for our portfolio, we are in competition with other potential buyers for the same properties, and such buyers may have greater financial resources or access to capital than we do or be willing to acquire properties in transactions that are more highly leveraged or are less attractive from a financial standpoint than we are willing to pursue. These factors may require us to pay more to purchase the property than if there were no other potential acquirers or we may have to locate another property that meets our investment criteria. Although we intend to acquire properties subject to existing leases, the leasing of real estate is often highly competitive, in the current market, and we may experience competition for tenants from owners and managers of competing projects. As a result, we may have to provide free rent, incur charges for tenant improvements, or offer other inducements, or we might not be able to timely lease the space, all of which may have material adverse effect on us. Competition may also lead to an adverse impactincrease in tenants electing to not renew their lease, seeking to reduce the amount of space they lease with us and/or seeking shorter lease terms, which may also have a material effect on our results of operations.us. At the time we elect to dispose of our properties, we will also be in competition with sellers of similar properties to locate suitable purchasers for our properties.
Our business is subject to many laws and governmental regulations. Changes in these laws and regulations, or their interpretation by agencies and courts, occur frequently.
We and any of our operating subsidiaries that we may form may be subject to state and local tax in states and localities in which they or we do business or own property. The tax treatment of us, the GCEAR Operating Partnership, any of our operating partnership, any operating subsidiaries we may form and the holders of our shares in local jurisdictions may differ from our U.S. federal income tax treatment.
Americans with Disabilities Act
Under the Americans with Disabilities Act of 1990 or ADA,(the “ADA”), all public accommodations and commercial facilities are required to meet certain federal requirements related to access and use by disabled persons. These requirements became effective in 1992. Complying with the ADA requirements could require us to remove access barriers. Failing to comply could result in the imposition of fines by the federal government or an award of damages to private litigants. Although we diligence compliance with laws, including the ADA, when we acquire properties, that substantially comply with these requirements, we may incur additional costs to comply with the ADA. In addition, a number of additional federal, state and local laws may require us to modify any properties we purchase,ADA or may restrict further renovations thereof, with respect to access by disabled persons. Additional legislation could impose financial obligations or restrictions with respectother regulations related to access by disabled persons. Although we believe that these costs will not have a material adverse effect on us, if required changes involve a greater amount of expenditures than we currently anticipate, our ability to make expected distributions could be adversely affected.
Environmental Matters
Under various federal, state and local laws, ordinances and regulations, a current or previous owner or operator of real property may be held liable for the costs of removing or remediating hazardous or toxic substances. These laws often impose clean-up responsibility and liability without regard to whether the owner or operator was responsible for, or even knew of, the presence of the hazardous or toxic substances. The costs of investigating, removing or remediating these substances may be substantial, and the presence of these substances may adversely affect our ability to rent propertieslease or sell the property or to borrow using the property as collateral and may expose us to liability resulting from any release of or exposure to these substances. If we arrange for the disposal or treatment of hazardous or toxic substances at another location, we may be liable for the costs of removing or remediating these substances at the disposal or treatment facility, whether or not the facility is owned or operated by us. We may be subject to common law claims by third parties based on damages and costs resulting from environmental contamination emanating from a site that we own or operate. Certain environmental laws also impose liability in connection with the handling of or exposure to asbestos-containing materials, pursuant to which third parties may seek recovery from owners or operators of real properties for personal injury associated with asbestos-containing materials and other hazardous or toxic substances. We maintain a pollution insurance policy for all of our properties to insure against the potential liability of remediation and exposure risk.
Other Regulations
The properties we acquire likelygenerally will be subject to various federal, state and local regulatory requirements, such as zoning and state and local fire and life safety requirements. Failure to comply with these requirements could result in the imposition of fines by governmental authorities or awards of damages to private litigants. WeThrough our due diligence process and protections in our leases, we aim to acquire properties that are in material compliance with all such regulatory requirements. However, we cannot assure youour stockholders that these requirements will not be changed or that new requirements will not be imposed which would require significant unanticipated expenditures by us and could have an adverse effect on our financial condition and results of operations.
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We may sell assets to third parties or to affiliates ofconduct our Advisor. Our nominating and corporate governance committee of our board of directors, which is comprised solely of independent directors, must review and approve all transactions between us and our Advisor and its affiliates.
Our Securities
We may make investments other than as previously described in this report, although we do not currently intend to do so. We have authority to purchase or otherwise reacquire our shares of common stock or any of our other securities. We have no present intention of repurchasingto repurchase any of our shares of common stock except pursuant to our share redemption programs, and weprogram (“SRP”) or pursuant to “net settlement” of shares to satisfy withholding obligations of our employees in connection with annual incentive awards.
We may in the future offer common stock or other debt or equity securities (including GCEAR OP Units) in exchange for cash, real estate assets or other investment targets or repurchase or otherwise reacquire common stock or other debt or equity securities.
We would only take such actionactions in conformity
with applicable federal and state laws and the requirements for qualifying as a REIT under the Internal Revenue Code of 1986, as amended (the "Code"“Code”).
GCEAR is internally managed by an experienced and Other Liquidity Events
We offer all of our assets,employees a comprehensive benefits and wellness package, which includes paid time off and parental leave, high-quality medical, dental and vision insurance, disability, pet and life insurance, fitness programs, 401(k) matching and long-term incentive plans. We also encourage internal mobility in our board maintains sole discretionorganization and provide career enhancement and education opportunities, as well as educational grants.
We believe that a wide range of opinions and experiences are key to change our current strategy as circumstances change if it believes such a change is in the best interestcontinued success, and we therefore value racial, gender, and generational diversity throughout our organization. As of December 31, 2020, approximately 45% of our stockholders. If our boardemployees were people of directors determines thatcolor/minorities and approximately 45% were women. In addition, as of December 31, 2020, a liquidity event is in the best interests of us and our stockholders, we expect that the board will take all relevant factors at that time into consideration when making a liquidity event decision, including prevailing market conditions.
Our social policy extends beyond the individuals within our organization and its affliliates provide management, acquisition, advisoryencourages our employees to have a positive impact on the community around us. Throughout our organization, we have a shared passion and certain administrative services for us.dedication to giving back to the communities in which we live and work. For this reason, we co-founded the Griffin Charitable Initiative, a program through which we actively contribute our time and resources to support charitable causes.
Available Information
We internally evaluate allmake available on the “SEC Filings” subpage of our propertieswebsite (www.gcear.com) free of charge our annual reports on Form 10-K, including this Annual Report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, ownership reports on Forms 3, 4 and interests therein5 and any amendments to those reports as one reportable segment.soon as practicable after we electronically file such reports with the SEC. Our electronically filed reports can also be obtained on the SEC’s internet site at http://www.sec.gov. Further, copies of our Code of Ethics and the charters for the Audit, Compensation, and Nominating and Corporate Governance Committees of our Board are also available on the “Corporate Governance” subpage of our website.
ITEM 1A. RISK FACTORS
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and/or our ability to make distributions to our stockholders could be materially and adversely affected, which we refer herein collectively as a “material adverse effect on us.” Some statements in this Annual Report on Form 10-K, including statements in the following risk factors, constitute forward-looking statements. Refer to the section entitled “Cautionary Note Regarding Forward-Looking Statements" for additional information regarding these forward-looking statements.
Risks Related to COVID-19
The current outbreak of COVID-19, and the future outbreak of other highly infectious or contagious diseases, could have a material adverse effect on us.
The current outbreak of COVID-19 has had, and another outbreak in the future could have, repercussions across regional and global economies and financial markets. The COVID-19 outbreak in many countries has had a significant adverse impact on global economic activity and has contributed to significant volatility and negative pressure in financial markets. The global impact of the pandemic has been rapidly evolving and, as cases of COVID-19 have continued to be identified, many countries, including the United States, have reacted by instituting various levels of quarantines, business and school closures and travel restrictions. Certain states and cities, including those where we own properties and where our principal place of business is located, have instituted similar measures, including various levels of “shelter in place” rules, and restrictions on the types of business that may continue to operate at full capacity. We cannot predict when restrictions currently in place will be lifted to some extent or entirely. As a result, the COVID-19 outbreak is negatively impacting almost every industry in the United States, directly or indirectly, including industries in which the Company and our tenants operate, which could result in a general decline in rents and an increased incidence of defaults under existing leases. The extent to which federal, state or local governmental authorities grant rent relief or other relief or enact amnesty programs applicable to our tenants in response to the COVID-19 outbreak may exacerbate the negative impacts that a slow down or recession could have on us. Demand for office space nationwide has declined and is likely to continue to decline due to the current economic downturn, bankruptcies, downsizing, layoffs, government regulations and restrictions on travel and permitted businesses operations that may be extended in duration and become recurring, increased usage of teleworking arrangements and cost cutting resulting from the pandemic, which could lead to lower office occupancy. The significance, extent, and duration of the overall operational and financial impact of the COVID-19 outbreak on our business will depend on future developments, which are highly uncertain and cannot be predicted with confidence, including the continued severity, duration, transmission rate and geographic spread of COVID-19 in the United States, the speed of the vaccine roll-out, effectiveness and willingness of people to take COVID-19 vaccines, the duration of associated immunity and their efficacy against emerging variants of COVID-19, the extent and effectiveness of other containment measures taken, and the response of the overall economy, the financial markets and the population, particularly in areas in which we operate. If we cannot operate our properties so as to meet our financial expectations, because of these or other risks, we may be prevented from growing the values of our real estate properties and uncertaintiesit may have a material adverse effect on us.
We cannot predict the impact that the COVID-19 pandemic will have on our tenants and other business partners; however, any material effect on these parties could have a material adverse effect on us. As of February 24, 2021, we received October-February rent payments from approximately 100% of our portfolio. In addition, during the year ended December 31, 2020, we received a number of short-term rent relief inquiries from our tenants, most often in the form of rent deferral inquiries, or requests for further discussion from tenants. We believe some of these inquiries were opportunistic in nature and may not have been as a result of a direct financial need due to the outbreak. As of February 24, 2021, we granted two of these deferral requests that deferred three months of rent to be collected during 2021 without interest and represented less than 1.0% of total revenue for the year ended December 31, 2020. While there are no current active short-term rent relief inquiries, we are unable to predict the amount of future rent relief inquiries and the October-February collections and rent relief requests to-date may not be indicative of collections or requests in any future period. Additionally, not all tenant inquiries will ultimately result in lease concessions.
Risks Related to the CCIT II Merger
The exchange ratio payable in connection with the CCIT II Merger is fixed and will not be adjusted in the event of any change in the relative values of CCIT II and the Company.
Upon the consummation of the CCIT II Merger, each issued and outstanding share of CCIT II’s common stock (other than certain excluded shares) will be converted into the right to receive 1.392 shares of our Class E common stock, in accordance with the CCIT II Merger Agreement. Such exchange ratio will not be adjusted, other than in the limited circumstances as expressly contemplated in the CCIT II Merger Agreement in connection with stock splits, combinations, reorganizations, or other similar events affecting the outstanding CCIT II common stock or the Company’s common stock. Except as expressly contemplated in the CCIT II Merger Agreement, no change in the merger consideration will be made for any reason, including the following:
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•changes in the respective businesses, operations, assets, liabilities and prospects of CCIT II or the Company;
•changes in the estimated NAV per share of either the shares of CCIT II’s common stock or our Class E common stock (or any other class of our common stock);
•interest rates, general market and economic conditions and other factors generally affecting the businesses of CCIT II or the Company;
•federal, state and local legislation, governmental regulation and legal developments in the businesses in which CCIT II or the Company operate;
•dissident stockholder activity, including any stockholder litigation challenging the CCIT II Merger;
•other factors beyond the control of CCIT II and the Company, including those described or referred to elsewhere in this “Risk Factors” section; and
•acquisitions, dispositions or other changes in CCIT II's or our portfolio.
Any such changes may materially alter or affect the relative values of CCIT II and the Company and, as a result, the merger consideration may be more or less than the value of our Class E common stock negotiated in the CCIT II Merger Agreement.
Completion of the CCIT II Merger is subject to many conditions and if these conditions are not satisfied or waived, the CCIT II Merger will not be completed, which could result in the CCIT II Merger being terminated and the expenditure of significant unrecoverable transaction costs. Additionally, in the event that the CCIT II Merger closes, the Company expects to incur substantial costs related to completion and integration of the CCIT II Merger.
The CCIT II Merger is subject to many conditions that must be satisfied, or to the extent permitted by law, waived, in order to complete the CCIT II Merger. There can be no assurance that such conditions will be satisfied or waived or that the CCIT II Merger will be completed. In addition, CCIT II or the Company may terminate the CCIT II Merger Agreement under certain circumstances, including, among other reasons, if the CCIT II Merger is not completed by May 30, 2021. Failure to consummate the CCIT II Merger may adversely affect the Company’s results of operations and the Company’s ongoing business could be adversely affected because the Company has incurred and will continue to incur certain transaction costs, regardless of whether the CCIT II Merger closes, which could have a material adverse effect on us.
Additionally, the Company expects to incur substantial costs in connection with completing the CCIT II Merger and integrating the properties and operations of CCIT II with the Company. While the Company has assumed that a certain level of transaction costs would be incurred, there are a number of factors beyond the Company’s control that could adversely affect the total amount or the timing of such costs. As a result, following the completion of the CCIT II Merger, the transaction costs associated with the CCIT II Merger could diminish a portion of the cost savings that the Company expects to achieve from the elimination of duplicative costs and the realization of economies of scale.
The pendency of the CCIT II Merger, including as a result of the restrictions on the operation of the Company’s business during the period between signing the CCIT II Merger Agreement and the completion of the CCIT II Merger and the diversion of our operationsmanagement's attention , could have a material adverse effect on us.
In connection with the pending CCIT II Merger, some of the Company’s or CCIT II’s tenants may delay or defer decisions relating to their leases, which could negatively impact the Company’s revenues, earnings, cash flows and expenses, regardless of whether the CCIT II Merger is completed. In addition, due to operating covenants in the CCIT II Merger Agreement, the Company may be unable, during the pendency of the CCIT II Merger, to pursue certain strategic transactions, undertake certain significant capital projects, undertake certain significant financing transactions and otherwise pursue other actions that are not in the ordinary course of business, even if such actions would prove beneficial. Additionally, the pending CCIT II Merger may divert the attention and resources of the Company’s management from the ongoing business activities and the pursuit of other opportunities that could be beneficial to the Company. If any of these risks were to materialize, it could have a material adverse effect on us
The issuance of our common stock as merger consideration in the CCIT II Merger will result in CCIT II’s stockholders having an ownership stake in the combined company, which will dilute the ownership position of our current stockholders.
The issuance of our common stock as merger consideration in the CCIT II Merger will result in CCIT II stockholders having an ownership in the combined company, which will dilute the ownership position of our current stockholders. Based on
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the number of shares of our common stock and CCIT II common stock outstanding on December 31, 2020, our current stockholders would hold approximately 72% of the issued and outstanding shares of our common stock following the CCIT II Merger. Consequently, our current stockholders, as a general matter, will have less influence over the management and policies of the combined company following the CCIT II Merger than they currently have over our management and policies.
Litigation challenging the CCIT II Merger may increase costs and prevent the CCIT II Merger from becoming effective within the expected timeframe, or from being completed at all, which could have a material adverse effect on us.
If one or more stockholders files a lawsuit challenging the CCIT II Merger, the Company cannot provide any assurance as to the outcome of any such lawsuit, including the costs associated with defending these claims or any other liabilities that may be incurred in connection with the litigation or settlement of these claims. If plaintiffs are successful in obtaining an injunction prohibiting the parties from completing the CCIT II Merger on the agreed-upon terms, such an injunction may prevent the completion of the CCIT II Merger in the expected time frame, or may prevent it from being completed at all. Whether or not any such plaintiffs’ claims are successful, this type of litigation is often expensive and diverts management’s attention and resources, which could have a material adverse effect on us.
Our anticipated indebtedness will increase upon completion of the CCIT II Merger, which could have a material adverse effect on us.
In connection with the CCIT II Merger, we believe areplan to refinance certain indebtedness of CCIT II using our Revolving Credit Facility (defined below) and will be subject to risks associated with debt financing, including a risk that our cash flow could be insufficient to meet required payments on our debt. As of December 31, 2020, we had approximately $2.1 billion of outstanding indebtedness and approximately $390.9 million of liquidity (including amounts available to be drawn under our Revolving Credit Facility). After giving effect to the CCIT II Merger, our total pro forma consolidated indebtedness as of December 31, 2020 would be approximately $2.5 billion and our liquidity would be approximately $542.0 million (cash and cash equivalents and amounts available to be drawn under our Revolving Credit Facility). Our indebtedness could have a material to stockholders. Other risks and uncertainties may exist thatadverse effect on us, as discussed elsewhere in this “Risk Factors” section.
Our future results will suffer if we do not considereffectively manage our expanded operations following the CCIT II Merger.
Following the CCIT II Merger, we expect to continue to expand our operations, including through strategic transactions, some of which may involve complex challenges. Our future success will depend, in part, upon our ability to manage our expansion and to integrate new operations into our existing business in an efficient and timely manner, and upon our ability to successfully monitor our operations, costs, regulatory compliance and service quality, and to maintain other necessary internal controls. There is no assurance that our strategic opportunities will be successful, or that we will realize its expected operating efficiencies, cost savings, revenue enhancements, or other benefits.
Following the consummation of the CCIT II Merger, we will assume certain potential liabilities relating to CCIT II.
Following the consummation of the CCIT II Merger, we assume certain potential liabilities relating to CCIT II. These liabilities could have a material basedadverse effect on us to the information currentlyextent we have not identified such liabilities or have underestimated the scope of such liabilities.
We may incur adverse tax consequences if, prior to the CCIT II Merger, CCIT II fails to qualify as a REIT for federal income tax purposes, which could have a material adverse effect on us.
CCIT II has operated in a manner that it believes has allowed it to qualify as a REIT for federal income tax purposes under the Code and intends to continue to do so through the time of the CCIT II Merger, and we intend to continue operating in such a manner following the CCIT II Merger. CCIT II has not requested and does not plan to request a ruling from the IRS that it qualifies as a REIT. Qualification as a REIT involves the application of highly technical and complex Code provisions for which there are only limited judicial and administrative interpretations. The determination of various factual matters and circumstances not entirely within the control of CCIT II may affect its ability to qualify as a REIT. In order to qualify as a REIT, CCIT II must satisfy a number of requirements, including requirements regarding the ownership of its stock and the composition of its gross income and assets. Also, a REIT must make distributions to stockholders aggregating annually at least 90% of its REIT taxable income, excluding any net capital gains.
If CCIT II (or, following the CCIT II Merger, the Company) loses its REIT status, or is determined to have lost its REIT status in a prior year, it will face serious tax consequences that would substantially reduce its cash available for distribution, including cash available to pay dividends to its stockholders, because:
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•it would be subject to federal corporate income tax on its net income for the years it did not qualify for taxation as a REIT (and, for such years, would not be allowed a deduction for dividends paid to stockholders in computing its taxable income);
•it could possibly be subject to increased state and local taxes for such periods;
•unless it is entitled to relief under applicable statutory provisions, neither it nor any “successor” company could elect to be taxed as a REIT until the fifth taxable year following the year during which it was disqualified; and
•for five years following re-election of REIT status, upon a taxable disposition of an asset owned as of such re-election, it could be subject to corporate level tax with respect to any built-in gain inherent in such asset at the time of re-election.
Following the CCIT II Merger, we will inherit any liability with respect to unpaid taxes of CCIT II for any periods prior to the CCIT II Merger. In addition, as described above, if CCIT II fails to qualify as a REIT as of the CCIT II Merger we nevertheless qualified as a REIT, in the event of a taxable disposition of a former CCIT II asset during the five years following the CCIT II Merger we would be subject to corporate tax with respect to any built-in gain inherent in such asset as of the CCIT II Merger.
As a result of all these factors, CCIT II's or the Company’s failure to qualify as a REIT could have a material adverse effect on us at this time.and could have other adverse effects on us, including material ones. In addition, for years in which we do not qualify as a REIT, we would not otherwise be required to make distributions to stockholders.
Risks Related to an Investment in Griffin Capital Essential Asset REIT II, Inc.Our Common Stock
There is currently no public trading market for shares of our sharescommon stock and there may never be one; therefore, it will be difficult for our stockholders to sell their shares.
There is currently no public market for shares of our share redemption programscommon stock and there may never be one.
Furthermore, our SRP includes numerous restrictions that limit a stockholder’s ability to sell their shares to us. Our SRP may provide stockholders with a limited opportunity to sell their shares to us after they have held them for a period of one year if would-be redeeming stockholders should be fully aware that our share redemption programs containcomply with significant restrictions and limitations. Further, our board may limit, suspend, terminate or amend any provision of the share redemption programs upon 30 days' notice. Redemption of shares under our share redemption program ("IPO Share Redemption Program") for Class A, Class AA, and Class AAA shares ("IPO shares") when requested, will generally be made on the last business day of the calendar month following the end of the calendar quarter. During any calendar year, we will not redeem in excess of 5% of the weighted average number of shares outstanding during the prior calendar year and redemptions will be funded solely from proceeds from the sale of IPO Shares under our DRP. Generally, our share redemption program for the New Shares ("New Share Redemption Program")SRP imposes a quarterly cap on aggregate redemptions of shares of our Class T, Class S, Class D and Class I share classes (including IPO shares that have been held for four years or longer)common stock equal to the amount of shares of such classes with a value (based on the applicable redemption price per share on the day the redemption is effected) of up to 5% of the aggregate NAV of the outstanding shares of such classes as of the last business day of the previous quarter; provided, however, that every quarter each class of our common stock will be allocated capacity within such aggregate limit to allow us to redeem shares equal to a value of up to 5% of the aggregate NAV of each class of common stock as of the last calendar day of the previous quarter.
Our Board may limit, suspend, terminate or amend any provision of our SRP upon 30 days’ notice and our Board did previously suspend our SRP effective March 28, 2020 and could do so again. Under the partial reinstatement of our SRP on July 16, 2020, redemptions of shares of our common stock are limited to those sought upon a stockholder’s death, qualifying disability, or determination of incompetence or incapacitation in accordance with the terms of the SRP, and are also subject to a quarterly cap on aggregate redemptions equal to amount of the aggregate NAV, as of the last business day of the previous quarter, of the shares issued pursuant to our distribution reinvestment plan (“DRP”) during such quarter. Additionally, the vast majority of our assets consistsconsist of properties which cannot generally be readily liquidated on short notice without impacting our ability to realize full value upon their disposition. Therefore,As a result, we may not always have a sufficient amount of cash to immediately satisfy redemption requests. Furthermore, if any single stockholder who owns a significant number of shares of our common stock elects to redeem shares in a given quarter, the limitations on redemption contained in our SRP may be met or exceeded.As a result stockholders’of the foregoing, a stockholder’s ability to have their shares redeemed by us pursuant to our SRP may be limited, andlimited.
Furthermore, to ensure that we do not fail to qualify as a REIT, our shares should be consideredcharter also prohibits the ownership by any Person (as defined in our charter) of more than 9.8% (in value or in number, whichever is more restrictive, as having only limited liquidity and at times may be illiquid.
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in a premium price for our Advisorstockholders, and could impose further impediments to a stockholder’s ability to sell shares of our dealer manager to the extent such valuations prove to not accurately reflect the true estimate of value and are not a precise measure of realizable value.common stock.
Our published NAV per share amounts may change materially if the appraised values of our properties materially change from prior appraisals or the actual operating results differ from whatour historical and/or anticipated results.
Furthermore, the NAV per share that we originally budgeted.publish will not reflect changes in our NAV, including potentially material changes, that are not immediately quantifiable.
We anticipate daily updatesupdate our NAV per share on a quarterly basis based on property andthird-party appraisals of our properties, which are impacted by real estate market events that are known to be material to our NAV. Notification of property and real estate market events may lag the actual event and events may be missed, unknown or difficult to value. The valuations will reflect information provided to the appraisers subject towith a reasonable time to analyze the event and document the new market value. Beginning in 2018, annualAnnual third-party appraisals of our properties using an appraisal report format will beare conducted on a rolling basis, such that properties will be appraised at different times butthroughout any given year with each property will begenerally appraised at least once per calendar year. When theseThese appraisals involve subjective judgements and are reflected in our NAV calculations, there may be a material change in our NAV per share amounts for each classnot necessarily representative of our common stock from those previously reported. In addition, actual operating results may differ from what we originally budgeted,the price at which may cause a material increasean asset or decrease in the NAV per share amounts.liability would sell pursuant to negotiation between an arms’ length buyer and seller. We will not retroactively adjust the NAV per share of eachany class reported. Therefore, because a new annual appraisal may differ materially from the prior appraisal or the actual results from operations may be better or worse than what we previously budgeted,assumed, the adjustment to reflect the new appraisal or actual operating results may cause the NAV per share for eachany class of our common stock to increase or decrease, and such increase or decrease will occur on the day the adjustment is made.
Our NAV is not subject to Generally Accepted Accounting Principles ("GAAP"), will not be independently auditeda GAAP measure and will involveinvolves certain subjective judgments by the Company, the independent valuation firmmanagement firms and other parties involved in valuing our assets and liabilities.
Our valuation procedures and our NAV are not subject to GAAP and willour NAV is not be subject to independent audit.a GAAP measure. Our NAV may differ from equity (net assets) reflected on our audited financial statements,prior appraisals and/or actual operating results, even if we are required to adopt a fair value basis of accounting for GAAP financial statement purposes. Additionally, we are dependent on our Advisor to be reasonably aware of material events specific to our properties (such as tenant disputes, damage, litigation and environmental issues) that may cause the value of a property to change materially and to promptly notify the independent valuation firm so that the information may be reflected in our real estate portfolio valuation. In addition, the implementation and coordination of our valuation procedures include certain subjective judgments of our Advisor,the Company, such as whether the independent valuation firmmanagement firms should be notified of events specific to our properties that could affect their valuations, as well as of the independent valuation firmmanagement firms and other parties we engage, as to whether adjustments to asset and liability valuations are appropriate. Accordingly, our stockholders must rely entirely on our board of directorsBoard to adopt appropriate valuation procedures and on the independent valuation management firm and other parties we engage in order to arrive at our NAV, which may not correspond to realizable value upon a sale of our assets. Our NAV is not audited or reviewed by our independent registered public accounting firm.
While the Institute for Portfolio Alternatives sets forth certain “best practices” guidelines for non-traded REITs to use in calculating NAV, there are no existing rules or regulatory bodies that specifically govern the manner in which we calculate our NAV. As a result, it is important that stockholders pay particular attention to the specific methodologies and assumptions we use to calculate our NAV. Other public REITs may use different methodologies or assumptions to determine their NAV. In addition, each year our board of directors,Board, including a majority of our independent directors, will reviewreviews the appropriateness of ourits valuation procedures and may, at any time, adopt changes to the valuation procedures. For example, we do not currently include any enterprise value or real estate acquisition costs inDuring such review, our assets calculated for purposes of our NAV. If we acquire real property assets as a portfolio, weBoard may pay a premium over the amount that we would pay for the assets individually. Our board of directors may change this or other aspects of our valuation procedures, which changes may have an adverse effect on our NAV and the price at which our stockholders may sell shares to us under our share redemption programs.
We may be unable to maintain cash distributions or increase distributions over time.
We may be unable to maintain cash distributions to stockholders. Distributions will be based principally on distribution expectations of our potential investors and cash available from our operations.or increase distributions over time. The amount of cash available for distribution will be affected by many factors, such as our ability to buyacquire properties as offering proceeds become available and our operating expense levels, as well as many other variables. Actual cash available for distribution may vary substantially from estimates. We cannot assure our stockholders that we will be able to pay or maintain distributions or that distributions will increase over time, nor can we give
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any assurance that rents from the properties will increase, or that future acquisitions of real properties will increase our cash available for distribution to our stockholders. Our actual results may differ significantly from the assumptions used by our board of directorsBoard in establishing the distribution rate to our stockholders.
We may suffer from delays in locating suitable investments, which could adversely affect our ability to make distributions at our current level and the value ofconsider a stockholder's investment.
If we engage in a Strategic Transaction, the value ascribed to our stockholders.
In the event that we complete a Strategic Transaction, the value of our assets.
Furthermore, because our common stock is not listed on any national securities exchange, the ability of interest relatedour stockholders to liquidate their investments is limited. As a result, there may be significant pent-up demand to sell shares of our common stock. A large volume of sales of shares of our common stock could decrease the positions they hold with affiliated entities, whichprevailing market price of our common stock significantly and could hinderimpair our ability to successfully implement our investment objectives and to generate returns to our stockholders.
Risks Related to these other entities and their owners, which fiduciary duties may conflict with the duties that they owe to our stockholders and us. Their loyalties to these other entities could result in actions or inactions that are detrimental to our business, which could harm the implementationOur Conflicts of our investment objectives. Conflicts with our business and interests are most likely to arise from involvement in activities related to (1) allocation of new investments and management time and services between us and the other entities, (2) our purchase of properties from, or sale of properties to, affiliated entities, (3) the timing and terms of the investment in or sale of an asset, (4) development of our properties by affiliates, (5) investments with affiliates of our Advisor, (6) compensation to our Advisor, and (7) our relationship with our dealer manager and property manager. If we do not successfully implement our investment objectives, we may be unable to generate cash needed to make distributions to our stockholders at our current level and to maintain or increase the value of our assets.Interest
Conflicts of interest relating to the purchase of properties, including conflicts with GCEAR, and such conflicts may not be resolved in our favor, which could adversely affect our investment opportunities.
Conflicts of interest could arise in the future as a result of the relationships between us and that entity relatedour affiliates, on one hand, and the GCEAR Operating Partnership or any partner thereof, on the other. Our directors and officers have duties to that entity making investmentsthe Company and our stockholders under applicable Maryland law in connection with their management of the Company. At the same time, we have fiduciary duties, as a general partner, to the GCEAR Operating Partnership and to the limited partners under Delaware law in connection with the management of the GCEAR Operating Partnership. Our duties as a general partner to the GCEAR Operating Partnership and its partners may come into conflict with the duties of our directors and officers to the Company and our stockholders. Further, Delaware law generally requires a general partner of a Delaware limited partnership to adhere to fiduciary duty standards under which it owes its limited partners the highest duties of good faith, fairness and loyalty and which generally prohibit such general partner from taking any action or redeemingengaging in any transaction as to which it has a conflict of interest. Additionally, the chairman of our common stock or the preferred units.
Risks Related to Our Corporate Structure
We are not afforded the protection of Maryland law relating to business combinations.
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Under Maryland law, "business combinations"“business combinations” between a Maryland corporation and an interested stockholder or an affiliate of an interested stockholder are prohibited for five years after the most recent date on which the interested stockholder becomes an interested stockholder. These business combinations include a merger, consolidation, share exchange, or, in circumstances specified in the statute, an asset transfer or issuance or reclassification of equity securities. An interested stockholder is defined as:
•any person who beneficially owns 10% or more of the voting power of the corporation'scorporation’s shares; or
•an affiliate or associate of the corporation who, at any time within the two-year period prior to the date in question, was the beneficial owner of 10% or more of the voting power of the then outstanding voting stock of the corporation.
These prohibitions are intended to prevent a change of control by interested stockholders who do not have the support of our board of directors.Board. Since our charter contains limitations on ownership of 9.8% or more of our common stock, we opted out of the business combinations statute in our charter. Therefore,charter and, therefore, we will not be afforded the protections of this statute and, accordingly,statute. However, there is no guarantee that the ownership limitations in our charter would provide the same measure of protection as the business combinations statute and prevent an undesired change of control by an interested stockholder.
Our stockholders'charter and bylaws and Maryland law contain provisions that may delay or prevent a change of control transaction.
Our charter prohibits the ownership by any Person (as defined in our charter) of more than 9.8% (in value or in number, whichever is more restrictive, as determined in good faith by our Board) of the aggregate of our common stock or more than 9.8% of the value (as determined in good faith by our Board) of the aggregate of our outstanding Shares (as defined in our charter), unless waived by our Board. The ownership limits and the other restrictions on ownership and transfer of our stock contained in our charter may delay or prevent a transaction or a change of control that might involve a premium price for our common stock or otherwise be in the best interest of our stockholders.
Our stockholders’ investment return maywould be reduced if we were required to register as an investment company under the 1940 Act and we would not be able to continue our business unless and until we registered under the 1940 Act.
We conduct our operations so that we and our subsidiaries are not required to register as an investment company under the 1940 Act. IfWe regularly review our investment activity to attempt to ensure that we losedo not come within the application of the 1940 Act. Among other things, we monitor the proportion of our exemption from registrationportfolio that is placed in various investments so that we do not come within the definition of an "investment company" under the 1940 Act. In order to avoid falling within the definition of an “investment company” under the 1940 Act, we will not be able to continue ourengage primarily in the business unless and until we register under the 1940 Act.
To maintain compliance with our 1940 Act exemption, we may be unable to sell assets we would otherwise want to sell and may need to sell assets we would otherwise wish to retain. In addition, we may be required to acquire additional income- or loss-generating assets that we might not otherwise acquire or foregoforgo opportunities to acquire interests in companies that we would otherwise want to acquire. If we areor our subsidiaries fail to maintain an exception or exemption from the 1940 Act, we may be required to, among other things, substantially change the manner in which we conduct our operations to avoid being required to register as an investment company under the 1940 Act or alternatively, register as an investment company under the 1940 Act. If we were required to register as an investment company but failfailed to do so, we would be prohibited from engaging in our business, and criminal and civil actions could be brought against us. In addition, our contracts would be unenforceable unless a court required enforcement, and a court could appoint a receiver to take control of usthe Company and liquidate our business.
Our stockholders are bound bystockholders’ interest in the majority vote on matters on whichCompany will be diluted as we issue additional shares and our stockholders are entitled to vote and, therefore, a stockholder's vote on a particular matter maystockholders’ interest in our assets will also be superseded bydiluted if the vote of other stockholders.GCEAR Operating Partnership issues additional units.
Our stockholders may vote on certain matters at any annual or special meeting of stockholders, including the election of directors. However, our stockholders will be bound by the majority vote on matters requiring approval of a majority of the stockholders even if they do not vote withhave preemptive rights to any shares issued by us in the majority on any such matter.
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an exchange of redemption of such shares, provided however, that any such amendment does not adversely affect the rights, preferences and privilegeslimited partnership interests of the stockholders;
Our rights and the rights of our stockholders to recover claims against our officers directors and our Advisordirectors are limited, which could reduce our stockholders'stockholders’ and our recovery against them if they cause us to incur losses.
Maryland law provides that a director has no liability in that capacity if he or she performs his or her duties in good faith, in a manner he or she reasonably believes to be in the corporation'scorporation’s best interests and with the care that an ordinarily prudent person in a like position would use under similar circumstances. Our charter in the case of our directors, officers, employees and agents, and the advisory agreement, in the case of our Advisor, requires us to indemnify our directors and officers employees and agents and our Advisor and its affiliates for actions taken by them in good faith and without negligence or misconduct.to the maximum extent permitted under Maryland law. Additionally, our charter limits the liability of our directors and officers for monetary damages to the maximum extent permitted under Maryland law. The former directors and officers of EA-1 also have indemnification agreements that we previously assumed for claims relating to such person’s status as a former director or officer of EA-1. Further, our charter permits the Company, with the approval of our Board, to provide such indemnification and advancement of expenses to any of our employees or agents. As a result, we and our stockholders may have more limited rights against our directors, officers, employees and agents, and our Advisor and its affiliates, than might otherwise exist under common law, which could reduce our stockholders'stockholders’ and our recovery against them. In addition, we may be obligated to fund the defense costs incurred by
our directors, officers, employees and agents or our Advisor in some cases which would decrease the cash otherwise available for distribution to our stockholders.
Holders of our investment objectives,Series A Preferred Shares will have a right to require us to redeem the Series A Preferred Shares for cash in the event that we have not listed our securities on a national exchange by a certain date. This redemption obligation would require us to allocate cash to such redemption on limited notice when there may be a shortage of cash or when we may prefer to allocate cash to other uses consistent with our business plans. Such holders also have a right to convert their Series A Preferred Shares into common shares as soon as August 2023 and such conversion would dilute the interests of our other shareholders. Furthermore, we may be obligated to issue a second tranche of such securities, increasing the holder’s interest in our Company. Any of the foregoing risks could have a material adverse effect on us.
We have issued 5,000,000 Series A Preferred Shares that rank senior to all other shares of our stock, including our focuscommon stock, and grant the holder certain rights that are superior or additional to the rights of common stockholders, including with respect to the payment of distributions, liquidation preference, redemption rights, and conversion rights. Distributions on single tenant business essential properties.
The holder of the Series A Preferred Shares will have a right to require us to redeem the Series A Preferred Shares (including any second tranche) for cash in the event that there has not been a listing by August 2023. This redemption obligation would require us to allocate cash to such redemption on limited notice when there may be a shortage of our investment objectives, they only have limited control over such changes. Additionally, we cannot assure stockholders thatcash or when we would be successful in attainingprefer to allocate cash to other uses consistent with our business plans. In addition, the holder of the Series A Preferred Shares has, the right to convert any or all of these investment objectives, which may adversely impact our financial performance and ability to make distributions at our current level to stockholders.
If we fail to pay distributions on the Series A Preferred Shares for six quarters (whether or not consecutive), the holder will be entitled to elect two additional directors of the Company (the Preferred Shares Directors”). The election will take place at the next annual meeting of stockholders, or at a special meeting of the holder of Series A Preferred Shares called for that purpose, and such right to elect Preferred Stock Directors shall continue until all distributions accumulated on the Series A Preferred Shares have been paid in a private offering of securities to institutional investors, (4) issue shares of restricted common stock or stock options to our independent directors, or (5) issue shares of our common stock in connection with an exchange of limited partnership interests of our Operating Partnership, existing stockholders and investors purchasing shares in our public offering will experience dilution of their equity investment in us. Because the limited partnership interests of our operating partnership may, in the discretion of our board of directors, be exchangedfull for shares of our common stock, any merger, exchange or conversion between our operating partnership and another entity ultimately could result in the issuance of a substantial number of shares of our common stock, thereby diluting the percentage ownership interest of other stockholders. Our Advisor may elect to receive the performanceall past distribution in units of our operating partnership and may also elect to receive reimbursements of expenses in such units or in our Class I shares, which would dilute the percentage ownership interest of our other stockholders. Because of these and other reasons described in this "Risk Factors" section, stockholders should not expect to be able to own a significant percentage of our shares.
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distribution period shall have been authorized, declared and paid in full or authorized, declared and a sum sufficient for the payment thereof irrevocably set apart for payment in trust.
If any of our properties. They will be paid substantial fees and expense reimbursements for these services, which will reduce the amount of cash available for investment in properties or distributionforegoing risks were to stockholders.materialize, it could have a material adverse effect on us.
We are uncertain of our sources of debt or equity for funding our future capital needs. If we cannot obtain funding on acceptable terms, our ability to make necessary capital improvements to our properties may be impaired or delayed.
To continue to qualify as a REIT, we generally must distribute to our stockholders at least 90% of our taxable income each year, excluding capital gains. Because of this distribution requirement, it is not likely that we will be able to fund a significant portion of our future capital needs from retained earnings. We have not identified all of our sources of debt or equity for funding, and such sources of funding may not be available to us on favorable terms or at all. If we do not have access to sufficient funding in the future, we may not be able to make necessary capital improvements to our properties, pay other expenses or expand our business.
Our bylaws designate the Circuit Court for Baltimore City, Maryland as the sole and exclusive forum for certain actions and proceedings that may be initiated by our stockholders.
Our bylaws provide that, unless we consent in writing to the selection of a different forum, the Circuit Court for Baltimore City, Maryland, or, if that court does not have jurisdiction, the U.S. District Court for the District of Maryland, Baltimore Division, will be the sole and exclusive forum for: (i) any derivative action or proceeding brought on behalf of the Company, (ii) any action asserting a claim of breach by any director, officer or other employee of the Company of a duty owed to the Company or our stockholders or of any standard of conduct set forth in the Maryland General Corporation Law (“MGCL”), (iii) any action asserting a claim arising pursuant to any provision of the MGCL including, but not limited to, the meaning, interpretation, effect, validity, performance or enforcement of our charter or our bylaws, or (iv) any action asserting a claim governed by the internal affairs doctrine. Any person or entity purchasing or otherwise acquiring or holding any interest in shares of our common stock will be deemed to have notice of and to have consented to these provisions of our bylaws, as they may be amended from time to time. Our Board, without stockholder approval, adopted this provision of our bylaws so that we may respond to such litigation more efficiently and reduce the costs associated with our responses to such litigation, particularly litigation that might otherwise be brought in multiple forums. This exclusive forum provision may limit a stockholder’s ability to bring a claim in a judicial forum that the stockholder believes is favorable for disputes with the Company or our directors, officers, agents or employees, if any, and may discourage lawsuits against us and our directors, officers, agents or employees, if any. Alternatively, if a court were to find this provision of our bylaws inapplicable to, or unenforceable in respect of, one or more of the specified types of actions or proceedings notwithstanding that the MGCL expressly provides that the charter or bylaws of a Maryland corporation may require that any internal corporate claim be brought only in courts sitting in one or more specified jurisdictions, we may incur additional costs that we do not currently anticipate associated with resolving such matters in other jurisdictions, which could have a material adverse effect on us.
Risks Related to Investments in Single Tenant Real EstateOur Business
We are primarily dependent on single-tenant leases for our properties depend upon a single tenant for all or a majority of their rental income,revenue, and our financial condition and ability to make distributions may be adversely affected by the bankruptcy, or insolvency, aor downturn in the business of, or a lease termination ofor election not to renew by a single tenant including those caused by the current economic climate.could have a material adverse effect on us.
Our properties are occupied by only one tenantprimarily leased to single tenants or will derive a majority of their rental income from one tenantsingle tenants and, therefore, the success of those properties is materially dependent on the financial stability of the companies to which we have leased and/or guaranteed such tenants. The nation as a
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We currently rely on these five tenants for a substantialmeaningful amount of revenue and adverse effects to their business could negatively affect our performance.have a material adverse effect on us.
Our five largest tenants, based on annualizedcontractual net rental income,rent for the 12-month period subsequent to December 31, 2020, were General Electric Company located in Georgia, Ohio and Texas (approximately 4.1%), Wood Group Mustang, Inc., located in Texas (approximately 3.4%), Southern Company Services, Inc. located in Alabama (approximately 10.9%3.1%), American Express Travel Related Services,McKesson Corporation, located in Arizona (approximately 3.0%) and LPL Holdings, Inc., located in ArizonaSouth Carolina (approximately 7.6%), Amazon.com.dedc, LLC, located in Ohio (approximately 7.4%), Bank of America, N.A., located in California (approximately 7.1%), and Wyndham Worldwide Operations, located in New Jersey (approximately 6.9%2.9%). The revenues generated by the properties leased and/or guaranteed by these tenants occupycompanies are substantially reliant upon the financial condition of these tenantssuch companies and, accordingly, any event of bankruptcy, insolvency, or a general downturn in the business of any of these tenants may result in the failure or delay of such tenant'stenant’s rental payments, which maycould have a substantialmaterial adverse effect on our financial performance.us.
We expect that our properties will be diverse according to geographic area and industrymay experience concentrations of our tenants. However,lease expiration dates in the event that we have a concentration of properties in any particular geographic area, any adverse situation that disproportionately affects that geographic area would have a magnified adverse effect on our portfolio. Similarly, if our tenants are concentrated in a certain industry or industries, any adverse effect to that industry generally would have a disproportionately adverse effect on our portfolio. As of December 31, 2017, approximately 15.7%, 13.4%, 13.3%, and 12.4% of our annualized net rent for the 12-month period subsequent to December 31, 2017 was concentrated in the Consumer Services, Utilities, Capital Goods, and Technology Hardware & Equipment industries, respectively. Additionally, as of December 31, 2017, approximately 12.7%, 11.3%, 11.1%, 10.9%, and 10.6%, of our annualized net rent for the 12-month period subsequent to December 31, 2017 was concentrated in the states of Ohio, Illinois, California, Alabama, and New Jersey, respectively.
Our lease expirations by year based on annualizedcontractual net rent for the 12-month period subsequent to December 31, 20172020 are as follows (dollars in thousands):
Year of Lease Expiration (1) | Contractual Net Rent (unaudited) | Number of Lessees | Approx. Square Feet | Percentage of Contractual Net Rent | ||||||||||||||||||||||
| 2021 | $ | 2,855 | 4 | 759,200 | 1.0 | % | ||||||||||||||||||||
| 2022 | 12,628 | 8 | 978,900 | 4.4 | ||||||||||||||||||||||
| 2023 | 22,935 | 9 | 1,233,000 | 7.9 | ||||||||||||||||||||||
| 2024 | 46,967 | 16 | 3,950,800 | 16.2 | ||||||||||||||||||||||
| 2025 | 35,795 | 19 | 2,644,700 | 12.4 | ||||||||||||||||||||||
| 2026 | 24,112 | 8 | 2,102,000 | 8.3 | ||||||||||||||||||||||
| >2027 | 144,050 | 49 | 12,072,054 | 49.8 | ||||||||||||||||||||||
| Vacant | — | — | 3,093,059 | — | ||||||||||||||||||||||
| Total | $ | 289,342 | 113 | 26,833,713 | 100.0 | % | ||||||||||||||||||||
| Year of Lease Expiration | Annualized Net Rent (unaudited) | Number of Lessees | Approx. Square Feet | Percentage of Annualized Net Rent | |||||||||
| 2018 - 2020 | $ | — | — | — | — | % | |||||||
| 2021 | 8,713 | 3 | 746,900 | 11.3 | |||||||||
| 2022 | 1,181 | 1 | 312,000 | 1.5 | |||||||||
| 2023 | 6,893 | 2 | 658,600 | 9.0 | |||||||||
| 2024 | 8,726 | 4 | 571,600 | 11.4 | |||||||||
| 2025 | 7,371 | 5 | 728,800 | 9.6 | |||||||||
2026 and beyond (1) | 43,892 | 12 | 4,321,500 | 57.2 | |||||||||
| Total | $ | 76,776 | 27 | 7,339,400 | 100.0 | % | |||||||
(1) Includes escrow proceedsExpirations that occur on the last day of approximately $5.1 million to be received during the 12-month periodmonth are shown as expiring in the subsequent to December 31, 2017.month.
We may experience similar concentrations of lease expiration dates in the future. As the expiration date of a lease for a single-tenant building approaches, the value of the property generally declines because of the risk that the building may not be re-leased or sold upon expiration of the existing lease or may not be re-leased on terms as favorable as those of the current leases.lease(s). Therefore, if we were to list or liquidate our portfolioany of these assets prior to the favorable re-leasing of the space, our stockholderswe may suffer a loss on theirour investment. Our stockholders may also suffer a loss (and a reduction in distributions) after the expiration of the lease terms if we are not able to re-lease such space on favorable terms. These expiring leases, therefore, increase our risk to real estate downturns during and approaching these periods of concentrated lease expirations. In addition, we may have to spend significant capital in order to ready the space for new tenants. To meet our need for cash at this time,during these times, we may have to increase borrowings or reduce our distributions, or both.
Any of our tenants, or any guarantor of a tenant's lease obligations,the foregoing risks could be subject to a bankruptcy proceeding pursuant to Title 11 of the bankruptcy laws of the United States. Such a bankruptcy filing would bar all efforts by us to collect pre-bankruptcy debts from these entities or their properties, unless we receive an enabling order from the bankruptcy court. Post-bankruptcy debts would be paid currently. If a lease is assumed, all pre-bankruptcy balances owing under it must be paid in full. If a lease is rejected by a tenant in bankruptcy, we would have a general unsecured claim for damages. If a lease is rejected, it is unlikely we would receive any payments from the tenant because our claim is capped at the rent reserved under the lease, without acceleration, for the greater of one year or 15% of the remaining term of the lease, but not greater than three years, plus rent already due but unpaid. This claim could be paid only in the event funds were available, and then only in the same percentage as that realizedmaterial adverse effect on other unsecured claims.us.
Net leases may not result in fair market lease rates over time.
A large portion of our rental income is derived from net leases. Net leases are typically characterized by (1) longer lease terms;terms and (2) fixed rental rate increases during the primary term of the lease and thus, there is an increased risk that these contractual lease terms will fail to result in fair market rental rates. As a result, our income and distributions to our stockholders could be lower than they would otherwise be if we did not engage in net leases.leases, which could have a material adverse effect on us..
Our real estate investments may include special use single tenant properties, thatand, as such, it may be difficult to retain existing tenants or to sell or re-lease uponthese properties if the existing tenant defaults or terminates its lease early, lease terminations.which could have a material adverse effect on us.
We focus our investments on commercial and industrial properties, a number of which may include manufacturing facilities andand/or special use single tenant properties. These types of properties are relatively illiquid compared to other types of real estate and financial assets. This illiquidity will limit our ability to quickly change our portfolio in response to changes in economic, market or other conditions. With these properties, if the current lease is terminated or not renewed or, in the case of a mortgage loan, if we take such property in foreclosure, we may be required to renovate thea vacant property or to make rent concessions in order to lease the propertytry to another tenantre-lease or sell the property.it,
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grant rent or other concessions and/or make significant capital expenditures to improveproperties in order to retain existing tenants. In addition, in the event we are forced to sell the property, we may have difficulty selling it to a party other than the tenant company that has leased and/or borrowerguaranteed the property due to the special purpose for which the property may have been designed. These and other limitations could have a material adverse effect on us and may affect our ability to retain existing tenants or to sell or re-lease these properties if the existing tenant defaults or terminates its lease early, which could have a material adverse effect on us.
We face significant competition for tenants, which may decrease or prevent increases of the occupancy and rental rates of our properties, which could have a material adverse effect on us.
The commercial real estate markets in which we operate are highly competitive.As we evaluate new properties for our portfolio, we are in competition with other potential buyers for the same properties that may have greater financial resources or access to capital than we may or be willing to acquire properties in transactions that are more highly leveraged or are less attractive from a financial standpoint than we are willing to pursue. This competition may require us to pay more to purchase the property than if there were no other potential acquirers or we may have to locate another property that meets our investment criteria.
Although we intend to acquire properties subject to existing leases, the leasing of real estate is often highly competitive, and we may experience competition for tenants from owners and managers of competing properties. As a result, we may have to provide free rent, incur charges for tenant improvements, offer other inducements, or we might not be able to timely lease the space, any of which could have a material adverse effect on us. If our competitors offer space at rental rates below current market rates or below the rental rates we currently charge our tenants, we may lose existing or potential tenants and we may be pressured to reduce our rental rates or to offer more substantial rent abatements, tenant improvements, early termination rights, below-market renewal options or other lease incentive payments in order to retain tenants when our leases expire. Competition for companies that may lease or guarantee our properties could decrease or prevent increases of the occupancy and rental rates of our properties, which could have a material adverse effect on us.Furthermore, at the time we elect to dispose of our properties, we will also be in competition with sellers of similar properties to locate suitable purchasers for our properties.
We depend on current key personnel for our future success, and the loss of such personnel or inability to attract and retain personnel could harm our business.
Our future success will depend in large part on our ability to attract and retain a sufficient number of qualified personnel. Competition for such personnel is intense, and we cannot assure stockholders that we will be successful in attracting and retaining such skilled personnel. Our future success also depends upon the service of our senior management team, who we believe have extensive market knowledge and business relationships and will exercise substantial influence over the Company’s operating, financing, acquisition and disposition activity. Among the reasons that they are important to our success is that we believe that each has a national or regional industry reputation that is expected to attract business and investment opportunities and assist us in negotiations with sellers, lenders, companies that may lease of guarantee our properties and other industry personnel. As a result, the loss of one or more of them could harm our business.We believe that many of our other key executive personnel also have extensive experience and strong reputations in the industry. In particular, the extent and nature of the business relationships that these individuals have developed is critically important to the success of our business. The loss of services of one or more members of our senior management team, or our inability to attract and retain highly qualified personnel, could adversely affect returnsour business, diminish our investment opportunities and weaken our business relationships with sellers, lenders, business partners, companies that may lease or guarantee our properties and other industry participants, any of which could have a material adverse effect on us.
Key employees of the Company may depart either before or after the CCIT II Merger because of a desire not to stockholders.remain with the Company following the CCIT II Merger. Accordingly, no assurance can be given that we will be able to retain such key personnel to the same extent as in the past.
Cybersecurity risks and cyber incidents may adversely affect our business by causing a disruption to our operations, a compromise or corruption of our confidential information, and/or damage to our business relationships, any of which could have a material adverse effect on us.
A cyber incident is any intentional or unintentional adverse event that threatens the confidentiality, integrity, or availability of our information resources and can include unauthorized persons gaining access to systems to disrupt operations, corrupting data or stealing confidential information. The risk of a cyber incident or disruption, including by computer hackers, foreign governments and cyber terrorists, has generally increased as the number, intensity and sophistication of attempted attacks have increased globally. As our reliance on technology increases, so do the risks posed to our systems – both internal
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and external. Our primary risks that could directly result from the occurrence of a cyber incident are theft of assets; operational interruption; regulatory enforcement, lawsuits and other legal proceedings; damage to our relationships with our tenants; and private data exposure. A significant and extended disruption could damage our business or reputation, cause a loss of revenue, have an adverse effect on tenant relations, cause an unintended or unauthorized public disclosure, or lead to the misappropriation of proprietary, personally identifying, or confidential information, any of which could result in us incurring significant expenses to resolve these kinds of issues. Although we have implemented processes, procedures and controls to help mitigate the risks associated with a cyber incident, there can be no assurance that these measures will be sufficient for all possible situations. Even security measures that are appropriate, reasonable and/or in accordance with applicable legal requirements may not be sufficient to protect the information we maintain. Unauthorized parties, whether within or outside the Company, may disrupt or gain access to our systems, or those of third parties with whom we do business, through human error, misfeasance, fraud, trickery, or other forms of deceit, including break-ins, use of stolen credentials, social engineering, phishing, computer viruses or other malicious codes, and similar means of unauthorized and destructive tampering. Even the most well-protected information, networks, systems and facilities remain potentially vulnerable because the techniques used in such attempted cyber incidents evolve and generally are not recognized until launched against a target. Accordingly, we may be unable to anticipate these techniques or to implement adequate security barriers or other preventative measures, making it impossible for us to entirely mitigate this risk. If any of the foregoing risks materialize, it could have a material adverse effect on us.
If we fail to maintain effective internal controls over financial reporting, we may not be able to accurately and timely report our financial results.
Effective internal controls over financial reporting are necessary for us to provide reliable financial reports, effectively prevent fraud and operate successfully. If we cannot provide reliable financial reports or prevent fraud, our reputation and operating results would be harmed. For so long as our common stock is not traded on a national securities exchange, we will be exempt from compliance with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002 and we can provide no assurance that the system and process evaluation and testing of our internal control over financial reporting that we perform to allow management to report on the effectiveness of such internal controls will be effective.
As a result of material weaknesses or significant deficiencies that may be identified in our internal control over financial reporting in the future, we may also identify certain deficiencies in some of our disclosure controls and procedures that we believe require remediation. If we or our independent registered public accounting firm discover any such material weaknesses or significant deficiencies, we will make efforts to further improve our internal control over financial reporting controls, but there is no assurance that we will be successful. Any failure to maintain effective controls or timely effect any necessary improvement of our internal control over financial reporting controls could harm operating results or cause us to fail to meet our reporting obligations. Ineffective internal control over financial reporting and disclosure controls could also cause investors to lose confidence in our reported financial information..
Risks Related to Investments in Real Estate
Our operating results will be affected by economic and regulatory changes that have an adverse impact on the real estate market in general, and we cannot assure our stockholders that we will be profitable or that we will realize growth in the value of our real estate properties.
We own and operate real estate. As of December 31, 2020, our real estate portfolio consisted of 98 properties in 25 states and 113 lessees consisting substantially of office, warehouse, and manufacturing facilities and one land parcel held for future development. Our operating results will be subject to risks generally incident to the ownership of real estate. These include, among others, and including those described elsewhere in this "Risk Factors" section:
•the value of real estate including,fluctuates depending on conditions in the general economy and without limitation:
the real estate business. Additionally, adverse changes in generalthese conditions may result in a decline in rental revenues, sales proceeds and occupancy levels at our properties and could have a material adverse effect on us. If rental revenues, sales proceeds and/or occupancy levels decline, we generally would expect to have less cash available to pay indebtedness and for distribution to stockholders;
•it may be difficult to buy and sell real estate quickly, or we or potential buyers of our properties may experience difficulty in obtaining financing, which may limit our ability to acquire or dispose of properties promptly in response to changes in economic or local conditions;other conditions. Additionally, we may be unable to identify, negotiate, finance or consummate acquisitions of new properties or dispositions of our properties, on favorable terms, or at all;
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•our properties in an area;may be subject to impairment losses, which could have a material adverse effect on us;
•changes in tax, real estate, environmental or zoning laws and zoning laws; regulations;
•changes in property tax assessments and insurance costs;
•the cost and availability of credit may be adversely affected by illiquid credit markets and wider credit spreads, and our inability or the inability of our tenants to timely refinance maturing liabilities to meet liquidity needs could have a material adverse effect on us; and
•we may from time to time be subject to litigation, which may significantly divert the attention and resources of the Company’s management and result in interest ratesdefense costs, settlements, fines or judgments against us, some of which are not, or cannot be, covered by insurance, and tight money supply; andany of which could have a material adverse effect on us.
These and other reasonsrisks could have a material adverse effect on us and may prevent us from being profitable or from realizing growth or maintaining the value of our real estate properties.
We may obtain only limited warranties when we purchase a property.
The seller of a property will often sell such property in its "as is"“as is” condition on a "where is"“where is” basis and "with“with all faults,"” without any warranties of merchantability or fitness for a particular use or purpose. In addition, purchase agreements maytypically contain only limited warranties, representations and indemnifications that will only survive for a limited period after the closing. Also, most sellers of large commercial properties are special purpose entities without significant assets other than the property itself.itself and there is often no credit behind the surviving provisions of a purchase agreement. The purchase of properties with limited warranties or from undercapitalized sellers increases the risk that we may lose some or all of our invested capital in the property as well as the loss of rental income from that property.
We may not be able to sell our properties at a price equal to, or greater than, the price for which we purchased such properties, which may lead to a decrease in the value of our assets.
Lock-out provisions are provisions that generally prohibit repayment of a loan balance for a certain number of years following the origination date of a loan. SuchWe may finance properties with lock-out provisions, are typically provided for by the Code or the terms of the agreement underlying a loan. Lock-out provisionswhich could materially restrict us from selling or otherwise disposing of or refinancing properties. These provisions would affect our ability to turn our investments into cash and thus affect cash available for distribution to stockholders. Lock-out provisionsour stockholders and may prohibit us from reducing the outstanding indebtedness with respect to any such properties by repaying or refinancing such indebtedness on a non-recourse basis at maturity, or increasing the amount of indebtedness with respect to such properties. Any mortgage debt that we place on our properties may also impose prepayment penalties upon the sale of the mortgaged property. If a lender invokes these penalties upon the sale of a property or prepayment of a mortgage on a property, the cost to usthe Company to sell the property could increase substantially.
Lock-out provisions could impair our ability to take actions during the lock-out period that would otherwise be in our stockholders' best interests and, therefore, may have an adverse impact on the value of the shares, relative to the value that would result if the lock-out provisions did not exist. In particular, lock-out provisions could preclude us from participating in major transactions that could result in a disposition of our assets or a change in control even though that disposition or change in control might be in our stockholders'stockholders’ best interests. Any of the foregoing could have a material adverse effect on us.
If we suffer losses that are not covered by insurance or that are in excess of insurance coverage, it could have a material adverse effect on us.
We can provide no assurance that we could lose invested capital and anticipated profits.
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However, the coverage and amounts of our environmental and flood insurance policies may not be sufficient to cover potential losses. our entire risk. We cannot assure stockholders that we will have adequate coverage for such losses. The Terrorism Risk Insurance ActIf we suffer losses that are not covered by insurance or that are in excess of 2002 is designed forinsurance coverage, it could have a sharing of terrorism losses between insurance companies and the federal government. We cannot be certain how this act will impact us or what additional cost to us, if any, could result. If such an event damaged or destroyed one or more of our properties, we could lose both our invested capital and anticipated profits from such property.material adverse effect on us.
We are subject to risks from climate change and natural disasters such as earthquakes and severe weather conditions.
Our properties are located in areas that may be subject to climate change and natural disasters, such as earthquakes and wildfires, and severe weather conditions. NaturalClimate change and natural disasters, including rising sea levels, flooding, extreme weather, and severe weather conditionschanges in precipitation and temperature, may result in significantphysical damage to, or a total loss of, our properties located in areas affected by these conditions, including those in low-lying areas close to sea level, and/or decreases in demand, rent from, or the value of those properties. In addition, we may incur material costs to protect these properties, including increases in our insurance premiums as a result of the threat of climate change, or the effects of climate change may not be covered by our insurance policies. Furthermore, changes in federal and state legislation and regulations on climate change could result in increased utility expenses and/or increased capital expenditures to improve the energy efficiency and reduce carbon emissions of our properties in order to comply with such regulations or result in fines for non-compliance.
The extent of our casualty losses and loss in operating income in connection with such events is a function of the severity of the event and the total amount of exposure in the affected area. When we have a geographic concentration of exposures, a single catastrophe (such as an earthquake, especiallyearthquake) affecting an area in California or Oregon) affecting a region maywhich we have a significant negativeconcentration of properties, such as in Texas, California, Ohio, Arizona, Georgia, Illinois or New Jersey, could have a material adverse effect on our financial condition and results of operations.us. As a result, our operating and financial results may vary significantly from one period to the next, and our financial results may be adversely affected by our exposure to losses arising from climate change, natural disasters or severe weather conditions.
Delays in the acquisition, development and construction of properties maycould have a material adverse effectseffect on our results of operations and returns to stockholders.us.
Our investments in unimproved real property, properties that are in need of redevelopment, or properties that are under development or construction will be subject to the uncertainties associated with the development and construction of real property, including those related to re-zoning land for development, environmental concerns of governmental entities and/or community groups and our builders'contractors’ ability to build in conformity with plans, specifications, budgets and timetables. If a buildercontractor fails to perform, we may resort to legal action relating to rescind the purchasecontract or the construction contract, as applicable, or to compel performance. A builder's performance which may lead to additional costs and delays.
Developing and constructing properties also be affected or delayed byexposes us to risks such as cost over-runs, carrying costs, completion guarantees, availability and costs of materials and labor issues, weather conditions beyond the builder's control.
and government regulation. Where properties are acquired prior to the start of construction or during the early stages of construction, it will typically take up to one year or more to complete construction and lease available space. Therefore, stockholders could suffer delays in the receipt of cash distributions attributable to those particular real properties. We may incur additional risks when we make periodic progress payments or other advances to builderscontractors before they complete construction. These and other factors can result in increased costs of a project or loss of our investment. We also must rely on rental income and expense projections and estimates of the fair market value of a property upon completion of construction when agreeing upon a purchase price at the time we acquire the property. If our projections are inaccurate, we may pay too much for a property, and the return on our investment could suffer.
Costs of complying with governmental laws and regulations, including those relating to environmental matters may adversely affect our income and the cash available for distribution.ADA, may have a material adverse effect on us.
All real property we acquire, and the operations conducted on real property are subject to federal, state and local laws and regulations relating to environmental protection and human healthzoning and safety.state and local fire and life safety requirements.
Under various federal, state and local laws, ordinances and regulations, a current or previous owner or operator of real property may be held liable for the costs of removing or remediating hazardous or toxic substances. These laws often impose clean-up responsibility and liability without regard to whether the owner or operator was responsible for, or even knew of, the presence of the hazardous or toxic substances. The costs of investigating, removing or remediating these substances may be substantial, and the presence of these substances may adversely affect our ability to lease or sell the property or to borrow using the property as collateral and may expose us to liability resulting from any release of or exposure to these substances, any of which could have a material adverse effect on us. If we arrange for the disposal or treatment of hazardous or toxic substances at another location, we may be liable for the costs of removing or remediating these substances at the disposal or treatment facility, whether or not the facility is owned or operated by us. We may be subject to common law claims by third parties based on damages and costs resulting from environmental contamination emanating from a site that we own or operate. Certain environmental laws also impose liability in connection with the handling of or exposure to asbestos-containing materials, pursuant to which third parties may seek recovery from owners or operators of real properties for personal injury associated with asbestos-containing materials and other hazardous or toxic substances. We maintain a pollution insurance policy for all of
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our properties to insure against the potential liability of remediation and exposure risk. Compliance with current and future laws and regulations generally govern wastewater discharges, air emissions, the operation and removal of underground and above-ground storage tanks, the use, storage, treatment, transportation and disposal of solid and hazardous materials, and the remediation of contamination associated with disposals.may require us to incur material expenditures, which could have a material adverse effect on us. Some of these laws and regulations may impose joint and several liability on tenants, owners or operators for the costs to investigate or remediate contaminated properties, regardless of fault or whether the acts causing the contamination were legal. This liability could be substantial. In addition, the presence of hazardous substances, or the failure to properly remediate these substances, may adversely affect our ability to sell, rent or pledge such property as collateral for future borrowings.
expenditures. We cannot assure our stockholders that the independent third-party environmental assessments we obtain prior to acquiring any properties we purchase will reveal all environmental liabilities or that a prior owner of a property did not create a material environmental condition not known to us. We cannot predict what other environmental legislation or regulations will be enacted in the future, how existing or future laws or regulations will be administered or interpreted, or what environmental conditions may be found to exist in the future. We cannot assure stockholders that our business, assets, results of operations, liquidity or financial condition will not be adversely affected by these laws, which may adversely affect cash available for distribution, and the amount of distributions to stockholders.
Furthermore, the properties we acquire generally will be subject to various federal, state and local regulatory requirements, such as zoning and state and local fire and life safety requirements. Failure to comply with these requirements could result in the imposition of fines by governmental authorities or awards of damages to private litigants. Through our due diligence process and protections in our leases, we aim to acquire properties that are in material compliance with all such regulatory requirements. However, we cannot assure our funds used for ADA compliance may affect cash available for distributionstockholders that these requirements will not be changed or that new requirements will not be imposed which would require significant unanticipated expenditures by us and could have a material adverse effect on us.
Any of the amount of distributions to stockholders.foregoing could have a material adverse effect on us.
If we sell properties by providing financing to purchasers, defaults by the purchasers would adversely affect our cash flows.could have a material adverse effect on us.
When we provide financing to purchasers, we will bear the risk that the purchaser may default, which could negatively impact our cash distributions to stockholders.have a material adverse effect on us. Even in the absence of a purchaser default, the distribution of the proceeds of sales to our stockholders, or their reinvestment in other assets, will be delayed until the promissory notes or other property we may accept upon the sale are actually paid, sold, refinanced or otherwise disposed of. In some cases, we may receive initial down payments in cash and other property in the year of sale in an amount less than the selling price and subsequent payments will be spread over a number of years. If any purchaser defaults under a financing arrangement with us, it could negatively impact our ability to make distributions to stockholders at our current level.have a material adverse effect on us.
We will be subject to risks associated with the co-ownersventure partners in our co-ownershipjoint venture arrangements that otherwise may not be present in other real estate investments.investments, which could have a material adverse effect on us.
We have entered into, and may continue to enter into, joint ventures or other co-ownership arrangements with respect to a portion of the properties we acquire. Ownership of co-ownershipjoint venture interests involves risks generally not otherwise present with an investment in real estate such as the following:
•the risk that a co-ownerventure partner may at any time have economic or business interests or goals that are or become inconsistent with our business interests or goals;
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•the risk that we would not be in a co-ownerposition to exercise sole decision-making authority regarding the property, joint venture or structure of ownership or that a venture partner may be in a position to take action contrary to our instructions or requests or contrary to our policies or objectives;objectives, which has the potential to create impasses on decisions, such as a sale;
•the risk that disputes with co-ownersventure partners may result in litigation, which may cause us to incur substantial costs and/or prevent ourdivert the attention and resources of the Company’s management from focusing on ourthe ongoing business objectives;activities and pursuit of other opportunities that could be beneficial to the Company;
•the possibility that an individual co-ownerventure partner might become insolvent or bankrupt, or otherwise default under the applicable mortgage loan financing documents, which may constitute an event of default under all of the applicable mortgage loan financing documents or allow the bankruptcy courtfail to reject the tenants-in-common agreement or management agreement entered into by the co-owner owning interests in the property;fund their share of required capital contributions;
•the possibility that a co-ownerjoint venture might not have adequate liquid assets to make cash advances that may be required in order to fund operations, maintenance and other expenses related to the property, which could result in the loss of
current or prospective tenants and may otherwise adversely affect the operation and maintenance of the property, and could cause a default under the mortgage loan financing and other documents applicable to the property and may result in late charges, penalties and interest, and may lead to the exercise of foreclosure and other remedies by the lender;
•the risk that both we and our venture partner(s) may each have the right to trigger a buy-sell right or forced sale arrangement, which could cause us to sell our interest, or acquire our venture partners’ interests, or to sell the underlying asset, either on unfavorable terms or at a time when we otherwise would not have initiated such a transaction;
•the risk that a co-ownersale or transfer by us to a third party of our interests in the joint venture may be subject to consent rights or rights of first refusal in favor of our venture partner(s), which would in each case restrict our ability to dispose of our interest in the joint venture;
•the risk that a venture partner could take or expects to take actions that could jeopardize our status as a REIT or require us to pay tax, in which case, we may be forced to dispose of our interest in that entity, including by contributing our interest to a subsidiary of ours that is subject to corporate level income tax;
•the risk that a venture partner could breach agreements related to the property, which may cause a default under, or result in personal liability for, the applicable mortgage loan financing documents, violate applicable securities laws and otherwise adversely affect the property and the co-ownershipjoint venture arrangement; or
•the risk that a default by any co-ownerventure partner would constitute a default under the applicable mortgage loan financing documents that could result in a foreclosure and the loss of all or a substantial portion of the investment made by the co-owner.venture partner.
Any of the above might subject a property to liabilities in excess of those contemplated and thus reduce the amount available for distribution to our stockholders.stockholders, which could have a material adverse effect on us.
In the event that our interests become adverse to those of the other co-owners,venture partners, we may not have the contractual right to purchase the co-ownershipjoint venture interests from the other co-owners. Even if we are given the opportunity to purchase such co-ownershipjoint venture interests in the future, we cannot guarantee that we will desire to do so given market conditions or have sufficient funds available at the time to purchase co-ownershipjoint venture interests from the co-owners.venture partner.
If approved by our Board, including by a majority of our independent directors, we may attempt to obtain a right of first refusal or option to buy the property held by the joint venture and allow such venture partners to exchange their interest for GCEAR OP Units or to sell their interest to us in its entirety. In the event that a venture partner were to elect to sell property held in any such joint venture, however, we may not have sufficient funds to exercise our right of first refusal to buy the venture partner’s interest in the property held by the joint venture. Furthermore, entering into joint ventures with our affiliates or with holders of GCEAR OP Units may result in certain conflicts of interest.
We might want to sell our co-ownershipjoint venture interests in a given property at a time when the other co-ownersventure partners in such property do not desire to sell their interests. Therefore, we may not be able to sell our interest in a property at the time we would like to
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sell. In addition, we anticipate that it will be much more difficult to find a willing buyer for our co-ownership interests in a property than it would be to find a buyer for a property we owned outright.
Any of the foregoing could have a material adverse effect on us.
Risks Associated with Debt Financing
If we breach covenants under our revolvingunsecured credit facilityagreement with KeyBank N.A. ("KeyBank") and other syndication partners, we could be held in default under such loan,agreement, which could accelerate our repayment date and materially adversely affect the value of our stockholders' investment incould have a material adverse effect on us.
In addition to customary representations, warranties, covenants, and indemnities, the RevolvingSecond Amended and Restated Credit Facility (the “Revolving Credit Facility”)Agreement contains a number of financial covenants and requires us and the borrower as described in Note 5, Debt, to comply with the following at all times, which will be testedour consolidated financial statements included in this Annual Report on a quarterly basis: (i) a maximum consolidated leverage ratio of 60%, or, once the collateral pledges are released, the ratio may increase to 65% for up to four consecutive quarters after a material acquisition only after the facility is deemed unsecured; (ii) a minimum consolidated tangible net worth of approximately $4.7 million, plus 75% of net future equity issuances (including units of operating partnership interests in the borrower); (iii) a minimum consolidated fixed charge coverage ratio of not less than 1.50:1.00, commencing as of the quarter ended March 31, 2016; (iv) a maximum total secured debt ratio of not greater than 40%, which ratio will increase by five percentage points for four quarters after closing of a material acquisition that is financed with secured debt; (v) a maximum total secured recourse debt ratio, excluding recourse obligations associated with interest rate hedges, of 10% of our total asset value (as defined), at the time our tangible net worth equals or exceeds $250 million (secured debt is not permitted prior to the time our tangible net worth exceeds $250 million); (vi) aggregate maximum unhedged variable rate debt of not greater than 30% of our total asset value; and (vii) a maximum payout ratio (as defined) of not greater than 95% of our core funds from operations (as defined), commencing as of the quarter ending March 31, 2018.Form 10-K.
We have broad authority to incur debt, and high debt levelsour indebtedness could hinder our abilityhave a material adverse effect on us.
Subject to make distributions and could decrease the value of our stockholders' investments.
Our indebtedness could limithave a material adverse effect on us, as well as:
•increasing our vulnerability to general adverse economic and industry conditions;
•limiting our ability to obtain additional financing to fund future working capital, acquisitions, capital expenditures and other general corporate requirements;
•requiring the amountuse of cash we have available to distribute and could result in a decline in the valuean increased portion of our stockholders' investments.cash flow from operations for the payment of principal and interest on our indebtedness, thereby reducing our ability to use our cash flow to fund working capital, acquisitions, capital expenditures and general corporate requirements;
•limiting our flexibility in planning for, or reacting to, continue to incur, mortgage indebtedness and other borrowings, which may increasechanges in our business risks.and our industry;
•putting us at a disadvantage compared to our competitors with less indebtedness; and
•limiting our ability to access capital markets or limiting the possibility of a listing on a national securities exchange.
We have placed, and intend to continue to place, permanent financing on our properties or obtain aincrease our credit facility or other similar financing arrangement in order to acquire properties as funds are being raised in our public offering.properties. We may also decide to later further leverage our properties. We may incur mortgage debt and pledge all or some of our real properties as security for that debt to obtainborrow additional funds to acquire real properties. We may borrow if we need funds to pay a desired distribution rate to our stockholders. We may also borrow if we deem it necessary or advisable to assure that we qualify and maintain our qualification as a REIT for federal income tax
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purposes. If there is aA shortfall between the cash flow from our properties and the cash flow needed to service mortgage debt thencould have a material adverse effect on us.
Any of the amount available for distribution to our stockholders may be reduced.foregoing could have a material adverse effect on us.
We have incurred, and intend to continue to incur, indebtedness secured by our properties. If we are unable to make our debt payments when required, a lender could foreclose on the property or properties securing such debt, which may result in foreclosure.could have a material adverse effect on us.
Some of our borrowings to acquire properties will be secured by mortgages on our properties. In addition, some of our properties contain mortgage financing. If we default on our secured indebtedness, the lender may foreclose and we could lose our entire investment in the properties securing such loan, which could adversely affect distributions to our stockholders.have a material adverse effect on us. To the extent lenders require us to cross-collateralize our properties, or provisions in our loan agreementsdocuments contain cross-default provisions, a default under a single loan agreement could subject multiple properties to foreclosure.
Lenders may require us to enter into restrictive covenants relating to our operations, which could limit our ability to make distributions to our stockholders at our current level.level or otherwise have a material adverse effect on us.
When providing financing, a lender could impose restrictions on us that affect our distribution and operating policies and our ability to incur additional debt.debt, including customary restrictive covenants, that, among other things, restrict our ability to incur additional indebtedness, to engage in material asset sales, mergers, consolidations and acquisitions, and to make capital expenditures, and maintain financial ratios. Loan documents we enter into may contain covenants that limit our ability to further mortgage the property or discontinue insurance coverage or replace our Advisor.coverage. These or other limitations may adversely affect our flexibility and limit our ability to make distributions to stockholders at our current level.level or otherwise have a material adverse effect on us.
Increases in interest rates could increase the amount of our debt payments and adversely affect our ability to make distributions to stockholders at our current level.level or otherwise have a material adverse effect on us.
We expect that we will incur indebtedness in the future. Interest we pay on our indebtedness will reduce cash available for distribution. Additionally, if we incur variable rate debt, increases in interest rates would increase our interest costs which could reduce our cash flows and our ability to make distributions to stockholders at our current level. In addition, if we need to repay existing
debt during periods of rising interest rates, we could be required to liquidate one or more of our investments in properties at times that may not permit realization of the maximum return on such investments.
A substantial portion of our resultsindebtedness bears interest at variable interest rates based on US Dollar London Interbank Offered Rate and certain of operations,our financial condition and abilitycontracts are also indexed to pay distributions to stockholders atUSD LIBOR. Changes in the method of determining LIBOR, or the replacement of LIBOR with an alternative reference rate, may adversely affect interest rates on our current level.
In July 2017, the Financial Conduct Authority, the authority that regulates the London Interbank Offered Rate (“LIBOR”), announced that it intended to stop compelling banks to submit rates for the calculation of LIBOR after 2021. The Alternative Reference Rates Committee (“ARRC”), in the U.S. has proposed that the Secured Overnight Financing Rate (“SOFR”), is the rate that represents best practice as the alternative to US Dollar LIBOR (“USD-LIBOR”) for use in derivatives and other financial contracts that are currently indexed to USD LIBOR. ARRC has proposed a paced market transition plan to SOFR from USD LIBOR and organizations are currently working on industry-wide and company-specific transition plans as relating to derivatives and cash markets exposed to USD LIBOR. We have certain financial contracts, including our resultsKeyBank Loans (as defined below) and our interest rate swaps, that are indexed to USD LIBOR. Changes in the method of operations, financial conditiondetermining LIBOR, or the replacement of LIBOR with an alternative reference rate, may adversely affect interest rates on our current or future indebtedness. Any transition process may involve, among other things, increased volatility or illiquidity in markets for instruments that rely on LIBOR, reductions in the value of certain instruments or the effectiveness of related transactions such as hedges, increased borrowing costs, uncertainty under applicable documentation, or difficult and costly consent processes. We are monitoring this activity and evaluating the related risks, and any such effects of the transition away from LIBOR may result in increased expenses, may impair our ability to pay distributionsrefinance our indebtedness or hedge our exposure to stockholders at our current level.floating rate instruments, or may result in difficulties, complications or delays in connection with future financing efforts, any of which could have a material adverse effect on us.
Federal Income Tax Risks
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Failure to continue to qualify as a REIT would adversely affect our operations and our ability to make distributions at our current level asbecause we willwould incur additional tax liabilities.liabilities, which could have a material adverse effect on us.
We believe we operate in a manner that allows us to qualify as a REIT for U.S. federal income tax purposes under the Code. Qualification as a REIT involves highly technical and complex Code provisions for which there are only limited judicial and administrative interpretations. Our qualification as a REIT will depend upon our ability to meet, through investments, actual operating results, distributions and satisfaction of specific stockholder rules, the various tests imposed by the Code.
If we fail to qualify as a REIT for any taxable year, we will be subject to federal income tax on our taxable income at corporate rates. If our REIT status is terminated for any reason,In addition, we would generally be disqualified from treatment as a REIT for the four taxable years following the year of such termination.losing our REIT status. Losing our REIT status would reduce our net earnings available for investment or distribution to stockholders because of the additional tax liability. If this occurs, we might be required to borrow funds or liquidate some investments in order to pay the applicable tax. In addition, distributions to our stockholders would no longer qualify for the distributionsdividends paid deduction, and we would no longer be required to make distributions.
Qualification as a REIT is subject to the satisfaction of tax requirements and various factual matters and circumstances that are not entirely within our control. New legislation, regulations, administrative interpretations, or court decisions could change the tax laws with respect to qualification as a REIT or the federal income tax consequences of being a REIT. Our failure to continue to qualify as a REIT would adversely affect the return ofcould have a stockholder's investment.material adverse effect on us.
To qualify as a REIT, and to avoid the payment of federal income and excise taxes and maintain our REIT status, we may be forced to borrow funds, use proceeds from the issuance of securities, (including our Follow-On Offering), or sell assets to pay distributions, which may result in our distributing amounts that may otherwise be used for our operations.operations, which could have a material adverse effect on us.
To obtain the favorable tax treatment accorded to REITs, we normally will be required each year to distribute to our stockholders at least 90% of our REIT taxable income, generally determined without regard to the deduction for distributionsdividends paid and by excluding net capital gains. We will be subject to federal income tax on our undistributed taxable income and net capital gain and to a 4% nondeductible excise tax on any amount by which distributionsdividends we pay with respect to any calendar year are less than the sum of (i) 85% of our ordinary income, (ii) 95% of our capital gain net income, and (iii) 100% of our undistributed income from prior years. These requirements could cause us to distribute amounts that otherwise would be spent on the acquisition, maintenance or development of properties and it is possible that we might be required to borrow funds, use proceeds from the issuance of securities, (including our Follow-On Offering), or sell assets in order to distribute enough of our taxable income to maintain our REIT status and to avoid the payment of federal income and excise taxes. We may be required to make distributions to our stockholders at times it would be more advantageous to reinvest cash in our business or when we do not have cash readily available for distribution, and we may be forced to liquidate assets on terms and at times unfavorable to us, which could have a material adverse effect on us. These methods of obtaining funding could affect future distributions by increasing operating costs and decreasing available cash. In addition, such distributions may constitute a return of capital.
If our operating partnershipthe GCEAR Operating Partnership fails to maintain its status as a partnership for federal income tax purposes, its income would be subject to taxation and our REIT status wouldcould be terminated.
We intend to maintain the status of our operating partnershipthe GCEAR Operating Partnership as a partnership for federal income tax purposes. However, if the Internal Revenue Service ("IRS")IRS were to successfully challenge the status of our operating partnershipthe GCEAR Operating Partnership as a partnership, it would be taxable as a corporation. In such event, this would reduce the amount of distributions that our operating partnershipthe GCEAR Operating Partnership could make to us.make. This would also result in our losing REIT status and becoming subject to a corporate level tax on our own income. This would substantially reduce our cash available to pay distributions and the return on our stockholders' investments.stockholders’ investment, which could have a material adverse effect on us. In addition, if any of the entities through which our operating partnershipthe GCEAR Operating Partnership owns its properties, in whole or in part, loses its characterization as a partnership for federal income tax purposes, the underlying entity would become subject to taxation as a corporation, thereby reducing distributions to our operating partnershipthe GCEAR Operating Partnership and jeopardizing our ability to maintain REIT status.
Our stockholders may have tax liability on distributions they elect to reinvest in our common stock.
If our stockholders participate in our DRP, they will be deemed to have received, and for federal income tax purposes will be taxed on, the amount reinvested in common stock to the extent the amount reinvested was not a tax-free return of capital. As a result, unless a stockholder is a tax-exempt entity, a stockholderit may have to use funds from other sources to pay its tax liability on the value of theour common stock received.
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In certain circumstances, we may be subject to federal and state income taxes as a REIT, which would reduce our cash available for distribution to stockholders.our stockholders and could have a material adverse effect on us.
Even if we qualify and maintain our status as a REIT, we may be subject to federal income taxes or state taxes. For example, net income from a "prohibited transaction"“prohibited transaction” will be subject to a 100% tax. We may not be able to make sufficient distributions to avoid excise taxes applicable to REITs. We may also decide to retain income we earn from the sale or other disposition of our property and pay income tax directly on such income. In that event, our stockholders would be treated as if they earned that income and paid the tax on it directly. However, our stockholders that are tax-exempt, such as charities or qualified pension plans, would have no benefit from their deemed payment of such tax liability. We may also be subject to state and local taxes on our income or property, either directly or at the level of the operating partnershipGCEAR Operating Partnership or at the level of the other companies through which we indirectly own our assets. Any federal or state taxes we pay will reduce our cash available for distribution to our stockholders. If any of the foregoing were to occur, it could have a material adverse effect on us.
We may be required to pay some taxes due to actions of our taxable REIT subsidiarysubsidiaries, which would reduce our cash available for distribution to stockholders.our stockholders and could have a material adverse effect on us.
Any net taxable income earned directly by our taxable REIT subsidiary,subsidiaries, or through entities that are disregarded for federal income tax purposes as entities separate from our taxable REIT subsidiaries, will be subject to federal and possibly state corporate income tax. We have elected to treat Griffin Capital Essential Asset TRS, II, Inc. as a taxable REIT subsidiary, and we may elect to treat other subsidiaries as taxable REIT subsidiaries in the future. In this regard, several provisions of the laws applicable to REITs and their subsidiaries ensure that a taxable REIT subsidiary will be subject to an appropriate level of federal income taxation. For example, a taxable REIT subsidiary is limited in its ability to deduct certain interest payments made to an affiliated REIT. In addition, the REIT has to pay a 100% penalty tax on some payments that it receives or on some deductions taken by a taxable REIT subsidiary if the economic arrangements between the REIT, the REIT'sREIT’s customers, and the taxable REIT subsidiary are not comparable to similar arrangements between unrelated parties. Finally, some state and local jurisdictions may tax some of our income even though as a REIT, we are not subject to federal income tax on that income because not all states and localities follow the federal income tax treatment of REITs. To the extent that we and our affiliates are required to pay federal, state and local taxes, we will have less cash available for distributions to our stockholders.
Complying with the REIT requirements may cause us to foregoforgo otherwise attractive opportunities.opportunities, which could have a material adverse effect on us.
To qualify as a REIT for federal income tax purposes, we must continually satisfy tests concerning, among other things, the sources of our income, the nature and diversification of our assets, the amounts we distribute to our stockholders and the ownership of shares of our common stock. We may be required to make distributions to stockholders at disadvantageous times or when we do not have funds readily available for distribution, or we may be required to liquidate otherwise attractive investments in order to comply with the REIT tests.tests, any of which could have a material adverse effect on us. Thus, compliance with the REIT requirements may hinder our ability to operate solely on the basis of maximizing profits.
To the extent our distributions represent a return of capital for tax purposes, a stockholder could recognize an increased capital gain upon a subsequent sale of the stockholder'sstockholder’s common stock.
Distributions in excess of our current and accumulated earnings and profits and not treated by us as a dividend will not be taxable to a stockholder to the extent those distributions do not exceed the stockholder’s adjusted tax basis in his or her common stock, but instead will constitute a return of capital and will reduce such adjusted basis. (Such distributions to Non-U.S. Stockholdersnon-U.S. stockholders may be subject to withholding, which may be refundable.) If distributions exceed such adjusted basis, then such adjusted basis will be reduced to zero and the excess will be capital gain to the stockholder.stockholder (assuming such stock is held as a capital asset for federal income tax purposes). If distributions result in a reduction of a stockholder’s adjusted basis in his or her common stock, then subsequent sales of such stockholder’s common stock potentially will result in recognition of an increased capital gain.
In certain circumstances, even if we qualify as a REIT, we and our Follow-On Offering and because those tax aspects are not the same for all investors, stockholders should consult their independent tax advisors with reference to their tax situation before investing in our shares.
Even if we have qualified and continues to qualify as a REIT, we may be treated as assets of an investing plan, in which event the underlying assets of such entity (and transactions involving such assets) would be subject to some federal, state and local taxes on our income or property and, in certain cases, a 100% penalty tax, in the prohibited transaction provisions. We intend to take such stepsevent we sell property as may be necessary to qualify us for one or more of the exemptions available, and thereby prevent our assets as being treated as assets of any investing plan.
material adverse effect on us.
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ITEM 1B. UNRESOLVED STAFF COMMENTS
ITEM 2. PROPERTIES
As of December 31, 2017,2020, we owned a fee simple interest and a leasehold interest in 2795 and 3 properties, respectively, encompassing approximately 7.326.8 million rentable square feet.feet and an 80% interest in an unconsolidated joint venture. See Part IV, Item 15. “Exhibits, Financial Statement Schedules—Schedule III—Real Estate and Accumulated Depreciation and Amortization,” of this Annual Report on Form 10-K for a detailed listing of all our properties.
| Property | Location | Tenant/Major Lessee | Acquisition Date | Purchase Price | Approx. Square Feet | % Leased | Property Type | Year of Lease Expiration | Annualized Net Rent (1) | ||||||||||||||
| Allstate | Lone Tree, CO | Allstate Insurance Company | 1/31/2017 | $ | 14,750 | (2) | 70,300 | 100% | Office | 2026 | $ | 1,059 | |||||||||||
| MISO | Carmel, IN | Midcontinent Independent System Operator, Inc. | 5/15/2017 | $ | 28,600 | 133,400 | 100% | Office | 2028 | $ | 1,915 | ||||||||||||
about our indebtedness secured by our properties.
Revenue Concentration
The percentage of contractual net rent for the 12-month period subsequent to December 31, 2020, by state, based on the respective in-place leases, is as follows (dollars in thousands):
| State | Contractual Net Rent (unaudited) | Number of Properties | Percentage of Contractual Net Rent | |||||||||||||||||
| Texas | $ | 34,091 | 11 | 11.8 | % | |||||||||||||||
| Ohio | 27,492 | 11 | 9.5 | |||||||||||||||||
| California | 26,596 | 5 | 9.2 | |||||||||||||||||
| Georgia | 25,882 | 5 | 8.9 | |||||||||||||||||
| Arizona | 25,411 | 8 | 8.8 | |||||||||||||||||
| Illinois | 22,762 | 9 | 7.9 | |||||||||||||||||
| New Jersey | 18,540 | 5 | 6.4 | |||||||||||||||||
| Colorado | 14,179 | 5 | 4.9 | |||||||||||||||||
| North Carolina | 13,298 | 6 | 4.6 | |||||||||||||||||
| Florida | 10,716 | 4 | 3.7 | |||||||||||||||||
All Others (1) | 70,375 | 29 | 24.3 | |||||||||||||||||
| Total | $ | 289,342 | 98 | 100.0 | % | |||||||||||||||
| State | Annualized Net Rent (unaudited) | Number of Properties | Percentage of Annualized Net Rent | |||||||
| Ohio | $ | 9,787 | 4 | 12.7 | % | |||||
| Illinois | 8,658 | 2 | 11.3 | |||||||
| California | 8,524 | 3 | 11.1 | |||||||
Alabama (1) | 8,352 | 1 | 10.9 | |||||||
| New Jersey | 8,129 | 2 | 10.6 | |||||||
| Arizona | 7,483 | 2 | 9.7 | |||||||
| Nevada | 6,779 | 2 | 8.8 | |||||||
| Texas | 4,073 | 1 | 5.3 | |||||||
| Oregon | 3,231 | 1 | 4.2 | |||||||
| North Carolina | 2,678 | 2 | 3.5 | |||||||
All Others (2) | 9,082 | 7 | 11.9 | |||||||
| Total | $ | 76,776 | 27 | 100.0 | % | |||||
(1)All others account for less than 3.1% of total contractual net rent on an individual state basis.
The percentage of annualizedcontractual net rent for the 12-month period subsequent to December 31, 2017,2020, by industry, based on the respective in-place leases, is as follows (dollars in thousands):
Industry (1) | Contractual Net Rent (unaudited) | Number of Lessees | Percentage of Contractual Net Rent | |||||||||||||||||
| Capital Goods | $ | 40,746 | 19 | 14.1 | % | |||||||||||||||
| Retailing | 31,085 | 8 | 10.7 | |||||||||||||||||
| Health Care Equipment & Services | 27,409 | 10 | 9.5 | |||||||||||||||||
| Insurance | 26,122 | 10 | 9.0 | |||||||||||||||||
| Consumer Services | 22,523 | 9 | 7.8 | |||||||||||||||||
| Telecommunication Services | 19,281 | 5 | 6.7 | |||||||||||||||||
| Diversified Financials | 18,702 | 5 | 6.5 | |||||||||||||||||
| Technology Hardware & Equipment | 16,458 | 6 | 5.7 | |||||||||||||||||
| Energy | 14,619 | 4 | 5.1 | |||||||||||||||||
| Consumer Durables & Apparel | 14,551 | 6 | 5.0 | |||||||||||||||||
All others (2) | 57,846 | 31 | 19.9 | |||||||||||||||||
| Total | $ | 289,342 | 113 | 100.0 | % | |||||||||||||||
(1) Industry classification based on the Global Industry Classification Standard.
(2) All others account for less than 4.2% of total contractual net rent on an individual industry basis.
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Industry (1) | Annualized Net Rent (unaudited) | Number of Lessees | Percentage of Annualized Net Rent | |||||||
| Consumer Services | $ | 12,083 | 3 | 15.7 | % | |||||
Utilities (2) | 10,267 | 2 | 13.4 | |||||||
| Capital Goods | 10,230 | 6 | 13.3 | |||||||
| Technology Hardware & Equipment | 9,550 | 3 | 12.4 | |||||||
| Diversified Financials | 5,863 | 1 | 7.6 | |||||||
| Retailing | 5,668 | 1 | 7.4 | |||||||
| Banks | 5,482 | 2 | 7.1 | |||||||
| Energy | 4,073 | 1 | 5.3 | |||||||
| Consumer Durables and Apparel | 3,231 | 1 | 4.2 | |||||||
| Transportation | 3,042 | 2 | 4.0 | |||||||
| Pharmaceuticals, Biotechnology & Life Sciences | 2,825 | 1 | 3.7 | |||||||
All Others (3) | 4,462 | 4 | 5.9 | |||||||
| Total | $ | 76,776 | 27 | 100.0 | % | |||||
The percentage of annualizedcontractual net rent for the 12-month period subsequent to December 31, 2017, by tenant,2020, for the top 10 tenants, based on the respective in-place leases, is as follows (dollars in thousands):
| Tenant | Contractual Net Rent (unaudited) | Percentage of Contractual Net Rent | ||||||||||||
| General Electric Company | $ | 11,772 | 4.1 | % | ||||||||||
| Wood Group Mustang, Inc. | $ | 9,808 | 3.4 | % | ||||||||||
| Southern Company Services, Inc. | $ | 8,866 | 3.1 | % | ||||||||||
| McKesson Corporation | $ | 8,794 | 3.0 | % | ||||||||||
| LPL Holdings, Inc. | $ | 8,284 | 2.9 | % | ||||||||||
| State Farm | $ | 7,338 | 2.5 | % | ||||||||||
| Digital Globe, Inc. | $ | 7,261 | 2.5 | % | ||||||||||
| Restoration Hardware | $ | 7,109 | 2.5 | % | ||||||||||
| Wyndham Hotel Group, LLC | $ | 7,059 | 2.4 | % | ||||||||||
| SB U.S. LLC | $ | 6,663 | 2.3 | % | ||||||||||
| Tenant | Annualized Net Rent (unaudited) | Percentage of Annualized Net Rent | |||||
Southern Company Services, Inc.(1) | $ | 8,352 | 10.9 | % | |||
| American Express Travel Related Services Company, Inc. | 5,863 | 7.6 | |||||
| Amazon.com.dedc, LLC | 5,668 | 7.4 | |||||
| Bank of America, N.A. | 5,482 | 7.1 | |||||
| Wyndham Worldwide Operations | 5,304 | 6.9 | |||||
| IGT | 4,694 | 6.1 | |||||
| 3M Company | 4,455 | 5.8 | |||||
| Zebra Technologies Corporation | 4,203 | 5.5 | |||||
| Wood Group Mustang, Inc. | 4,073 | 5.3 | |||||
| Nike | 3,231 | 4.2 | |||||
Other (2) | 25,451 | 33.2 | |||||
| Total | $ | 76,776 | 100.0 | % | |||
The tenant lease expirations by year based on annualizedcontractual net rent for the 12-month period subsequent to December 31, 20172020 are as follows (dollars in thousands):
Year of Lease Expiration (1) | Contractual Net Rent (unaudited) | Number of Lessees | Approx. Square Feet | Percentage of Contractual Net Rent | ||||||||||||||||||||||
| 2021 | $ | 2,855 | 4 | 759,200 | 1.0 | % | ||||||||||||||||||||
| 2022 | 12,628 | 8 | 978,900 | 4.4 | ||||||||||||||||||||||
| 2023 | 22,935 | 9 | 1,233,000 | 7.9 | ||||||||||||||||||||||
| 2024 | 46,967 | 16 | 3,950,800 | 16.2 | ||||||||||||||||||||||
| 2025 | 35,795 | 19 | 2,644,700 | 12.4 | ||||||||||||||||||||||
| 2026 | 24,112 | 8 | 2,102,000 | 8.3 | ||||||||||||||||||||||
| >2027 | 144,050 | 49 | 12,072,054 | 49.8 | ||||||||||||||||||||||
| Vacant | — | — | 3,093,059 | — | ||||||||||||||||||||||
| Total | $ | 289,342 | 113 | 26,833,713 | 100.0 | % | ||||||||||||||||||||
| Year of Lease Expiration | Annualized Net Rent (unaudited) | Number of Lessees | Approx. Square Feet | Percentage of Annualized Net Rent | |||||||||
| 2018 - 2020 | $ | — | — | — | — | % | |||||||
| 2021 | 8,713 | 3 | 746,900 | 11.3 | |||||||||
| 2022 | 1,181 | 1 | 312,000 | 1.5 | |||||||||
| 2023 | 6,893 | 2 | 658,600 | 9.0 | |||||||||
| 2024 | 8,726 | 4 | 571,600 | 11.4 | |||||||||
| 2025 | 7,371 | 5 | 728,800 | 9.6 | |||||||||
2026 and beyond (1) | 43,892 | 12 | 4,321,500 | 57.2 | |||||||||
| Total | $ | 76,776 | 27 | 7,339,400 | 100.0 | % | |||||||
ITEM 3. LEGAL PROCEEDINGS
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Market Information
As of March 7, 2018,February 24, 2021, we had approximately 23,278, 270, 270, 282,531, 25,985,155, 50,107,715, and 969,016 of 559,728 Class T shares, 1,801 Class S shares, 41,302 Class D shares, 1,900,456 Class I shares, 24,396,690 Class A shares, 47,442,476 Class AA andshares, 923,087 Class AAAshares and 155,608,273 Class E shares of common stock outstanding, including common stock issued pursuant to our DRP and stock distributions held by a total of approximately 16,50047,000 stockholders of record. There is currently no established public trading market for our common stock. Therefore, there is a risk that a stockholder may not be able to sell our stock at a time or price acceptable to the stockholder, or at all.
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As described in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations,” we expect to pay distributions regularly unless our results of operations, our general financial condition, general economic conditions, or other factors inhibit us from doing so. Distributions will be authorized at the discretion of our Board, which will be directed, in substantial part, by its obligation to cause us to comply with the REIT requirements of the Code.
NAV and NAV per Share Calculation
As a public company, we are required to issue financial statements generally based on historical cost in accordance with GAAP as applicable to our financial statements. To calculate our NAV for the purpose of establishing a purchase and redemption price for our shares, we have adopted a model, as explained below, which adjusts the value of certain of our assets from historical cost to fair value. As a result, our NAV may differ from the amount reported as stockholder’s equity on the face of our financial statements prepared in accordance with GAAP. When the fair value of our assets isand liabilities are calculated for the purposes of determining our NAV per share, the calculation is done using the fair value methodologies detailed within the Financial Accounting Standards Board ("FASB") Accounting Standards Codification under Topicgenerally in accordance with GAAP principles set forth in ASC 820, Fair Value Measurements and Disclosures.Disclosures. However, our valuation procedures and our NAV are not subject to GAAP and will not be subject to independent audit. Our NAV may differ from equity reflected on our audited financial statements, even if we are required to adopt a fair value basis of accounting for GAAP financial statement purposes in the future. Furthermore, no rule or regulation requires that we calculate NAV in a certain way. Although we believe our NAV calculation methodologies are consistent with standard industry principles,practices, there is no established practiceguidance among public REITs, whether listed or not, for calculating NAV in order to establish a purchase and redemption price. As a result, other public REITs may use different methodologies or assumptions to determine NAV.
On February 26, 2020, our Board approved the temporary suspension of (i) the primary portion of our Follow-On Offering, (as defined below) effective February 27, 2020; (ii) our SRP, effective March 28, 2020; and (iii) our DRP, effective March 8, 2020. Redemptions sought upon a stockholder's death, qualifying disability, or determination of incompetence or incapacitation were honored in the first quarter of 2020 in accordance with the terms of the SRP. The Follow-On Offering terminated with the expiration of the registration statement on September 20, 2020. On July 16, 2020, our Board approved the (i) reinstatement of the DRP, effective July 27, 2020; (ii) amendment of the DRP to allow for the use of the most recently published NAV per share of the applicable share class available at the time of reinvestment as the DRP purchase price for each share class; and (iii) partial reinstatement of the SRP, effective August 17, 2020. After March 31, 2020, we (i) ceased publishing a daily updated estimate of our NAV per share; (ii) are continuing our internal procedures for calculating NAV per share; and (iii) will continue to publish updated estimates of our NAV per share on a quarterly basis. We published our updated December 31, 2020 NAV per share on January 19, 2021.
Prior to the suspension (and subsequent expiration) of our Follow-On Offering, we were offering to the public four classes of shares of our common stock, Class T shares, Class S shares, Class D shares and Class I shares with NAV-based pricing. The share classes had different selling commissions, dealer manager fees and ongoing distribution fees. Our NAV is calculated for the New Shareseach of these classes and our IPO Shares by ALPS Fund Services, Inc. (the "NAV Accountant"), a third-party firm approved by our board of directors, including a majority of our independent directors,Class A shares, Class AA shares, Class AAA shares and Class E shares after the end of each business day that the New York Stock Exchange is open for unrestricted trading.trading, by our NAV accountant, ALPS Fund Services, Inc., a third-party firm approved by our Board, including a majority of our independent directors. Our board of directors,Board, including a majority of our independent directors, may replace our NAV Accountantaccountant with another party, including our Advisor, if it is deemed appropriate to do so. Our Board, including a majority of the independent directors, has adopted valuation procedures that contain a comprehensive set of methodologies to be used in connection with the calculation of our NAV.
At the end of each such trading day, before taking into consideration accrued distributions or class-specific expense accruals, any change in the aggregate company NAV (whether an increase or decrease) is allocated among each class of shares based on each class’s relative percentage of the previous aggregate company NAV plus issuances of shares that were effective the previous trading day. Changes in the aggregate company NAV reflect factors including, but not limited to, unrealized/realized gains (losses) on the fair value of our real property portfolio and our management company, any applicable organization and offering costs and any expense reimbursements, real estate-related assets and liabilities, and daily accruals for income and expenses, (including the allocation/accrualamortization of any performance distribution and accruals for advisory fees and distribution fees)transaction costs, and distributions to investors. Changes in our aggregate company NAV also include material non-recurring events, such as capital expenditures and material property acquisitions and dispositions. On an ongoing basis, we will adjust the accruals to reflect actual operating results and the outstanding receivable, payable and other account balances resulting from the accumulation of daily accruals when such financial information is available.
Our most significant source of net income is property income. We accrue estimated income and expenses on a daily basis based on annual budgets as adjusted from time to time to reflect changes in the business throughout the year. For the first month following a property acquisition, we calculate and accrue portfolio income with respect to such property based on the
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performance of the property before the acquisition and the contractual arrangements in place at the time of the acquisition, as identified and reviewed through our due diligence and underwriting process in connection with the acquisition. For the purpose
of calculating our NAV, all organizationalorganization and offering costs reduce NAV as part of our estimated income and expense accrual. On a periodic basis, our income and expense accruals are adjusted based on information derived from actual operating results.
Following the calculation and allocation of changes in the aggregate company NAV as described above, NAV for each share class is adjusted for accrued distributions and the accrued distribution fee, to determine the current day’s NAV. Selling commissions and dealer manager fees, which are effectively paid by purchasersThe purchase price of Class T and Class S shares in the Follow-On Offering at the time of purchase, because the purchase price of such shares is equal to the applicable NAV per share plus the applicable selling commission and/or dealer manager fee, will generallyfee. Selling commissions and dealer manager fees have no effect on the NAV of any class.
NAV per share for each class is calculated by dividing such class’s NAV at the end of each trading day by the number of shares outstanding for that class on such day.
Under GAAP, we accrueaccrued the full cost of the distribution fee as an offering cost for the New SharesClass T, Class S, and Class D shares up to the 9.0% limit at the time such shares arewere sold. For purposes of NAV, we recognize the distribution fee as a reduction of NAV on a daily basis as such fee is accrued. We intend to reduce the net amount of distributions paid to stockholders by the portion of the distribution fee accrued for such class of shares, so that the result is that although the obligation to pay future distribution fees is accrued on a daily basis and included in the NAV calculation, it is not expected to impact the NAV of the shares because of the adjustment to distributions.
Set forth below are the components of theour daily NAV as of December 31, 20172020 and September 30, 2017,2020, calculated in accordance with our valuation procedures (in thousands, except share and per share amounts):
| December 31, 2020 | September 30, 2020 | ||||||||||
| Real Estate Asset Fair Value | $ | 4,277,879 | $ | 4,299,301 | |||||||
Investments in Unconsolidated Entities | 4,100 | 4,100 | |||||||||
| Goodwill (Management Company Value) | 230,000 | 230,000 | |||||||||
| Interest Rate Swap (Unrealized Loss) | (56,776) | (62,478) | |||||||||
| Perpetual Convertible Preferred Stock | (125,000) | (125,000) | |||||||||
| Other Assets, net | 157,182 | 158,843 | |||||||||
| Total Debt at Fair Value | (2,140,065) | (2,172,130) | |||||||||
| NAV | $ | 2,347,320 | $ | 2,332,636 | |||||||
| Total Shares Outstanding | 262,196,714 | 262,064,167 | |||||||||
| NAV per share | $ | 8.95 | $ | 8.90 | |||||||
| As of December 31, 2017 | As of September 30, 2017 | |||||||
| Gross Real Estate Asset Value | $ | 1,205,346 | $ | 1,198,222 | ||||
| Other Assets, net | 13,167 | 2,453 | ||||||
| Mortgage Debt | (484,728 | ) | (474,728 | ) | ||||
| NAV | $ | 733,785 | $ | 725,947 | ||||
| Total Shares Outstanding | 76,995,113 | 76,591,700 | ||||||
| NAV per share | $ | 9.53 | $ | 9.48 | ||||
Our independent valuation firm utilized the discounted cash flow approach for all 2796 properties and the direct capitalization approach for two properties in our portfolio with a weighted average of approximately 10.36.8 years remaining on their existing leases. The sales comparison approach was utilized for the Lynwood land parcel. The overall capitalization rate for the two properties utilizing the direct capitalization approach during the quarter was 5.59%. The following summarizes the range of overallcash flow discount rates and terminal capitalization rates for the 2796 properties using the discounted cash flow discount rates:approach:
| Weighted Average | ||||||
| Range | ||||||
| Overall Capitalization Rate (direct capitalization approach) | N/A | N/A | N/A | |||
| Terminal Capitalization Rate (discounted cash flow approach) | 5.75% | 9.00% | 6.48% | |||
| Cash Flow Discount Rate (discounted cash flow approach) | 6.00% | 9.75% | 7.15% | |||
| Range | Weighted Average | ||||||||||||||||
| Cash Flow Discount Rate (discounted cash flow approach) | 6.00% | 14.00% | 7.57% | ||||||||||||||
| Terminal Capitalization Rate (discounted cash flow approach) | 5.25% | 10.00% | 6.81% | ||||||||||||||
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The following table sets forth the quarterly changes to the components of NAV for the Company and the reconciliation of NAV changes for each class of shares:
| Share Classes | ||||||||||||||||||||||||||||
| Class T | Class S | Class D | Class I | IPO | OP Units | Total | ||||||||||||||||||||||
| NAV as of September 30, 2017 | $ | 2,503 | $ | 2,503 | $ | 2,502 | $ | 2,494,580 | $ | 723,255,361 | $ | 189,644 | $ | 725,947,093 | ||||||||||||||
| Fund Level Changes to NAV | ||||||||||||||||||||||||||||
| Realized/unrealized losses on net assets | 63 | 53 | 54 | 53,846 | 15,557,385 | 4,065 | 15,615,466 | |||||||||||||||||||||
| Dividend Accrual | (35 | ) | (30 | ) | (35 | ) | (36,720 | ) | (10,616,965 | ) | (2,773 | ) | (10,656,558 | ) | ||||||||||||||
| Class specific changes to NAV | ||||||||||||||||||||||||||||
| Stockholder Servicing fees/distribution fees | (7 | ) | (6 | ) | (2 | ) | — | (776,390 | ) | (203 | ) | (776,608 | ) | |||||||||||||||
| NAV as of December 31, 2017 before share/unit sale/redemption activity | $ | 2,524 | $ | 2,520 | $ | 2,519 | $ | 2,511,706 | $ | 727,419,391 | $ | 190,733 | $ | 730,129,393 | ||||||||||||||
| Dollar/unit sale/redemption activity | ||||||||||||||||||||||||||||
| Amount sold | 37,090 | 23 | 27 | 28,255 | 5,568,405 | — | 5,633,800 | |||||||||||||||||||||
| Amount redeemed | — | — | — | — | (1,943,289 | ) | — | (1,943,289 | ) | |||||||||||||||||||
| NAV as of December 31, 2017 | $ | 39,614 | $ | 2,543 | $ | 2,546 | $ | 2,539,961 | $ | 731,044,507 | $ | 190,733 | $ | 733,819,904 | ||||||||||||||
Shares/ units outstanding as of September 30, 2017 | 264 | 264 | 264 | 263,200 | 76,307,708 | 20,000 | 76,591,700 | |||||||||||||||||||||
| Shares/units sold | 3,883 | 2 | 3 | 2,972 | 606,209 | — | 613,069 | |||||||||||||||||||||
| Shares/units redeemed | — | — | — | — | (209,657 | ) | — | (209,657 | ) | |||||||||||||||||||
Shares/units outstanding as of December 31, 2017 (1) | 4,147 | 266 | 267 | 266,172 | 76,704,260 | 20,000 | 76,995,112 | |||||||||||||||||||||
NAV per share/unit as of September 30, 2017 | $ | 9.48 | $ | 9.48 | $ | 9.48 | $ | 9.48 | $ | 9.48 | $ | 9.48 | ||||||||||||||||
| Change in NAV per share/unit | 0.07 | 0.08 | 0.06 | 0.06 | 0.05 | 0.06 | ||||||||||||||||||||||
| NAV per share/unit as of December 31, 2017 | $ | 9.55 | $ | 9.56 | $ | 9.54 | $ | 9.54 | $ | 9.53 | $ | 9.54 | ||||||||||||||||
| Quarter | Total Distributions Declared and Paid to Limited Partners (1) | Total Distributions Declared and Paid to Stockholders (1) | Distributions Declared per Common Share (3) | ||||||||
1st Quarter 2016 | $ | 3 | $ | 4,477 | $ | 0.14 | |||||
2nd Quarter 2016 | $ | 3 | $ | 6,164 | $ | 0.14 | |||||
3rd Quarter 2016 | $ | 3 | $ | 7,831 | $ | 0.14 | |||||
4th Quarter 2016 | $ | 3 | $ | 9,164 | $ | 0.14 | |||||
1st Quarter 2017 | $ | 3 | $ | 10,067 | $ | 0.14 | |||||
2nd Quarter 2017 | $ | 3 | $ | 10,360 | $ | 0.14 | |||||
3rd Quarter 2017 | $ | 3 | $ | 10,556 | $ | 0.14 | |||||
4th Quarter 2017 | $ | 2 | $ | 10,652 | (2) | $ | 0.14 | ||||
| Share Classes | |||||||||||||||||||||||||||||||||||||||||||||||
| Class T | Class S | Class D | Class I | Class E | IPO (1) | OP Units | Total | ||||||||||||||||||||||||||||||||||||||||
| NAV as of September 30, 2020 | $ | 5,012 | $ | 16 | $ | 368 | $ | 17,056 | $ | 1,384,969 | $ | 641,005 | $ | 284,210 | $ | 2,332,636 | |||||||||||||||||||||||||||||||
| Fund level changes to NAV | |||||||||||||||||||||||||||||||||||||||||||||||
| Unrealized gain on net assets | 67 | — | 5 | 228 | 18,511 | 8,576 | 3,801 | 31,188 | |||||||||||||||||||||||||||||||||||||||
| Unrealized gain (loss) on interest rate swaps | 13 | — | 1 | 42 | 3,384 | 1,568 | 695 | 5,703 | |||||||||||||||||||||||||||||||||||||||
| Dividend accrual | (36) | — | (3) | (167) | (13,645) | (6,382) | (2,801) | (23,034) | |||||||||||||||||||||||||||||||||||||||
| Class specific changes to NAV | |||||||||||||||||||||||||||||||||||||||||||||||
| Stockholder servicing fees/distribution fees | (13) | — | — | — | — | (347) | (3) | (363) | |||||||||||||||||||||||||||||||||||||||
| NAV as of December 31, 2020 before share/unit sale/redemption activity | $ | 5,043 | $ | 16 | $ | 371 | $ | 17,159 | $ | 1,393,219 | $ | 644,420 | $ | 285,902 | $ | 2,346,130 | |||||||||||||||||||||||||||||||
| Unit sale/redemption activity- Dollars | |||||||||||||||||||||||||||||||||||||||||||||||
| Amount sold | $ | 21 | $ | — | $ | 3 | $ | 245 | $ | 4,485 | $ | 3,080 | $ | — | $ | 7,834 | |||||||||||||||||||||||||||||||
| Amount redeemed and to be paid | — | — | — | (197) | (4,767) | (1,680) | — | (6,644) | |||||||||||||||||||||||||||||||||||||||
| NAV as of December 31, 2020 | $ | 5,064 | $ | 16 | $ | 374 | $ | 17,207 | $ | 1,392,937 | $ | 645,820 | $ | 285,902 | $ | 2,347,320 | |||||||||||||||||||||||||||||||
| Shares/units outstanding as of September 30, 2020 | 555,732 | 1,802 | 40,789 | 1,894,647 | 155,245,967 | 72,486,331 | 31,838,899 | 262,064,167 | |||||||||||||||||||||||||||||||||||||||
| Shares/units sold | 2,374 | — | 306 | 27,250 | 503,143 | 348,782 | — | 881,855 | |||||||||||||||||||||||||||||||||||||||
| Shares/units redeemed | — | — | — | (21,855) | (536,824) | (190,629) | — | (749,308) | |||||||||||||||||||||||||||||||||||||||
| Shares/units outstanding as of December 31, 2020 | 558,106 | 1,802 | 41,095 | 1,900,042 | 155,212,286 | 72,644,484 | 31,838,899 | 262,196,714 | |||||||||||||||||||||||||||||||||||||||
| NAV per share as of September 30, 2020 | $ | 9.02 | $ | 9.01 | $ | 9.00 | $ | 9.00 | $ | 8.92 | $ | 8.84 | |||||||||||||||||||||||||||||||||||
| Change in NAV per share/unit | 0.05 | 0.06 | 0.06 | 0.06 | 0.05 | 0.05 | |||||||||||||||||||||||||||||||||||||||||
| NAV per share as of December 31, 2020 | $ | 9.07 | $ | 9.07 | $ | 9.06 | $ | 9.06 | $ | 8.97 | $ | 8.89 | |||||||||||||||||||||||||||||||||||
Recent Sales of Unregistered Securities
During the year ended December 31, 2017,2020, there were no sales of unregistered securities.
| As of December 31, 2017 | ||||
| Common shares issued in the primary portion of our IPO | 72,663,855 | |||
| Common shares issued in our offering pursuant to our DRP portion of the IPO | 4,436,226 | |||
| Total common shares | 77,100,081 | |||
| Gross proceeds from the primary portion of our IPO | $ | 724,017 | ||
| Gross proceeds from our offering from shares issued pursuant to our DRP portion of the IPO | 41,912 | |||
| Total gross proceeds from our IPO | $ | 765,929 | ||
| Selling commissions and dealer manager fees incurred | (51,004 | ) | ||
| Reimbursement of O&O costs paid to our Advisor | (6,722 | ) | ||
| Net proceeds from our IPO | $ | 708,203 | ||
| Reimbursement of O&O costs owed to our Advisor | (8 | ) | ||
| Net proceeds from our IPO, adjusted for O&O costs owed to our Advisor | $ | 708,195 | ||
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
On July 16, 2020, the New Shares (and IPO Shares that have been held for four years or longer). UnderBoard approved the New Share Redemption Program, we will redeem shares aspartial reinstatement of the last business daySRP, effective August 17, 2020, subject to the following limitations: (A) redemptions will be limited to those sought upon a stockholder's death, qualifying disability, or determination of each quarter. The redemption priceincompetence or incapacitation in accordance with the terms of the SRP, and (B) the quarterly cap on aggregate redemptions will be equal to the NAV per share for the applicable class generally on the 13th of the month immediately prior to the end of the applicable quarter. Redemption requests exceeding the quarterly cap will be filled on a pro rata basis. With respect to any pro rata treatment, redemption requests following the death or qualifying disability of a stockholder will be considered first, as a group, followed by requests where pro rata redemption would result in a stockholder owning less than the minimum balance of $2,500 of shares of our common stock, which will be redeemed in full to the extent there are available funds, with any remaining available funds allocated pro rata among all other redemption requests. All unsatisfied redemption requests must be resubmitted after the start of the next quarter, or upon the recommencement of the New Share Redemption Program, as applicable.
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During the quarter ended December 31, 2020, we redeemed shares under the SRP as follows:
| For the Month Ended | Total Number of Shares repurchased | Average Price Paid per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | Maximum Number (or Approximate Dollar Value) of Shares (or Units) That May Yet be Purchased Under the Plans or Programs | ||||||||||||||||||||||
| October 31, 2020 | — | $ | — | — | — | |||||||||||||||||||||
| November 30, 2020 | — | $ | — | — | — | |||||||||||||||||||||
| December 31, 2020 | 600,075 | $ | 8.91 | — | (1) | |||||||||||||||||||||
(1)For a description of the maximum number of shares that may be purchased under our filings with the SEC. For additional details regarding our IPO Share Redemption Program, pleaseSRP, see Note 8, 9, Equity,to theour consolidated financial statements containedincluded in this report.Annual Report on Form 10-K.
Performance Graph
The information below shall not be deemed to be “soliciting material” or to be “filed” with the SEC or subject to Regulation 14A or 14C, other than as provided in Item 201 of December 31, 2017, $32.4 millionRegulation S-K, or to the liabilities of Section 18 of the Exchange Act, except to the extent we specifically request that such information be treated as soliciting material or specifically incorporate it by reference into a filing under the Securities Act or the Exchange Act.
The performance graph below is a comparison of the five-year cumulative return of our shares of Class A common stock, was available for redemptionthe Standard and $2.2 millionPoor’s 500 Index (“S&P 500”), and the FTSE NAREIT Equity REITs Index. Performance is shown both with and without “Sales Load” and net of common stockall other fees and expenses. Sales Load is defined as upfront selling commissions, dealer manager fees, and estimated issuer and organizational offering expenses, in conformity with the definition of “Net Investment” amount set forth in FINRA Rule 2231. We disclosed our initial estimate of our net asset value per share on February 13, 2017, which estimate was reclassified from redeemable common stock to accrued expenses and other liabilities in the consolidated balance sheet as of December 31, 2017.
| For the Month Ended | Total Number of Shares Redeemed | Weighted Average Price Paid per Share | Total Number of Shares Redeemed as Part of Publicly Announced Plans or Programs | Maximum Number (or Approximate Dollar Value) of Shares (or Units) that May Yet Be Purchased Under the Plans or Programs | ||||||||
October 31, 2017 (1) | 209,657 | $ | 9.27 | 209,657 | (2) | |||||||
| November 30, 2017 | — | — | — | (2) | ||||||||
| December 31, 2017 | — | — | — | (2) | ||||||||
ITEM 6. SELECTED FINANCIAL DATA
Omitted at the option of Financial Condition and Resultsthe Registrant.
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| Year Ended December 31, | For the Period from February 11, 2014 (Date of Initial Capitalization) through December 31, | |||||||||||||||
| 2017 | 2016 | 2015 | 2014 | |||||||||||||
| Operating Data | ||||||||||||||||
| Total revenue | $ | 107,381 | $ | 62,812 | $ | 25,149 | $ | — | ||||||||
| Income (loss) before other income and (expenses) | $ | 26,107 | $ | 4,264 | $ | (11,653 | ) | $ | (439 | ) | ||||||
| Net income (loss) | $ | 11,119 | $ | (6,107 | ) | $ | (16,504 | ) | $ | (495 | ) | |||||
| Net income (loss) attributable to common stockholders | $ | 11,116 | $ | (6,104 | ) | $ | (17,247 | ) | $ | (437 | ) | |||||
Net income (loss) attributable to common stockholders per share, basic and diluted (1) | $ | 0.15 | $ | (0.12 | ) | $ | (1.19 | ) | $ | (0.86 | ) | |||||
| Distributions declared per common share | $ | 0.55 | $ | 0.55 | $ | 0.55 | $ | 0.26 | ||||||||
| Balance Sheet Data | ||||||||||||||||
| Total assets | $ | 1,179,948 | $ | 1,184,475 | $ | 536,720 | $ | 10,588 | ||||||||
| Total liabilities | $ | 584,999 | $ | 613,090 | $ | 307,213 | $ | 1,057 | ||||||||
| Redeemable common stock | $ | 32,405 | $ | 16,930 | $ | 4,566 | $ | 51 | ||||||||
| Total stockholders’ equity | $ | 562,468 | $ | 554,371 | $ | 224,844 | $ | 9,341 | ||||||||
| Total equity | $ | 562,544 | $ | 554,455 | $ | 224,941 | $ | 9,480 | ||||||||
| Other Data | ||||||||||||||||
| Net cash provided by (used in) operating activities | $ | 39,712 | $ | 16,444 | $ | (2,935 | ) | $ | 54 | |||||||
| Net cash used in investing activities | $ | (87,207 | ) | $ | (533,806 | ) | $ | (486,148 | ) | $ | (2,000 | ) | ||||
| Net cash provided by financing activities | $ | 29,984 | $ | 563,313 | $ | 500,522 | $ | 7,917 | ||||||||
ITEM 7. MANAGEMENT'SMANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following “Management’s Discussion and Analysis of Financial Condition and ResultResults of Operations” should be read in conjunction with the Company’s consolidated financial statements and the notes thereto contained in this report.Annual Report on Form 10-K.
In connection with the EA Merger on April 30, 2019, EA-2 was the legal acquirer and EA-1 was the accounting acquirer for financial reporting purposes. The financial information for GCEAR as set forth in this Annual Report on Form 10-K represents a continuation of the financial information of EA-1 as the accounting acquirer. Thus, the financial information set forth herein for any period prior to April 30, 2019 reflects results of pre-EA Merger EA-1. The results of operations of EA-2 are incorporated into GCEAR effective May 1, 2019. Following the EA Merger, the surviving company was renamed Griffin Capital Essential Asset, REIT, II, Inc.,
As used throughout this Annual Report on Form 10-K, references to “GCEAR,” the “Company,” “we,” “our,” and “us” herein refer to EA-1 and one or more of EA-1’s subsidiaries for periods prior to the EA Merger, and GCEAR and one or more of GCEAR’s subsidiaries for periods following the EA Merger. Accordingly, comparisons of the period to period financial information of GCEAR may not be meaningful.
Overview
We are an internally managed, publicly-registered non-traded REIT. We own and operate a Maryland corporation, was formed on November 20, 2013 under the Maryland General Corporation Lawgeographically diversified portfolio of strategically-located, high-quality corporate office and qualified as a REIT commencing with the year ended December 31, 2015. We were organized primarily with the purpose of acquiring single tenant net leaseindustrial properties that are considered essentialprimarily net-leased to the occupying tenant,single tenants that we have determined to be creditworthy.
The GCEAR platform was founded in 2009 and expectwe have since grown to use a substantial amountbecome one of the largest office and industrial-focused net-lease REITs in the United States. Since our founding, our mission has been consistent – to generate long-term results for our stockholders by combining the durability of high-quality corporate tenants, the stability of net proceeds from our Follow-On Offering to invest in these properties. We have no employeesleases and are externally advisedthe power of proactive management. To achieve this mission, we leverage the skills and managed by our Advisor. Our year end is December 31.
development, finance, law and accounting. They are led by an experienced senior management team with the SEC.
commercial real estate experience.
As of December 31, 2017, our real estate portfolio consisted of 272020, we owned 98 properties (35 buildings) consisting substantially of office, industrial, distribution, and data center facilities with a combined acquisition value of $1.1 billion, including the allocation of the purchase price to above and below-market lease valuation, encompassing approximately 7.3 million square feet.(including one land parcel held for future development) in 25 states. Our annualizedcontractual net rent for the 12-month period subsequent to December 31, 2017 was2020 is expected to be approximately $76.8$289.3 million with approximately 82.7%64.3% expected to be generated by properties leased to tenants and/or guarantorsguaranteed, directly or whose non-guarantor parentindirectly, by companies we have investment grade or, in management's belief, equivalent ratings. Our rentable square feet under lease asdetermined to be creditworthy. As of December 31, 20172020, our portfolio was 100%approximately 88.5% leased (based on square footage), with a weighted average remaining lease term of 10.36.83 years, withweighted average annual rent increases of approximately 2.4%, and2.1%.
On October 29, 2020, we entered into the CCIT II Merger Agreement pursuant to which we will acquire CCIT II for approximately $1.2 billion in a debt to total real estate acquisition value of 43.2%.
(including one land parcel held for future development) in 26 states.
COVID-19 and Outlook
We are closely monitoring the impact of the COVID-19 pandemic on all aspects of our business and geographies, including how it will impact our tenants and business partners. The COVID-19 pandemic in many countries, including the United States, has significantly adversely impacted global economic activity and has contributed to volatility and negative pressure in financial markets. The global impact of the pandemic has been rapidly evolving and, as cases of COVID-19 have continued to be identified, many countries, including the United States, have reacted by instituting various levels of quarantines, business and school closures and travel restrictions. Certain states and cities, including those where we own properties and where our principal place of business is located, have instituted similar measures, including various levels of“shelter in place” rules, and restrictions on the types of business that may continue to operate at full capacity. We cannot predict when restrictions
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currently in place will be lifted to some extent or entirely. As a result, the COVID-19 pandemic is negatively impacting almost every industry, directly or indirectly, including industries in which the Company and our tenants operate, which could result in a general decline in rents and an increased incidence of defaults under existing leases. The extent to which federal, state or local governmental authorities grant rent relief or other relief or enact amnesty programs applicable to our tenants in response to the consolidated financial statements.
While we did not incur significant disruptions from the COVID-19 pandemic during the three months ended December 31, 2020, we are unable to predict the impact that the COVID-19 pandemic will have on our financial condition, results of operations and cash flows due to numerous uncertainties. These uncertainties include the continued severity, duration, transmission rate and geographic spread of COVID-19 in the United States, the speed of the vaccine roll-out, effectiveness and willingness of people to take COVID-19 vaccines, the duration of associated immunity and their efficacy against emerging variants of COVID-19, the extent and effectiveness of other containment measures taken, and the response of the overall economy, the financial markets and the population, particularly in areas in which we operate. If we cannot operate our properties so as to meet our financial expectations, because of these or other risks, we may be prevented from growing the values of our real estate properties, and our financial condition, including our NAV per share, results of operations, cash flows, performance, or our ability to satisfy our debt obligations and/or to maintain our level of distributions to our stockholders may be adversely impacted or disrupted. We cannot predict the impact that the COVID-19 pandemic will have on our tenants and other business partners; however, any material effect on these parties could adversely impact us. As of February 24, 2021, we received October-February 2020 rent payments from 100% of our portfolio. In addition, we have received a number of short-term rent relief inquiries from our tenants, most often in the form of rent deferral inquiries, or requests for further discussion from tenants. We believe some of these inquiries were opportunistic in nature and may not have been as a result of a direct financial need due to the outbreak. As of February 24, 2021, we granted two of these deferral requests that deferred three months of rent to be collected during 2021 without interest and represented less than 1.0% of total revenue for the year ended December 31, 2020. While there are no current active short-term rent relief inquiries, we are unable to predict the amount of future rent relief inquiries and the October-February collections and rent relief requests to-date may not be indicative of collections or requests in any future period. Additionally, not all tenant inquiries will ultimately result in lease concessions.
While the long-term impact of the COVID-19 pandemic on our business is not yet known, our management believes we are well-positioned from a liquidity perspective with $390.9 million of immediate liquidity as of December 31, 2020, consisting of $221.9 million undrawn on our Revolving Credit Facility and $169.0 million of cash on hand. Included in these amounts is $125.0 million from our Revolving Credit Facility that we borrowed in April 2020 for potential upcoming capital expenditure requirements and to provide us with a flexible conservative cash management position. Additionally, our Second Amendment to the Second Amended and Restated Credit Agreement increased our credit facility availability from $1.5 billion to $1.9 billion. See Part I "Item 1A. Risk Factors", of this Annual Report on Form 10-K for a discussion about risks that COVID-19 directly or indirectly may pose to our business.
Our primary focus continues to be protecting the health and well-being of our employees and ensuring that there is limited operational disruption as a result of the COVID-19 pandemic. Some of the primary steps we have taken to accomplish these objectives were: (1) initially instituting elective telework arrangements and then following with mandatory telework arrangements with minor exceptions for certain “essential” business functions, (2) capital investment in technology solutions and hardware, as necessary, to allow for a fully remote workforce, (3) mandatory self-quarantines where necessary, (4) recommendations and FAQs to all employees regarding best practices to avoid infection, as well as steps to take in the event inflation does become a factor, we expectof an infection, (5) temporary prohibition of business travel, other than essential business travel approved by management, and (6) creation of an internal COVID-19 task force that meets to discuss additional safety measures to ensure the safe return of our leases typicallyemployees to the office, which plans will not include provisions that would protect us from the impact of inflation. We will attempt to acquire propertiesbe finalized in accordance with leases that require the tenants to pay, directly or indirectly, all operating expenses and certain capital expenditures, which will protect us from increases in certain expenses, including, but not limited to, material and labor costs. In addition, we will attempt to acquire properties with leases that include rental rate increases, which will act as a potential hedge against inflation.applicable local guidelines, when such guidelines are established.
We have established accounting policies which conform to GAAP in the United States as contained in the FASBFinancial Accounting Standards Board Accounting Standards Codification ("ASC"). The preparation of our consolidated financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses. If our judgment or interpretation of the facts and circumstances relating to the various transactions had been different, it is possible that different estimates would have been applied, thus resulting in a different presentation of the financial statements. Additionally, other companies may use different estimates and assumptions that may impact the comparability of our financial condition and results of operations to those companies.
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The following critical accounting policies discussion reflects what we believe are the most significant estimates, assumptions, and judgments used in the preparation of our consolidated financial statements. This discussion of our critical accounting policies is intended to supplement the description of our accounting policies in the footnotes to our consolidated financial statements and to provide additional insight into the information used by management when evaluating significant estimates, assumptions, and judgments. For further discussion ofon our significant accounting policies, see Note 2, “Basis of Presentation and Summary of Significant Accounting Policies,” to our consolidated financial statements included in this report.Annual Report on Form 10-K.
Real Estate - Valuation and Purchase Price Allocation
When we acquire operating properties, we allocate the purchase price on an asset acquisition to the various components of the acquisition based upon the relative fair value of each component. The components typically include land, building and improvements, tenant improvements, intangible assets related to above and below market leases, intangible assets related to in-place leases, debt and other assumed assets and liabilities. Transaction costs are capitalized as a component of the cost of the asset acquisition.
We allocate the purchase price to the relative fair value of the tangible assets of a property by valuing the property as if it were vacant. This “as-if vacant” value is estimated using an income, or discounted cash flow, approach that relies upon Level 3 inputs, which are unobservable inputs based on our assumptions about the assumptions a market participant would use. These Level 3 inputs include discount rates, capitalization rates, market rents and comparable sales data for similar properties. Estimates of future cash flows are based on a number of factors, including historical operating results, known and anticipated trends, and market and economic conditions.
In determining the relative fair value of intangible lease assets or liabilities, we also consider Level 3 inputs. Acquired above- and below-market leases are valued based on the present value of the difference between prevailing market rates and
the in-place rates measured over a period equal to the remaining term of the lease for above-market leases and the initial term plus the term of any below-market fixed rate renewal options for below-market leases, if applicable. The estimated relative fair value of acquired in-place at-market tenant leases are the costs that would have been incurred to lease the property to the occupancy level of the property at the date of acquisition. Such estimates include the value associated with leasing commissions, legal and other costs, as well as the estimated period necessary to lease such property that would be incurred to lease the property to its occupancy level at the time of its acquisition. Acquisition costs associated with an asset acquisition are capitalized as a component of the transaction.
The difference between the relative fair value and the face value of debt assumed in connection with an acquisition is recorded as a premium or discount and amortized to “interest expense” over the life of the debt assumed. The valuation of assumed liabilities is based on our estimate of the current market rates for similar liabilities in effect at the acquisition date.
For acquisitions that do not meet the accounting criteria to be accounted for asof an asset acquisition, we allocate the cost of the acquisition, which excludes any associated acquisition costs that are expensed when incurred, to the individual assets and liabilities assumed on a fair value basis.as incurred.
Impairment of Real Estate and Related Intangible Assets and Liabilities
We continually monitor events and changes in circumstances that could indicate that the carrying amounts of real estate and related intangible assets may not be recoverable. When indicators of potential impairment are present that indicate that the carrying amounts of real estate and related intangible assets may not be recoverable, management will assess the recoverability of the assets by determining whether the carrying value of the assets will be recovered through the undiscounted future operating cash flows expected from the use of the assets and the eventual disposition. If, based on this analysis, we do not believe that we will be able to recover the carrying value of the asset, we will record an impairment loss to the extent the carrying value exceeds the estimated fair value of the asset.
Projections of expected future undiscounted cash flows require management to estimate future market rental income amounts subsequent to the expiration of current lease agreements, property operating expenses, discount rates, the number of months it takes to re-lease the property and the number of years the property is held for investment. As of December 31, 2017,2020, in connection with the preparation and review of the Company's financial statements, we did not record anyrecorded an impairment chargesprovision related to the building and land on three properties. See Note 3, Real Estate to our real estate assets or intangible assets.consolidated financial statements included in this Annual Report on Form 10-K for details.
Revenue Recognition
Leases associated with the acquisition and contribution of certain real estate assets have net minimum rent payment increases during the term of the lease and are recorded to rental revenue on a straight-line basis, commencing as of the
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contribution or acquisition date. If a lease provides for contingent rental income, we will defer the recognition of contingent rental income, such as percentage rents, until the specific target that triggers the contingent rental income is achieved.
Tenant reimbursement revenue, which is comprised of additional amounts collected from tenants for the recovery of certain operating expenses, including repair and maintenance, property taxes and insurance, and capital expenditures, to the extent allowed pursuant to the lease (collectively "Recoverable Expenses"), is recognized as revenue when the additional rent is due. Recoverable Expenses to be reimbursed by a tenant are determined based on our estimate of the property's operating expenses for the year, pro ratedpro-rated based on leased square footage of the property, and are collected in equal installments as additional rent from the tenant, pursuant to the terms of the lease. At least quarterly,Monthly, we reconcile the amount of additional rent paid by the tenant during the year to the actual amount of the Recoverable Expenses incurred by us for the same period. The difference, if any, is either charged or credited to the tenant pursuant to the provisions of the lease. In certain instances, the lease may restrict the amount we can recover from the tenant such as a cap on certain or all property operating expenses.
Recently Issued Accounting Pronouncements
See Note 2, Basis of Presentation and Summary of Significant Accounting Policies, to theour consolidated financial statements.statements including in this Annual Report on Form 10-K.
Results of Operations
Overview
Our ability to re-lease space subject to expiring leases will impact our results of operations and is affected by economic and competitive conditions in our markets. Leases that comprise approximately 1.0% of our contractual net rent for the 12-month period subsequent to December 31, 2020 are scheduled to expire during the period from January 1, 2021 to December 31, 2021. We assume, based upon internal renewal probability estimates, that some of our tenants will renew and others will vacate and the associated space will be re-let subject to market leasing assumptions. Using the aforementioned assumptions, we expect that the rental rates on the respective new leases may vary from the rates under existing leases expiring during the period from January 1, 2021 to December 31, 2021, thereby resulting in revenue that may differ from the current in-place rents.
We are not aware of any other material trends or uncertainties, other than as discussed under "COVID-19 and Outlook" and other than national economic conditions affecting real estate in general, that may reasonably be expected to have a material impact, favorable or unfavorable, on revenues or income from the acquisition, management and operations of properties other than those listed in Part I, Item 1A. Risk Factors, of this Annual Report on Form 10-K.
Segment Information
The Company internally evaluates all of the properties and interests therein as one reportable segment.
Recent Developments
The following are significant developments in our business during 2020:
•Executed definitive documents with CCIT II pursuant to which we will acquire CCIT II for approximately $1.2 billion in a stock-for-stock transaction, which is expected to close in March 2021 (see “Overview”);
•Amended the terms of our Revolving Credit Facility to provide for a new $400 million delayed draw term loan and to provide us the option, subject to obtaining additional commitments from lenders and certain other customary conditions, to increase the commitments under the Revolving Credit Facility, increase the existing term loans and/or incur new term loans by up to an additional $600.0 million in the aggregate;
•Drew $125.0 million from our RevolvingCredit Facility in April 2020 for potential upcoming capital expenditure requirements and to provide us with a flexible conservative cash management position, in light of the COVID-19 pandemic and concerns about potential pressure on cash flow and the potential for insufficient access to bank finance;
•Entered into three interest rate swap agreements to hedge variable cash flows in March with a term of approximately five years with a total notional amount of $325.0 million;
•Concluded our Follow-On Offering after the expiration of its registration statement in September, following its temporary suspension in February;
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•Reinstated our DRP in July and amended it to permit the use of the most recently published NAV per share of the applicable share class available, following the temporary suspension of the DRP in March;
•Partially reinstated our SRP in August with certain limitations after its temporary suspension in March;
•Elected to change from a quarterly to a monthly declaration of distributions commencing in April 2020 in order to give the Board maximum flexibility due to the review of a prior potential strategic transaction and to monitor and evaluate the situation related to the financial impact of COVID-19 pandemic and limited our annualized distribution rate to $0.35/share, all-cash, subject to adjustments for class-specific expenses, commencing with distributions accrued during the month of April 2020, and paid in early May 2020 and then declared daily cash distributions during the fourth quarter; and
•Disposed of two properties, Bank of America I and Bank of America II, each in Simi Valley, California for gross proceeds of $30.0 million in December and $24.5 million in June, respectively.
Same Store Analysis
For the year ended December 31, 2017,2020, our "Same Store" portfolio consisted of 1572 properties, encompassing approximately 19.5 million square feet, with an acquisition value of $479.2$2.9 billion and contractual net rent for the 12-month period subsequent to December 31, 2020 of $210.9 million. Our "Same Store" portfolio includes properties which were held for a full period for all periods presented. The following table provides a comparative summary of the results of operations for 15the 72 properties for the years ended December 31, 20172020 and 20162019 (dollars in thousands):
| Year Ended December 31, | Increase/(Decrease) | Percentage Change | ||||||||||||
| 2017 | 2016 | |||||||||||||
| Rental income | $ | 38,879 | $ | 38,903 | $ | (24 | ) | 0 | % | |||||
| Property expense recoveries | 9,220 | 8,633 | 587 | 7 | % | |||||||||
| Asset and property management fees to affiliates | 4,232 | 5,578 | (1,346 | ) | (24 | )% | ||||||||
| Property operating expenses | 3,520 | 3,384 | 136 | 4 | % | |||||||||
| Property tax expense | 5,734 | 5,420 | 314 | 6 | % | |||||||||
| Depreciation and amortization | 21,496 | 21,547 | (51 | ) | 0 | % | ||||||||
| Interest expense | 4,090 | 4,090 | — | 0 | % | |||||||||
| Year Ended December 31, | Increase/(Decrease) | Percentage Change | |||||||||||||||||||||
| 2020 | 2019 | ||||||||||||||||||||||
| Rental income | $ | 294,251 | $ | 300,374 | $ | (6,123) | (2) | % | |||||||||||||||
| Property operating expense | 49,705 | 49,470 | 235 | — | |||||||||||||||||||
| Property management fees to non-affiliates | 3,018 | 2,840 | 178 | 6 | % | ||||||||||||||||||
| Property tax expense | 31,581 | 31,528 | 53 | — | |||||||||||||||||||
| Depreciation and amortization | 104,931 | 106,435 | (1,504) | (1) | % | ||||||||||||||||||
Portfolio Analysis
Comparison of the Years Ended December 31, 20172020 and 2016
The following table provides summary information about our results of operations for the yearyears ended December 31, 20172020 and 20162019 (dollars in thousands):
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| Year Ended December 31, | Increase/(Decrease) | Percentage Change | Year Ended December 31, | Increase/(Decrease) | Percentage Change | |||||||||||||||||||||||||||||||||||
| 2017 | 2016 | 2020 | 2019 | |||||||||||||||||||||||||||||||||||||
| Rental income | $ | 89,797 | $ | 51,403 | $ | 38,394 | 75 | % | Rental income | $ | 397,452 | $ | 387,108 | $ | 10,344 | 3 | % | |||||||||||||||||||||||
| Property expense recoveries | 17,584 | 11,409 | 6,175 | 54 | % | |||||||||||||||||||||||||||||||||||
| Asset management fees to affiliates | 8,027 | 6,413 | 1,614 | 25 | % | |||||||||||||||||||||||||||||||||||
| Property management fees to affiliates | 1,799 | 1,052 | 747 | 71 | % | |||||||||||||||||||||||||||||||||||
| Advisory fees to affiliates | 2,550 | — | 2,550 | 100 | % | |||||||||||||||||||||||||||||||||||
| Performance distributions to affiliates | 2,394 | — | 2,394 | 100 | % | |||||||||||||||||||||||||||||||||||
| Property operating expense | 6,724 | 4,428 | 2,296 | 52 | % | Property operating expense | 57,461 | 55,301 | 2,160 | 4 | % | |||||||||||||||||||||||||||||
| Property tax expense | 10,049 | 7,046 | 3,003 | 43 | % | Property tax expense | 37,590 | 37,035 | 555 | 1 | % | |||||||||||||||||||||||||||||
| Acquisition fees and expenses to non-affiliates | — | 1,113 | (1,113 | ) | (100 | )% | ||||||||||||||||||||||||||||||||||
| Acquisition fees and expenses to affiliates | — | 6,176 | (6,176 | ) | (100 | )% | ||||||||||||||||||||||||||||||||||
| Property management fees to non-affiliates | Property management fees to non-affiliates | 3,656 | 3,528 | 128 | 4 | % | ||||||||||||||||||||||||||||||||||
| General and administrative expenses | 3,445 | 2,804 | 641 | 23 | % | General and administrative expenses | 38,633 | 26,078 | 12,555 | 48 | % | |||||||||||||||||||||||||||||
| Corporate operating expenses to affiliates | 2,336 | 1,622 | 714 | 44 | % | Corporate operating expenses to affiliates | 2,500 | 2,745 | (245) | (9) | % | |||||||||||||||||||||||||||||
| Depreciation and amortization | 43,950 | 27,894 | 16,056 | 58 | % | Depreciation and amortization | 161,056 | 153,425 | 7,631 | 5 | % | |||||||||||||||||||||||||||||
| Impairment provision | Impairment provision | 23,472 | 30,734 | (7,262) | (24) | % | ||||||||||||||||||||||||||||||||||
| Interest expense | 15,519 | 10,384 | 5,135 | 49 | % | Interest expense | 79,646 | 73,557 | 6,089 | 8 | % | |||||||||||||||||||||||||||||
| (Loss) from investment in unconsolidated entities | (Loss) from investment in unconsolidated entities | (6,523) | (5,307) | (1,216) | 23 | % | ||||||||||||||||||||||||||||||||||
| Gain from disposition of assets | Gain from disposition of assets | 4,083 | 29,938 | (25,855) | (86) | % | ||||||||||||||||||||||||||||||||||
Rental Income
The increase in assetrental income of approximately $10.3 million during the year ended December 31, 2020 compared to the year ended December 31, 2019 is primarily due to (1) an increase of approximately $36.7 million as a result of the EA Merger and property management fees to affiliatestwo properties acquired in 2019 and 2020; (2) new and amended leases of $18.2 million for the year ended December 31, 2017 was primarily the result of portfolio growth during 2016 and 2017;2020; offset by changes in the asset management fee structure attributed(3) approximately $25.0 million related to the Follow-On Offering with a daily NAV structure. (See Note 10, Related Party Transactions, for additional details).
Property Operating Expense
The increase in property operating expense of approximately $7.3 million. The decrease was a result of an accounting standard, which clarified the definition of a business combination. Under the clarified definition, our two acquisitions through$2.2 million during the year ended December 31, 2017 did not qualify as a business combination; consequently, we accounted for each transaction as an asset acquisition. Thus,2020 compared to the year ended December 31, 2019 is primarily the result of (1) approximately $1.2$2.0 million of acquisition expense was capitalized as part ofrelated to two properties vacated during the asset acquisition and allocated on a relative fair value basis.year ended December 31, 2020 that were tenant-managed; (2) approximately $1.0 million primarily related to one property acquired subsequent to June 30, 2019; offset by (3) approximately $0.8 million related to one property sold during the year ended December 31, 2019.
General and Administrative Expenses
General and administrative expenses for the year ended December 31, 2020 increased by approximately $12.6 million compared to the year ended December 31, 2019 primarily due to (1) an increase of approximately $5.0 million in professional fees, mainly due to the write-off of transaction costs and audit fees; (2) an approximately $3.7 million increase in payroll primarily due to employee severance payment, the EA Merger (see Note 1, Organization, to our consolidated financial statements included in this Annual Report on Form 10-K for details), and an increase in number of employees.; (3) approximately $1.5 million in restricted stock unit expense as a result of RSUs issued during the year ended December 31, 2020; (4) approximately $1.4 million in accelerated RSU amortization expense related to a resignation of an officer of the Company; and (5) an approximately $0.6 million increase in transfer agent fees as a result of additional shareholder accounts activity during the year ended December 31, 2020 compared to the year ended December 31, 2019.
Corporate Operating Expenses to Affiliates
Agreement. See Note 11, Related Party Transactions, to our consolidated financial statements included in this Annual Report
on Form 10-K for details.
Depreciation and Amortization
Depreciation and amortization for the year ended December 31, 2020 increased by approximately $7.6 million compared to the year ended December 31, 2019 as a result of (1) approximately $18.4 million related to the EA Merger and properties acquired during 2019 and 2020; and (2) an approximately $4.5 million increase as a result of fixed asset additions during the year ago wasended December 31, 2020; offset by (3) approximately $1.4 million. The increase was$11.6 million related
to fully depreciated assets and four properties sold subsequent to 2019; and (4) approximately $4.2 million in amortization of the management contract intangible during the year ended December 31, 2019.
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Impairment Provision
The decrease in impairment provision of approximately $7.3 million for the year ended December 31, 2020 compared to (1) the issuanceyear ended December 31, 2019 is primarily the result of restricted stock to our independent directors, which contributed approximately $0.3 million; (2) approximately $0.4 million of professional fees;larger impairments in the previous year at two properties (2200 Channahon Road and (3) approximately $0.6 million in corporate payroll due to an increase in headcount.Houston Westway I).
Interest Expense
The increase of approximately $6.1 million in interest expense for the year ended December 31, 2017 was2020 as compared to the year ended December 31, 2019 is primarily the result of (1) approximately $3.1 million related to draws that totaled $274.2 million froman increase in borrowing on our Revolving Credit Facility to fund six acquisitions subsequent to January 1, 2016.
Loss from our resultsInvestment in Unconsolidated Entities
The increase of operationsapproximately $1.2 million in loss from investment in unconsolidated entities for the year ended December 31, 20162020 as compared to the same period in the prior year, are primarily a result of current year activity, including a full year of revenues and expenses for prior year acquisitions and activity for acquisitions subsequent to December 31, 2015.
| Year Ended December 31, | Increase/(Decrease) | Percentage Change | ||||||||||||
| 2016 | 2015 | |||||||||||||
| Rental income | $ | 51,403 | $ | 21,216 | $ | 30,187 | 142 | % | ||||||
| Property expense recoveries | 11,409 | 3,933 | 7,476 | 190 | % | |||||||||
| Asset management fees to affiliates | 6,413 | 2,624 | 3,789 | 144 | % | |||||||||
| Property management fees to affiliates | 1,052 | 333 | 719 | 216 | % | |||||||||
| Property operating expense | 4,428 | 1,317 | 3,111 | 236 | % | |||||||||
| Property tax expense | 7,046 | 2,713 | 4,333 | 160 | % | |||||||||
| Acquisition fees and expenses to non-affiliates | 1,113 | 3,058 | (1,945 | ) | (64 | )% | ||||||||
| Acquisition fees and expenses to affiliates | 6,176 | 10,876 | (4,700 | ) | (43 | )% | ||||||||
| General and administrative expenses | 2,804 | 1,883 | 921 | 49 | % | |||||||||
| Corporate operating expenses to affiliates | 1,622 | 1,937 | (315 | ) | (16 | )% | ||||||||
| Depreciation and amortization | 27,894 | 12,061 | 15,833 | 131 | % | |||||||||
| Interest expense | 10,384 | 4,851 | 5,533 | 114 | % | |||||||||
The decrease in acquisition fees and expenses to non-affiliates and affiliates for the year ended December 31, 2016gain from disposition of assets of approximately $25.9 million compared to the same period a year ago was approximately $6.6 million. The decrease was ais primarily the result of an updatethe sale of Bank of America II for a total gain of $4.3 million in 2020 compared to an accounting standard, which clarifiedtwo properties sold in 2019 (7601 Technology Way & 2160 East Grand Avenue), for total gain of approximately $29.6 million.
For additional information related to a comparison of the definitionCompany’s results for the years ended December 31, 2019 and
2018, please see the information under the caption “Management’s Discussion and Analysis of a business combination. Under the clarified definition, our four acquisitionsFinancial Condition and Results
of Operations” contained in the fourth quarter of 2016 did not qualify as business combinations; consequently, we accounted for each one as an asset acquisition. Thus, approximately $8.7 million of acquisition expenses were capitalized as part of the asset acquisitions and allocatedCompany’s, Annual Report on a relative fair value basis.
Funds from Operations and ModifiedAdjusted Funds from Operations
Our management believes that historical cost accounting for real estate assets in accordance with GAAP implicitly assumes that the value of real estate assets diminishes predictably over time. Since real estate values have historically risen or fallen with market conditions, many industry investors and analysts have considered the presentation of operating results for real estate companies that use historical cost accounting to be insufficient.
Management is responsible for managing interest rate, hedge and foreign exchange risk.risks. To achieve our objectives, we may borrow at fixed rates or variable rates. In order to mitigate our interest rate risk on certain financial instruments, if any, we may enter into interest rate cap agreements or other hedge instruments and in order to mitigate our risk to foreign currency exposure, if any, we may enter into foreign currency hedges. We view fair value adjustments of derivatives, impairment charges and gains and losses from dispositions of assets as non-recurring items or items which are unrealized and may not ultimately be realized, and which are not reflective of on-goingongoing operations and are therefore typically adjusted for when assessing operating performance.
In order to provide a more complete understanding of the operating performance of a REIT, the National Association of Real Estate Investment Trusts (“NAREIT”) promulgated a measure known as fundsFunds from operationsOperations (“FFO”). FFO is defined as net income or loss computed in accordance with GAAP, excluding extraordinary items, as defined by GAAP, and gains and losses from sales of depreciable operating property, adding back asset impairment write-downs, plus real estate related depreciation and amortization (excluding amortization of deferred financing costs and depreciation of non-real estate assets), and after adjustment for unconsolidated partnerships, joint ventures and preferred distributions. Because FFO calculations exclude such items as depreciation and amortization of real estate assets and gains and losses from sales of operating real estate assets (which can vary among owners of identical assets in similar conditions based on historical cost accounting and useful-life estimates), they facilitate comparisons of operating performance between periods and between other REITs. As a result, we believe that the use of FFO, together with the required GAAP presentations, provides a more complete understanding of our
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performance relative to our competitors and a more informed and appropriate basis on which to make decisions involving operating, financing, and investing activities. It should be noted, however, that other REITs may not define FFO in accordance with the current NAREIT definition or may interpret the current NAREIT definition differently than we do, making comparisons less meaningful.
AFFO is a measure used among our peer group, which includes daily NAV REITs. We also believe that AFFO is a recognized measure of such holdingssustainable operating performance by the REIT industry. Further, we believe AFFO is not a fundamental attributeuseful in comparing the sustainability of our operating performance with the sustainability of the business plan, unrealized gains or losses resulting from consolidation from, or deconsolidation to, equity accounting, and after adjustments for consolidated and unconsolidated partnerships and joint ventures, with such adjustments calculated to reflect MFFO on the same basis.operating performance of other real estate companies.
For all of these reasons, we believe the non-GAAP measures of FFO and MFFO,AFFO, in addition to income (loss) from operations, net income (loss) and cash flows from operating activities, as defined by GAAP, are helpful supplemental performance measures and useful to investors in evaluating the performance of our real estate portfolio. However, a material limitation associated with FFO and MFFOAFFO is that they are not indicative of our cash available to fund distributions since other uses of cash, such as capital expenditures at our properties and principal payments of debt, are not deducted when calculating FFO and MFFO.AFFO. The use of MFFOAFFO as a measure of long-term operating performance on value is also limited if we do not continue to operate under our current business plan as noted above. MFFOAFFO is useful in assisting management and investors in assessing our on-goingongoing ability to generate cash flow from operations and continue as a going concern in future operating periods, and in particular, after the offering and acquisition stages are complete. However, FFO and MFFOAFFO are not useful measures in evaluating NAV because impairments are taken into account in determining NAV but not in determining FFO and MFFO.AFFO. Therefore, FFO and MFFOAFFO should not be viewed as a more prominent measure of performance than income (loss) from operations, net income (loss) or to cash flows from operating activities and each should be reviewed in connection with GAAP measurements.
Neither the SEC, NAREIT, nor any other applicable regulatory body has opined on the acceptability of the adjustments contemplated to adjust FFO in order to calculate MFFOAFFO and its use as a non-GAAP performance measure. In the future, the SEC or NAREIT may decide to standardize the allowable exclusions across the REIT industry, and we may have to adjust the calculation and characterization of this non-GAAP measure.
Our calculation of FFO and MFFOAFFO is presented in the following table for the years ended December 31, 2017, 20162020, 2019 and 2015 (dollars in thousands)2018 (in thousands, except per share amounts):
| Year Ended December 31, | |||||||||||||||||
| 2020 | 2019 | 2018 | |||||||||||||||
| Net (loss) income | $ | (5,774) | $ | 37,044 | $ | 22,038 | |||||||||||
| Adjustments: | |||||||||||||||||
| Depreciation of building and improvements | 93,979 | 80,393 | 60,120 | ||||||||||||||
| Amortization of leasing costs and intangibles | 67,366 | 73,084 | 59,020 | ||||||||||||||
| Impairment provision | 23,472 | 30,734 | — | ||||||||||||||
| Equity interest of depreciation of building and improvements - unconsolidated entities | 1,438 | 2,800 | 2,594 | ||||||||||||||
| Equity interest of amortization of intangible assets - unconsolidated entities | 1,751 | 4,632 | 4,644 | ||||||||||||||
| Loss (Gain) from disposition of assets | (4,083) | (29,938) | (1,231) | ||||||||||||||
| Equity interest of gain on sale - unconsolidated entities | — | (4,128) | — | ||||||||||||||
| Impairment on unconsolidated entities | 1,906 | 6,927 | — | ||||||||||||||
| FFO | $ | 180,055 | $ | 201,548 | $ | 147,185 | |||||||||||
| Distributions to redeemable preferred shareholders | (8,708) | (8,188) | (3,275) | ||||||||||||||
| FFO attributable to common stockholders and limited partners | $ | 171,347 | $ | 193,360 | $ | 143,910 | |||||||||||
| Reconciliation of FFO to AFFO: | |||||||||||||||||
| FFO attributable to common stockholders and limited partners | $ | 171,347 | $ | 193,360 | $ | 143,910 | |||||||||||
| Adjustments: | |||||||||||||||||
| Acquisition fees and expenses to non-affiliates | — | — | 1,331 | ||||||||||||||
| Non-cash earn-out adjustment | (2,581) | (1,461) | — | ||||||||||||||
| Revenues in excess of cash received, net | (25,686) | (19,519) | (8,571) | ||||||||||||||
| Amortization of share-based compensation | 4,108 | 2,614 | — | ||||||||||||||
| Deferred rent - ground lease | 2,065 | 1,353 | 841 | ||||||||||||||
| Amortization of above/(below) market rent, net | (2,292) | (3,201) | (685) | ||||||||||||||
| Amortization of debt premium/(discount), net | 412 | 300 | 32 | ||||||||||||||
| Amortization of ground leasehold interests | (290) | (52) | 28 | ||||||||||||||
| Non-cash lease termination income | — | (10,150) | (12,532) | ||||||||||||||
| Financed termination fee payments received | 7,557 | 6,065 | 15,866 | ||||||||||||||
| Company's share of revenues in excess of cash received (straight-line rents) - unconsolidated entity | 505 | 528 | 116 | ||||||||||||||
| Unrealized loss (gain) on investments | 31 | 307 | — | ||||||||||||||
| Company's share of amortization of above market rent - unconsolidated entity | 1,419 | 3,696 | 2,956 | ||||||||||||||
| Performance fee adjustment | — | (2,604) | — | ||||||||||||||
| Unconsolidated joint venture valuation adjustment | 4,452 | — | — | ||||||||||||||
| Employee separation expense | 2,666 | — | — | ||||||||||||||
| Write-off of transaction costs | 4,427 | 252 | — | ||||||||||||||
| AFFO available to common stockholders and limited partners | $ | 168,140 | $ | 171,488 | $ | 143,292 | |||||||||||
| FFO per share, basic and diluted | $ | 0.65 | $ | 0.76 | $ | 0.81 | |||||||||||
| AFFO per share, basic and diluted | $ | 0.64 | $ | 0.68 | $ | 0.80 | |||||||||||
| Weighted-average common shares outstanding - basic EPS | 230,042,543 | 222,531,173 | 169,907,020 | ||||||||||||||
| Weighted-average OP Units | 31,919,525 | 30,947,370 | 8,120,706 | ||||||||||||||
| Weighted-average common shares and OP Units outstanding - basic FFO/AFFO | 261,962,068 | 253,478,543 | 178,027,726 | ||||||||||||||
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| Year Ended December 31, | ||||||||||||
| 2017 | 2016 | 2015 | ||||||||||
| Net income (loss) | $ | 11,119 | $ | (6,107 | ) | $ | (16,506 | ) | ||||
| Adjustments: | ||||||||||||
| Depreciation of building and improvements | 20,194 | 11,630 | 4,916 | |||||||||
| Amortization of leasing costs and intangibles | 23,756 | 16,264 | 7,145 | |||||||||
| FFO | $ | 55,069 | $ | 21,787 | $ | (4,445 | ) | |||||
| Distributions to redeemable preferred unit holders | — | — | (398 | ) | ||||||||
| Distributions to noncontrolling interests | (11 | ) | (11 | ) | (11 | ) | ||||||
| Preferred units redemption charge | — | — | (375 | ) | ||||||||
| FFO, adjusted for noncontrolling interest distributions | $ | 55,058 | $ | 21,776 | $ | (5,229 | ) | |||||
| Reconciliation of FFO to MFFO: | ||||||||||||
| Adjusted FFO | $ | 55,058 | $ | 21,776 | $ | (5,229 | ) | |||||
| Adjustments: | ||||||||||||
| Acquisition fees and expenses to non-affiliates | — | 1,113 | 3,058 | |||||||||
| Acquisition fees and expenses to affiliates | — | 6,176 | 10,876 | |||||||||
| Revenues in excess of cash received, net | (10,528 | ) | (3,699 | ) | (1,500 | ) | ||||||
| Amortization of below market rent, net | (4,573 | ) | (3,592 | ) | (1,858 | ) | ||||||
| Unrealized loss (gain) on derivatives | 83 | (155 | ) | — | ||||||||
| Preferred units redemption charge | — | — | 375 | |||||||||
| Loss on extinguishment of debt - write-off of deferred financing costs | — | 377 | — | |||||||||
| Performance distribution adjustment | 1,197 | — | — | |||||||||
| MFFO | $ | 41,237 | $ | 21,996 | $ | 5,722 | ||||||
Liquidity and Capital Resources
Financing Activities
Second Amended and Restated Credit Agreement
Pursuant to the Second Amended and Restated Credit Agreement dated as of April 30, 2019 (as amended by the First Amendment to the Second Amended and Restated Credit Agreement dated as of October 1, 2020 and the Second Amendment to Second Amended and Restated Credit Agreement dated as of December 18, 2020, the “Second Amended and Restated Credit Agreement”), with KeyBank, as administrative agent, and a delay betweensyndicate of lenders, we, through the saleGCEAR Operating Partnership, as the borrower, have been provided with a $1.9 billion credit facility consisting of our sharesa $750 million senior unsecured revolving credit facility (the “Revolving Credit Facility”) maturing in June 2022 with (subject to the satisfaction of certain customary conditions) a one-year extension option, a $200 million senior unsecured term loan maturing in June 2023 (the “$200M 5-Year Term Loan”), a $150 million senior unsecured term loan maturing in April 2026 (the “$150M 7-Year Term Loan”), a $400 million senior unsecured term loan maturing in April 2024 (the “$400M 5-Year Term Loan”) and our purchase of properties that could resulta delayed draw $400 million senior unsecured term loan maturing in a delayDecember 2025 (the “Delayed Draw $400M 5-Year Term Loan”). The Credit Facility also provides the option, subject to obtaining additional commitments from lenders and certain other customary conditions, to increase the commitments under the Revolving Credit Facility, increase the existing term loans and/or incur new term loans by up to an additional $600 million in the benefitsaggregate. As of December 31, 2020, the remaining capacity under the Revolving Credit Facility was $221.9 million and the entire amount of the Delayed Draw $400M 5-Year Term Loan was undrawn. We refer to the Revolving Credit Facility, the $200M 5-Year Term Loan, the $400M 5-Year Term Loan and the Delayed Draw $400M 5-Year Term Loan collectively as the “KeyBank Loans.”
Based on the terms of the Second Amended and Restated Credit Agreement as of December 31, 2020, the interest rate for the Credit Facility varies based on our stockholders, ifconsolidated leverage ratio and ranges (a) in the case of the Revolving Credit Facility, from LIBOR plus 1.30% to LIBOR plus 2.20%, (b) in the case of each of the $200M 5-Year Term Loan, the $400M 5-Year Term Loan and the Delayed Draw $400M 5-Year Term Loan, from LIBOR plus 1.25% to LIBOR plus 2.15% and (c) in the case of the $150M 7-Year Term Loan, from LIBOR plus 1.65% to LIBOR plus 2.50%. If the GCEAR Operating Partnership obtains an investment grade rating of its senior unsecured long term debt from Standard & Poor's Rating Services, Moody's Investors Service, Inc., or Fitch, Inc., the applicable LIBOR margin and base rate margin will vary based on such rating and range (i) in the case of the Revolving Credit Facility, from LIBOR plus 0.825% to LIBOR plus 1.55%, (ii) in the case of each of the $200M 5-Year Term Loan, the $400M 5-Year Term Loan and the Delayed Draw $400M 5-Year Term Loan, from LIBOR plus 0.90% to LIBOR plus 1.75% and (iii) in the case of the $150M 7-Year Term Loan, from LIBOR plus 1.40% to LIBOR plus 2.35%. The Second Amended and Restated Credit Agreement provides procedures for determining a replacement reference rate in the event that LIBOR is discontinued. See Part I "Item 1A. Risk Factors", of this Annual Report on Form 10-K for a discussion about risks that the replacement of LIBOR with an alternative reference rate may adversely affect interest rates on our current or future indebtedness and may otherwise adversely affect our financial condition and results of operations.
In the event that any of returns generated from our investment operations. Our Advisor will evaluate potential property acquisitions and engage in negotiations with sellers on our behalf. After a purchase contractthe Delayed Draw $400M 5-Year Term Loan is executed that contains specific terms, the property will not be purchased until the successful completion of due diligence, which includes reviewadvanced as of the title insurance commitment,date that is 120 days after December 18, 2020, such unadvanced amount will incur an appraisalunused fee equal to 0.20% annually multiplied by the average daily amount of the unadvanced portion of the Delayed Draw $400M 5-Year Term Loan. Such unused fee will be payable quarterly in arrears and an environmental analysis. In some instances,will start accruing on the proposed acquisitiondate that is 120 days after December 18, 2020 and will requirestop accruing on the negotiationfirst to occur of final binding(a) the date the Delayed Draw $400M 5-Year Term Loan is fully advanced, (b) the date that is 180 days after December 18, 2020, or (c) the date the GCEAR Operating Partnership, as borrower, terminates any remaining portion of the Delayed Draw $400M 5-Year Term Loan.
Derivative Instruments
As discussed in Note 6, Interest Rate Contracts, to the consolidated financial statements, we entered into interest rate swap agreements which may include financing documents. During this period, we may decide to temporarily invest any unused proceeds fromhedge the variable cash flows associated with certain existing or forecasted, LIBOR-based variable-rate debt, including our public offeringsSecond Amended and Restated Credit Agreement. The effective portion of changes in certain investments that could yield lower returns than the properties. These lower returns may affect our ability to make distributions.
fair value of
48
The following table sets forth a summary of the interest rate swaps at December 31, 2020 and December 31, 2019 (dollars in thousands):
Fair Value (1) | Current Notional Amount | |||||||||||||||||||||||||||||||||||||||||||
| December 31, | December 31, | |||||||||||||||||||||||||||||||||||||||||||
| Derivative Instrument | Effective Date | Maturity Date | Interest Strike Rate | 2020 | 2019 | 2020 | 2019 | |||||||||||||||||||||||||||||||||||||
| (Liabilities) | ||||||||||||||||||||||||||||||||||||||||||||
| Interest Rate Swap | 3/10/2020 | 7/1/2025 | 0.83% | $ | (2,963) | $ | — | $ | 150,000 | $ | — | |||||||||||||||||||||||||||||||||
| Interest Rate Swap | 3/10/2020 | 7/1/2025 | 0.84% | (2,023) | — | 100,000 | — | |||||||||||||||||||||||||||||||||||||
| Interest Rate Swap | 3/10/2020 | 7/1/2025 | 0.86% | (1,580) | — | 75,000 | — | |||||||||||||||||||||||||||||||||||||
| Interest Rate Swap | 7/1/2020 | 7/1/2025 | 2.82% | (13,896) | (7,038) | 125,000 | 125,000 | |||||||||||||||||||||||||||||||||||||
| Interest Rate Swap | 7/1/2020 | 7/1/2025 | 2.82% | (11,140) | (5,651) | 100,000 | 100,000 | |||||||||||||||||||||||||||||||||||||
| Interest Rate Swap | 7/1/2020 | 7/1/2025 | 2.83% | (11,148) | (5,665) | 100,000 | 100,000 | |||||||||||||||||||||||||||||||||||||
| Interest Rate Swap | 7/1/2020 | 7/1/2025 | 2.84% | (11,225) | (5,749) | 100,000 | 100,000 | |||||||||||||||||||||||||||||||||||||
| Interest Rate Swap | 7/9/2015 | 7/1/2020 | 1.69% | — | (43) | — | 425,000 | |||||||||||||||||||||||||||||||||||||
| Total | $ | (53,975) | $ | (24,146) | $ | 750,000 | $ | 850,000 | ||||||||||||||||||||||||||||||||||||
(1) We record all derivative instruments on a gross basis in the consolidated balance sheets, and accordingly, there are currently offering shares pursuant to our DRP as partno offsetting amounts that net assets against liabilities. As of our December 31, 2020, derivatives where in a liability position are included in the line item "Interest rate swap liability," in the consolidated balance sheets at fair value.
Common Equity
Follow-On Offering. The DRP may be terminated at any time upon 10 days’ prior written notice to stockholders, which may be provided through our filings with the SEC.Offering
On September 20, 2017, we commenced our Follow-On Offeringa follow-on offering of up to $2.2 billion of shares, consisting of up to $2.0 billion of shares in our primary offering and $0.2 billion of shares pursuant to our DRP (collectively, the "Follow-On Offering"). Pursuant to the Follow-On Offering, we offered to the public four new classes of shares of our common stock: Class T shares, Class S shares, Class D shares, and Class I shares with NAV-based pricing. The share classes have different selling commissions, dealer manager fees, and ongoing distribution fees and eligibility requirements.
On February 26, 2020, our Board approved the temporary suspension of the primary portion of our Follow-On Offering, effective February 27, 2020. The Follow-On Offering terminated with the expiration of the registration statement on September 20, 2020. Following the termination of the Follow-On Offering, it will no longer be a potential source of liquidity for us.
Distribution Reinvestment Plan
On February 26, 2020, our Board approved the temporary suspension of our DRP, effective March 8, 2020.
On July 16, 2020, the Board approved the (i) reinstatement of the DRP, effective July 27, 2020; and $0.2 billion(ii) amendment of the DRP to allow for the use of the most recently published NAV per share of the applicable share class available at the time of reinvestment as the DRP purchase price for each share class.
On July 17, 2020, we filed a registration statement on Form S-3 for the registration of up to $100 million in shares pursuant to the DRP. On September 20, 2017, we reclassified all Class T shares sold in the IPO as "Class AA" shares and all Class I shares sold in the IPO as "Class AAA" shares.
our DRP (the “DRP Offering”).The following table summarizes shares issued and gross proceeds received for each share class asDRP Offering may be terminated at any time upon 10 days prior written notice to stockholders.As of December 31, 2017 (dollars2020, we had sold 32,978,545 shares for approximately $318.2 million in thousands):our DRP Offering.
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| Class | ||||||||||||||||||||||||||||||||
| T | S | D | I | A | AA | AAA | Total | |||||||||||||||||||||||||
| Gross proceeds from primary portion of offerings | $ | 41 | $ | 3 | $ | 3 | $ | 2,493 | $ | 240,780 | $ | 474,858 | $ | 8,379 | $ | 726,557 | ||||||||||||||||
| Gross proceeds from DRP | $ | — | $ | — | $ | — | $ | 41 | $ | 19,773 | $ | 21,828 | $ | 312 | $ | 41,954 | ||||||||||||||||
| Shares issued in primary portion of offerings | 4,144 | 264 | 264 | 263,200 | 24,199,760 | 47,562,870 | 901,225 | 72,931,727 | ||||||||||||||||||||||||
| DRP shares issued | 4 | 4 | 4 | 4,276 | 2,089,748 | 2,313,170 | 33,308 | 4,440,514 | ||||||||||||||||||||||||
| Stock distribution shares issued | — | — | — | — | 263,641 | 300,166 | 4,676 | 568,483 | ||||||||||||||||||||||||
| Restricted stock units issued | — | — | — | — | — | — | 25,500 | 25,500 | ||||||||||||||||||||||||
| Total shares issued prior to redemptions | 4,148 | 268 | 268 | 267,476 | 26,553,149 | 50,176,206 | 964,709 | 77,966,224 | ||||||||||||||||||||||||
| Share Class | Amount (dollars in thousands) | Shares | ||||||||||||
| Class A | $ | 6,923 | 743,349 | |||||||||||
| Class AA | 13,695 | 1,470,340 | ||||||||||||
| Class AAA | 207 | 22,190 | ||||||||||||
| Class D | 12 | 1,312 | ||||||||||||
| Class E | 296,930 | 30,697,419 | ||||||||||||
| Class I | 300 | 31,992 | ||||||||||||
| Class S | — | 12 | ||||||||||||
| Class T | 112 | 11,931 | ||||||||||||
| Total | $ | 318,179 | 32,978,545 | |||||||||||
Share Redemption Program
On February 26, 2020, our Board approved the temporary suspension of our SRP, effective March 28, 2020. Redemptions sought upon a reasonable levelstockholder's death, qualifying disability, or determination of liquidity for redemptionsincompetence or incapacitation were honored in the first quarter of 2020 in accordance with the terms of the New Shares, shares are not eligibleSRP, and the SRP was officially suspended as of March 28, 2020 for redemptionregular redemptions and subsequent redemptions for death, qualifying disability, or determination of incompetence or incapacitation after those honored in the first year after purchase except upon death or qualifying disabilityquarter of a stockholder; provided, however, shares issued pursuant to2020.
On July 16, 2020, the DRP are notBoard approved the partial reinstatement of the SRP, effective August 17, 2020, subject to the one-year holding period. In addition, our New Share Redemption Program generally imposesfollowing limitations: (A) redemptions will be limited to those sought upon a stockholder's death, qualifying disability, or determination of incompetence or incapacitation in accordance with the terms of the SRP, and (B) the quarterly cap on aggregate redemptions of our New Shares (including IPO shares that have been held for 4 years or longer)will be equal to a value of up to 5% of the aggregate NAV, of the outstanding shares of such classes as of the last business day of the previous quarter.
On December 12, 2014,March 30, 2020, our Board limited the annualized distribution rate to $0.35/share, all-cash, subject to adjustments for class-specific expenses. This change commenced with distributions accrued during the month of April 2020, and paid in early May 2020.
Perpetual Convertible Preferred Shares
Upon consummation of the EA Mergers, we through our Operating Partnership,issued 5,000,000 Series A Preferred Shares to the Purchaser (defined below). We assumed the purchase agreement (the "Purchase Agreement") that EA-1 entered into on August 8, 2018 with SHBNPP Global Professional Investment Type Private Real Estate Trust No. 13(H) (acting through Kookmin Bank as trustee) (the "Purchaser") and Shinhan BNP Paribas Asset Management Corporation, as an asset manager of the Purchaser, pursuant to which the Purchaser agreed to purchase an aggregate of 10,000,000 shares of EA-1 Series A Cumulative Perpetual Convertible Preferred Stock at a revolving credit agreement, as amended by the first amendment to the revolving credit agreement dated asprice of May 27, 2015, and as further amended by the increase agreements to the revolving credit agreement dated as of August 11, 2015 and November 22, 2016, and various notes related thereto, related to a loan with a syndicate of lenders, under which KeyBank, National Association ("KeyBank"$25.00 per share (the "EA-1 Series A Preferred Shares") serves as administrative agent; Bank of America, N.A., SunTrust Bank, Capital One, National Association ("Capital One"), and Wells Fargo Bank, National Association, serve as co-syndication agents; and KeyBanc Capital Markets, Merrill Lynch, Pierce, Fenner and Smith Incorporated, SunTrust Robinson Humphrey, Inc., Capital One, and Wells Fargo Securities, LLC serve as joint lead arrangers and joint bookrunners. In addition, we entered into guaranty agreements.in two tranches, each comprising 5,000,000 EA-1 Series A Preferred Shares.
Pursuant to the credit agreement, we were provided withPurchase Agreement, the Purchaser has agreed to purchase an additional 5,000,000 Series A Preferred Shares (the "Second Issuance") at a revolving credit facility (as amended,later date (the "Second Issuance Date") for an additional purchase price of $125 million subject to approval by the "Revolving Credit Facility")Purchaser’s internal investment committee and the satisfaction of certain conditions set forth in an initial commitment amountthe Purchase Agreement. Pursuant to the Purchaser is generally restricted from transferring the Series A Preferred Shares or the economic interest in the Series A Preferred Shares for a period of $250.0 million, which commitment may be increased under certain circumstances upfive years from the applicable closing date.
Distributions for Perpetual Convertible Preferred Shares
Subject to the terms of the applicable articles supplementary, the holder of the Series A Preferred Shares are entitled to receive distributions quarterly in arrears at a maximum total commitmentrate equal to one-fourth (1/4) of $1.25 billion. Onthe applicable varying rate, as follows:
i.6.55% from and after August 11, 2015, we exercised our right under8, 2018 until August 8, 2023, or if the credit agreementSecond Issuance occurs, the five year anniversary of the Second Issuance Date (the "Reset Date"), subject to increase the total commitments from $250.0 million to $410.0 million,paragraphs (iii) and on November 22, 2016, we exercised our right under the credit agreement to increase the total commitments from $410.0 million to $550.0 million.
(iv) below;
50
ii.6.75% from and after the Reset Date, subject to paragraphs (iii) and (iv) below;
iii.if a listing of our Class E shares of common stock or the Series A Preferred Shares on a national securities exchange registered under Section 6(a) of the Exchange Act, does not occur by August 1, 2020 (the "First Triggering Event"), 7.55% from and after August 2, 2020 and 7.75% from and after the Reset Date, subject to paragraph (iv) below and certain conditions as set forth in the articles supplementary; or
iv.if such a listing does not occur by August 1, 2021, 8.05% from and after August 2, 2021 until the Reset Date, and 8.25% from and after the Reset Date.
As of December 31, 2020, our annual distribution rate was 7.55% for the Series A Preferred Shares since no listing of either our Class E common stock or the Series A Preferred Shares occurred prior to August 1, 2020.
Liquidation Preference
Upon any voluntary or involuntary liquidation, dissolution or winding up of the Company, the holders of the Series A Preferred Shares will be entitled to be paid out of our assets legally available for distribution to the stockholders, after payment of or provision for our debts and other liabilities, liquidating distributions, in cash or property at its fair market value as determined by the Board, in the amount, for each outstanding Series A Preferred Share equal to $25.00 per Series A Preferred Share (the "Liquidation Preference"), plus an amount equal to any accumulated and unpaid distributions to the date of payment, before any distribution or payment is made to holders of shares of common stock or any other class or series of equity securities ranking junior to the Series A Preferred Shares but subject to the preferential rights of holders of any class or series of equity securities ranking senior to the Series A Preferred Shares. After payment of the full amount of the Liquidation Preference to which they are entitled, plus an amount equal to any accumulated and unpaid distributions to the date of payment, the holders of Series A Preferred Shares will have no right or claim to any of our remaining assets.
Company Redemption Rights
The Revolving Credit Facility has an initial term of four years, maturing on December 12, 2018. The Revolving Credit FacilitySeries A Preferred Shares may be extended for a one-year period if certain conditions are met and we pay an extension fee. Payments underredeemed by the Revolving Credit Facility are interest only and are due on the first day of each quarter.
Holder Redemption Rights
In the event we fail to effect a listing of our shares of common stock or Series A Preferred Shares by August 1, 2023, the holder of any Series A Preferred Shares has the option to request a redemption of such prepayment.
Conversion Rights
Subject to our redemption rights and certain conditions set forth in the articles supplementary, a holder of December 31, 2017, we werethe Series A Preferred Shares, at his or her option, will have the right to convert such holder's Series A Preferred Shares into shares of our common stock any time after the earlier of (i) August 8, 2023, or if the Second Issuance occurs, five years from the Second Issuance Date or (ii) a Change of Control (as defined in compliance with all applicable covenants.
Fair value (1) | Current Effective Notional Amount (2) | |||||||||||||||||||||
| Derivative Instrument | Effective Date | Maturity Date | Interest Strike Rate | December 31, 2017 | December 31, 2016 | December 31, 2017 | December 31, 2016 | |||||||||||||||
| Assets | ||||||||||||||||||||||
| Interest Rate Swap | 4/1/2016 | 12/12/2018 | 0.74% | $ | 967 | $ | 996 | $ | 100,000 | $ | 100,000 | |||||||||||
Interest Rate Swap (3) | 11/1/2017 | 7/1/2018 | 1.50% | 65 | — | 100,000 | — | |||||||||||||||
| Total | $ | 1,032 | $ | 996 | $ | 200,000 | $ | 100,000 | ||||||||||||||
| Payments Due During the Years Ending December 31, | |||||||||||||||||||
| Total | 2018 | 2019-2020 | 2021-2022 | Thereafter | |||||||||||||||
Outstanding debt obligations (1) (2) | $ | 484,728 | $ | — | $ | 357,758 | $ | 4,449 | $ | 122,521 | |||||||||
Interest on outstanding debt obligations (3) | 65,177 | 16,097 | 23,901 | 10,364 | 14,815 | ||||||||||||||
| Interest rate swaps | 79 | 79 | — | — | — | ||||||||||||||
| Total | $ | 549,984 | $ | 16,176 | $ | 381,659 | $ | 14,813 | $ | 137,336 | |||||||||
Other Potential Future Sources of Capital
51
Liquidity Requirements
Our principal liquidity needs for the next 12 months and beyond are to fund:
•normal recurring expenses;
•debt service and principal repayment obligations;
•capital expenditures, including tenant improvements and leasing costs;
•redemptions;
•distributions to shareholders, including preferred equity distribution and distributions to holders of GCEAR OP Units; and
•possible acquisitions of properties.
Contractual Commitments and Contingencies
The following is a summary of our contractual obligations as of December 31, 2020 (in thousands):
| Payments Due During the Years Ending December 31, | |||||||||||||||||||||||||||||
| Total | 2021 | 2022-2023 | 2024-2025 | Thereafter | |||||||||||||||||||||||||
Outstanding debt obligations (1) | $ | 2,152,593 | $ | 9,587 | $ | 347,603 | $ | 554,032 | $ | 1,241,371 | |||||||||||||||||||
Interest on outstanding debt obligations (2) | 330,273 | 62,986 | 118,435 | 80,366 | 68,486 | ||||||||||||||||||||||||
Interest rate swaps (3) | 63,093 | 13,770 | 27,540 | 21,783 | — | ||||||||||||||||||||||||
| Ground lease obligations | 295,001 | 1,510 | 3,452 | 3,881 | 286,158 | ||||||||||||||||||||||||
| Total | $ | 2,840,960 | $ | 87,853 | $ | 497,030 | $ | 660,062 | $ | 1,596,015 | |||||||||||||||||||
(1)Amounts only include principal payments. The payments on our mortgage debt do not include the premium/discount or debt financing costs.
(2)Projected interest payments are based on the outstanding principal amounts at December 31, 2020. Projected interest payments on the Credit Facility and Term Loan are based on the contractual interest rates in order to meet our long-term liquidity requirements and to fund our distributions. effect at December 31, 2020.
Summary of Cash Flows
We expect to meet our short-term operating liquidity requirements from advances from our Advisor and its affiliates, proceeds received from our offerings, andwith operating cash flows generated from our properties and other properties we acquire in the future. Any advancesdraws from our Advisor will be repaid, without interest, as funds are available after meeting our current liquidity requirements, subject to the limitations on reimbursement set forth in the “Management Compensation” section of our prospectus.KeyBank loans.
Our cash, cash equivalents and restricted cash balances decreasedincreased by approximately $17.5$41.1 million during the year ended December 31, 20172020 compared to the same period a year ago and were primarily used in or provided by the following:following (in thousands):
| Year Ended December 31, | |||||||||||||||||
| 2020 | 2019 | Change | |||||||||||||||
| Net cash provided by operating activities | $ | 164,538 | $ | 160,849 | $ | 3,689 | |||||||||||
| Net cash (used in) provided by investing activities | $ | (24,971) | $ | 85,818 | $ | (110,789) | |||||||||||
| Net cash provided by (used in) financing activities | $ | (49,521) | $ | (197,692) | $ | 148,171 | |||||||||||
Operating Activities.Activities. Cash flows provided by operating activities are primarily dependent on the occupancy level, the rental rates of our leases, the collectability of rent and recovery of operating expenses from our tenants, and the timing of acquisitions. Net cash provided by operating activities forDuring the year ended December 31, 2017 increased to $39.72020, we generated $164.5 million in cash from operating activities compared to cash provided by operating activities of approximately $16.4$160.8 million for the year ended December 31, 2016.2019. Net cash provided by/(used) inby operating activities before changes in operating assets and liabilities for the year ended December 31, 2017 increased2020 decreased by $19.4approximately $14.5 million to $34.7approximately $159.5 million compared to approximately $15.3$174.0 million for the year ended December 31, 2016. The increase is primarily due to2019.
Investing Activities. Cash provided by investing activities for the operating results of recently acquired properties.
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| Year Ended December 31, | |||||||||||||||||
| 2020 | 2019 | Increase (decrease) | |||||||||||||||
| Net cash (used in) provided by investing activities: | |||||||||||||||||
| Distributions of capital from investment in unconsolidated entities | $ | 8,531 | $ | 14,603 | $ | (6,072) | |||||||||||
| Proceeds from disposition of properties | 51,692 | 139,446 | (87,754) | ||||||||||||||
| Real estate acquisition deposits | 1,047 | (1,047) | 2,094 | ||||||||||||||
| Cash acquired in connection with the EA Merger, net of acquisition costs | — | 25,320 | (25,320) | ||||||||||||||
| Total sources of cash provided by investing activities | $ | 61,270 | $ | 178,322 | $ | (117,052) | |||||||||||
| Uses of cash for investing activities: | |||||||||||||||||
| Acquisition of properties, net | $ | (16,584) | $ | (38,775) | $ | 22,191 | |||||||||||
| Payments for construction in progress | (58,938) | (46,346) | (12,592) | ||||||||||||||
| Contributions of capital for investment in unconsolidated entities | (8,160) | — | (8,160) | ||||||||||||||
| Restricted reserves | (1,530) | 1,039 | (2,569) | ||||||||||||||
| Purchase of investments | (1,029) | (8,422) | 7,393 | ||||||||||||||
| Total uses of cash (used in) provided by investing activities | $ | (86,241) | $ | (92,504) | $ | 6,263 | |||||||||||
| Net cash (used in) provided by investing activities | $ | (24,971) | $ | 85,818 | $ | (110,789) | |||||||||||
Financing Activities. Cash used $87.2 million in cash for investingfinancing activities compared to $533.8 million used during the same period in 2016. The $446.6 million decrease in cash utilization in investing activities is primarily related to the following:
| Year Ended December 31, | |||||||||||||||||
| 2020 | 2019 | Increase (decrease) | |||||||||||||||
| Sources of cash (used in) provided by financing activities: | |||||||||||||||||
| Proceeds from borrowings - Revolver/KeyBank Loans | $ | 215,000 | $ | 942,854 | $ | (727,854) | |||||||||||
| Issuance of common stock, net of discounts and underwriting costs | 4,698 | 8,826 | (4,128) | ||||||||||||||
| Total sources of cash provided by (used in) financing activities | $ | 219,698 | $ | 951,680 | $ | (731,982) | |||||||||||
| Uses of cash (used in) provided by financing activities: | |||||||||||||||||
| Principal payoff of secured indebtedness - Unsecured Credit Facility - EA-1 | $ | — | $ | (715,000) | $ | 715,000 | |||||||||||
| Principal payoff of secured indebtedness - Revolver Loan | (53,000) | (104,439) | 51,439 | ||||||||||||||
| Principal amortization payments on secured indebtedness | (7,362) | (6,577) | (785) | ||||||||||||||
| Repurchase of common shares to satisfy employee tax withholding requirements | (751) | — | (751) | ||||||||||||||
| Repurchase of common stock | (107,821) | (200,013) | 92,192 | ||||||||||||||
| Distributions to common stockholders | (72,143) | (90,116) | 17,973 | ||||||||||||||
| Dividends paid on preferred units subject to redemption | (8,396) | (8,188) | (208) | ||||||||||||||
| Distributions to noncontrolling interests | (13,290) | (16,865) | 3,575 | ||||||||||||||
| Deferred financing costs | (4,725) | (5,737) | 1,012 | ||||||||||||||
| Offering costs | (594) | (2,384) | 1,790 | ||||||||||||||
| Repurchase of noncontrolling interest | (1,137) | (53) | (1,084) | ||||||||||||||
| Total sources of cash (used in) provided by financing activities | $ | (269,219) | $ | (1,149,372) | $ | 880,153 | |||||||||||
| Net cash (used in) provided by financing activities | $ | (49,521) | $ | (197,692) | $ | 148,171 | |||||||||||
Distributions will be paid to our stockholders as of the record date selected by our board of directors.Board. We expect to continue to pay distributions monthly based on daily declaration and record dates so that investors may be entitled to distributions immediately upon purchasing our shares.dates. We expect to regularly pay distributions regularly unless our results of operations, our general financial condition, general economic conditions, or other factors inhibit us from doing so. Distributions will be authorized at the discretion of our board of directors,Board, which will be directed, in substantial part, by its obligation to cause us to comply with the REIT requirements of the Code. The funds we receive from operations that are available for distribution may be affected by a number of factors, including the following:
•our operating and interest expenses;
•the amount of distributions or dividends received by us from our indirect real estate investments, if applicable;investments;
•our ability to keep our properties occupied;
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•our ability to maintain or increase rental rates;
•tenant improvements, capital expenditures and reserves for such expenditures;
•the issuance of additional shares; and
•financings and refinancings.
Distributions may be funded with operating cash flow offering proceeds,from our properties, any future public offerings, or a combination thereof. From inception and through December 31, 2017, we funded 93% of our cash distributions from cash flow provided by operating activities and 7% from offering proceeds. To the extent that we do not have taxable income, distributions paid will be considered a return of capital to stockholders. The following table shows distributions declared, distributions paid, and cash flowsflow provided by operating activities during the yearsyear ended December 31, 20172020 and 2016, excluding stock distributionsDecember 31, 2019 (dollars in thousands):
| Year Ended December 31, 2017 | Year Ended December 31, 2016 | Year Ended December 31, 2020 | Year Ended December 31, 2019 | |||||||||||||||||||||||||||||||||
| Distributions paid in cash — noncontrolling interests | $ | 11 | $ | 11 | Distributions paid in cash — noncontrolling interests | $ | 13,290 | $ | 16,865 | |||||||||||||||||||||||||||
| Distributions paid in cash — common stockholders | 19,232 | 11,541 | Distributions paid in cash — common stockholders | 72,143 | 90,116 | |||||||||||||||||||||||||||||||
| Distributions paid in cash — preferred stockholders | Distributions paid in cash — preferred stockholders | 8,396 | 8,188 | |||||||||||||||||||||||||||||||||
| Distributions of DRP | 22,208 | 15,158 | Distributions of DRP | 24,497 | 41,060 | |||||||||||||||||||||||||||||||
| Total distributions | $ | 41,451 | (1) | $ | 26,710 | Total distributions | $ | 118,326 | (1) | $ | 156,229 | |||||||||||||||||||||||||
Source of distributions (2) | Source of distributions (2) | |||||||||||||||||||||||||||||||||||
| Cash flows provided by operations | $ | 19,243 | 46 | % | $ | 11,301 | 42 | % | ||||||||||||||||||||||||||||
| Offering proceeds from issuance of common stock | — | 0 | % | 251 | 1 | % | ||||||||||||||||||||||||||||||
| Paid from cash flows provided by operations | Paid from cash flows provided by operations | $ | 93,829 | 79 | % | $ | 115,169 | 74 | % | |||||||||||||||||||||||||||
| Offering proceeds from issuance of common stock pursuant to the DRP | 22,208 | 54 | % | 15,158 | 57 | % | Offering proceeds from issuance of common stock pursuant to the DRP | 24,497 | 21 | 41,060 | 26 | |||||||||||||||||||||||||
| Total sources | $ | 41,451 | (3) | 100 | % | $ | 26,710 | 100 | % | Total sources | $ | 118,326 | (3) | 100 | % | $ | 156,229 | 100 | % | |||||||||||||||||
| Net cash provided by operating activities | Net cash provided by operating activities | $ | 164,538 | $ | 160,849 | |||||||||||||||||||||||||||||||
(1)Distributions are paid on a monthly basis in arrears. Distributions for all record dates of a given month are paid on or about the first business day of the following month. Total cash distributions declared but not paid as of December 31, 2020 were $7.8 million for common stockholders and noncontrolling interests.
(2)Percentages were calculated by dividing the respective source amount by the total sources of distributions.
(3)Allocation of total sources are calculated on a quarterly basis.
For the year ended December 31, 2020, we paid and declared cash distributions of approximately $92.4 million to common stockholders including shares issued pursuant to the DRP, and approximately $12.7 million to the limited partners of the GCEAR Operating Partnership, as compared to FFO attributable to common stockholders and limited partners and AFFO available to common stockholders and limited partners for the year ended December 31, 2020 of approximately $171.3 million and $168.1 million, respectively. The payment of distributions from sources other than FFO or AFFO may reduce the amount of proceeds available for investment and operations or cause us to incur additional interest expense as a result of borrowed funds. From our inception through December 31, 2020, we paid approximately $850.4 million of cumulative distributions (excluding preferred distributions), including approximately $318.3 million reinvested through our DRP, as compared to net cash provided by operating activities of approximately $557.8 million.
Off-Balance Sheet Arrangements
As of December 31, 2017,2020, we had no off-balance sheet transactions, nor do we currently have any such arrangements or obligations.
The real estate market has not been affected significantly by inflation in the past several years due to the consolidated financial statements.relatively low inflation rate. However, in the event inflation does become a factor, we expect that our leases do not specifically protect us from the impact of inflation. We will attempt to acquire properties with leases that require the tenants to pay, directly or indirectly, all operating expenses and certain capital expenditures, which will protect us from increases in certain expenses, including, but not limited to, material and labor costs. In addition, we will attempt to acquire properties with leases that include rental rate increases, which will act as a potential hedge against inflation.
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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSUREDISCLOSURES ABOUT MARKET RISK
Market risks include risks that arise from changes in interest rates, foreign currency exchange rates, commodity prices, equity prices and other market changes that affect market-sensitive instruments. In pursuing our business plan, weWe expect that the primary market risk to which we will be exposed is interest rate risk.risk, including the risk of changes in the underlying rates on our variable rate debt. Our current indebtedness consists of the Revolving Credit FacilityKeyBank loans and the AIG Loan. other loans and property secured mortgages as described in Note 5, Debt, to our consolidated financial statements included in this Annual Report on Form 10-K.These instruments were not entered into for other than trading purposes.
Our interest rate risk management objectives will be to limit the impact of interest rate changes on earnings and cash flows and to lower overall borrowing costs. To achieve our objectives, we may borrow at fixed rates or variable rates. We may also utilize a variety of financial instruments, including interest rate swap agreements, caps, floors, and other interest rate exchange contracts. We will not enter into these financial instruments for speculative purposes. The use of these types of instruments to hedge a portion of our exposure to changes in interest rates carries additional risks, such as counterparty credit risk and the legal enforceability of hedging contracts.
On February 25, 2016,July 9, 2015, we (through our Operating Partnership) entered into anexecuted one interest rate swap agreement to hedge the variable cash flows associated with the LIBO Rate-based variable rate debt, on our Revolving Credit Facility.LIBOR. The interest rate swap iswas effective for the period from AprilJuly 9, 2015 to July 1, 2016 to December 12, 20182020 with a notional amount of $100.0 million. Effective as$425.0 million, which matured during the third quarter of November 1, 2017, Griffin Capital Essential Asset Operating Partnership, L.P, an affiliated party, novated a $100 million2020.
On August 31, 2018, we executed four interest rate swap agreementagreements to hedge future variable cash flows associated with an expiration dateLIBOR. The forward-starting interest rate swaps with a total notional amount of June$425.0 million became effective on July 1, 20182020 and have a term of five years.
On March 10, 2020, we entered into three interest rate swap agreements to our Operating Partnership. We paidhedge variable cash flows associated with LIBOR. The interest rate swaps became effective on March 10, 2020, and have a term of approximately nine thousand dollars, which approximated fair value.five and half years with notional amounts of $150.0 million, $100.0 million and $75.0 million respectively.
As of December 31, 2017,2020, our debt consisted of approximately $327.0 million$1.8 billion in fixed rate debt (including the interest rate swap)swaps) and approximately $157.8 $373.5 million in variable rate debt (excluding unamortized deferred financing cost and discounts, net, of approximately $12.2 million). As of December 31, 2019, our debt consisted of approximately $1.4 billion in fixed rate debt (including the effect of interest rate swaps) and approximately $536.5 million in variable rate debt (excluding unamortized deferred financing costscost and discounts, net, of approximately $2.9 million). As of December 31, 2016, our debt consisted of approximately $226.9 million in fixed rate debt (including the interest rate swap) and approximately $233.5 million in variable rate debt (excluding deferred financing costs of approximately $4.0
$10.0 million). Changes in interest ratesrates have different impacts on the fixed and variable rate debt. A change in interest rates on fixed rate debt impacts its fair value but has no impacteffect on interest incurred or cash flows. A change in interest rates on variable rate debt could impactaffect the interest incurred and cash flows and its fair value.
Our future earnings and fair values relating to variable rate financial instruments are primarily dependent upon prevalent market rates of interest, such as LIBO Rate.LIBOR. However, our interest rate swap agreements are intended to reduce the effects of interest rate changes. The effect of an increase of 100 basis points in interest rates, assuming a LIBO RateLIBOR floor of 0%, on our variable ratevariable-rate debt, which currently consists ofincluding our Revolving Credit Facility,KeyBank loans, after consideringconsidering the effect of our interest rate swap agreementagreements, would decrease our future earnings and cash flows by approximately $2.2$2.9 million annually.
Interest rate risk amounts were determined by considering the impact of hypothetical interest rates on our financial instruments. These analyses do not consider the effect of any change in overall economic activity that could occur. Further, in the event of a change of that magnitude, we may take actions to further mitigate our exposure to the change. However, due to the uncertainty of the specific actions that would be taken and their possible effects, these analyses assume no changes in our financial structure.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and supplementary data filed as part of this annual reportAnnual Report on Form 10-K are set forth beginning on page F-1 of this report.Annual Report on Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
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ITEM 9A. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
As of the end of the period covered by this report,Annual Report on Form 10-K, management, with the participation of our principal executive and principal financial officers, including our chief executive officer and chief financial officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures. Based upon, and as of the date of the evaluation, our chief executive officer and chief financial officer concluded that the disclosure controls and procedures were effective as of the end of the period covered by this reportAnnual Report on Form 10-K to ensure that information required to be disclosed in the reports we file and submit under the Exchange Act is recorded, processed, summarized and reported as and when required. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports we file and submit under the Exchange Act is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding required disclosure.
Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for us. Our management, including our chief executive officer and chief financial officer, evaluated, as of December 31, 2017,2020, the effectiveness of our internal control over financial reporting using the framework inInternal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on that evaluation, our management concluded that our internal control over financial reporting was effective as of December 31, 2017.2020.
There have been no changes in our internal control over financial reporting that occurred during the quarter ended December 31, 20172020 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
ITEM 9B. OTHER INFORMATION
None.
PART III
We expect to file a definitive proxy statement for our 2021 Annual Meeting of Stockholders (the “2021 Proxy Statement”) with the quarter ended December 31, 2017, there was noSEC, pursuant to Regulation 14A, not later than 120 days after the end of our fiscal year. Accordingly, certain information required by Part III has been omitted under General Instruction G(3) to Form 10-K and is incorporated by reference to the 2021 Proxy Statement. Only those sections of the 2021 Proxy Statement that specifically address the items required to be disclosed in a report on Form 8-K which was not disclosed in a report on Form 8-K.set forth herein are incorporated by reference.
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
| Name | Fees Earned or Paid in Cash | Stock Awards | Option Awards | Non-Equity Incentive Plan Compensation | Change in Pension Value and Nonqualified Deferred Compensation Earnings | All other Compensation | Total | |||||||||||||||||||||
| Kevin A. Shields | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||||||
| Michael J. Escalante | — | — | — | — | — | — | — | |||||||||||||||||||||
| Samuel Tang | 60,500 | 112,090 | — | — | — | — | 172,590 | |||||||||||||||||||||
| J. Grayson Sanders | 58,000 | 112,090 | — | — | — | — | 170,090 | |||||||||||||||||||||
| Kathleen S. Briscoe | 60,000 | 112,090 | — | — | — | — | 172,090 | |||||||||||||||||||||
| Total | $ | 178,500 | $ | 336,270 | $ | — | $ | — | $ | — | $ | — | $ | 514,770 | ||||||||||||||
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference to the Plan.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The following table sets forth, as of February 28, 2018,information required by this item is incorporated by reference to the amount of our common stock beneficially owned by: (1) any person who is known by us2021 Proxy Statement to be filed with the beneficial owner of more than 5%SEC within 120 days after the end of the outstanding shares of our common stock; (2) each of our directors; (3) each of our Named Executive Officers; and (4) all of our current directors and executive officers as a group. The percentage of beneficial ownership is calculated based on 77,187,820 shares of common stock outstanding as of February 28, 2018.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE
56
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
| 2017 | 2016 | ||||||
| Audit Fees | $ | 446,679 | $ | 661,605 | |||
| Audit-Related Fees | — | — | |||||
| Tax Fees | 113,744 | 82,614 | |||||
| All Other Fees | 1,250 | 1,250 | |||||
| Total | $ | 561,673 | $ | 745,469 | |||
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(a) List of Documents Filed.
1.The list of the financial statements contained herein is set forth on page F-1 hereof.
2.Schedule III — Real Estate and Accumulated Depreciation is set forth beginning on page S-1 hereof. All other schedules for which provision is made in the applicable accounting regulations of the SEC are not required under the related instructions or are not applicable and therefore have been omitted.
3.The Exhibits filed in response to Item 601 of Regulation S-K are listed on the Exhibit Index below.
(b) See (a) 3 above.
(c) See (a) 2 above.
EXHIBIT INDEX
The following exhibits are included in this Annual Report on Form 10-K for the year ended December 31, 20172020 (and are numbered in accordance with Item 601 of Regulation S-K).
| Exhibit No. | Description | |||||
57
58
59
| 101* | The following Griffin Capital Essential Asset REIT, December 31, Balance Sheets, (ii) Consolidated Statements of Operations, (iii) Consolidated Statements of Comprehensive (Loss) Income, | ||||||
| * | Filed herewith. | ||||||
| ** | Furnished herewith. | ||||||
| + | Management contract, compensatory plan or arrangement filed in response to Item 15(a)(3) of | ||||||
61
ITEM 16. FORM 10-K SUMMARY
Not Applicable.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this reportAnnual Report on Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of El Segundo, State of California, on March 9, 2018.February 26, 2021.
| GRIFFIN CAPITAL ESSENTIAL ASSET REIT, | |||||||||||||
| By: | /s/ | ||||||||||||
| Chief Executive Officer and | |||||||||||||
Pursuant to the requirements of the Securities Exchange Act of 1934, this reportAnnual Report on Form 10-K has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated:
| Signature | Title | Date | ||||||||||||
| /s/ Michael J. Escalante | Chief Executive Officer and President and Director (Principal Executive Officer) | February 26, 2021 | ||||||||||||
| Michael J. Escalante | ||||||||||||||
| /s/ Javier F. Bitar | Chief Financial Officer and Treasurer (Principal Financial Officer) | February 26, 2021 | ||||||||||||
| Javier F. Bitar | ||||||||||||||
| Bryan K. Yamasawa | ||||||||||||||
| /s/ Kevin A. Shields | ||||||||||||||
| Kevin A. Shields | ||||||||||||||
| /s/ | ||||||||||||||
| /s/ | Independent Director | |||||||||||||
| /s/ Kathleen S. Briscoe | Independent Director | February 26, 2021 | ||||||||||||
| Kathleen S. Briscoe | ||||||||||||||
| /s/ J. Grayson Sanders | Independent Director | |||||||||||||
| J. Grayson Sanders | ||||||||||||||
| /s/ Samuel Tang | Independent Director | |||||||||||||
| Samuel Tang | ||||||||||||||
63
GRIFFIN CAPITAL ESSENTIAL ASSET REIT, II, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
| Consolidated Financial Statements | |||||
F- | |||||
F- | |||||
F- | |||||
F- | |||||
F- | |||||
F- | |||||
F- | |||||
| Financial Statement Schedule | |||||
S- | |||||
F-1
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of Griffin Capital Essential Asset REIT, II, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Griffin Capital Essential Asset REIT, II, Inc. (the Company) as of December 31, 20172020 and 2016,2019, and the related consolidated statements of operations, comprehensive (loss) income, (loss), equity, and cash flows for each of the three years in the period ended December 31, 2017,2020, and the related notes and financial statement schedule listed in the Index at Item 15(a) (collectively referred to as the “financial“consolidated financial statements”). In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of the Company at December 31, 20172020 and 2016,2019, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2017,2020, in conformity with U.S. generally accepted accounting principles.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
F-2
| Impairment of Real Estate | |||||
| Description of the Matter | As of December 31, 2020 the Company’s carrying value of real estate was $3.5 billion. As discussed in Note 2 of the consolidated financial statements, the Company assesses the carrying values of its real estate assets whenever events or changes in circumstances indicate that the carrying amounts of real estate assets may not be fully recoverable. When impairment indicators are identified, recoverability of real estate assets is measured by comparison of the carrying amount of the asset to the estimated future undiscounted cash flows. When the carrying amount of the real estate assets are not recoverable based on the undiscounted cash flows, management calculates an impairment charge as the amount the carrying value exceeds the estimated fair value of the real estate property as of the measurement date. There were $23.5 million of impairment charges recognized during the year ended December 31, 2020. Auditing the Company’s evaluation of whether its real estate assets are impaired was complex and involved a high degree of subjectivity in the identification of indicators of impairment and management’s assumptions in estimating future cash flows as estimates and judgments underlying the identification or determination of recoverability and fair value were based on assumptions about future market and economic conditions. Where indicators of impairment exist, the estimation required in the undiscounted future cash flows and fair value assumption includes future market rental income amounts, property operating expenses, lease-up period, terminal capitalization rate and the number of years the property is expected to be held. | ||||
| How we Addressed the Matter in Our Audit | Our testing of the Company’s impairment assessment included, among other procedures, evaluating significant judgments applied in determining whether indicators of impairment were present by obtaining evidence to corroborate such judgments and searching for evidence contrary to such judgments. Included in the audit procedures we performed, we searched for any properties with upcoming lease expirations, changes in tenant credit quality, or tenants with significant allowances for doubtful accounts. For real estate properties with identified indicators of impairment, we performed audit procedures over the Company’s projection of the undiscounted future cash flows and estimated fair value of real estate assets that were impaired. We recalculated the estimates using management’s model and compared the market rental rates, lease-up period, property operating expenses, discount rate and terminal capitalization rate assumptions to industry data and appraisals. We involved a valuation specialist to assist in evaluating the key assumptions listed above. We evaluated the reasonableness of the anticipated hold period assumption used by management by considering the performance of the asset and whether the assumption was consistent with evidence obtained in other areas of the audit. We performed sensitivity analyses on the Company’s inputs, including market rental rates, net operating income, and the terminal capitalization rate, to assess whether changes to certain assumptions would result in a materially different outcome and assessed historical accuracy of management’s estimates. | ||||
/s/ Ernst & Young LLP
We have served as the Company’s auditor since 2014.
2008.
Los Angeles, California
February 26, 2021
F-3
GRIFFIN CAPITAL ESSENTIAL ASSET REIT, II, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except units and share amounts)
| December 31, | ||||||||||||||||||
| December 31, 2017 | December 31, 2016 | 2020 | 2019 | |||||||||||||||
| ASSETS | ASSETS | |||||||||||||||||
| Cash and cash equivalents | $ | 33,164 | $ | 49,340 | Cash and cash equivalents | $ | 168,954 | $ | 54,830 | |||||||||
| Restricted cash | 12,886 | 14,221 | Restricted cash | 34,352 | 58,430 | |||||||||||||
| Real estate: | Real estate: | |||||||||||||||||
| Land | 122,482 | 117,569 | Land | 445,674 | 458,339 | |||||||||||||
| Building | 815,721 | 787,999 | ||||||||||||||||
| Building and improvements | Building and improvements | 3,112,253 | 3,043,527 | |||||||||||||||
| Tenant origination and absorption cost | 240,364 | 227,407 | Tenant origination and absorption cost | 740,489 | 744,773 | |||||||||||||
| Construction in progress | 299 | 80 | Construction in progress | 11,886 | 31,794 | |||||||||||||
| Total real estate | 1,178,866 | 1,133,055 | Total real estate | 4,310,302 | 4,278,433 | |||||||||||||
| Less: accumulated depreciation and amortization | (83,905 | ) | (39,955 | ) | Less: accumulated depreciation and amortization | (817,773) | (668,104) | |||||||||||
| Total real estate, net | 1,094,961 | 1,093,100 | Total real estate, net | 3,492,529 | 3,610,329 | |||||||||||||
| Investments in unconsolidated entities | Investments in unconsolidated entities | 34 | 11,028 | |||||||||||||||
| Intangible assets, net | 3,294 | 3,528 | Intangible assets, net | 10,035 | 12,780 | |||||||||||||
| Deferred rent receivable | Deferred rent receivable | 98,116 | 73,012 | |||||||||||||||
| Deferred leasing costs, net | Deferred leasing costs, net | 45,966 | 49,390 | |||||||||||||||
| Goodwill | Goodwill | 229,948 | 229,948 | |||||||||||||||
| Due from affiliates | 686 | — | Due from affiliates | 1,411 | 837 | |||||||||||||
| Deferred rent | 22,733 | 5,424 | ||||||||||||||||
| Other assets, net | 12,224 | 18,862 | ||||||||||||||||
| Right of use asset | Right of use asset | 39,935 | 41,347 | |||||||||||||||
| Other assets | Other assets | 30,570 | 33,571 | |||||||||||||||
| Total assets | $ | 1,179,948 | $ | 1,184,475 | Total assets | $ | 4,151,850 | $ | 4,175,502 | |||||||||
| LIABILITIES AND EQUITY | LIABILITIES AND EQUITY | |||||||||||||||||
| Debt: | ||||||||||||||||||
| Revolving Credit Facility | $ | 355,561 | $ | 330,272 | ||||||||||||||
| AIG Loan | 126,287 | 126,200 | ||||||||||||||||
| Total debt | 481,848 | 456,472 | ||||||||||||||||
| Debt, net | Debt, net | $ | 2,140,427 | $ | 1,969,104 | |||||||||||||
| Restricted reserves | 13,368 | 55,797 | Restricted reserves | 12,071 | 14,064 | |||||||||||||
| Accrued expenses and other liabilities | 19,903 | 21,527 | ||||||||||||||||
| Interest rate swap liability | Interest rate swap liability | 53,975 | 24,146 | |||||||||||||||
| Redemptions payable | Redemptions payable | 5,345 | 96,648 | |||||||||||||||
| Distributions payable | 1,689 | 1,494 | Distributions payable | 9,430 | 15,530 | |||||||||||||
| Due to affiliates | 16,896 | 22,481 | Due to affiliates | 3,272 | 10,883 | |||||||||||||
| Below market leases, net | 51,295 | 55,319 | ||||||||||||||||
| Intangible liabilities, net | Intangible liabilities, net | 27,333 | 31,805 | |||||||||||||||
| Lease liability | Lease liability | 45,646 | 45,020 | |||||||||||||||
| Accrued expenses and other liabilities | Accrued expenses and other liabilities | 114,434 | 96,389 | |||||||||||||||
| Total liabilities | 584,999 | 613,090 | Total liabilities | 2,411,933 | 2,303,589 | |||||||||||||
| Commitments and contingencies (Note 11) | ||||||||||||||||||
| Commitments and contingencies (Note 13) | Commitments and contingencies (Note 13) | 0 | 0 | |||||||||||||||
| Perpetual convertible preferred shares | Perpetual convertible preferred shares | 125,000 | 125,000 | |||||||||||||||
| Common stock subject to redemption | 32,405 | 16,930 | Common stock subject to redemption | 2,038 | 20,565 | |||||||||||||
| Stockholders' equity: | ||||||||||||||||||
Common Stock, $0.001 par value - Authorized: 800,000,000 and 700,000,000 shares as of December 31, 2017 and December 31, 2016, respectively;77,175,283 and 70,939,647 shares outstanding in aggregate, as of December 31, 2017 and December 31, 2016, respectively (1) | 76 | 71 | ||||||||||||||||
| Additional paid-in capital | 656,705 | 615,653 | ||||||||||||||||
| Noncontrolling interests subject to redemption; 556,099 and 554,110 units as of December 31, 2020 and December 31, 2019, respectively | Noncontrolling interests subject to redemption; 556,099 and 554,110 units as of December 31, 2020 and December 31, 2019, respectively | 4,610 | 4,831 | |||||||||||||||
| Stockholders’ equity: | Stockholders’ equity: | |||||||||||||||||
Common stock, $0.001 par value; 800,000,000 shares authorized; 230,320,668 and 227,853,720 shares outstanding in the aggregate as of December 31, 2020 and December 31, 2019, respectively(1) | Common stock, $0.001 par value; 800,000,000 shares authorized; 230,320,668 and 227,853,720 shares outstanding in the aggregate as of December 31, 2020 and December 31, 2019, respectively(1) | 230 | 228 | |||||||||||||||
| Additional paid-in-capital | Additional paid-in-capital | 2,103,028 | 2,060,604 | |||||||||||||||
| Cumulative distributions | (82,590 | ) | (38,406 | ) | Cumulative distributions | (813,892) | (715,792) | |||||||||||
| Accumulated deficit | (12,672 | ) | (23,788 | ) | ||||||||||||||
| Accumulated other comprehensive income | 949 | 841 | ||||||||||||||||
| Total stockholders' equity | 562,468 | 554,371 | ||||||||||||||||
| Accumulated earnings | Accumulated earnings | 140,354 | 153,312 | |||||||||||||||
| Accumulated other comprehensive loss | Accumulated other comprehensive loss | (48,001) | (21,875) | |||||||||||||||
| Total stockholders’ equity | Total stockholders’ equity | 1,381,719 | 1,476,477 | |||||||||||||||
| Noncontrolling interests | 76 | 84 | Noncontrolling interests | 226,550 | 245,040 | |||||||||||||
| Total equity | 562,544 | 554,455 | Total equity | 1,608,269 | 1,721,517 | |||||||||||||
| Total liabilities and equity | $ | 1,179,948 | $ | 1,184,475 | Total liabilities and equity | $ | 4,151,850 | $ | 4,175,502 | |||||||||
(1) See Note 9, Equity, for the number of shares outstanding of each class of common stock as of December 31, 2020.
See accompanying notes.
F-4
GRIFFIN CAPITAL ESSENTIAL ASSET REIT, II, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share and per share amounts)
| Year Ended December 31, | |||||||||||
| 2017 | 2016 | 2015 | |||||||||
| Revenue: | |||||||||||
| Rental income | $ | 89,797 | $ | 51,403 | $ | 21,216 | |||||
| Property expense recovery | 17,584 | 11,409 | 3,933 | ||||||||
| Total revenue | 107,381 | 62,812 | 25,149 | ||||||||
| Expenses: | |||||||||||
| Asset management fees to affiliates | 8,027 | 6,413 | 2,624 | ||||||||
| Property management fees to affiliates | 1,799 | 1,052 | 333 | ||||||||
| Advisory fees to affiliates | 2,550 | — | — | ||||||||
| Property operating | 6,724 | 4,428 | 1,317 | ||||||||
| Property tax | 10,049 | 7,046 | 2,713 | ||||||||
| Acquisition fees and expenses to non-affiliates | — | 1,113 | 3,058 | ||||||||
| Performance distribution to affiliates | 2,394 | — | — | ||||||||
| Acquisition fees and expenses to affiliates | — | 6,176 | 10,876 | ||||||||
| General and administrative | 3,445 | 2,804 | 1,883 | ||||||||
| Corporate operating expenses to affiliates | 2,336 | 1,622 | 1,937 | ||||||||
| Depreciation and amortization | 43,950 | 27,894 | 12,061 | ||||||||
| Total expenses | 81,274 | 58,548 | 36,802 | ||||||||
| Income (loss) before other income and (expenses) | 26,107 | 4,264 | (11,653 | ) | |||||||
| Interest expense | (15,519 | ) | (10,384 | ) | (4,851 | ) | |||||
| Other income, net | 531 | 13 | — | ||||||||
| Net income (loss) | 11,119 | (6,107 | ) | (16,504 | ) | ||||||
| Distributions to redeemable preferred unit holders | — | — | (398 | ) | |||||||
| Preferred units redemption premium | — | — | (375 | ) | |||||||
| Less: Net (income) loss attributable to noncontrolling interests | (3 | ) | 3 | 30 | |||||||
| Net income (loss) attributable to common stockholders | $ | 11,116 | $ | (6,104 | ) | $ | (17,247 | ) | |||
| Net income (loss) attributable to common stockholders per share, basic and diluted | $ | 0.15 | $ | (0.12 | ) | $ | (1.19 | ) | |||
| Weighted average number of common shares outstanding, basic and diluted | 75,799,415 | 50,712,589 | 14,479,960 | ||||||||
| Year Ended December 31, | |||||||||||||||||
| 2020 | 2019 | 2018 | |||||||||||||||
| Revenue: | |||||||||||||||||
| Rental income | $ | 397,452 | $ | 387,108 | $ | 336,359 | |||||||||||
| Expenses: | |||||||||||||||||
| Property operating expense | 57,461 | 55,301 | 49,509 | ||||||||||||||
| Property tax expense | 37,590 | 37,035 | 44,662 | ||||||||||||||
| Property management fees to non-affiliates | 3,656 | 3,528 | 0 | ||||||||||||||
| Property asset management fees to affiliates | 0 | 0 | 23,668 | ||||||||||||||
| Property management fees to affiliates | 0 | 0 | 9,479 | ||||||||||||||
| Self-administration transaction expense | 0 | 0 | 1,331 | ||||||||||||||
| General and administrative expenses | 38,633 | 26,078 | 6,968 | ||||||||||||||
| Corporate operating expenses to affiliates | 2,500 | 2,745 | 3,594 | ||||||||||||||
| Impairment provision | 23,472 | 30,734 | 0 | ||||||||||||||
| Depreciation and amortization | 161,056 | 153,425 | 119,168 | ||||||||||||||
| Total expenses | 324,368 | 308,846 | 258,379 | ||||||||||||||
| Income before other income and (expenses) | 73,084 | 78,262 | 77,980 | ||||||||||||||
| Other income (expenses): | |||||||||||||||||
| Interest expense | (79,646) | (73,557) | (55,194) | ||||||||||||||
| Management fee revenue from affiliates | 0 | 6,368 | 0 | ||||||||||||||
| Other income, net | 3,228 | 1,340 | 275 | ||||||||||||||
| (Loss) from investment in unconsolidated entities | (6,523) | (5,307) | (2,254) | ||||||||||||||
| Gain from disposition of assets | 4,083 | 29,938 | 1,231 | ||||||||||||||
| Net (loss) income | (5,774) | 37,044 | 22,038 | ||||||||||||||
| Distributions to redeemable preferred shareholders | (8,708) | (8,188) | (3,275) | ||||||||||||||
| Net loss (income) attributable to noncontrolling interests | 1,732 | (3,749) | (789) | ||||||||||||||
| Net (loss) income attributable to controlling interest | (12,750) | 25,107 | 17,974 | ||||||||||||||
| Distributions to redeemable noncontrolling interests attributable to common stockholders | (208) | (320) | (356) | ||||||||||||||
| Net (loss) income attributable to common stockholders | $ | (12,958) | $ | 24,787 | $ | 17,618 | |||||||||||
| Net (loss) income attributable to common stockholders per share, basic and diluted | $ | (0.06) | $ | 0.11 | $ | 0.10 | |||||||||||
| Weighted average number of common shares outstanding - basic and diluted | 230,042,543 | 222,531,173 | 169,907,020 | ||||||||||||||
See accompanying notes.
F-5
GRIFFIN CAPITAL ESSENTIAL ASSET REIT, II, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME (LOSS)
(in thousands)
| Year Ended December 31, | |||||||||||||||||
| 2020 | 2019 | 2018 | |||||||||||||||
| Net (loss) income | $ | (5,774) | $ | 37,044 | $ | 22,038 | |||||||||||
| Other comprehensive loss: | |||||||||||||||||
| Equity in other comprehensive (loss) income of unconsolidated joint venture | 0 | (217) | 122 | ||||||||||||||
| Change in fair value of swap agreements | (29,704) | (22,303) | (5,301) | ||||||||||||||
| Total comprehensive (loss) income | (35,478) | 14,524 | 16,859 | ||||||||||||||
| Distributions to redeemable preferred shareholders | (8,708) | (8,188) | (3,275) | ||||||||||||||
| Distributions to redeemable noncontrolling interests attributable to common stockholders | (208) | (320) | (356) | ||||||||||||||
| Comprehensive loss (income) attributable to noncontrolling interests | 5,310 | (695) | (479) | ||||||||||||||
| Comprehensive (loss) income attributable to common stockholders | $ | (39,084) | $ | 5,321 | $ | 12,749 | |||||||||||
See accompanying notes.
F-6
| Year Ended December 31, | |||||||||||
| 2017 | 2016 | 2015 | |||||||||
| Net income (loss) | $ | 11,119 | $ | (6,107 | ) | $ | (16,504 | ) | |||
| Other comprehensive income (loss): | |||||||||||
| Change in fair value of swap agreement | 108 | 841 | — | ||||||||
| Total comprehensive income (loss) | 11,227 | (5,266 | ) | (16,504 | ) | ||||||
| Distributions to redeemable preferred unit holders | — | — | (398 | ) | |||||||
| Preferred units redemption premium | — | — | (375 | ) | |||||||
| Less: comprehensive (income) loss attributable to noncontrolling interests | (3 | ) | 3 | 30 | |||||||
| Comprehensive income (loss) attributable to common stockholders | $ | 11,224 | $ | (5,263 | ) | $ | (17,247 | ) | |||
GRIFFIN CAPITAL ESSENTIAL ASSET REIT, II, INC.
CONSOLIDATED STATEMENTS OF EQUITY
(in thousands, except share amounts)
| Accumulated Other Comprehensive (Loss) Income | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Common Stock | Additional Paid-In Capital | Cumulative Distributions | Accumulated Income (Deficit) | Total Stockholders’ Equity | Non-controlling Interests | Total Equity | |||||||||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance December 31, 2017 | 179,121,568 | $ | 179 | $ | 1,561,686 | $ | (454,526) | $ | 110,907 | $ | 2,460 | $ | 1,220,706 | $ | 31,105 | $ | 1,251,811 | ||||||||||||||||||||||||||||||||||||
| Deferred equity compensation | 8,035 | — | 38 | — | — | — | 38 | — | 38 | ||||||||||||||||||||||||||||||||||||||||||||
| Distributions to common stockholders | — | — | — | (75,613) | — | — | (75,613) | — | (75,613) | ||||||||||||||||||||||||||||||||||||||||||||
| Issuance of shares for distribution reinvestment plan | 4,262,336 | 4 | 40,834 | (40,838) | — | — | — | — | 0 | ||||||||||||||||||||||||||||||||||||||||||||
| Repurchase of common stock | (9,113,598) | (9) | (83,565) | — | — | — | (83,574) | — | (83,574) | ||||||||||||||||||||||||||||||||||||||||||||
| Reduction of common stock subject to redemption | — | — | 42,736 | — | — | — | 42,736 | — | 42,736 | ||||||||||||||||||||||||||||||||||||||||||||
| Issuance of limited partnership units | — | — | — | — | — | — | — | 205,000 | 205,000 | ||||||||||||||||||||||||||||||||||||||||||||
| Distributions to noncontrolling interests | — | — | — | — | — | — | — | (4,368) | (4,368) | ||||||||||||||||||||||||||||||||||||||||||||
| Distributions to noncontrolling interests subject to redemption | — | — | — | — | — | — | — | (13) | (13) | ||||||||||||||||||||||||||||||||||||||||||||
| Offering costs on preferred shares | — | — | (4,959) | — | — | — | (4,959) | — | (4,959) | ||||||||||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | 17,618 | — | 17,618 | 789 | 18,407 | ||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive loss | — | — | — | — | — | (4,869) | (4,869) | (310) | (5,179) | ||||||||||||||||||||||||||||||||||||||||||||
| Balance December 31, 2018 | 174,278,341 | $ | 174 | $ | 1,556,770 | $ | (570,977) | $ | 128,525 | $ | (2,409) | $ | 1,112,083 | $ | 232,203 | $ | 1,344,286 | ||||||||||||||||||||||||||||||||||||
| Common Stock | Additional Paid-In Capital | Cumulative Distributions | Accumulated Deficit | Accumulated Other Comprehensive Income | Total Stockholders’ Equity | Non- controlling Interests | Total Equity | |||||||||||||||||||||||||||
| Shares | Amount | |||||||||||||||||||||||||||||||||
| Balance December 31, 2014 | 1,133,773 | $ | 11 | $ | 9,838 | $ | (72 | ) | $ | (437 | ) | $ | — | $ | 9,340 | $ | 139 | $ | 9,479 | |||||||||||||||
| Gross proceeds from issuance of common stock | 26,897,208 | 16 | 268,957 | — | — | — | 268,973 | — | 268,973 | |||||||||||||||||||||||||
| Discount on issuance of common stock | — | — | (997 | ) | — | — | — | (997 | ) | — | (997 | ) | ||||||||||||||||||||||
| Offering costs including dealer manager fees to affiliates | — | — | (27,514 | ) | — | — | — | (27,514 | ) | — | (27,514 | ) | ||||||||||||||||||||||
| Distributions to common stockholders | — | — | — | (3,173 | ) | — | — | (3,173 | ) | — | (3,173 | ) | ||||||||||||||||||||||
| Issuance of shares for distribution reinvestment plan | 477,638 | 2 | 4,535 | (4,537 | ) | — | — | — | — | — | ||||||||||||||||||||||||
| Additions to common stock subject to redemption | — | — | (4,538 | ) | — | — | — | (4,538 | ) | — | (4,538 | ) | ||||||||||||||||||||||
| Issuance of stock dividend | 47,551 | — | 476 | (476 | ) | — | — | — | — | — | ||||||||||||||||||||||||
| Additions to noncontrolling interests subject to redemption | — | — | — | (375 | ) | — | — | (375 | ) | — | (375 | ) | ||||||||||||||||||||||
| Distributions for noncontrolling interest | — | — | — | 375 | — | — | 375 | (11 | ) | 364 | ||||||||||||||||||||||||
| Net loss | — | — | — | — | (17,247 | ) | — | (17,247 | ) | (30 | ) | (17,277 | ) | |||||||||||||||||||||
| Balance December 31, 2015 | 28,556,170 | $ | 29 | $ | 250,757 | $ | (8,258 | ) | $ | (17,684 | ) | $ | — | $ | 224,844 | $ | 98 | $ | 224,942 | |||||||||||||||
| Gross proceeds from issuance of common stock | 40,700,406 | $ | 40 | $ | 406,423 | $ | — | $ | — | $ | — | $ | 406,463 | $ | — | $ | 406,463 | |||||||||||||||||
| Discount on issuance of common stock | — | — | (696 | ) | — | — | — | (696 | ) | — | (696 | ) | ||||||||||||||||||||||
| Offering costs including dealer manager fees to affiliates | — | — | (43,340 | ) | — | — | — | (43,340 | ) | — | (43,340 | ) | ||||||||||||||||||||||
| Distributions to common stockholders | — | — | — | (12,479 | ) | — | — | (12,479 | ) | — | (12,479 | ) | ||||||||||||||||||||||
| Issuance of shares for distribution reinvestment plan | 1,599,355 | 2 | 15,157 | (15,159 | ) | — | — | — | — | — | ||||||||||||||||||||||||
| Repurchase of common stock | (167,442 | ) | — | (1,627 | ) | — | — | — | (1,627 | ) | — | (1,627 | ) | |||||||||||||||||||||
| Additions to common stock subject to redemption | — | — | (13,531 | ) | — | — | — | (13,531 | ) | — | (13,531 | ) | ||||||||||||||||||||||
| Issuance of stock dividends | 251,158 | — | 2,510 | (2,510 | ) | — | — | — | — | — | ||||||||||||||||||||||||
| Distributions to noncontrolling interest | — | — | — | — | — | — | — | (11 | ) | (11 | ) | |||||||||||||||||||||||
| Net loss | — | — | — | (6,104 | ) | — | (6,104 | ) | (3 | ) | (6,107 | ) | ||||||||||||||||||||||
| Other comprehensive income | — | — | — | — | — | 841 | 841 | — | 841 | |||||||||||||||||||||||||
| Balance December 31, 2016 | 70,939,647 | $ | 71 | $ | 615,653 | $ | (38,406 | ) | $ | (23,788 | ) | $ | 841 | $ | 554,371 | $ | 84 | $ | 554,455 | |||||||||||||||
| Gross proceeds from issuance of common stock | 4,205,673 | 4 | 41,822 | — | — | — | 41,826 | — | 41,826 | |||||||||||||||||||||||||
| Discount on issuance of common stock | — | — | (16 | ) | — | — | — | (16 | ) | — | (16 | ) | ||||||||||||||||||||||
| Stock-based compensation | 25,500 | — | 292 | — | — | — | 292 | — | 292 | |||||||||||||||||||||||||
| Offering costs including dealer manager fees and stockholder servicing fees to affiliates | — | — | (3,593 | ) | — | — | — | (3,593 | ) | — | (3,593 | ) | ||||||||||||||||||||||
| Distributions to common stockholders | — | — | — | (19,427 | ) | — | — | (19,427 | ) | — | (19,427 | ) | ||||||||||||||||||||||
| Issuance of shares for distribution reinvestment plan | 2,358,188 | 2 | 22,206 | (22,208 | ) | — | — | — | — | — | ||||||||||||||||||||||||
| Repurchase of common stock | (623,499 | ) | (1 | ) | (5,741 | ) | — | — | — | (5,742 | ) | — | (5,742 | ) | ||||||||||||||||||||
| Additions to common stock subject to redemption | — | — | (16,467 | ) | — | — | — | (16,467 | ) | — | (16,467 | ) | ||||||||||||||||||||||
| Issuance of stock dividends | 269,774 | — | 2,549 | (2,549 | ) | — | — | — | — | — | ||||||||||||||||||||||||
| Distributions to noncontrolling interest | — | — | — | — | — | — | — | (11 | ) | (11 | ) | |||||||||||||||||||||||
| Net income | — | — | — | — | 11,116 | — | 11,116 | 3 | 11,119 | |||||||||||||||||||||||||
| Other comprehensive income | — | — | — | — | — | 108 | 108 | — | 108 | |||||||||||||||||||||||||
| Balance December 31, 2017 | 77,175,283 | $ | 76 | $ | 656,705 | $ | (82,590 | ) | $ | (12,672 | ) | $ | 949 | $ | 562,468 | $ | 76 | $ | 562,544 | |||||||||||||||
GRIFFIN CAPITAL ESSENTIAL ASSET REIT, II, INC.
CONSOLIDATED STATEMENTS OF EQUITY
(in thousands, except share amounts)
| Common Stock | Additional Paid-In Capital | Cumulative Distributions | Accumulated Income (Deficit) | Accumulated Other Comprehensive (Loss) Income | Total Stockholders’ Equity | Non-controlling Interests | Total Equity | ||||||||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance December 31, 2018 | 174,278,341 | $ | 174 | $ | 1,556,770 | $ | (570,977) | $ | 128,525 | $ | (2,409) | $ | 1,112,083 | $ | 232,203 | $ | 1,344,286 | ||||||||||||||||||||||||||||||||||||
| Gross proceeds from issuance of common stock | 973,490 | — | 9,383 | — | — | — | 9,383 | — | 9,383 | ||||||||||||||||||||||||||||||||||||||||||||
| Deferred equity compensation | 260,039 | — | 2,623 | — | — | — | 2,623 | — | 2,623 | ||||||||||||||||||||||||||||||||||||||||||||
| Cash distributions to common stockholders | — | — | — | (89,836) | — | — | (89,836) | — | (89,836) | ||||||||||||||||||||||||||||||||||||||||||||
| Issuance of shares for distribution reinvestment plan | 4,298,420 | 4 | 41,056 | (40,840) | — | — | 220 | — | 220 | ||||||||||||||||||||||||||||||||||||||||||||
| Repurchase of common stock | (31,290,588) | (30) | (296,629) | — | — | — | (296,659) | — | (296,659) | ||||||||||||||||||||||||||||||||||||||||||||
| Reclassification of common stock subject to redemption | — | — | (9,042) | — | — | — | (9,042) | — | (9,042) | ||||||||||||||||||||||||||||||||||||||||||||
| Issuance of limited partnership units | — | — | — | — | — | — | — | 25,000 | 25,000 | ||||||||||||||||||||||||||||||||||||||||||||
| Issuance of stock dividend for noncontrolling interest | — | — | — | — | — | — | — | 1,861 | 1,861 | ||||||||||||||||||||||||||||||||||||||||||||
| Issuance of stock dividends | 1,279,084 | 2 | 12,189 | (14,139) | — | — | (1,948) | — | (1,948) | ||||||||||||||||||||||||||||||||||||||||||||
| EA Merger | 78,054,934 | 78 | 746,160 | — | — | — | 746,238 | 5,039 | 751,277 | ||||||||||||||||||||||||||||||||||||||||||||
| Distributions to noncontrolling interests | — | — | — | — | — | — | — | (19,716) | (19,716) | ||||||||||||||||||||||||||||||||||||||||||||
| Distributions to noncontrolling interests subject to redemption | — | — | — | — | — | — | — | (45) | (45) | ||||||||||||||||||||||||||||||||||||||||||||
| Offering costs | — | — | (1,906) | — | — | — | (1,906) | — | (1,906) | ||||||||||||||||||||||||||||||||||||||||||||
| Reclass of noncontrolling interest subject to redemption | — | — | — | — | — | — | — | 3 | 3 | ||||||||||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | 24,787 | — | 24,787 | 3,749 | 28,536 | ||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive loss | — | — | — | — | — | (19,466) | (19,466) | (3,054) | (22,520) | ||||||||||||||||||||||||||||||||||||||||||||
| Balance December 31, 2019 | 227,853,720 | $ | 228 | $ | 2,060,604 | $ | (715,792) | $ | 153,312 | $ | (21,875) | $ | 1,476,477 | $ | 245,040 | $ | 1,721,517 | ||||||||||||||||||||||||||||||||||||
See accompanying notes.
| Common Stock | Additional Paid-In Capital | Cumulative Distributions | Accumulated Income (Deficit) | Accumulated Other Comprehensive (Loss) Income | Total Stockholders’ Equity | Non-controlling Interests | Total Equity | ||||||||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance December 31, 2019 | 227,853,720 | $ | 228 | $ | 2,060,604 | $ | (715,792) | $ | 153,312 | $ | (21,875) | $ | 1,476,477 | $ | 245,040 | $ | 1,721,517 | ||||||||||||||||||||||||||||||||||||
| Gross proceeds from issuance of common stock | 433,328 | — | 4,141 | — | — | — | 4,141 | — | 4,141 | ||||||||||||||||||||||||||||||||||||||||||||
| Deferred equity compensation | 436,704 | — | 4,106 | — | — | — | 4,106 | — | 4,106 | ||||||||||||||||||||||||||||||||||||||||||||
| Shares acquired to satisfy employee tax withholding requirements on vesting restricted stock | (78,849) | — | (751) | — | — | — | (751) | — | (751) | ||||||||||||||||||||||||||||||||||||||||||||
| Cash distributions to common stockholders | — | — | — | (69,532) | — | — | (69,532) | — | (69,532) | ||||||||||||||||||||||||||||||||||||||||||||
| Issuance of shares for distribution reinvestment plan | 2,693,560 | 3 | 24,494 | (22,820) | — | — | 1,677 | — | 1,677 | ||||||||||||||||||||||||||||||||||||||||||||
| Repurchase of common stock | (1,841,887) | (2) | (16,517) | — | — | — | (16,519) | — | (16,519) | ||||||||||||||||||||||||||||||||||||||||||||
| Reclass of noncontrolling interest subject to redemption | — | — | — | — | — | — | — | 224 | 224 | ||||||||||||||||||||||||||||||||||||||||||||
| Repurchase of noncontrolling interest | — | — | — | — | — | — | — | (1,137) | (1,137) | ||||||||||||||||||||||||||||||||||||||||||||
| Reclass of common stock subject to redemption | — | — | 18,528 | — | — | — | 18,528 | — | 18,528 | ||||||||||||||||||||||||||||||||||||||||||||
| Issuance of stock dividend for noncontrolling interest | — | — | — | — | — | — | — | 1,068 | 1,068 | ||||||||||||||||||||||||||||||||||||||||||||
| Issuance of stock dividends | 824,092 | 1 | 7,688 | (5,748) | — | — | 1,941 | — | 1,941 | ||||||||||||||||||||||||||||||||||||||||||||
| Distributions to noncontrolling interest | — | — | — | — | — | — | — | (13,306) | (13,306) | ||||||||||||||||||||||||||||||||||||||||||||
| Distributions to noncontrolling interests subject to redemption | — | — | — | — | — | — | — | (29) | (29) | ||||||||||||||||||||||||||||||||||||||||||||
| Offering costs | — | — | 735 | — | — | — | 735 | — | 735 | ||||||||||||||||||||||||||||||||||||||||||||
| Net loss | — | — | — | — | (12,958) | — | (12,958) | (1,732) | (14,690) | ||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive loss | — | — | — | — | — | (26,126) | (26,126) | (3,578) | (29,704) | ||||||||||||||||||||||||||||||||||||||||||||
| Balance December 31, 2020 | 230,320,668 | $ | 230 | $ | 2,103,028 | $ | (813,892) | $ | 140,354 | $ | (48,001) | $ | 1,381,719 | $ | 226,550 | $ | 1,608,269 | ||||||||||||||||||||||||||||||||||||
F-7
GRIFFIN CAPITAL ESSENTIAL ASSET REIT, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
| Year Ended December 31, | |||||||||||
| 2017 | 2016 | 2015 | |||||||||
| Net income (loss) | $ | 11,119 | $ | (6,107 | ) | $ | (16,504 | ) | |||
| Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: | |||||||||||
| Depreciation of building and improvements | 20,194 | 11,630 | 4,916 | ||||||||
| Amortization of tenant origination and absorption costs | 23,756 | 16,264 | 7,145 | ||||||||
| Amortization of above and below market leases | (4,573 | ) | (3,592 | ) | (1,858 | ) | |||||
| Amortization of deferred financing costs | 1,106 | 1,196 | 514 | ||||||||
| Deferred rent | (17,308 | ) | (3,924 | ) | (1,500 | ) | |||||
| Stock based compensation | 292 | — | — | ||||||||
| Unrealized loss (gain) on interest rate swap | 83 | (155 | ) | — | |||||||
| Change in operating assets and liabilities: | |||||||||||
| Other assets, net | 4,590 | (1,040 | ) | (2,065 | ) | ||||||
| Accrued expenses and other liabilities, net | (2,615 | ) | 3,094 | 6,271 | |||||||
| Due to affiliates, net | 3,068 | (922 | ) | 146 | |||||||
| Net cash provided by (used in) operating activities | 39,712 | 16,444 | (2,935 | ) | |||||||
| Investing Activities: | |||||||||||
| Acquisition of properties, net | (44,234 | ) | (538,845 | ) | (479,198 | ) | |||||
| Restricted reserves | (42,430 | ) | (3,541 | ) | — | ||||||
| Improvements to real estate | (21 | ) | (40 | ) | — | ||||||
| Payments for construction in progress | (772 | ) | (80 | ) | — | ||||||
| Real estate acquisition deposits | 250 | 8,700 | (6,950 | ) | |||||||
| Net cash used in investing activities | (87,207 | ) | (533,806 | ) | (486,148 | ) | |||||
| Financing Activities: | |||||||||||
| Proceeds from borrowings - Credit Facility | 24,300 | 249,900 | 286,050 | ||||||||
| Proceeds from borrowings - AIG Loan | — | — | 126,970 | ||||||||
| Principal payoff of indebtedness - Credit Facility | — | (55,000 | ) | (147,492 | ) | ||||||
| Deferred financing costs | (30 | ) | (1,578 | ) | (2,186 | ) | |||||
| Issuance of common stock, net of offering costs | 30,699 | 383,170 | 240,596 | ||||||||
| Issuance of preferred units subject to redemption | — | — | 73,260 | ||||||||
| Redemption of preferred units | — | — | (73,260 | ) | |||||||
| Repurchase of common stock | (5,742 | ) | (1,627 | ) | — | ||||||
| Distributions paid to common stockholders | (19,232 | ) | (11,541 | ) | (2,632 | ) | |||||
| Distributions paid to noncontrolling interests | (11 | ) | (11 | ) | (11 | ) | |||||
| Distributions paid to preferred units subject to redemption | — | — | (398 | ) | |||||||
| Preferred offering costs | — | — | (375 | ) | |||||||
| Net cash provided by financing activities | 29,984 | 563,313 | 500,522 | ||||||||
| Net (decrease) increase in cash, cash equivalents and restricted cash | (17,511 | ) | 45,951 | 11,439 | |||||||
| Cash, cash equivalents and restricted cash at the beginning of the period | 63,561 | 17,610 | 6,171 | ||||||||
| Cash, cash equivalents and restricted cash at the end of the period | $ | 46,050 | $ | 63,561 | $ | 17,610 | |||||
| Supplemental disclosure of cash flow information: | |||||||||||
| Cash paid for interest | $ | 13,116 | $ | 9,228 | $ | 2,616 | |||||
| Supplemental disclosures of non-cash investing and financing transactions: | |||||||||||
| Increase in fair value swap agreement | $ | 108 | $ | 841 | $ | — | |||||
| Increase in Stock Servicing Fee Payable | $ | 660 | $ | 17,449 | $ | 25 | |||||
| Increase in distributions payable to common stockholders | $ | 195 | $ | 938 | $ | 541 | |||||
| Common stock issued pursuant to the distribution reinvestment plan | $ | 22,208 | $ | 15,158 | $ | 4,515 | |||||
| Year Ended December 31, | |||||||||||||||||
| 2020 | 2019 | 2018 | |||||||||||||||
| Operating Activities: | |||||||||||||||||
| Net (loss) income | $ | (5,774) | $ | 37,044 | $ | 22,038 | |||||||||||
| Adjustments to reconcile net (loss) income to net cash provided by operating activities: | |||||||||||||||||
| Depreciation of building and building improvements | 93,980 | 80,394 | 60,120 | ||||||||||||||
| Amortization of leasing costs and intangibles, including ground leasehold interests and leasing costs | 67,076 | 73,031 | 59,048 | ||||||||||||||
| Amortization of below market leases, net | (2,292) | (3,201) | (685) | ||||||||||||||
| Amortization of deferred financing costs and debt premium | 2,607 | 5,562 | 3,071 | ||||||||||||||
| Amortization of swap interest | 126 | 126 | 126 | ||||||||||||||
| Deferred rent | (25,687) | (19,519) | (8,571) | ||||||||||||||
| Deferred rent, ground lease | 2,065 | 1,640 | 0 | ||||||||||||||
| Termination fee revenue - receivable from tenant, net | 0 | (6,000) | (3,114) | ||||||||||||||
| Gain from sale of depreciable operating property | (4,083) | (29,940) | (1,231) | ||||||||||||||
| Gain on fair value of earn-out | (2,657) | (1,461) | 0 | ||||||||||||||
| Unrealized loss on interest rate swap | 0 | 0 | 2 | ||||||||||||||
| Loss from investment in unconsolidated entities | 2,071 | 5,307 | 2,254 | ||||||||||||||
| Investment in unconsolidated entities valuation adjustment | 4,453 | 0 | 0 | ||||||||||||||
| Loss from investments | 31 | 307 | 0 | ||||||||||||||
| Impairment provision | 23,472 | 30,734 | 0 | ||||||||||||||
| Performance distribution allocation (non-cash) | 0 | (2,604) | 0 | ||||||||||||||
| Stock-based compensation | 4,107 | 2,623 | 38 | ||||||||||||||
| Change in operating assets and liabilities: | |||||||||||||||||
| Deferred leasing costs and other assets | 4,383 | (7,775) | (13,503) | ||||||||||||||
| Restricted reserves | 27 | 14 | 57 | ||||||||||||||
| Accrued expenses and other liabilities | 4,203 | (9,505) | 3,463 | ||||||||||||||
| Due to affiliates, net | (3,570) | 4,072 | (2,254) | ||||||||||||||
| Net cash provided by operating activities | 164,538 | 160,849 | 120,859 | ||||||||||||||
| Investing Activities: | |||||||||||||||||
| Cash acquired in connection with the EA Merger, net of acquisition costs | 0 | 25,320 | 0 | ||||||||||||||
| Acquisition of properties, net | (16,584) | (38,775) | (182,250) | ||||||||||||||
| Proceeds from disposition of properties | 51,692 | 139,446 | 11,442 | ||||||||||||||
| Real estate acquisition deposits | 1,047 | (1,047) | (3,350) | ||||||||||||||
| Reserves for tenant improvements | (1,530) | 1,039 | (357) | ||||||||||||||
| Payments for construction in progress | (58,938) | (46,346) | (24,398) | ||||||||||||||
| Investment in unconsolidated joint venture | (8,160) | 0 | (3,274) | ||||||||||||||
| Distributions of capital from investment in unconsolidated entities | 8,531 | 14,603 | 7,691 | ||||||||||||||
| Purchase of investments | (1,029) | (8,422) | 0 | ||||||||||||||
| Net cash (used in) provided by investing activities | (24,971) | 85,818 | (194,496) | ||||||||||||||
| Year Ended December 31, | |||||||||||||||||
| 2020 | 2019 | 2018 | |||||||||||||||
| Financing Activities: | |||||||||||||||||
| Proceeds from borrowings - KeyBank Loans | 0 | 627,000 | 0 | ||||||||||||||
| Proceeds from borrowings - Revolver/KeyBank Loans | 215,000 | 315,854 | 0 | ||||||||||||||
| Proceeds from borrowings - Revolver Loan - EA-1 | 0 | 0 | 96,100 | ||||||||||||||
| Principal payoff of secured indebtedness - Revolver Loan | (53,000) | (104,439) | 0 | ||||||||||||||
| Principal payoff of secured indebtedness - Mortgage Debt | 0 | 0 | (18,954) | ||||||||||||||
| Principal payoff of secured indebtedness - Unsecured Credit Facility - EA-1 | 0 | (715,000) | (106,253) | ||||||||||||||
| Principal amortization payments on secured indebtedness | (7,362) | (6,577) | (6,494) | ||||||||||||||
| Deferred financing costs | (4,725) | (5,737) | (24) | ||||||||||||||
| Offering costs | (594) | (2,384) | (4,959) | ||||||||||||||
| Issuance of perpetual convertible preferred shares | 0 | 0 | 125,000 | ||||||||||||||
| Repurchase of common stock | (107,821) | (200,013) | (83,574) | ||||||||||||||
| Repurchase of noncontrolling interest | (1,137) | (53) | 0 | ||||||||||||||
| Issuance of common stock, net of discounts and underwriting costs | 4,698 | 8,826 | 0 | ||||||||||||||
| Repurchase of common shares to satisfy employee tax withholding requirements | (751) | 0 | 0 | ||||||||||||||
| Dividends paid on preferred units subject to redemption | (8,396) | (8,188) | (1,228) | ||||||||||||||
| Distributions to noncontrolling interests | (13,290) | (16,865) | (4,737) | ||||||||||||||
| Distributions to common stockholders | (72,143) | (90,116) | (71,822) | ||||||||||||||
| Net cash used in financing activities | (49,521) | (197,692) | (76,945) | ||||||||||||||
| Net increase (decrease) in cash, cash equivalents and restricted cash | 90,046 | 48,975 | (150,582) | ||||||||||||||
| Cash, cash equivalents and restricted cash at the beginning of the period | 113,260 | 64,285 | 214,867 | ||||||||||||||
| Cash, cash equivalents and restricted cash at the end of the period | $ | 203,306 | $ | 113,260 | $ | 64,285 | |||||||||||
| Supplemental disclosure of cash flow information: | |||||||||||||||||
| Cash paid for interest | $ | 80,155 | $ | 65,040 | $ | 50,736 | |||||||||||
| Supplemental disclosures of non-cash investing and financing transactions: | |||||||||||||||||
| Goodwill -Self Administration Transaction | $ | 0 | $ | 0 | $ | 229,948 | |||||||||||
| Affiliates - receivables and other related party assets acquired in Self Administration Transaction | $ | 0 | $ | 0 | $ | 19,878 | |||||||||||
| Distributions payable to common stockholders | $ | 6,864 | $ | 13,035 | $ | 9,799 | |||||||||||
| Distributions payable to noncontrolling interests | $ | 943 | $ | 1,758 | $ | 402 | |||||||||||
| Common stock issued pursuant to the distribution reinvestment plan | $ | 24,497 | $ | 41,060 | $ | 40,838 | |||||||||||
| Common stock redemptions funded subsequent to period-end | $ | (5,345) | $ | 96,648 | $ | 0 | |||||||||||
| Issuance of stock dividends | $ | 5,747 | $ | 14,139 | $ | 0 | |||||||||||
| Mortgage debt assumed in conjunction with the acquisition of real estate assets plus a premium of $109 | $ | 18,884 | $ | 0 | $ | 0 | |||||||||||
| Payable for construction in progress | $ | 472 | $ | 0 | $ | 0 | |||||||||||
| Accrued tenant obligations | $ | 30,011 | $ | 11,802 | $ | 0 | |||||||||||
| Limited partnership units issued in exchange for net assets acquired in Self Administration Transaction | $ | 0 | $ | 25,000 | $ | 205,000 | |||||||||||
| Due to affiliates- Self Administration Transaction | $ | 0 | $ | 0 | $ | 41,114 | |||||||||||
| Other liabilities assumed in Self Administration Transaction | $ | 0 | $ | 0 | $ | 7,951 | |||||||||||
| Decrease in fair value swap agreement | $ | (29,704) | $ | (22,303) | $ | (5,427) | |||||||||||
| Decrease in stockholder servicing fee payable | $ | (1,388) | $ | 0 | $ | 0 | |||||||||||
| Net assets acquired in Merger in exchange for common shares | $ | 0 | $ | 751,277 | $ | 0 | |||||||||||
| Implied EA-1 common stock and operating partnership units issued in exchange for net assets acquired in Merger | $ | 0 | $ | 751,277 | $ | 0 | |||||||||||
| Operating lease right-of-use assets obtained in exchange for lease liabilities upon adoption of ASC 842 on January 1, 2019 | $ | — | $ | 25,521 | $ | — | |||||||||||
| Operating lease right-of-use assets obtained in exchange for lease liabilities upon adoption of ASC 842 subsequent to January 1, 2019 | $ | — | $ | 16,919 | $ | — | |||||||||||
| Distributions to redeemable noncontrolling interests attributable to common stockholders as reflected on the consolidated statements of operations | $ | 0 | $ | 0 | $ | 355 | |||||||||||
F-8
GRIFFIN CAPITAL ESSENTIAL ASSET REIT, II, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 20172020
(Dollars in thousands unless otherwise noted and excluding per share amounts)amounts
1. Organization
Griffin Capital Essential Asset REIT, II, Inc., a Maryland corporation (the (“GCEAR” or the “Company”), was formed on November 20, 2013 under the Maryland General Corporation Law and qualified as a is an internally managed, publicly registered real estate investment trust (“REIT”("REIT") commencing with the year ended December 31, 2015. The Company was organized primarily with the purposethat owns and operates a geographically diversified portfolio of acquiring single tenant net leasecorporate office and industrial properties that are considered essential to the occupying tenant, and has used a substantial amount of the net proceeds from its initial public offering ("IPO") to invest in such properties. The Company’s year endprimarily net-leased. GCEAR’s year-end date is December 31.
On December 14, 2018, GCEAR, Griffin Capital Company,Essential Asset Operating Partnership II, L.P. (the “GCEAR II Operating Partnership”), GCEAR’s wholly-owned subsidiary Globe Merger Sub, LLC a Delaware limited liability company (the “Sponsor”(“EA Merger Sub”), is the sponsor of the Company. The Sponsor, which wasentity formerly known as Griffin Capital Corporation, began operations in 1995 to engage principally in acquiringEssential Asset REIT, Inc. (“EA-1”), and developing office and industrial properties. Kevin A. Shields, the Company's Chief Executive Officer and Chairman of the Company's board of directors, controls the Sponsor.
Griffin Capital Essential Asset AdvisorOperating Partnership, L.P. (the “EA-1 Operating Partnership”) entered into an Agreement and Plan of Merger (the “EA Merger Agreement”). On April 30, 2019, pursuant to the EA Merger Agreement, (i) EA-1 merged with and into EA Merger Sub, with EA Merger Sub surviving as GCEAR’s direct, wholly-owned subsidiary (the “EA Company Merger”) and (ii) the GCEAR II Operating Partnership merged with and into the EA-1 Operating Partnership (the “EA Partnership Merger” and, together with the EA Company Merger, the “EA Mergers”), with the EA-1 Operating Partnership (and now known as the “GCEAR Operating Partnership”) surviving the EA Partnership Merger. In addition, on April 30, 2019, following the EA Mergers, EA Merger Sub merged into GCEAR.In connection with the EA Mergers, the Company converted EA-1’s Series A cumulative perpetual convertible preferred stock into GCEAR’s newly created Series A cumulative perpetual convertible preferred stock (the “Series A Preferred Shares”). Also on April 30, 2019, the Company converted each EA-1 Operating Partnership unit outstanding into 1.04807 Class E units in the GCEAR Operating Partnership and each unit outstanding in the GCEAR II Operating Partnership converted into 1 unit of like class in the GCEAR Operating Partnership (the “GCEAR OP Units”). The GCEAR Operating Partnership and Griffin Capital Real Estate Company, LLC ("GRECO") are the subsidiaries of the Company and are the entities through which the Company conducts its business.
In addition, on December 14, 2018, EA-1 and the EA-1 Operating Partnership entered into a series of transactions, agreements, and amendments to EA-1’s existing agreements and arrangements with EA-1’s former sponsor, Griffin Capital Company, LLC ("GCC"), and Griffin Capital, LLC (“GC LLC”), pursuant to which GCC and GC LLC contributed all of the membership interests of GRECO (including the GRECO employees) and certain assets related to the business of GRECO to the EA-1 Operating Partnership (the "Self-Administration Transaction"). As a result of the Self-Administration Transaction, EA-1 became self-managed and acquired the advisory, asset management and property management business of GRECO. In connection with the EA Mergers, many of the agreements and amendments entered into by EA-1 as part of the Self-Administration Transaction were assumed by GCEAR pursuant to the EA Mergers.
In connection with the EA Mergers, GCEAR was the legal acquirer and EA-1 was the accounting acquirer for financial reporting purposes. Thus, the financial information set forth herein subsequent to the EA Mergers reflects results of the combined entity, and the financial information set forth herein prior to the EA Mergers reflects EA-1’s results. For this reason, period to period comparisons may not be meaningful.
When used in this section, unless the context requires otherwise, all references to “GCEAR,” “we,” “our,” and “us” herein mean EA-1 and one or more of EA-1’s subsidiaries for periods prior to the EA Mergers, and GCEAR and one or more of GCEAR’s subsidiaries, including GRECO and the GCEAR Operating Partnership, for periods following the EA Mergers. Certain historical information of GCEAR is included for background purposes.
On October 29, 2020, Cole Office & Industrial REIT (CCIT II), Inc. (“CCIT II”), a Maryland corporation, Cole Corporate Income Operating Partnership II, LP, a Delaware limited partnership and a wholly owned subsidiary of CCIT II (the “CCIT II Operating Partnership”), CRI CCIT II LLC, a Delaware limited liability company (the “Advisor”and a wholly owned subsidiary of CCIT II (“CCIT II LP” and, together with CCIT II and the CCIT II Operating Partnership, the “CCIT II Parties”), was formed on November 19, 2013. Griffin Capital Real Estate Company,GCEAR, GRT (Cardinal REIT Merger Sub), LLC, a Maryland limited liability company and a wholly owned subsidiary of GCEAR (“GCEAR Merger Sub”), the GCEAR Operating Partnership, GRT OP (Cardinal New GP Sub), LLC, a Delaware limited liability company ("GRECO"), is the sole memberand a wholly owned subsidiary of the Advisor and Griffin Capital,GCEAR Operating Partnership (“New GP Sub”), GRT OP (Cardinal LP Merger Sub), LLC, a Delaware limited liability company ("GC"), is the sole member of GRECO. The Sponsor is the sole member of GC. The Advisor is responsible for managing the Company’s affairs onand a day-to-day basis and identifying and making acquisitions and investments on behalfwholly owned subsidiary of the Company under the terms of the Advisory Agreement (as defined below). The Company's officers are also officers of the Advisor and officers of the Sponsor.
F-9
GRIFFIN CAPITAL ESSENTIAL ASSET REIT, II, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 20172020
(Dollars in thousands unless otherwise noted and excluding per share amounts)amounts
New GP Sub and LP Merger Sub, the DRP. The Company reclassified all Class T and Class I shares sold in the IPO as "Class AA" and "Class AAA" shares, respectively.
GCEAR Merger Sub being the Advisor agreedsurviving entity, (ii) OP Merger Sub will merge with and into CCIT II Operating Partnership (the “CCIT II Partnership Merger”), with the CCIT II Operating Partnership being the surviving entity and (iii) CCIT II LP will merge with and into LP Merger Sub (the “CCIT II LP Merger” and, together with the CCIT II REIT Merger and the CCIT II Partnership Merger, the “CCIT II Mergers”), with CCIT II LP Merger Sub being the surviving entity.
At the effective time of the CCIT II Mergers and subject to provide certain servicesthe terms and conditions of the CCIT II Merger Agreement, each issued and outstanding share of CCIT II Class A common stock and each issued and outstanding share of CCIT II Class T common stock (other than excluded shares) will be converted into the right to receive 1.392 shares of GCEAR Class E common stock, subject to the treatment of fractional shares in accordance with the CCIT II Merger Agreement.
The board of directors of CCIT II (the “CCIT II Board”), based on the unanimous recommendation of the special committee of the CCIT II Board, which was comprised solely of independent directors, and the board of directors of GCEAR, respectively, each approved the CCIT II Mergers. The obligations of CCIT II and GCEAR to effect the CCIT II Mergers are subject to the satisfaction or waiver of several conditions set forth in the CCIT II Merger Agreement, as described in the proxy statement/prospectus filed with the SEC on December 11, 2020, including the approval of CCIT II stockholders. On February 23, 2021, CCIT II held a special meeting of its stockholders and the CCIT II stockholders voted to approve the CCIT II REIT Merger and the other proposals described in the proxy statement/prospectus filed with the SEC on December 11, 2020.
The GCEAR Operating Partnership owns, directly or indirectly, all of the properties that the Company has acquired. As of December 31, 2020, the Company owned approximately 87.8% of the GCEAR OP Units of the GCEAR Operating Partnership. As a result of the contribution of 5 properties to the Company and the Self-Administration Transaction, the former sponsor and certain of its affiliates owned approximately 10.6% of the limited partnership units of the GCEAR Operating Partnership, including approximately 2.4 million units owned by the Company’s Executive Chairman and Chairman of the Board, Kevin A. Shields, as of December 31, 2020. The remaining approximately 1.6% GCEAR OP Units are owned by unaffiliated third parties. The GCEAR Operating Partnership may conduct certain activities through one or more of the Company’s taxable REIT subsidiaries, which are wholly-owned subsidiaries of the GCEAR Operating Partnership.
As of December 31, 2020, the Company had issued 284,595,718 shares (approximately $2.8 billion) of common stock since November 9, 2009 in various private offerings, public offerings, distribution reinvestment plan ("DRP") offerings and mergers (includes EA-1 offerings and EA-1 merger with Signature Office REIT, Inc. and the Company agreed to provide certain compensationEA Mergers). There were 230,320,668 shares of common stock outstanding as of December 31, 2020, including shares issued pursuant to the AdvisorDRP, less shares redeemed pursuant to the share redemption program ("SRP") and a self-tender offer that occurred in exchange for such services.
2. Basis of Presentation and Summary of Significant Accounting Policies
The accompanying consolidated financial statements of the Company are prepared by management on the accrual basis of accounting and in accordance with generally accepted accounting principles in the United States (“GAAP”) as contained in the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”), and in conjunction with rules and regulations of the SEC. The consolidated financial statements include accounts and related adjustments, which are, in the opinion of management, of a normal recurring nature and necessary for a fair presentation of the Company's financial position, results of operations and cash flows for the years ended December 31, 20172020 and 2016.2019.
The consolidated financial statements of the Company include all accounts of the Company, the GCEAR Operating Partnership, and its subsidiaries. Intercompany transactions are not shown on the consolidated statements. However, each property owning entity is a wholly ownedwholly-owned subsidiary which is a special purpose entity ("SPE"), whose assets and credit are not available to satisfy the debts or obligations of any other entity, except to the extent required with respect to any co-borrower or guarantor under the same credit facility.
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GRIFFIN CAPITAL ESSENTIAL ASSET REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2020
(Dollars in thousands unless otherwise noted and excluding per share amounts
Principles of Consolidation
The Company's financial statements, and the financial statements of the GCEAR Operating Partnership, including its
wholly-owned subsidiaries, are consolidated in the accompanying consolidated financial statements. The portion of these entities not wholly-owned by the Company is presented as noncontrolling interests. All significant intercompany accounts and transactions have been eliminated in consolidation.
Consolidation Considerations
Current accounting guidance provides a framework for identifying a variable interest entity (“VIE”) and determining when a company should include the assets, liabilities, noncontrolling interests, and results of activities of a VIE in its consolidated financial statements. In general, a VIE is an entity or other legal structure used to conduct activities or hold assets that either (1) has an insufficient amount of equity to carry out its principal activities without additional subordinated financial support, (2) has a group of equity owners that are unable to make significant decisions about its activities, or (3) has a group of equity owners that do not have the obligation to absorb losses or the right to receive returns generated by its operations. Generally, a VIE should be consolidated if a party with an ownership, contractual, or other financial interest in the VIE (a variable interest holder) has the power to direct the VIE’s most significant activities and the obligation to absorb losses or right to receive benefits of the VIE that could be significant to the VIE. A variable interest holder that consolidates the VIE is called the primary beneficiary. Upon consolidation, the primary beneficiary generally must initially record all of the VIE’s assets, liabilities, and noncontrolling interests at fair value and subsequently account for the VIE as if it were consolidated based on majority voting interest. See Note 4, Investments in Unconsolidated Entities, for more detail.
Cash and Cash Equivalents
The Company considers all short-term, highly liquid investments that are readily convertible to cash with a maturity of three months or less at the time of purchase to be cash equivalents. Cash and cash equivalents may include cash and short-term investments. Short-term investments are stated at cost, which approximates fair value. There were 0 cash equivalents, nor were there restrictions on the use of the Company’s cash balance as of December 31, 2020 and 2019.
The Company maintains its cash accounts with major financial institutions. The cash balances consist of business checking accounts. These accounts are insured by the Federal Deposit Insurance Corporation up to $250,000 at each institution. The Company has not experienced any losses with respect to cash balances in excess of government provided insurance. Management believes there was no significant concentration of credit risk with respect to these cash balances as of December 31, 2020.
Restricted Cash
In conjunction with acquisitions of certain assets, as required by certain lease provisions or certain lenders in conjunction with an acquisition or debt financing, or credits received by the seller of certain assets, the Company assumed or funded reserves for specific property improvements and deferred maintenance, re-leasing costs, and taxes and insurance, which are included on the consolidated balance sheets as restricted cash.
Real Estate Purchase Price Allocation
The Company applies the provisions in ASC 805-10, Business Combinations ("ASC 805-10"), to account for the acquisition of real estate, or real estate related assets, in which a lease, or other contract, is in place representing an active revenue stream, as an asset acquisition (in rare cases, a business combination). In accordance with the provisions of ASC 805-10 (on an asset acquisition), the Company recognizes the assets acquired, the liabilities assumed and any noncontrolling interest in the acquired entity at their relative fair values. The accounting provisions have also established that transaction costs associated with an asset acquisition are capitalized.
Acquired in-place leases are valued as above-market or below-market as of the date of acquisition. The valuation is measured based on the present value (using an interest rate, which reflects the risks associated with the leases acquired) of the difference between (a) the contractual amounts to be paid pursuant to the in-place leases and (b) management’s estimate of fair market lease rates for the corresponding in-place leases over a period equal to the remaining non-cancelable term of the lease
F-11
GRIFFIN CAPITAL ESSENTIAL ASSET REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2020
(Dollars in thousands unless otherwise noted and excluding per share amounts
for above-market leases, taking into consideration below-market extension options for below-market leases. In addition, renewal options are considered and will be included in the valuation of in-place leases if (1) it is likely that the tenant will exercise the option, and (2) the renewal rent is considered to be sufficiently below a fair market rental rate at the time of renewal. The above-market and below-market lease values are capitalized as intangible lease assets or liabilities and amortized as an adjustment to rental income over the remaining terms of the respective leases.
The aggregate relative fair value of in-place leases includes direct costs associated with obtaining a new tenant, opportunity costs associated with lost rentals, which are avoided by acquiring an in-place lease, and tenant relationships. Direct costs associated with obtaining a new tenant include commissions, tenant improvements, and other direct costs, and are estimated using methods similar to those used in independent appraisals and management’s consideration of current market costs to execute a similar lease. These direct costs are considered intangible lease assets and are included with real estate assets on the consolidated balance sheets. The intangible lease assets are amortized to expense over the remaining terms of the respective leases. The value of opportunity costs is calculated using the contractual amounts to be paid, including real estate taxes, insurance, and other operating expenses, pursuant to the in-place leases over a market lease-up period for a similar lease. Customer relationships are valued based on management’s evaluation of certain characteristics of each tenant’s lease and the Company’s overall relationship with that respective tenant. Characteristics management will consider in allocating these values include the nature and extent of the Company’s existing business relationships with tenants, growth prospects for developing new business with the tenant, the tenant’s credit quality and expectations of lease renewals (including those existing under the terms of the lease agreement), among other factors. These intangibles will be included in intangible lease assets on the consolidated balance sheets and are amortized to expense over the remaining term of the respective leases.
The determination of the relative fair values of the assets and liabilities acquired requires the use of significant assumptions about current market rental rates, rental growth rates, discount rates and other variables.
Depreciation and Amortization
The purchase price of real estate acquired and costs related to development, construction, and property improvements are capitalized. Repairs and maintenance costs include all costs that do not extend the useful life of the real estate asset and are expensed as incurred. The Company considers the period of future benefit of an asset to determine the appropriate useful life. The Company anticipates the estimated useful lives of its assets by class to be generally as follows:
| Buildings | 25-40 years | ||||
| Building Improvements | 5-20 years | ||||
| Land Improvements | 15-25 years | ||||
| Tenant Improvements | Shorter of estimated useful life or remaining contractual lease term | ||||
| Tenant Origination and Absorption Cost | Remaining contractual lease term | ||||
| In-place Lease Valuation | Remaining contractual lease term with consideration as to below-market extension options for below-market leases | ||||
If a lease is terminated or amended prior to its scheduled expiration, the Company will accelerate/extend the remaining useful life of the unamortized lease-related costs.
Impairment of Real Estate and Related Intangible Assets
In accordance with the provisions of the Impairment or Disposal of Long-Lived Assets Subsections of ASC 360, the Company assesses the carrying values of our respective long-lived assets, whenever events or changes in circumstances indicate that the carrying amounts of these assets may not be fully recoverable.
Recoverability of real estate assets is measured by comparison of the carrying amount of the asset to the estimated future undiscounted cash flows. To review real estate assets for recoverability, the Company considers current market conditions as well as the Company's intent with respect to holding or disposing of the asset. The intent with regard to the underlying assets might change as market conditions and other factors change. Fair value is determined through various valuation techniques, including discounted cash flow models, applying a capitalization rate to estimated net operating income of a property, quoted market values and third party appraisals, where considered necessary. The use of projected future cash flows is based on assumptions that are consistent with estimates of future expectations and the strategic plan used to manage the Company's underlying business. If the Company analysis indicates that the carrying value of the real estate asset is not recoverable on an
F-12
GRIFFIN CAPITAL ESSENTIAL ASSET REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2020
(Dollars in thousands unless otherwise noted and excluding per share amounts
undiscounted cash flow basis, the Company will recognize an impairment charge for the amount by which the carrying value exceeds the current estimated fair value of the real estate property.
Projections of expected future undiscounted cash flows require management to estimate future market rental income amounts subsequent to the expiration of current lease agreements, property operating expenses, the number of months it takes to re-lease the property and the number of years the property is held for investment.
Revenue Recognition
Leases associated with the acquisition and contribution of certain real estate assets (see Note 3, Real Estate) have net minimum rent payment increases during the term of the lease and are recorded to rental revenue on a straight-line basis, commencing as of the contribution or acquisition date. If a lease provides for contingent rental income, the Company will defer the recognition of contingent rental income, such as percentage rents, until the specific target that triggers the contingent rental income is achieved.
Tenant reimbursement revenue, which is comprised of additional amounts collected from tenants for the recovery of certain operating expenses, including repair and maintenance, property taxes (excluding taxes paid by a lessee directly to a third party on behalf of the lessor) and insurance, and capital expenditures, to the extent allowed pursuant to the lease (collectively, "Recoverable Expenses"), is recognized as revenue when the additional rent is due. Recoverable Expenses to be reimbursed by a tenant are determined based on the Company's estimate of the property's operating expenses for the year, pro ratedpro-rated based on leased square footage of the property, and are collected in equal installments as additional rent from the tenant, pursuant to the terms of the lease. At least quarterly,the end of each quarter, the Company reconciles the amount of additional rent paid by the tenant during the quarter to the actual amount of the Recoverable Expenses incurred by the Company for the same period. The difference, if any, is either charged or credited to the tenant pursuant to the provisions of the lease. In certain instances, the lease may restrict the amount the Company can recover from the tenant such as a cap on certain or all property operating expenses.
In a situation in which a lease associated with a significant tenant has been, or is expected to be, terminated early, or extended, the Company evaluates the remaining useful life of amortizable assets in the asset group related to the lease that will be terminated (i.e., above- and below-market lease intangibles, in-place lease value and deferred leasing costs). Based upon consideration of the facts and circumstances surrounding the termination or extension, the Company may write-off or accelerate the amortization associated with the asset group. Such amounts are included within rental and other income for above- and below-market lease intangibles and amortization for the remaining lease related asset groups in the consolidated statements of operations.
Lease Accounting
On January 1, 2019, the Company adopted ASC 842 using the modified retrospective approach and elected to apply the provisions as of the date of adoption on a prospective basis. Upon adoption of ASC 842, the Company elected the “package of practical expedients,” which allowed the Company to not reassess (a) whether expired or existing contracts as of January 1, 2019 are or contain leases, (b) the lease classification for any expired or existing leases as of January 1, 2019, and (c) the treatment of initial direct costs relating to any existing leases as of January 1, 2019. The package of practical expedients was made as a single election and was consistently applied to all leases that commenced before January 1, 2019.
Lessor
ASC 842 requires lessors to account for leases using an approach that is substantially equivalent to existing guidance for sales-type leases, direct financing leases, and operating leases. As the Company elected the package of practical expedients, the Company's existing leases as of January 1, 2019 continue to be accounted for as operating leases.
Upon adoption of ASC 842, the Company elected the practical expedient permitting lessors to elect by class of underlying asset to not separate nonlease components (for example, maintenance services, including common area maintenance) from associated lease components (the “non-separation practical expedient”) if both of the following criteria are met: (1) the timing and pattern of transfer of the lease and non-lease component(s) are the same and (2) the lease component would be classified as an operating lease if it were accounted for separately. If both criteria are met, the combined component is accounted for in accordance with ASC 842 if the lease component is the predominant component of the combined component; otherwise, the combined component is accounted for in accordance with the revenue recognition standard. The Company assessed the criteria above with respect to the Company's operating leases and determined that they qualify for the non-separation practical
F-13
GRIFFIN CAPITAL ESSENTIAL ASSET REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2020
(Dollars in thousands unless otherwise noted and excluding per share amounts
expedient. As a result, the Company accounted for and presented all rental income earned pursuant to operating leases, including property expense recovery, as a single line item, “Rental income,” in the consolidated statement of operations for all periods presented. Prior to the adoption of ASC 842, the Company presented rental income, property expense recovery and other income related to leases separately in the Company's consolidated statements of operations.
Under ASC 842, lessors are required to record revenues and expenses on a gross basis for lessor costs (which include real estate taxes) when these costs are reimbursed by a lessee. Conversely, lessors are required to record revenues and expenses on a net basis for lessor costs when they are paid by a lessee directly to a third party on behalf of the lessor. Prior to the adoption of ASC 842, the Company recorded revenues and expenses on a gross basis for real estate taxes whether they were reimbursed to the Company by a tenant or paid directly by a tenant to the taxing authorities on the Company's behalf. Effective January 1, 2019, the Company is recording these costs in accordance with ASC 842.
Lessee
ASC 842 requires lessees to recognize the following for all leases (with the exception of short-term leases) at the commencement date: (1) a lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis; and (2) a right-of-use asset (“ROU asset”), which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. ASC 842 also requires lessees to classify leases as either finance or operating leases based on whether or not the lease is effectively a financed purchase of the leased asset by the lessee. This classification is used to evaluate whether the lease expense should be recognized based on an effective interest method or on a straight-line basis over the term of the lease.
On January 1, 2019, the Company was the lessee on 2 ground leases, which were classified as operating leases under ASC 840. As the Company elected the packages of practical expedients, the Company is not required to reassess the classification of these existing leases and, as such, these leases continue to be accounted for as operating leases.
On January 1, 2019, the Company recognized ROU assets and lease liabilities for these leases on the Company's consolidated balance sheets, and on a go-forward basis, lease expense will be recognized on a straight-line basis over the remaining term of the lease. On January 1, 2019, the Company recorded a ROU asset of $25.5 million and a corresponding liability of approximately $27.6 million relating to the Company's existing ground lease arrangements. These operating leases were recognized based on the present value of the future minimum lease payments over the lease term. As these leases do not provide an implicit rate, the Company used its incremental borrowing rate based on the information available in determining the present value of future payments. The discount rate used to determine the present value of these operating leases’ future payments was 5.36%. There was no impact to beginning equity as a result of the adoption related to the lessee accounting as the difference between the asset and liability is attributed to derecognition of pre-existing straight-line rent balances.
On March 1, 2019. the Company entered into an office lease located in Chicago, Illinois. The Company recorded a ROU asset of $0.6 million and a corresponding liability to the Company's lease agreements. The discount rate used to determine the present value of these operating leases’ future payments was 3.94%.
On September 20, 2019, the Company acquired the McKesson II property and assumed a ground lease from the seller. The Company recorded a ROU asset of $16.3 million and a corresponding liability to the Company's existing ground lease agreements. The discount rate used to determine the present value of these operating leases’ future payments was 4.36%.
Upon adoption of ASC 842, the Company also elected the practical expedient to not separate non-lease components, such as common area maintenance, from associated lease components for the Company's ground and office space leases.
Derivative Instruments and Hedging Activities
ASC 815, Derivatives and Hedging ("ASC 815") provides the disclosure requirements for derivatives and hedging activities with the intent to provide users of financial statements with an enhanced understanding of: (a) how and why an entity uses derivative instruments, (b) how the entity accounts for derivative instruments and related hedged items, and (c) how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows. Further, ASC 815 requires qualitative disclosures regarding the Company’s objectives and strategies for using derivatives, as well as quantitative disclosures about the fair value of gains and losses on derivative instruments, and disclosures about credit-risk-related contingent features in derivative instruments.
As required by ASC 815, the Company recorded all derivatives on the consolidated balance sheet at fair value. The accounting for changes in the fair value of derivatives depends on the intended use of the derivative, and whether the Company
F-14
GRIFFIN CAPITAL ESSENTIAL ASSET REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2020
(Dollars in thousands unless otherwise noted and excluding per share amounts
has elected to designate a derivative in a hedging relationship and apply hedge accounting and whether the hedging relationship has satisfied the criteria necessary to apply hedge accounting. Derivatives designated and qualifying as a hedge of the exposure to changes in the fair value of an asset, liability, or firm commitment attributable to a particular risk, such as interest rate risk, are considered fair value hedges. Derivatives designated and qualifying as a hedge of the exposure to variability in expected future cash flows, or other types of forecasted transactions, are considered cash flow hedges. Hedge accounting generally provides for the matching of the timing of gain or loss recognition on the hedging instrument with the recognition of the changes in the fair value of the hedged asset or liability that are attributable to the hedged risk in a fair value hedge or the earnings effect of the hedged forecasted transactions in a cash flow hedge. The Company may enter into derivative contracts that are intended to economically hedge certain risks, even though hedge accounting does not apply or the Company elects not to apply hedge accounting. See Note 6, Interest Rate Contracts, for more detail.
Income Taxes
The Company has elected to be taxed as a REIT under the Internal Revenue Code ("Code"). To qualify as a REIT, the Company must meet certain organizational and operational requirements. The Company intends to adhere to these requirements and maintain its REIT status for the current year and subsequent years. As a REIT, the Company generally will not be subject to federal income taxes on taxable income that is distributed to stockholders. However, the Company may be subject to certain state and local taxes on its income and property, and federal income and excise taxes on its undistributed taxable income, if any. If the Company fails to qualify as a REIT in any taxable year, the Company will then be subject to federal income taxes on the taxable income at regular corporate rates and will not be permitted to qualify for treatment as a REIT for federal income tax purposes for four years following the year during which qualification is lost unless the Internal Revenue Service ("IRS") grants the Company relief under certain statutory provisions. Such an event could materially adversely affect net income and net cash available for distribution to stockholders. As of December 31, 2020, the Company satisfied the REIT requirements and distributed all of its taxable income.
Pursuant to the Code, the Company has elected to treat its corporate subsidiary as a TRS. In general, the TRS may perform non-customary services for the Company’s tenants and may engage in any real estate or non-real estate-related business. The TRS will be subject to corporate federal and state income tax.
Goodwill
Goodwill represents the excess of consideration paid over the fair value of underlying identifiable net assets of business acquired. The Company's goodwill has an indeterminate life and is not amortized, but is tested for impairment on an annual basis, or more frequently if events or changes in circumstances indicate that the asset might be impaired. The Company takes a qualitative approach to consider whether an impairment of goodwill exists prior to quantitatively determining the fair value of the reporting unit in step one of the impairment test. The Company performs its annual assessment on October 1st.
Company
F-14
GRIFFIN CAPITAL ESSENTIAL ASSET REIT, II, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 20172020
(Dollars in thousands unless otherwise noted and excluding per share amounts)amounts
The Company considers all short-term, highly liquid investments that are readily convertible to cash with a maturity of three months or less at the time of purchasehas elected to be cash equivalents. Cashtaxed as a REIT under the Internal Revenue Code ("Code"). To qualify as a REIT, the Company must meet certain organizational and cash equivalentsoperational requirements. The Company intends to adhere to these requirements and maintain its REIT status for the current year and subsequent years. As a REIT, the Company generally will not be subject to federal income taxes on taxable income that is distributed to stockholders. However, the Company may include cashbe subject to certain state and short-term investments. Short-term investments are stated at cost, which approximates fair value. There were no cash equivalents, nor were there restrictionslocal taxes on its income and property, and federal income and excise taxes on its undistributed taxable income, if any. If the Company fails to qualify as a REIT in any taxable year, the Company will then be subject to federal income taxes on the use oftaxable income at regular corporate rates and will not be permitted to qualify for treatment as a REIT for federal income tax purposes for four years following the Company’s cash balance as of December 31, 2017 and 2016.
Goodwill
Goodwill represents the valuationexcess of in-place leases if (1) it is likely that the tenant will
Derivative Instruments and Hedging Activities
ASC Topic 815: 815, Derivatives and HedgingHedging ("ASC 815"), provides the disclosure requirements for derivatives and hedging activities with the intent to provide users of financial statements with an enhanced understanding of: (a) how and why an entity uses derivative instruments, (b) how the entity accounts for derivative instruments and related hedged items, and (c) how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows. Further, ASC 815 requires qualitative disclosures regarding the Company’s objectives and strategies for using derivatives, as well as quantitative disclosures about the fair value of gains and losses on derivative instruments, and disclosures about credit-risk-related contingent features in derivative instruments.
As required by ASC 815, the Company recorded all derivatives on the consolidated balance sheet at fair value. The accounting for changes in the fair value of derivatives depends on the intended use of the derivative, and whether the Company
F-14
GRIFFIN CAPITAL ESSENTIAL ASSET REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2020
(Dollars in thousands unless otherwise noted and excluding per share amounts
has elected to designate a derivative in a hedging relationship and apply hedge accounting and whether the hedging relationship has satisfied the criteria necessary to apply hedge accounting. Derivatives designated and qualifying as a hedge of the exposure to changes in the fair value of an asset, liability, or firm commitment attributable to a particular risk, such as interest rate risk, are considered fair value hedges. Derivatives designated and qualifying as a hedge of the exposure to variability in expected future cash flows, or other types of forecasted transactions, are considered cash flow hedges. Hedge accounting generally provides for the matching of the timing of gain or loss recognition on the hedging instrument with the recognition of the changes in the fair value of the hedged asset or liability that are attributable to the hedged risk in a fair value hedge or the earnings effect of the hedged forecasted transactions in a cash flow hedge. The Company may enter into derivative contracts that are intended to economically hedge certain risks, even though hedge accounting does not apply or the Company elects not to apply hedge accounting. See Note 5, 6, Interest Rate Contracts.Contracts, for more detail.
Income Taxes
The Company has elected to be taxed as a REIT under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended (the "Code"("Code") for the year ended December 31, 2015. . To qualify as a REIT, the Company must meet certain organizational and operational requirements. The Company intends to adhere to these requirements including a requirement to currently distribute at least 90% ofand maintain its REIT status for the REIT’s ordinary taxable income to stockholders.current year and subsequent years. As a REIT, the Company generally will not be subject to federal income taxtaxes on taxable income that is distributed to stockholders. However, the Company may be subject to certain state and local taxes on its income and property, and federal income and excise taxes on its undistributed taxable income, if any. If the Company fails to qualify as a REIT in any taxable year, after the Company initially qualifies to be taxed as a REIT, the Company will then be subject to federal income taxes on the taxable income at regular corporate rates and will not be permitted to qualify for treatment as a REIT for federal income tax purposes for four years following the year during which qualification is lost unless the Internal Revenue Service ("IRS") grants the Company relief under certain statutory provisions. Such an event could materially adversely affect net income and net cash available for distribution to stockholders. However,As of December 31, 2020, the Company believes that it is organizedsatisfied the REIT requirements and will operate in such a manner asdistributed all of its taxable income.
Pursuant to qualify for treatment as a REIT and intends to operate in the foreseeable future in such a manner that it will remain qualified as a REIT for federal income tax purposes.
Goodwill
Goodwill represents the excess of December 31, 2017,consideration paid over the TRSfair value of underlying identifiable net assets of business acquired. The Company's goodwill has an indeterminate life and is not commenced operations.amortized, but is tested for impairment on an annual basis, or more frequently if events or changes in circumstances indicate that the asset might be impaired. The Company takes a qualitative approach to consider whether an impairment of goodwill exists prior to quantitatively determining the fair value of the reporting unit in step one of the impairment test. The Company performs its annual assessment on October 1st.
Use of Estimates
assumptions that affect the amounts reported in the unaudited consolidated financial statements and accompanying notes. Actual results could materially differ from those estimates.
Per Share Data
The Company reports earnings per share for the period as (1) basic earnings per share computed by dividing net income (loss) attributable to common stockholders by the weighted average number of common shares outstanding during the period, and (2) diluted earnings per share computed by dividing net income (loss) attributable to common stockholders by the weighted average number of common shares outstanding, including common stock equivalents. As of December 31, 20172020 and December 31, 2016,2019, there were no material common stock equivalents that would have a dilutive effect on earnings (loss) per share for common stockholders.
F-15
GRIFFIN CAPITAL ESSENTIAL ASSET REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2020
(Dollars in thousands unless otherwise noted and excluding per share amounts
number of common shares outstanding increases as a result of a stock dividend or stock split or decreases as a result of a reverse stock split. If changes in common stock resulting from stock dividends, stock splits, or reverse stock splits occur after the close of the period but before the consolidated financial statements are issued or are available to be issued, the per-shareper share computations for those and any prior-periodprior period consolidated financial statements presented shall be based on the new number of shares.
Segment Information
ASC Topic 280, Segment Reporting,, establishes standards for reporting financial and descriptive information about a public entity’s reportable segments. The Company internally evaluates all of the properties and interests therein as one1 reportable segment.
Unaudited Data
Any references to the number of buildings, square footage, number of leases, occupancy, and any amounts derived from these values in the notes to the consolidated financial statements are unaudited and outside the scope of the Company's independent registered public accounting firm's audit of its consolidated financial statements in accordance with the standards of the Public Company Accounting Oversight Board.Board ("PCAOB").
Recently Issued Accounting Pronouncements
Adoption of New Accounting Pronouncements
During the first quarter of 2020, the FASB issued ASU No. 2017-12, Derivatives2020-04, Reference Rate Reform (Topic 848). ASU 2020-04 contains practical expedients for reference rate reform related activities that impact debt, leases, derivatives and Hedging, that simplifies hedge accounting.other contracts. The purpose of this updated guidance in ASU 2020-04 is to better align a company’s financial reporting for hedgingoptional and may be elected over time as reference rate reform activities with the economic objectives of those activities. For cash flow hedges that are highly effective, the new standard requires all changes (effective and ineffective components) in the fair value of the hedging instrument to be recorded in other comprehensive income and to be reclassified into earnings only when the hedged item impacts earnings. Current guidance requires a periodic recognition of hedge ineffectiveness in earnings.
3. Real Estate
As of December 31, 2017,2020, the Company'sCompany’s real estate portfolio consisted of 2798 properties (35 buildings)(including one land parcel held for future development), in 1725 states consisting substantially of office, industrial, distribution,warehouse, and data centermanufacturing facilities with a combined acquisition value of $1.1approximately $4.1 billion, including the allocation of the purchase price to above and below-market lease valuation, encompassing approximately 7.3 million square feet.valuation.
Depreciation expense for buildings and improvements for the yearyears ended December 31, 20172020, 2019, and 2018 was $20.2 million.$94.0 million, $80.4 million, and $60.1 million, respectively. Amortization expense for intangibles, including but not limited to, tenant origination and absorption costs for the yearyears ended December 31, 20172020, 2019, and 2018 was $23.8 million.$67.1 million, $73.0 million and $59.0 million respectively.
2020 Acquisitions
The purchase price and other acquisition items for the propertiesproperty acquired during the year ended December 31, 20172020 are shown below:
F-16
GRIFFIN CAPITAL ESSENTIAL ASSET REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2020
(Dollars in thousands unless otherwise noted and excluding per share amounts
| Paid to Advisor | |||||||||||||||||||||||
| Property | Location | Tenant/Major Lessee | Acquisition Date | Purchase Price | Approx. Square Feet | Acquisition Fees and Reimbursable Expenses (1) | Contingent Advisor Payment (2) | Year of Lease Expiration | |||||||||||||||
| Allstate | Lone Tree, CO | Allstate Insurance Company | 1/31/2017 | $ | 14,750 | (3) | 70,300 | $ | 402 | $ | 273 | 2026 | |||||||||||
| MISO | Carmel, IN | Midcontinent Independent System Operator, Inc. | 5/15/2017 | $ | 28,600 | 133,400 | $ | 696 | $ | 529 | 2028 | ||||||||||||
| Property | Location | Tenant/Major Lessee | Acquisition Date | Purchase Price | Square Feet | Acquisition Fees and Expenses | Year of Lease Expiration | |||||||||||||||||||||||||||||||||||||
| Pepsi Bottling Ventures | North Carolina | PepsiCo | 2/5/2020 | $34,937 | 526,320 | $386 | 2032 | |||||||||||||||||||||||||||||||||||||
Real Estate - Valuation and Purchase Price Allocation
The Company allocates the purchase price to the relative fair value of the tangible assets of a property by valuing the property as if it were vacant. This “as-if vacant” value is estimated using an income, or discounted cash flow, approach that relies upon Level 3 inputs, which are unobservable inputs based on the Company's review of the assumptions a market participant would use. These Level 3 inputs include discount rates, capitalization rates, market rents and comparable sales data for similar properties. Estimates of future cash flows are based on a number of factors including historical operating results, known and anticipated trends, and market and economic conditions. In calculating the “as-if vacant” value for acquisitionsthe acquisition completed during the year ended December 31, 2017,2020, the Company used a discount rates ranging from 5.75% to 8.25%.
6.25%.
In determining the fair value of intangible lease assets or liabilities, the Company also considers Level 3 inputs. Acquired above and below-market leases are valued based on the present value of the difference between prevailing market rates and the in-place rates measured over a period equal to the remaining term of the lease for above-market leases and the initial term plus the term of any below-market fixed rate renewal options for below-market leases, if applicable. The estimated fair value of acquired in-place at-market tenant leases are the costs that would have been incurred to lease the property to the occupancy level of the property at the date of acquisition. Such estimates include the value associated with leasing commissions, legal and other costs, as well as the estimated period necessary to lease such property that would be incurred to lease the property to its occupancy level at the time of its acquisition. Acquisition costs associated with asset acquisitions are capitalized induring the period they are incurred.
The following summarizes the purchase price allocations forallocation of the propertiesproperty acquired during the year ended December 31, 2017:2020:
Property(1) | Land | Building and Improvements | Tenant Origination and Absorption Cost | In-Place Lease Valuation Above Market | In-Place Lease Valuation (Below) Market | Total | |||||||||||||||||||
| Allstate | $ | 1,808 | $ | 9,071 | $ | 5,019 | $ | — | $ | (1,001 | ) | $ | 14,897 | ||||||||||||
| MISO | $ | 3,104 | $ | 18,077 | $ | 7,937 | $ | 218 | $ | — | $ | 29,336 | |||||||||||||
| Property | Land | Building | Improvements | Tenant origination and absorption costs | In-place lease valuation - (below) / market | Debt discount / (premium) | Total (1) | |||||||||||||||||||||||||||||||||||||
| Pepsi Bottling Ventures | $3,407 | $26,813 | $954 | $4,970 | $(712) | $(109) | $35,323 | |||||||||||||||||||||||||||||||||||||
(1)The allocations noted above are based on a determination of the relative fair value of the total consideration provided and represent the amount paid including capitalized acquisition costs.
Intangibles
The Company allocated a portion of the acquired and contributed real estate asset value to in-place lease valuation, tenant origination and absorption cost, and other intangibles, net of the write-off of intangibles for the years ended December 31, 2020 and 2019:
F-17
GRIFFIN CAPITAL ESSENTIAL ASSET REIT, II, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 20172020
(Dollars in thousands unless otherwise noted and excluding per share amounts)amounts
| December 31, | |||||||||||
| 2020 | 2019 | ||||||||||
| In-place lease valuation (above market) | $ | 43,576 | $ | 44,012 | |||||||
| In-place lease valuation (above market) - accumulated amortization | (35,604) | (33,322) | |||||||||
| In-place lease valuation (above market), net | 7,972 | 10,690 | |||||||||
| Ground leasehold interest (below market) | 2,254 | 2,254 | |||||||||
| Ground leasehold interest (below market) - accumulated amortization | (191) | (164) | |||||||||
| Ground leasehold interest (below market), net | 2,063 | 2,090 | |||||||||
| Intangible assets, net | $ | 10,035 | $ | 12,780 | |||||||
| In-place lease valuation (below market) | $ | (68,334) | $ | (67,622) | |||||||
| Land leasehold interest (above market) | (3,072) | (3,073) | |||||||||
| In-place lease valuation & land leasehold interest - accumulated amortization | 44,073 | 38,890 | |||||||||
| Intangible liabilities, net | $ | (27,333) | $ | (31,805) | |||||||
| Tenant origination and absorption cost | $ | 740,489 | $ | 744,773 | |||||||
| Tenant origination and absorption cost - accumulated amortization | (412,462) | (354,379) | |||||||||
| Tenant origination and absorption cost, net | $ | 328,027 | $ | 390,394 | |||||||
| As of December 31, 2017 | |||
| 2018 | $ | 71,662 | |
| 2019 | 78,887 | ||
| 2020 | 80,492 | ||
| 2021 | 72,677 | ||
| 2022 | 73,538 | ||
| Thereafter | 528,803 | ||
| Total | $ | 906,059 | |
| December 31, 2017 | December 31, 2016 | ||||||
| In-place lease valuation (above market) | $ | 4,046 | $ | 3,828 | |||
| In-place lease valuation (above market), accumulated amortization | (752 | ) | (300 | ) | |||
| Intangible assets, net | $ | 3,294 | $ | 3,528 | |||
| In-place lease valuation (below market) | $ | (62,070 | ) | $ | (61,069 | ) | |
| In-place lease valuation (below market) - accumulated amortization | 10,775 | 5,750 | |||||
| In-place lease valuation (below market), net | $ | (51,295 | ) | $ | (55,319 | ) | |
| Tenant origination and absorption cost | $ | 240,364 | $ | 227,407 | |||
| Tenant origination and absorption cost - accumulated amortization | (47,165 | ) | (23,409 | ) | |||
| Tenant origination and absorption cost, net | $ | 193,199 | $ | 203,998 | |||
The amortization of the intangible assets and other leasing costs for the respective periods is as follows:
| Amortization (income) expense for the year ended December 31, | |||||||||||||||||
| 2020 | 2019 | 2018 | |||||||||||||||
| Above and below market leases, net | $ | (2,292) | $ | (3,201) | $ | (685) | |||||||||||
| Tenant origination and absorption cost | $ | 62,459 | $ | 69,502 | $ | 55,464 | |||||||||||
| Ground leasehold amortization (below market) | $ | (291) | $ | (52) | $ | 27 | |||||||||||
| Other leasing costs amortization | $ | 4,908 | $ | 3,581 | $ | 3,557 | |||||||||||
| Amortization (income) expense for the year ended December 31, | |||||||||||
| 2017 | 2016 | 2015 | |||||||||
| In-place lease valuation | $ | (4,573 | ) | $ | (3,592 | ) | $ | (1,858 | ) | ||
| Tenant origination and absorption cost | $ | 23,756 | $ | 16,264 | $ | 7,145 | |||||
The following table sets forth the estimated annual amortization (income) expense for in-place lease valuation, andnet, tenant origination and absorption costs, ground leasehold improvements, and other leasing costs as of December 31, 20172020 for the next five years:
| Year | In-Place Lease Valuation | Tenant Origination and Absorption Costs | ||||||
| 2018 | $ | (4,695 | ) | $ | 24,198 | |||
| 2019 | $ | (4,695 | ) | $ | 24,198 | |||
| 2020 | $ | (4,695 | ) | $ | 24,198 | |||
| 2021 | $ | (3,799 | ) | $ | 19,715 | |||
| 2022 | $ | (3,799 | ) | $ | 19,597 | |||
| Year | In-place lease valuation, net | Tenant origination and absorption costs | Ground leasehold improvements | Other leasing costs | ||||||||||||||||||||||
| 2021 | $ | (2,118) | $ | 57,243 | $ | (290) | $ | 5,862 | ||||||||||||||||||
| 2022 | $ | (2,518) | $ | 54,114 | $ | (290) | $ | 5,867 | ||||||||||||||||||
| 2023 | $ | (2,465) | $ | 49,551 | $ | (290) | $ | 5,739 | ||||||||||||||||||
| 2024 | $ | (1,648) | $ | 37,371 | $ | (291) | $ | 5,504 | ||||||||||||||||||
| 2025 | $ | (1,186) | $ | 26,813 | $ | (290) | $ | 5,385 | ||||||||||||||||||
F-18
| December 31, 2017 | December 31, 2016 | Contractual Interest Rate (1) | Payment Type | Loan Maturity | Effective Interest Rate (4) | ||||||||||
| Revolving Credit Facility | $ | 357,758 | $ | 333,458 | 2.87% | Interest Only | December 2019 (2) | 3.32% | |||||||
| AIG Loan | 126,970 | 126,970 | 4.15% | Interest Only (3) | November 2025 | 4.22% | |||||||||
| Total Debt | 484,728 | 460,428 | |||||||||||||
| Unamortized deferred financing costs | (2,880 | ) | (3,956 | ) | |||||||||||
| Total Debt, net | $ | 481,848 | $ | 456,472 | |||||||||||
GRIFFIN CAPITAL ESSENTIAL ASSET REIT, II, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 20172020
(Dollars in thousands unless otherwise noted and excluding per share amounts)amounts
Sale of Property
On June 30, 2020, the Company sold the Bank of America II property located at 1800 Tapo Canyon in Simi Valley, California for total gross proceeds of $24.5 million, less closing costs and other closing credits. The carrying value of the property on the closing date was approximately $19.6 million. Upon the sale of the property, the Company recognized a gain of approximately $4.3 million.
On December 22, 2020, the Company sold Bank of America I property located at 450 American Way in Simi Valley, California for total gross proceeds of $30.0 million, less closing costs and other closing credits. The carrying value of the property approximated the selling price.
Impairments
2200 Channahon Road, Houston Westway I and 2275 Cabot Drive
During the year ended December 31, 2020, in connection with the preparation and review of the Company's financial statements, the Company recorded an impairment provision of approximately $23.5 million as it was determined that the carrying value of the real estate would not be recoverable on 3 properties. This impairment resulted from changes in longer absorption periods, lower market rents and shorter anticipated hold periods. In determining the fair value of property, the Company considered Level 3 inputs. See Note 8,Fair Value Measurements, for details.
Restricted Cash
In conjunction with the acquisition of certain assets, as required by certain lease provisions or certain lenders in conjunction with an acquisition or debt financing, or credits received by the seller of certain assets, the Company assumed or funded reserves for specific property improvements and deferred maintenance, re-leasing costs, and taxes and insurance, which are included on the consolidated balance sheets as restricted cash. Additionally, an ongoing replacement reserve is funded by certain tenants pursuant to each tenant’s respective lease as follows:
| Balance as of | |||||||||||
| December 31, 2020 | December 31, 2019 | ||||||||||
| Cash reserves | $ | 20,385 | $ | 48,129 | |||||||
| Restricted lockbox | 13,967 | 10,301 | |||||||||
| Total | $ | 34,352 | $ | 58,430 | |||||||
F-19
GRIFFIN CAPITAL ESSENTIAL ASSET REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2020
(Dollars in thousands unless otherwise noted and excluding per share amounts
4.Investments in Unconsolidated Entities
The interests discussed below are deemed to be variable interests in VIEs and, based on an evaluation of the variable interests against the criteria for consolidation, the Company determined that it is not the primary beneficiary of the investments, as the Company does not have power to direct the activities of the entities that most significantly affect their performance. As such, the interest in the VIEs is recorded using the equity method of accounting in the accompanying consolidated financial statements. Under the equity method, the investments in the unconsolidated entities are stated at cost and adjusted for the Company’s share of net earnings or losses and reduced by distributions. Equity in earnings of real estate ventures is generally recognized based on the allocation of cash distributions upon liquidation of the investment at book value in accordance with the operating agreements. The Company's maximum exposure to losses associated with its unconsolidated investments is primarily limited to its carrying value in the investments.
Heritage Commons X, LTD
In June 2018, the Company, through an SPE, wholly-owned by the GCEAR Operating Partnership, formed a joint venture ("Heritage Commons X") for the construction and ownership of a four-story Class "A" office building with a net rentable area of approximately 200,000 square feet located in Fort Worth, Texas (the "Heritage Commons Property"). The Heritage Commons Property was completed in April 2019 and is 100% leased to Mercedes-Benz Financial Services USA.
On July 17, 2019, Heritage Commons X sold the Heritage Commons Property.
Digital Realty Trust, Inc.
In September 2014, the Company, through an SPE wholly-owned by the GCEAR Operating Partnership, acquired an 80% interest in a joint venture with an affiliate of Digital Realty Trust, Inc. ("Digital") for $68.4 million, which was funded with equity proceeds raised in the Company's public offerings. The gross acquisition value of the property was $187.5 million, plus closing costs, which was partially financed with debt of $102.0 million. The joint venture was created for purposes of directly or indirectly acquiring, owning, financing, operating and maintaining a data center facility located in Ashburn, Virginia (the "Digital Property"). The Digital Property is approximately 132,300 square feet and consists of certain data processing and communications equipment that is fully leased to a social media company and a financial services company with an average remaining lease term of approximately three years.
In September 2014, the joint venture entered into a secured term loan (the "Digital Loan") in the amount of approximately $102.0 million. The Digital Loan had an original maturity date of September 9, 2019 and included 2 extension options of 12 additional months each beyond the original maturity date. On March 29, 2019, the joint venture executed the first 12-month loan extension. Based on the executed extension, the new loan maturity date was September 9, 2020. The extension did not change the loan amount, rate or other substantive terms. The Company had approximately $8.2 million in an outstanding letter of credit.
Since the tenant did not execute a long term extension or sign a new lease with the joint venture, the joint venture elected not to accept the loan extension terms offered by the lender and subsequent discussions did not result in an additional loan extension in 2020. As a result, on September 9, 2020, the lender provided a notice of default for non-payment of the unpaid balance of the non-recourse Digital Loan and exercised its right to draw on the stand-by letter of credit. The Company funded the $8.2 million stand-by letter of credit with cash.
In accordance with the terms of the Digital operating agreement, the Company holds a guaranteed minimum return such that the Digital managing member will pay an amount to the Company in order for the Company to receive a minimum 7% return on investment, subject to a cap on actual cash amounts distributed to the managing member. As part of the wind up of the joint venture, the Company has recorded a receivable from the Digital managing member of $4.1 million that it expects to receive in first quarter of 2021 and has written off its remaining investment in the venture. The Company is not exposed to any future funding obligations and there are no other future losses expected to arise from this investment.
F-20
GRIFFIN CAPITAL ESSENTIAL ASSET REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2020
(Dollars in thousands unless otherwise noted and excluding per share amounts
As of December 31, 2020, the balance of the investments is shown below:
| Digital Realty | Heritage Commons X | Total | |||||||||||||||
| Balance as of December 31, 2019 | $ | 10,584 | $ | 444 | $ | 11,028 | |||||||||||
| Net loss | (164) | 0 | (164) | ||||||||||||||
| Distributions | (8,121) | (410) | (8,531) | ||||||||||||||
| Contributions | 8,160 | 0 | 8,160 | ||||||||||||||
Valuation adjustment (1) | (4,453) | 0 | (4,453) | ||||||||||||||
Impairment (2) | (1,906) | — | (1,906) | ||||||||||||||
Clawback receivable reclass (3) | (4,100) | — | (4,100) | ||||||||||||||
| Balance as of December 31, 2020 | $ | 0 | $ | 34 | $ | 34 | |||||||||||
(1) Amount represents a charge to arrive at the net realizable value as of December 31, 2020, which is included in the line item "(Loss) Gain from investment in unconsolidated entities" in the consolidated statement of operations.
(2) Amount represents an impairment on the Company's Digital investment that the Company determined in connection with the preparation and review of the financial statements. Amount included in the line item "(Loss) Gain from investment in unconsolidated entities" in the consolidated statement of operations.
(3) Amount represents a reclass of the clawback to other assets as disclosed above.
5. Debt
As of December 31, 2020 and December 31, 2019, the Company’s debt consisted of the following:
| December 31, | Contractual Interest Rate (1) | Loan Maturity | Effective Interest Rate (2) | ||||||||||||||||||||||||||
| 2020 | 2019 | ||||||||||||||||||||||||||||
| HealthSpring Mortgage Loan | $ | 20,208 | $ | 20,723 | 4.18% | April 2023 | 4.62% | ||||||||||||||||||||||
| Midland Mortgage Loan | 98,155 | 100,249 | 3.94% | April 2023 | 4.12% | ||||||||||||||||||||||||
| Emporia Partners Mortgage Loan | 1,627 | 2,104 | 5.88% | September 2023 | 5.96% | ||||||||||||||||||||||||
| Samsonite Loan | 20,165 | 21,154 | 6.08% | September 2023 | 5.09% | ||||||||||||||||||||||||
| Highway 94 Loan | 14,689 | 15,610 | 3.75% | August 2024 | 4.80% | ||||||||||||||||||||||||
| Pepsi Bottling Ventures Loan | 18,587 | 0 | 3.69% | October 2024 | 3.92% | ||||||||||||||||||||||||
| AIG Loan II | 126,792 | 126,970 | 4.15% | November 2025 | 4.93% | ||||||||||||||||||||||||
| BOA Loan | 375,000 | 375,000 | 3.77% | October 2027 | 3.91% | ||||||||||||||||||||||||
| BOA/KeyBank Loan | 250,000 | 250,000 | 4.32% | May 2028 | 4.14% | ||||||||||||||||||||||||
| AIG Loan | 103,870 | 105,762 | 4.96% | February 2029 | 5.08% | ||||||||||||||||||||||||
| Total Mortgage Debt | 1,029,093 | 1,017,572 | |||||||||||||||||||||||||||
Revolving Credit Facility (3) | 373,500 | 211,500 | LIBO Rate + 1.60% | June 2023 | 1.88% | ||||||||||||||||||||||||
| 2023 Term Loan | 200,000 | 200,000 | LIBO Rate + 1.55% | June 2023 | 1.80% | ||||||||||||||||||||||||
| 2024 Term Loan | 400,000 | 400,000 | LIBO Rate + 1.55% | April 2024 | 1.79% | ||||||||||||||||||||||||
| 2026 Term Loan | 150,000 | 150,000 | LIBO Rate + 1.85% | April 2026 | 2.06% | ||||||||||||||||||||||||
| Total Debt | 2,152,593 | 1,979,072 | |||||||||||||||||||||||||||
| Unamortized Deferred Financing Costs and Discounts, net | (12,166) | (9,968) | |||||||||||||||||||||||||||
| Total Debt, net | $ | 2,140,427 | $ | 1,969,104 | |||||||||||||||||||||||||
(1)Including the effect of the interest rate swap agreements with a total notional amount of $750 million the weighted average interest rate as of December 31, 2020 was 3.58% for both the Company’s fixed-rate and variable-rate debt combined and 3.96% for the Company’s fixed-rate debt only.
(2)Reflects the effective interest rate as of December 31, 2020 and includes the effect of amortization of discounts/premiums and deferred financing costs.
(3)The LIBO rate as of December 1, 2020 (effective date) was 0.16%. The Revolving Credit Facility has an initial term of fourapproximately two years, maturing on December 12, 2018. The Revolving Credit FacilityJune 28, 2022, and may be extended for a one-year period if certain conditions are met and the Company paysupon payment of an extension fee. PaymentsSee discussion below.
F-21
GRIFFIN CAPITAL ESSENTIAL ASSET REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2020
(Dollars in thousands unless otherwise noted and excluding per share amounts
Second Amended and Restated Credit Agreement
Pursuant to the Second Amended and Restated Credit Agreement dated as of April 30, 2019 (as amended by the First Amendment to the Second Amended and Restated Credit Agreement dated as of October 1, 2020 and the Second Amendment to Second Amended and Restated Credit Agreement dated as of December 18, 2020, the “Second Amended and Restated Credit Agreement”), with KeyBank, as administrative agent, and a syndicate of lenders, we, through the GCEAR Operating Partnership, as the borrower, have been provided with a $1.9 billion credit facility consisting of a $750 million senior unsecured revolving credit facility (the “Revolving Credit Facility”) maturing in June 2022 with (subject to the satisfaction of certain customary conditions) a one-year extension option, a $200 million senior unsecured term loan maturing in June 2023 (the “$200M 5-Year Term Loan”), a $150 million senior unsecured term loan maturing in April 2026 (the “$150M 7-Year Term Loan”), a $400 million senior unsecured term loan maturing in April 2024 (the “$400M 5-Year Term Loan”) and a delayed draw $400 million senior unsecured term loan maturing in December 2025 (the “Delayed Draw $400M 5-Year Term Loan”) (collectively, the “KeyBank Loans”).The credit facility also provides the option, subject to obtaining additional commitments from lenders and certain other customary conditions, to increase the commitments under the Revolving Credit Facility, are interest only and are due onincrease the first dayexisting term loans and/or incur new term loans by up to an additional $600 million in the aggregate. As of each quarter.
Based on the terms as of December 31, 2020, the interest rate calculatedfor the credit facility varies based on the consolidated leverage ratio of the GCEAR Operating Partnership, us, and our subsidiaries and ranges (a) in the case of the Revolving Credit Facility, from LIBOR plus the applicable1.30% to LIBOR margin, as providedplus 2.20%, (b) in the credit agreement, orcase of each of the Base Rate$200M 5-Year Term Loan, the $400M 5-Year Term Loan and the Delayed Draw $400M 5-Year Term Loan, from LIBOR plus the applicable base rate margin, as provided1.25% to LIBOR plus 2.15% and (c) in the credit agreement. Thecase of the $150M 7-Year Term Loan, from LIBOR plus 1.65% to LIBOR plus 2.50%.If the GCEAR Operating Partnership obtains an investment grade rating of its senior unsecured long term debt from Standard & Poor's Rating Services, Moody's Investors Service, Inc., or Fitch, Inc., the applicable LIBOR margin and base rate margin are dependentwill vary based on such rating and range (i) in the case of the Revolving Credit Facility, from LIBOR plus 0.825% to LIBOR plus 1.55%, (ii) in the case of each of the $200M 5-Year Term Loan, the $400M 5-Year Term Loan and the Delayed Draw $400M 5-Year Term Loan, from LIBOR plus 0.90% to LIBOR plus 1.75% and (iii) in the case of the $150M 7-Year Term Loan, from LIBOR plus 1.40% to LIBOR plus 2.35%.
In the event that any of the 2025 Term Loan is not advanced as of the date that is 120 days after December 18, 2020, such unadvanced amount will incur an unused fee equal to 0.20% annually multiplied by the average daily amount of the unadvanced portion of the 2025 Term Loan. Such unused fee will be payable quarterly in arrears and will start accruing on the date that is 120 days after December 18, 2020 and will stop accruing on the first to occur of (a) the date the 2025 Term Loan is fully advanced, (b) the date that is 180 days after December 18, 2020, or (c) the date the GCEAR Operating Partnership, as borrower, terminates any remaining portion of the 2025 Term Loan.
The Second Amended and Restated Credit Agreement provides that the GCEAR Operating Partnership must maintain a pool of unencumbered real properties (each a "Pool Property" and collectively the "Pool Properties") that meet certain requirements contained in the Second Amended and Restated Credit Agreement. The agreement sets forth certain covenants relating to the Pool Properties, including, without limitation, the following:
•there must be no less than 15 Pool Properties at any time;
•no greater than 15% of the aggregate pool value may be contributed by a single Pool Property or tenant;
•no greater than 15% of the aggregate pool value may be contributed by Pool Properties subject to ground leases;
•no greater than 20% of the aggregate pool value may be contributed by Pool Properties which are under development or assets under renovation;
•the minimum aggregate leasing percentage of all Pool Properties must be no less than 90%; and
•other limitations as determined by KeyBank upon further due diligence of the Pool Properties.
F-22
GRIFFIN CAPITAL ESSENTIAL ASSET REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2020
(Dollars in thousands unless otherwise noted and excluding per share amounts
Borrowing availability under the Second Amended and Restated Credit Agreement is limited to the lesser of the maximum amount of all loans outstanding that would result in (i) an unsecured leverage ratio of no greater than 60%, or (ii) an unsecured interest coverage ratio of no less than 2.00:1.00.
Guarantors of the KeyBank Loans include the Company, each special purpose entity that owns a Pool Property, and each of the GCEAR Operating Partnership's other subsidiaries which owns a direct or indirect equity interest in a special purpose entity that owns a Pool Property.
In addition to customary representations, warranties, covenants, and indemnities, the KeyBank Loans require the GCEAR Operating Partnership to comply with the following at all times, which will be tested on a quarterly basis:
•a maximum consolidated leverage ratio of 60%, or, the ratio may increase to 65% for up to 4 consecutive quarters after a material acquisition;
•a minimum consolidated tangible net worth of 75% of the Company's consolidated tangible net worth at closing of the Revolving Credit Facility, or approximately $2.0 billion, plus 75% of net future equity issuances (including GCEAR OP Units ), minus 75% of the amount of any payments used to redeem the Company's stock or OP Units, minus any amounts paid for the redemption or retirement of or any accrued return on the preferred equity issued under the preferred equity investment made in EA-1 in August 2018 by SHBNPP Global Professional Investment Type Private Real Estate Trust No. 13 (H);
•upon consummation, if ever, of an initial public offering, a minimum consolidated tangible net worth of 75% of the Company's consolidated tangible net worth at the time of such initial public offering plus 75% of net future equity issuances (including GCEAR OP Units) should the Company publicly list its shares;
•a minimum consolidated fixed charge coverage ratio of not less than 1.50:1.00;
•a maximum total secured debt ratio of not greater than 40%, which ratio will increase by 5 percentage points for 4 quarters after closing of a material acquisition that is financed with secured debt;
•a minimum unsecured interest coverage ratio of 2.00:1.00;
•a maximum total secured recourse debt ratio, excluding recourse obligations associated with interest rate hedges, of 10% of our total asset value; and
•aggregate maximum unhedged variable rate debt of not greater than 30% of the Company's total asset value.
Furthermore, the activities of the GCEAR Operating Partnership, the Company, and the Company's subsidiaries as disclosed in the periodic compliance certificate provided to the administrative agent each quarter.
Debt Covenant Compliance
Pursuant to the terms of the Revolving Credit FacilityCompany's mortgage loans and AIG Loan,the KeyBank Loans, the GCEAR Operating Partnership, in consolidation with the Company, is subject to certain loan compliance covenants. The Company was in compliance with all applicableof its debt covenants as of December 31, 2017.
| December 31, 2017 | ||||
| 2018 | $ | — | ||
| 2019 | 357,758 | |||
| 2020 | — | |||
| 2021 | 2,178 | |||
| 2022 | 2,271 | |||
| Thereafter | 122,521 | |||
| Total principal | 484,728 | |||
| Unamortized deferred loan costs | (2,880 | ) | ||
| Total | $ | 481,848 | ||
2020.
F-23
GRIFFIN CAPITAL ESSENTIAL ASSET REIT, II, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 20172020
(Dollars in thousands unless otherwise noted and excluding per share amounts)amounts
The following summarizes the future scheduled principal repayments of all loans as of December 31, 2020 per the loan terms discussed above:
| As of December 31, 2020 | |||||
| 2021 | $ | 9,587 | |||
| 2022 | 10,216 | ||||
| 2023 | 337,387 | ||||
| 2024 | 433,921 | ||||
| 2025 | 120,111 | ||||
| Thereafter | 1,241,371 | ||||
| Total principal | 2,152,593 | ||||
| Unamortized debt premium/(discount) | (577) | ||||
| Unamortized deferred loan costs | (11,589) | ||||
| Total | $ | 2,140,427 | |||
Risk Management Objective of Using Derivatives
The Company is exposed to certain risks arising from both business operations and economic conditions. The Company manages economic risks, including interest rate, liquidity, and credit risk primarily by managing the amount, sources, and duration of debt funding and the use of derivative financial instruments. Specifically, the Company enteredenters into derivative financial instruments to manage exposures that arise from business activities that result in the payment of future known and uncertain cash amounts, the valuevalues of which are determined by expected cash payments principally related to borrowings and interest rates. Interest rate swaps designated as cash flow hedges involve the receipt of variable amounts from a counterparty in exchange for making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount. The Company does not use derivatives for trading or speculative purposes.
Derivative Instruments
On February 25, 2016,July 9, 2015, the Company entered into anexecuted 1 interest rate swap agreement to hedge the variable cash flows associated with the LIBO Rate-based variable-rate debt on the Company's Revolving Credit Facility.LIBOR. The interest rate swap iswas effective for the period from AprilJuly 9, 2015 to July 1, 2016 to December 12, 20182020 with a notional amount of $100.0 million.$425.0 million, which matured during the third quarter of 2020.
On March 10, 2020, the Company entered into 3 interest rate swap agreements to the Operating Partnership, ashedge variable cash flows associated with LIBOR. The swap agreements became effective on March 10, 2020, and have a resultterm of the repaymentapproximately five years with notional amounts of debt. The terms of the cash flow swap are listed in the table below.$150.0 million, $100.0 million and $75.0 million, respectively.
The effective portion ofCompany also has entered into interest rate swap agreements to hedge the variable cash flows associated with certain existing or forecasted LIBOR based variable-rate debt, including the Company's KeyBank Loans. The change in the fair value of derivatives designated and qualifying as cash flow hedges is initially recorded in AOCIaccumulated other comprehensive income ("AOCI") and is subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. Amounts reported in AOCI related to derivatives will be reclassified to interest expense as interest payments are made on the Company's variable-rate debt.
F-24
GRIFFIN CAPITAL ESSENTIAL ASSET REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2020
(Dollars in thousands unless otherwise noted and excluding per share amounts
The following table sets forth a summary of the interest rate swaps at December 31, 20172020 and 2019:
Fair Value (1) | Current Notional Amounts | |||||||||||||||||||||||||||||||||||||||||||
| December 31, | December 31, | |||||||||||||||||||||||||||||||||||||||||||
| Derivative Instrument | Effective Date | Maturity Date | Interest Strike Rate | 2020 | 2019 | 2020 | 2019 | |||||||||||||||||||||||||||||||||||||
| (Liabilities) | ||||||||||||||||||||||||||||||||||||||||||||
| Interest Rate Swap | 3/10/2020 | 7/1/2025 | 0.83% | $ | (2,963) | $ | 0 | $ | 150,000 | $ | 0 | |||||||||||||||||||||||||||||||||
| Interest Rate Swap | 3/10/2020 | 7/1/2025 | 0.84% | (2,023) | 0 | 100,000 | 0 | |||||||||||||||||||||||||||||||||||||
| Interest Rate Swap | 3/10/2020 | 7/1/2025 | 0.86% | (1,580) | 0 | 75,000 | 0 | |||||||||||||||||||||||||||||||||||||
| Interest Rate Swap | 7/1/2020 | 7/1/2025 | 2.82% | (13,896) | (7,038) | 125,000 | 125,000 | |||||||||||||||||||||||||||||||||||||
| Interest Rate Swap | 7/1/2020 | 7/1/2025 | 2.82% | (11,140) | (5,651) | 100,000 | 100,000 | |||||||||||||||||||||||||||||||||||||
| Interest Rate Swap | 7/1/2020 | 7/1/2025 | 2.83% | (11,148) | (5,665) | 100,000 | 100,000 | |||||||||||||||||||||||||||||||||||||
| Interest Rate Swap | 7/1/2020 | 7/1/2025 | 2.84% | (11,225) | (5,749) | 100,000 | 100,000 | |||||||||||||||||||||||||||||||||||||
| Interest Rate Swap | 7/9/2015 | 7/1/2020 | 1.69% | 0 | (43) | 0 | 425,000 | |||||||||||||||||||||||||||||||||||||
| Total | $ | (53,975) | $ | (24,146) | $ | 750,000 | $ | 850,000 | ||||||||||||||||||||||||||||||||||||
(1)The Company records all derivative instruments on a gross basis in the consolidated balance sheets, and accordingly there are no offsetting amounts that net assets against liabilities. As of December 31, 2016:2020, derivatives in a liability position are included in the line item "Interest rate swap liability" in the consolidated balance sheets at fair value.
Fair Value (1) | Current Effective Notional Amount (2) | |||||||||||||||||||||
| Derivative Instrument | Effective Date | Maturity Date | Interest Strike Rate | December 31, 2017 | December 31, 2016 | December 31, 2017 | December 31, 2016 | |||||||||||||||
| Assets | ||||||||||||||||||||||
| Interest Rate Swap | 4/1/2016 | 12/12/2018 | 0.74% | $ | 967 | $ | 996 | $ | 100,000 | $ | 100,000 | |||||||||||
Interest Rate Swap (3) | 11/1/2017 | 7/1/2018 | 1.50% | 65 | — | 100,000 | — | |||||||||||||||
| Total | $ | 1,032 | $ | 996 | $ | 200,000 | $ | 100,000 | ||||||||||||||
The following table sets forth the impact of the interest rate swaps on the consolidated financial statements of operations for the periods presented:
| Year Ended December 31, | ||||||||
| 2017 | 2016 | |||||||
| Interest Rate Swaps in Cash Flow Hedging Relationship: | ||||||||
| Amount of loss recognized in AOCI on derivative (effective portion) | $ | 428 | $ | 662 | ||||
| Amount of (gain) loss reclassified from AOCI into earnings under “Interest expense” (effective portion) | $ | (319 | ) | $ | 179 | |||
| Amount of (loss) gain recognized in earnings under “Interest expense” (ineffective portion and amount excluded from effectiveness testing) | $ | (80 | ) | $ | 155 | |||
| Year Ended December 31, | |||||||||||
| 2020 | 2019 | ||||||||||
| Interest Rate Swap in Cash Flow Hedging Relationship: | |||||||||||
| Amount of (loss) gain recognized in AOCI on derivatives | $ | (38,319) | $ | (19,944) | |||||||
| Amount of (gain) loss reclassified from AOCI into earnings under “Interest expense” | $ | 8,615 | $ | (2,359) | |||||||
| Total interest expense presented in the consolidated statement of operations in which the effects of cash flow hedges are recorded | $ | 79,646 | $ | 73,557 | |||||||
During the twelve months subsequent to December 31, 2017,2020, the Company estimates that an additional $1.0$13.8 million of its expense will be recognized from AOCI into earnings.
As of December 31, 2017,2020 and 2019, the fair value of interest rate swaps that were in asset positions excludinga liability position, which excludes any adjustment for nonperformance risk related to the Company's derivative counterparty agreement, whichthese agreements, was approximately $1.0 million.$54.0 million and $24.1 million, respectively. As of December 31, 2017,2020 and December 31, 2019, the Company had not posted any collateral related to these agreements.
F-25
GRIFFIN CAPITAL ESSENTIAL ASSET REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2020
(Dollars in thousands unless otherwise noted and excluding per share amounts
7. Accrued Expenses and Other Liabilities
Accrued expenses and other liabilities consisted of the Company's derivative counterparty agreement.following as of December 31, 2020 and 2019:
| December 31, | |||||||||||
| 2020 | 2019 | ||||||||||
| Accrued tenant improvements | $ | 30,011 | $ | 11,802 | |||||||
| Prepaid tenant rent | 20,780 | 20,510 | |||||||||
| Real estate taxes payable | 15,380 | 13,385 | |||||||||
| Deferred compensation | 10,599 | 9,209 | |||||||||
| Interest payable | 9,147 | 12,264 | |||||||||
| Property operating expense payable | 8,473 | 7,752 | |||||||||
| Other liabilities | 20,044 | 21,467 | |||||||||
| Total | $ | 114,434 | $ | 96,389 | |||||||
8. Fair Value Measurements
The Company is required to disclose fair value information about all financial instruments, whether or not recognized in the consolidated balance sheets, for which it is practicable to estimate fair value. The Company measures and discloses the estimated fair value of financial assets and liabilities utilizing a fair value hierarchy that distinguishes between data obtained from sources independent of the reporting entity and the reporting entity’s own assumptions about market participant assumptions. This hierarchy consists of three broad levels, as follows: (i) quoted prices in active markets for identical assets or liabilities, (ii) "significant other observable inputs," and (iii) "significant unobservable inputs." "Significant other observable inputs" can include quoted prices for similar assets or liabilities in active markets, as well as inputs that are observable for the asset or liability, such as interest rates, foreign exchange rates, and yield curves that are observable at commonly quoted intervals. "Significant unobservable inputs" are typically based on an entity’s own assumptions, since there is little, if any, related market activity. In instances in which the determination of the fair value measurement is based on inputs from different levels of the fair value hierarchy, the level in the fair value hierarchy within which the entire fair value measurement falls is based on the lowest level of input that is significant to the fair value measurement in its entirety. The Company's assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability. There were no transfers between the levels in the fair value hierarchy during the yearyears ended December 31, 2017.2020 and 2019.
The following tables settable sets forth the assets/(liabilities)assets and liabilities that the Company measures at fair value on a recurring basis by level within the fair value hierarchy as of December 31, 20172020 and 2016:2019:
| Assets/(Liabilities) | Total Fair Value | Quoted Prices in Active Markets for Identical Assets and Liabilities | Significant Other Observable Inputs | Significant Unobservable Inputs | ||||||||||||||||||||||
| December 31, 2020 | ||||||||||||||||||||||||||
| Interest Rate Swap Liability | $ | (53,975) | $ | 0 | $ | (53,975) | $ | 0 | ||||||||||||||||||
| Corporate Owned Life Insurance Asset | $ | 4,454 | $ | 0 | $ | 4,454 | $ | 0 | ||||||||||||||||||
| Mutual Funds Asset | $ | 6,643 | $ | 6,643 | $ | 0 | $ | 0 | ||||||||||||||||||
| Deferred Compensation Liability | $ | (10,599) | $ | 0 | $ | (10,599) | $ | 0 | ||||||||||||||||||
| December 31, 2019 | ||||||||||||||||||||||||||
| Interest Rate Swap Liability | $ | (24,146) | $ | 0 | $ | (24,146) | $ | 0 | ||||||||||||||||||
| Earn-out Liability (due to affiliates) | $ | (2,919) | $ | 0 | $ | 0 | $ | (2,919) | ||||||||||||||||||
| Corporate Owned Life Insurance Asset | $ | 2,134 | $ | 0 | $ | 2,134 | $ | 0 | ||||||||||||||||||
| Mutual Funds Asset | $ | 6,983 | $ | 6,983 | $ | 0 | $ | 0 | ||||||||||||||||||
| Deferred Compensation Liability | $ | (9,209) | $ | 0 | $ | (9,209) | $ | 0 | ||||||||||||||||||
F-26
| Total Fair Value | Quoted Prices in Active Markets for Identical Assets and Liabilities | Significant Other Observable Inputs | Significant Unobservable Inputs | |||||||||
| Interest Rate Swaps at: | ||||||||||||
| December 31, 2017 | $ | 1,032 | $ | — | $ | 1,032 | $ | — | ||||
| December 31, 2016 | $ | 996 | $ | — | $ | 996 | $ | — | ||||
GRIFFIN CAPITAL ESSENTIAL ASSET REIT, II, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 20172020
(Dollars in thousands unless otherwise noted and excluding per share amounts)amounts
Earn-outs
The Current Operating Partnership will pay GCC in cash earn-out consideration ("Cash Earn-Out") equal to (i) 37.25% of the amounts received by the Company's advisor as advisory fees pursuant to the Company's advisory agreement with respect to the incremental common equity invested in the Company's follow-on public offering from April 30, 2019 through the September 20, 2020 (termination of the follow-on offering) plus (ii) 37.25% of the amounts that would have been received by the Company's advisor as performance distributions pursuant to the Current Operating Partnership agreement of the Current Operating Partnership with respect to assets acquired by the Company from April 30, 2019 through September 20, 2020. The Cash Earn-Out consideration will accrue on an ongoing basis and be paid quarterly; provided that such cash earn-out consideration will in no event exceed an amount equal to 2.5% of the aggregate dollar amount of common equity invested in the Company pursuant to its follow-on public offering from April 30, 2019 through September 20, 2020.
The Company estimated the fair value of the Cash Earn-Out liability using a discounted cash flow. The estimate required the Company to make various assumptions about future equity raised, capitalization rates and annual net operating income growth prior to the termination of the follow-on offering. During the year ended ended December 31, 2020, the Company recorded an adjustment of approximately $2.6 million, which is included in "Other income, net" on the consolidated statement of operations as a reduction of the Company's liability. As of December 31, 2020, the liability is approximately $0.3 million. Since the follow-on offering terminated on September 20, 2020, the liability is based on actual amounts raised during the offering. The Company has made one payment of approximately $0.1 million as of December 31, 2020.
Real Estate
For the year ended December 31, 2020, in connection with the preparation and review of the Company's financial statements, the Company determined that 3 of the Company's properties were impaired based upon discounted cash flow analyses where the most significant inputs were the market rental rates, terminal capitalization rate, discount rate and expected hold period. The Company considered these inputs as Level 3 measurements within the fair value hierarchy. The following table is a summary of the quantitative information related to the non-recurring fair value measurement for the impairment of the Company's real estate properties for the year-ended December 31, 2020:
| Range of Inputs or Inputs | ||||||||||||||||||||
| Unobservable Inputs: | 2200 Channahon Road | Houston Westway I | 2275 Cabot Drive | |||||||||||||||||
| Market rent per square foot | $2.00 to $3.00 | $15.00 to $17.00 | $11.00 to $12.00 | |||||||||||||||||
| Terminal capitalization rate | 9.75% | 7.75% | 9.00% | |||||||||||||||||
| Discount rate | 14.00% | 9.00% | 10.25% | |||||||||||||||||
Financial Instruments Disclosed at Fair Value
Financial instruments as of December 31, 2020 and December 31, 2019 consisted of cash and cash equivalents, restricted cash, accounts receivable, accrued expenses and other liabilities, and mortgage payable and other borrowings, as defined in Note 5, Debt. With the exception of the mortgage loans in the table below, the amounts of the financial instruments presented in the consolidated financial statements substantially approximate their fair value as of December 31, 2017.2020 and December 31, 2019. The fair value of the 10 mortgage loanloans in the table below is estimated by discounting theeach loan’s principal balance over the remaining term of the mortgage using current borrowing rates available to the Company for debt instruments with similar terms and maturities. The Company determined that the mortgage loandebt valuation in its entirety is classified in Level 2 of the fair value hierarchy, as the fair value is based on current pricing for debt with similar terms as the in-place debt, and there were no transfers into and outdebt.
F-27
GRIFFIN CAPITAL ESSENTIAL ASSET REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 20172020
(Dollars in thousands unless otherwise noted and 2016.
excluding per share amounts
| December 31, 2017 | December 31, 2016 | ||||||||||||||
| Fair Value | Carrying Value (1) | Fair Value | Carrying Value (1) | ||||||||||||
| AIG Loan | $ | 122,928 | $ | 126,970 | $ | 120,322 | $ | 126,970 | |||||||
| December 31, 2020 | December 31, 2019 | ||||||||||||||||||||||
| Fair Value | Carrying Value (1) | Fair Value | Carrying Value (1) | ||||||||||||||||||||
| BOA Loan | $ | 355,823 | $ | 375,000 | $ | 369,343 | $ | 375,000 | |||||||||||||||
| BOA/KeyBank Loan | $ | 263,454 | $ | 250,000 | $ | 264,101 | $ | 250,000 | |||||||||||||||
| AIG Loan II | $ | 121,011 | $ | 126,792 | $ | 122,258 | $ | 126,970 | |||||||||||||||
| AIG Loan | $ | 102,033 | $ | 103,870 | $ | 101,663 | $ | 105,762 | |||||||||||||||
| Midland Mortgage Loan | $ | 97,709 | $ | 98,155 | $ | 99,318 | $ | 100,249 | |||||||||||||||
| Samsonite Loan | $ | 21,030 | $ | 20,165 | $ | 22,103 | $ | 21,154 | |||||||||||||||
| HealthSpring Mortgage Loan | $ | 20,462 | $ | 20,208 | $ | 20,868 | $ | 20,723 | |||||||||||||||
| Pepsi Bottling Ventures Loan | $ | 18,942 | $ | 18,587 | $ | 0 | $ | 0 | |||||||||||||||
| Highway 94 Loan | $ | 14,447 | $ | 14,689 | $ | 15,101 | $ | 15,610 | |||||||||||||||
| Emporia Partners Mortgage Loan | $ | 1,654 | $ | 1,627 | $ | 2,105 | $ | 2,104 | |||||||||||||||
(1)The carrying values do not include the debt premium/(discount) or deferred financing costs |
| December 31, 2017 | December 31, 2016 | |||||||
| Prepaid rent | $ | 4,304 | $ | 9,484 | ||||
| Leasing commission payable | 3,783 | 3,783 | ||||||
| Accrued property taxes | 3,490 | 2,678 | ||||||
| Interest expense payable | 3,013 | 1,716 | ||||||
| Other liabilities | 5,313 | 3,866 | ||||||
| Total | $ | 19,903 | $ | 21,527 | ||||
Class T shares, Class S shares, Class D shares, Class I shares, Class A shares, Class AA shares, Class AAA and Class AAAE shares vote together as a single class, and each share is entitled to one1 vote on each matter submitted to a vote at a meeting of the Company's stockholders; provided that with respect to any matter that would only have a material adverse effect on the rights of a particular class of common stock, only the holders of such affected class are entitled to vote.
| Class | ||||||||||||||||||||||||||||||||
| T | S | D | I | A | AA | AAA | Total | |||||||||||||||||||||||||
| Gross proceeds from primary portion of offerings | $ | 41 | $ | 3 | $ | 3 | $ | 2,493 | $ | 240,780 | $ | 474,858 | $ | 8,379 | $ | 726,557 | ||||||||||||||||
| Gross proceeds from DRP | $ | — | $ | — | $ | — | $ | 41 | $ | 19,773 | $ | 21,828 | $ | 312 | $ | 41,954 | ||||||||||||||||
| Shares issued in primary portion of offerings | 4,144 | 264 | 264 | 263,200 | 24,199,760 | 47,562,870 | 901,225 | 72,931,727 | ||||||||||||||||||||||||
| DRP shares issued | 4 | 4 | 4 | 4,276 | 2,089,748 | 2,313,170 | 33,308 | 4,440,514 | ||||||||||||||||||||||||
| Stock distribution shares issued | — | — | — | — | 263,641 | 300,166 | 4,676 | 568,483 | ||||||||||||||||||||||||
| Restricted stock units issued | — | — | — | — | — | — | 25,500 | 25,500 | ||||||||||||||||||||||||
| Total redemptions | — | — | — | — | (557,206 | ) | (233,735 | ) | — | (790,941 | ) | |||||||||||||||||||||
| Total shares outstanding as of 12/31/2017 | 4,148 | 268 | 268 | 267,476 | 25,995,943 | 49,942,471 | 964,709 | 77,175,283 | ||||||||||||||||||||||||
| Total shares outstanding as of 12/31/2016 | — | — | — | — | 25,562,982 | 44,595,631 | 781,034 | 70,939,647 | ||||||||||||||||||||||||
| December 31, 2017 | |||
| Cumulative offering costs | $ | 1,698 | |
| Cumulative organizational costs | $ | 359 | |
| Organizational and offering costs advanced by the Advisor | $ | 1,226 | |
Organizational and offering costs paid by the Company | 831 | ||
| Adjustment to organizational and offering costs pursuant to the limitation: | |||
| Reduction in due to affiliates | (999 | ) | |
| Due from affiliates | (677 | ) | |
| Net due to Advisor | $ | 381 | |
As of December 31, 2017, organizational2020, there were 558,107 shares of Class T common stock, 1,800 shares of Class S common stock, 41,095 shares of Class D common stock, 1,896,696 shares of Class I common stock, 24,325,680 shares of Class A common stock, 47,304,097 of Class AA common stock, 920,920 shares of Class AAA common stock, and offering costs incurred by the Company related to the IPO were approximately $76.0 million. In addition, the total outstanding amounts155,272,273 of the Contingent Advisor Payment Holdback asClass E common stock outstanding.
Common Equity
As of December 31, 20172020, the Company had received aggregate gross offering proceeds of approximately $2.8 billion from the sale of shares in the private offering, the public offerings, the DRP offerings and 2016 were $0.1 millionmergers (includes EA-1 offerings and $5.4 million, respectively.
Inc. in June 2015 and 174,981,547 Class E shares (in exchange for all outstanding shares of EA-1's common stock at the time of the EA Merger) in April 2019 upon the consummation of the EA Merger. As of December 31, 20172020, there were 230,320,668 shares outstanding, including shares issued pursuant to the DRP, less shares redeemed pursuant to the SRP and the self-tender offer, which occurred in May 2019.
On February 26, 2020, the Company’s Board of Directors (the “Board”) approved the temporary suspension of the primary portion of the Company’s follow-on offering of up to $2.2 billion of shares, consisting of up to $2.0 billion of shares in thousands unless otherwise notedour primary offering and excluding per share amounts)
$0.2 billion of shares pursuant to our DRP (the “Follow-On Offering”), effective February 27, 2020. The Follow-On Offering terminated with the expiration of the registration statement on Form S-11 (Registration No. 333-217223), as amended, on September 20, 2020.F-28
| Year Ended December 31, | ||||||||
| Period | 2017 | 2016 | ||||||
| Shares of common stock redeemed | 623,499 | 167,442 | ||||||
| Weighted average price per share | $ | 9.21 | $ | 9.72 | ||||
GRIFFIN CAPITAL ESSENTIAL ASSET REIT, II, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 20172020
(Dollars in thousands unless otherwise noted and excluding per share amounts)amounts
On July 17, 2020, the Company cannot purchase allfiled a registration statement on Form S-3 for the registration of up to $100 million in shares presentedpursuant to the Company's DRP (the “DRP Offering”).The DRP Offering may be terminated at any time upon 10 days’ prior written notice to stockholders.
As of December 31, 2020, the Company sold 32,978,545 shares for redemptionapproximately $318.2 million in any quarter, based upon insufficient cash availablethe Company's DRP offerings. The following table summarizes the DRP offerings ,by share class, as of December 31, 2020:
| Share Class | Amount | Shares | ||||||||||||
| Class A | 6,923 | 743,349 | ||||||||||||
| Class AA | 13,695 | 1,470,340 | ||||||||||||
| Class AAA | 207 | 22,190 | ||||||||||||
| Class D | 12 | 1,312 | ||||||||||||
| Class E | 296,930 | 30,697,419 | ||||||||||||
| Class I | 300 | 31,992 | ||||||||||||
| Class S | 0 | 12 | ||||||||||||
| Class T | 112 | 11,931 | ||||||||||||
| Total | $ | 318,179 | 32,978,545 | |||||||||||
As of December 31, 2020 and December 31, 2019, the Company had issued approximately $318.2 million and $293.7 million in shares pursuant to the DRP, respectively.
Share Redemption Program (SRP)
The Company has adopted the SRP that enables stockholders to sell their stock to the Company in limited circumstances. On August 8, 2019, the Company's Board amended and restated its SRP, effective as of September 12, 2019, in order to (i) clarify that only those stockholders who purchased their shares from us or received their shares from the limit onCompany (directly or indirectly) through one or more non-cash transactions (including transfers to trusts, family members, etc.) may participate in the numberSRP; (ii) allocate capacity within each class of sharescommon stock such that the Company may redeem during any calendar year, the Company will attemptup to honor5% of the aggregate NAV of each class of common stock; (iii) treat all unsatisfied redemption requests on a pro rata basis. With respect to any pro rata treatment, redemption requests following the death or qualifying disability of a stockholder will be considered first, as a group, followed by requests where pro rata redemption would result in a stockholder owning less than the minimum balance of $2,500 of shares of common stock, which will be redeemed in full to the extent there are available funds, with any remaining available funds allocated pro rata among all other redemption requests. The Company will treat the unsatisfied(or portion of the redemption requestthereof) as a request for redemption the following quarter. Such pending requests will generally be honored on a pro rata basis. Any stockholder request to cancel an outstanding redemption must be sent toquarter unless otherwise withdrawn; and (iv) make certain other clarifying changes.
On November 7, 2019, the Company's transfer agent prior toBoard amended and restated the last day of the new quarter. The Company will determine whether sufficient funds are available or the IPO Share Redemption Program has reached the 5% share limit as soon as practicable after the end of each quarter, but in any event prior to the applicable payment date.
In connection with a potential strategic transaction, on February 26, 2020, the Follow-On Offering,Board approved the Company’s boardtemporary suspension of directors adopted the New ShareSRP, effective March 28, 2020. On July 16, 2020, the Board approved the partial reinstatement of the SRP, effective August 17, 2020, subject to the following limitations: (A) redemptions will be limited to those sought upon a stockholder’s death, qualifying disability, or determination of incompetence or incapacitation in accordance with the terms of the SRP, and (B) the quarterly cap on aggregate redemptions will be equal to the aggregate NAV, as of the last business day of the previous quarter, of the shares issued pursuant to the DRP during such quarter. Settlements of share redemptions will be made within the first three business days of the following quarter. Redemption Program foractivity during the New Shares (and IPO Shares that have been held for four years or longer). quarter is listed below.
F-29
GRIFFIN CAPITAL ESSENTIAL ASSET REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2020
(Dollars in thousands unless otherwise noted and excluding per share amounts
Under the New Share Redemption Program,SRP, the Company will redeem shares as of the last business day of each quarter. The redemption price will be equal to the NAV per share for the applicable class generally on the 13th day of the month immediately prior to quarter end (which will be the endmost recently published NAV). Redemption requests must be received by 4:00 p.m. (Eastern time) on the second to last business day of the applicable quarter. Redemption requests exceeding the quarterly cap will be filled on a pro rata basis. With respect to any pro rata treatment, redemption requests following the death or qualifying disability of a stockholder will be considered first, as a group, followed by requests where pro rata redemption would result in a stockholder owning less than the minimum balance of $2,500 of shares of the Company's common stock, which will be redeemed in full to the extent there are available funds, with any remaining available funds allocated pro rata among all other redemption requests. All unsatisfied redemption requests must be resubmitted after the start of the next quarter, or upon the recommencement of the New Share Redemption Program,SRP, as applicable.
There are several restrictions under the New Share Redemption Program.SRP. Stockholders generally have tomust hold their shares for one year before submitting their shares for redemption under the program; however, the Company will waive the one-year holding period in the event of the death or qualifying disability of a stockholder. Shares issued pursuant to the DRP are not subject to the one-year holding period. In addition, the New Share Redemption ProgramSRP generally imposes a quarterly cap on aggregate redemptions of the New Shares (and IPOCompany's shares that have been held for four years or longer) equal to a value of up to 5% of the aggregate NAV of the outstanding shares of such classes as of the last business day of the previous quarter. quarter, subject to the further limitations as indicated in the August 8, 2019 amendments discussed above.
As the value on the aggregate redemptions of the New SharesCompany's shares is outside the Company's control, the 5% quarterly cap is considered to be temporary equity and is presented as the common stock subject to redemption on the accompanying consolidated balance sheets. For
The following table summarizes share redemption (excluding the self-tender offer) activity during the years ended December 31, 2020 and 2019:
| Year Ended December 31, | |||||||||||
| 2020 | 2019 | ||||||||||
| Shares of common stock redeemed | 1,841,887 | 20,933,322 | |||||||||
| Weighted average price per share | $ | 9.01 | $ | 9.44 | |||||||
Since July 31, 2014 and through December 31, 2020, the Company had redeemed 26,072,452 shares (excluding the self-tender offer) of common stock for approximately $245.3 million at a weighted average price per share of $9.41 pursuant to the SRP. Since July 31, 2014 and through December 31, 2019, the Company had honored all outstanding redemption requests. During the three months ended September 30, 2019, redemption requests for Class E shares exceeded the quarterly 5% per share class limitation by 2,872,488 shares or approximately $27.4 million. The Class E shares not redeemed during that quarter, or 25% of the shares submitted, were treated as redemption requests for the quarter ended December 31, 2017,2019. All outstanding requests for the quarter ended September 30, 2019 and all new requests for the quarter ended December 31, 2019 were honored on January 2, 2020. Redemptions sought upon a stockholder's death, qualifying disability, or determination of incompetence or incapacitation in the first quarter of 2020 were honored in accordance with the terms of the SRP, and the SRP officially was suspended as of March 28, 2020 for regular redemptions and subsequent redemptions for death, qualifying disability, or determination of incompetence or incapacitation after those honored in the first quarter of 2020. As described above, the SRP was partially reinstated, effective August 17, 2020, for redemptions sought upon a stockholder’s death, qualifying disability, or determination of incompetence or incapacitation in accordance with the terms of the SRP, subject to a quarterly cap on aggregate redemptions equal to the aggregate NAV, as of the last business day of the previous quarter, of the shares issued pursuant to the DRP during such quarter. During the year ended December 31, 2020, the Company received redemption requests (including those due to death, disability or incapacitation) for 600,075 shares of common stock that were all redeemed during and subsequent to the current quarter.
Series A Preferred Shares
On August 8, 2018, EA-1 entered into a purchase agreement (the "Purchase Agreement") with SHBNPP Global Professional Investment Type Private Real Estate Trust No. 13(H) (acting through Kookmin Bank as trustee) (the "Purchaser") and Shinhan BNP Paribas Asset Management Corporation, as an asset manager of the Purchaser, pursuant to which the Purchaser agreed to purchase an aggregate of 10,000,000 shares of EA-1 Series A Cumulative Perpetual Convertible Preferred Stock at a price of $25.00 per share (the "EA-1 Series A Preferred Shares") in 2 tranches, each comprising 5,000,000 EA-1 Series A Preferred Shares. On August 8, 2018 (the "First Issuance Date"), EA-1 issued 5,000,000 Series A Preferred Shares to the Purchaser for a total purchase price of $125.0 million (the "First Issuance"). EA-1 paid transaction fees totaling 3.5% of the
F-30
GRIFFIN CAPITAL ESSENTIAL ASSET REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2020
(Dollars in thousands unless otherwise noted and excluding per share amounts
First Issuance purchase price and incurred approximately $0.4 million in transaction-related expenses to unaffiliated third parties. EA-1's former external advisor incurred transaction-related expenses of approximately $0.2 million, which was zero.reimbursed by EA-1.
Upon consummation of the Mergers, the Company issued 5,000,000 Series A Preferred Shares to the Purchaser. Pursuant to the Purchase Agreement, the Purchaser has agreed to purchase an additional 5,000,000 Series A Preferred Shares (the "Second Issuance") at a later date (the "Second Issuance Date") for an additional purchase price of $125.0 million subject to approval by the Purchaser’s internal investment committee and the satisfaction of certain conditions set forth in the Purchase Agreement. Pursuant to the Purchase Agreement, the Purchaser is generally restricted from transferring the Series A Preferred Shares or the economic interest in the Series A Preferred Shares for a period of five years from the applicable closing date.
The Company's Series A Preferred Shares are not registered under the Securities Act and are not listed on a national securities exchange. The articles supplementary filed by the Company related to the Series A Preferred Shares set forth the key terms of such shares as follows:
Distributions
Subject to the terms of the applicable articles supplementary, the holders of the Series A Preferred Shares are entitled to receive distributions quarterly in arrears at a rate equal to one-fourth (1/4) of the applicable varying rate, as follows:
| i. | 6.55% from and after the First Issuance Date, or if the Second Issuance occurs, 6.55% from and after the Second Issuance Date until the five year anniversary of the First Issuance Date, or if the Second Issuance occurs, the five year anniversary of the Second Issuance Date (the “Reset Date”), subject to paragraphs (iii) and (iv) below; | ||||
| ii. | 6.75% from and after the Reset Date, subject to paragraphs (iii) and (iv) below; | ||||
| iii. | if a listing of the Company's shares of Class E Common Stock or the Series A Preferred Shares on a national securities exchange registered under Section 6(a) of the Exchange Act, does not occur by August 1, 2020 (the “First Triggering Event”), 7.55% from and after August 2, 2020 and 7.75% from and after the Reset Date, subject to (iv) below and certain conditions as set forth in the articles supplementary; or | ||||
| iv. | if such a listing does not occur by August 1, 2021, 8.05% from and after August 2, 2021 until the Reset Date, and 8.25% from and after the Reset Date. | ||||
Liquidation Preference
Upon any voluntary or involuntary liquidation, dissolution or winding up of the Company, the holders of the Series A Preferred Shares will be entitled to be paid out of the Company's assets legally available for distribution to the stockholders, after payment of or provision for the Company's debts and other liabilities, liquidating distributions, in cash or property at its fair market value as determined by the Company's Board, in the amount, for each outstanding Series A Preferred Share equal to $25.00 per Series A Preferred Share (the "Liquidation Preference"), plus an amount equal to any accumulated and unpaid distributions to the date of payment, before any distribution or payment is made to holders of shares of common stock or any other class or series of equity securities ranking junior to the Series A Preferred Shares but subject to the preferential rights of holders of any class or series of equity securities ranking senior to the Series A Preferred Shares. After payment of the full amount of the Liquidation Preference to which they are entitled, plus an amount equal to any accumulated and unpaid distributions to the date of payment, the holders of Series A Preferred Shares will have no right or claim to any of the Company's remaining assets.
Company Redemption Rights
The Series A Preferred Shares may be redeemed by the Company, in whole or in part, at the Company's option, at a per share redemption price in cash equal to $25.00 per Series A Preferred Share (the "Redemption Price"), plus any accumulated and unpaid distributions on the Series A Preferred Shares up to the redemption date, plus, a redemption fee of 1.5% of the Redemption Price in the case of a redemption that occurs on or after the date of the First Triggering Event, but before the date that is five years from the First Issuance Date.
Holder Redemption Rights
In the event the Company fails to effect a listing of the Company’s boardshares of directorscommon stock or Series A Preferred Shares by August 1, 2023, the holder of any Series A Preferred Shares has the option to request a redemption of such shares on or on any date following August 1, 2023, at the Redemption Price, plus any accumulated and unpaid distributions up to the
F-31
GRIFFIN CAPITAL ESSENTIAL ASSET REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2020
(Dollars in thousands unless otherwise noted and excluding per share amounts
redemption date (the "Redemption Right"); provided, however, that no holder of the Series A Preferred Shares shall have a Redemption Right if such a listing occurs prior to or on August 1, 2023.
Conversion Rights
Subject to the Company's redemption rights and certain conditions set forth in the articles supplementary, a holder of the Series A Preferred Shares, at his or her option, will have the right to modify or suspendconvert such holder's Series A Preferred Shares into shares of the New Share Redemption Program upon 30 days' notice atCompany's common stock any time after the earlier of (i) five years from the First Issuance Date, or if it deems such action to bethe Second Issuance occurs, five years from the Second Issuance Date or (ii) a Change of Control (as defined in the Company’s best interestarticles supplementary) at a per share conversion rate equal to the Liquidation Preference divided by the then Common Stock Fair Market Value (as defined in the articles supplementary).
Issuance of Restricted Stock Units to Executive Officers and Employees
On May 1, 2019, the best interest ofCompany issued 1,009,415 restricted stock units ("2019 RSUs") to the Company’s stockholders. Any such modification or suspension will be communicated to stockholders throughCompany's officers under the Company’s filings with the SEC.
As of December 31, 2020, there was $4.5 million of unrecognized compensation expense remaining over two years.
On January 15, 2020, the Company issued 589,248 restricted stock units ("2020 RSUs") to Company employees, including officers, under the Griffin Capital Essential Asset REIT, Inc. Employee and LTIP. Each 2020 RSU represents a contingent right to receive 1 share of the Company’s Class E common stock when settled in accordance with the terms of the respective restricted stock award agreement. The remaining scheduled to vest in equal, 25% installments on each of December 31, 2021, 2022 and 2023 provided that the employee continues to be employed by the Company on each such date, subject to certain accelerated vesting provisions as provided in the respective restricted stock unit award agreement. The fair value of grants issued was approximately $5.5 million. Forfeitures on the Company's restricted stock units are recognized as they occur.
As of December 31, 2020, there was $3.6 million of unrecognized compensation expense remaining over three years.
Total compensation expense for the grant of awards to the Company's directorsyear ended December 31, 2020 and full-time employees (should2019 was approximately $5.2 million and $2.4 million, respectively. In December 2020, the Company ever have employees), directors and full-time employeesaccrued for the accelerating the vesting of the Advisor and affiliate entities that provide services to the Company, and certain consultants that provide services to the Company, the Advisor, or affiliate entities. Awards granted under the Plan may consist of stock options, restricted stock units to a former executive as part of his resignation. The acceleration resulted in $1.4 million of compensation expense. The restricted stock appreciation rights, distribution equivalent rights and other equity-based awards. The stock-based payment will be measured at fair value and recognized as compensation expense over the vesting period. The term of the Plan is ten years and the total number ofunits vested in February 2021.
| Number of Unvested Shares of Restricted Stock Awards | Weighted-Average Grant Date Fair Value per Share | |||||||||||||
| Balance at December 31, 2018 | 0 | $ | — | |||||||||||
| Granted | 1,009,415 | $ | 9.56 | |||||||||||
| Forfeited | 0 | $ | 0 | |||||||||||
| Vested | (252,354) | $ | 9.56 | |||||||||||
| Balance at December 31, 2019 | 757,061 | |||||||||||||
| Granted | 589,248 | $ | 9.35 | |||||||||||
| Forfeited | (3,744) | $ | 9.35 | |||||||||||
Vested(1) | (398,729) | $ | 9.48 | |||||||||||
| Balance at December 31, 2020 | 943,836 | |||||||||||||
(1) Total shares vested include 78,849 shares of common stock reserved for issuance underthat were tendered by employees during the Plan will be equal to 10% of the outstanding shares of stock at any time, not to exceed 10,000,000 shares in the aggregate. As ofyear ended December 31, 2017, approximately 7,717,528 shares were available for future issuance under2020, to satisfy minimum statutory tax with holdings requirements associated with the Plan.vesting of RSUs.
F-32
GRIFFIN CAPITAL ESSENTIAL ASSET REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2020
(Dollars in thousands unless otherwise noted and excluding per share amounts
Issuance of Restricted Stock to Directors
On June 15, 2020, the Company issued an aggregate of 15,000 shares of restricted stock to the Company's independent directors. These restricted shares were fully vested upon issuance.
Distributions
Earnings and profits, which determine the taxability of distributions to stockholders, may differ from income reported for financial reporting purposes due to the differences for federal income tax purposes in the treatment of loss on debt, revenue recognition and compensation expense and in the basis of depreciable assets and estimated useful lives used to compute depreciation expense.
The following unaudited table summarizes the federal income tax treatment for all distributions per share for the years ended December 31, 2017, 20162020, 2019, and 20152018 reported for federal tax purposes and serves as a designation of capital gain distributions, if applicable, pursuant to Code Section 857(b)(3)(c) of the Code(C) and Treasury Regulation § 1.857-6(e)§1.857-6(e).
| Year Ended December 31, | |||||||||||||||||||||||||||||
| 2020 | 2019 | 2018 | |||||||||||||||||||||||||||
| Ordinary income | $ | 0.13 | 33 | % | $ | 0.22 | 37 | % | $ | 0.32 | 47 | % | |||||||||||||||||
| Capital gain | 0 | 0 | % | 0.08 | 13 | % | 0 | 0 | % | ||||||||||||||||||||
| Return of capital | 0.27 | 67 | % | 0.30 | 50 | % | 0.36 | 53 | % | ||||||||||||||||||||
| Total distributions paid | $ | 0.40 | 100 | % | $ | 0.60 | 100 | % | $ | 0.68 | 100 | % | |||||||||||||||||
| Year Ended December 31, | ||||||||||||||||||
| 2017 | 2016 | 2015 | ||||||||||||||||
| Ordinary income | $ | 0.04 | 7.90 | % | $ | 0.31 | 57.10 | % | $ | 0.21 | 38.60 | % | ||||||
| Return of capital | 0.51 | 92.10 | % | 0.24 | 42.90 | % | 0.34 | 61.40 | % | |||||||||
| Total distributions paid | $ | 0.55 | 100.00 | % | $ | 0.55 | 100.00 | % | $ | 0.55 | 100.00 | % | ||||||
Noncontrolling interests represent limited partnership interests in the Operating Partnership. TheGCEAR Operating Partnership issued 20,000in which the Company is the general partner. General partnership units and limited partnership units for $10.00 per unit on February 11, 2014 toof the Advisor in exchange forGCEAR Operating Partnership were issued as part of the initial capitalization of the EA-1 Operating Partnership. Partnership and GCEAR II Operating Partnership, in conjunction with members of management's contribution of certain assets, other contributions, and in connection with the Self-Administration Transaction as discussed in Note 1, Organization.
As of December 31, 2017,2020, noncontrolling interests were approximately 0.03%12.2% of total shares outstanding and 12.0% of weighted average shares outstanding (both measures assuming limited partnership unitsGCEAR OP Units were converted to common stock). The Company has evaluated the terms of the limited partnership interests in the GCEAR Operating Partnership, and as a result, has classified limited partnership interests issued in the initial capitalization, in conjunction with the contributed assets and in connection with the Self-Administration Transaction, as noncontrolling interests, which are presented as a component of permanent equity, except as discussed below.
The Company evaluates individual noncontrolling interests for the ability to recognize the noncontrolling interest as permanent equity on the consolidated balance sheets at the time such interests are issued and on a continual basis. Any noncontrolling interest that fails to qualify as permanent equity will behas been reclassified as temporary equity and adjusted to the greater of (a) the carrying amount or (b) its redemption value as of the end of the period in which the determination is made.
As of December 31, 2020, the limited partners of the GCEAR Operating Partnership owned approximately $31.8 million GCEAR OP Units, which were issued to affiliated parties and unaffiliated third parties in exchange for certain properties, and in connection with the Self-Administration Transaction and other services. Approximately 20.4 million GCEAR OP Units issued to affiliates had a mandatory hold period until December 2020 and had no voting rights until the units convert to common shares. In addition, 0.2 million GCEAR OP Units were issued to unaffiliated third parties unrelated to property contributions. To the extent the contributors should elect to redeem all or a portion of their GCEAR OP Units, pursuant to the terms of the
F-33
GRIFFIN CAPITAL ESSENTIAL ASSET REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2020
(Dollars in thousands unless otherwise noted and excluding per share amounts
respective contribution agreement, such redemption shall be at a per unit value equivalent to the price at which the contributor acquired its GCEAR OP Units in the respective transaction.
The limited partners of the GCEAR Operating Partnership, other than those related to the Will Partners REIT, LLC ("Will Partners") property contribution, will have the right to cause the general partner of the GCEAR Operating Partnership, the Company, to redeem their limited partnership unitsGCEAR OP Units for cash equal to the value of an equivalent number of shares, or, at the Company’s option, the Company may purchase such limited partners' limited partnership unitstheir GCEAR OP Units by issuing one1 share of the Company’s common stock for the original redemption value of each limited partnership unit redeemed. The Company has the control and ability to settle such requests in shares. These rights may not be exercised under certain circumstances which could cause the Company to lose its REIT election. Furthermore, limited partners may exercise their redemption rights only after their limited partnershipThere were 134,383 GCEAR OP Units redeemed during the year ended December 31, 2020 and 6,000 units have been outstanding for one year. The limited partnership units are reported onredeemed during the consolidated balance sheets as noncontrolling interests.year ended December 31, 2019.
The following summarizes the activity for noncontrolling interests recorded as equity for the years ended December 31, 2017, 20162020 and 2015:2019:
| December 31, | |||||||||||
| 2020 | 2019 | ||||||||||
| Beginning balance | $ | 245,040 | $ | 232,203 | |||||||
| Contributions/issuance of noncontrolling interests | 0 | 30,039 | |||||||||
| Reclass of noncontrolling interest subject to redemption | 224 | 0 | |||||||||
| Repurchase of noncontrolling interest | (1,137) | 0 | |||||||||
| Issuance of stock dividend for noncontrolling interest | 1,068 | 1,861 | |||||||||
| Distributions to noncontrolling interests | (13,306) | (19,716) | |||||||||
| Allocated distributions to noncontrolling interests subject to redemption | (29) | (42) | |||||||||
| Net (loss) income | (1,732) | 3,749 | |||||||||
| Other comprehensive loss | (3,578) | (3,054) | |||||||||
| Ending balance | $ | 226,550 | $ | 245,040 | |||||||
Noncontrolling interests subject to redemption
Operating partnership units issued pursuant to the Will Partners property contribution are not included in permanent equity on the consolidated balance sheets. The partners holding these units can cause the general partner to redeem the units for the cash value, as defined in the GCEAR Operating Partnership agreement. As the general partner does not control these redemptions, these units are presented on the consolidated balance sheets as noncontrolling interest subject to redemption at their redeemable value. The net income (loss) and distributions attributed to these limited partners is allocated proportionately between common stockholders and other noncontrolling interests that are not considered redeemable.
| Year Ended December 31, | |||||||||||
| 2017 | 2016 | 2015 | |||||||||
| Beginning balance | $ | 84 | $ | 98 | $ | 139 | |||||
| Distributions to noncontrolling interests | (11 | ) | (11 | ) | (11 | ) | |||||
| Net income (loss) | 3 | (3 | ) | (30 | ) | ||||||
| Ending balance | $ | 76 | $ | 84 | $ | 98 | |||||
Summarized below are the related-party costs incurred by the Company for the years ended December 31, 2017, 20162020, 2019 and 2015,2018, respectively, and any related amounts receivable and payable as of December 31, 20172020 and 2016:2019:
| Incurred for the Year Ended December 31, | Receivable as of December 31, | ||||||||||||||||||||||||||||
| 2020 | 2019 | 2018 | 2020 | 2019 | |||||||||||||||||||||||||
| Assets Assumed through the Self-Administration Transaction | |||||||||||||||||||||||||||||
| Cash to be received from an affiliate related to deferred compensation and other payroll costs | $ | 0 | $ | 658 | $ | 0 | $ | 0 | $ | 0 | |||||||||||||||||||
| Other fees | 243 | 0 | 0 | 293 | 352 | ||||||||||||||||||||||||
| Due from GCC | |||||||||||||||||||||||||||||
| Reimbursable Expense Allocation | 15 | 4 | 0 | 4 | 4 | ||||||||||||||||||||||||
| Payroll/Expense Allocation | 653 | 481 | 0 | 1,114 | 481 | ||||||||||||||||||||||||
| Due from Affiliates | |||||||||||||||||||||||||||||
| Payroll/Expense Allocation | 0 | 1,217 | 0 | 0 | 0 | ||||||||||||||||||||||||
| O&O Costs (including payroll allocated to O&O) | 0 | 157 | 0 | 0 | 0 | ||||||||||||||||||||||||
Other Fees | 0 | 6,375 | 0 | 0 | 0 | ||||||||||||||||||||||||
| Total incurred/receivable | $ | 911 | $ | 8,892 | $ | 0 | $ | 1,411 | $ | 837 | |||||||||||||||||||
F-34
GRIFFIN CAPITAL ESSENTIAL ASSET REIT, II, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 20172020
(Dollars in thousands unless otherwise noted and excluding per share amounts)amounts
| Incurred for the Year Ended December 31, | Payable as of December 31, | ||||||||||||||||||||||||||||
| 2020 | 2019 | 2018 | 2020 | 2019 | |||||||||||||||||||||||||
| Expensed | |||||||||||||||||||||||||||||
| Operating expenses | $ | 0 | $ | 0 | $ | 3,594 | $ | 0 | $ | 0 | |||||||||||||||||||
| Asset management fees | 0 | 0 | 23,668 | 0 | 0 | ||||||||||||||||||||||||
| Property management fees | 0 | 0 | 9,479 | 0 | 0 | ||||||||||||||||||||||||
| Disposition fees | 0 | 641 | 177 | 0 | 0 | ||||||||||||||||||||||||
| Costs advanced by the advisor | 2,000 | 3,771 | 546 | 1,085 | 1,164 | ||||||||||||||||||||||||
| Consulting fee - shared services | 2,500 | 2,500 | 0 | 695 | 441 | ||||||||||||||||||||||||
| Capitalized | |||||||||||||||||||||||||||||
| Acquisition fees | 0 | 942 | 5,331 | 0 | 0 | ||||||||||||||||||||||||
| Leasing commissions | 0 | 2,540 | 2,289 | 0 | 0 | ||||||||||||||||||||||||
| Assumed through Self- Administration Transaction/EA Mergers | |||||||||||||||||||||||||||||
| Earn-out | 0 | 0 | 0 | 262 | 2,919 | ||||||||||||||||||||||||
| Other Fees | 0 | 20 | 0 | 0 | 0 | ||||||||||||||||||||||||
| Stockholder Servicing Fee | 0 | 692 | 0 | 494 | 4,994 | ||||||||||||||||||||||||
| Other | |||||||||||||||||||||||||||||
| Distributions | 10,537 | 14,138 | 0 | 736 | 1,365 | ||||||||||||||||||||||||
| Total incurred/payable | $ | 15,037 | $ | 25,244 | $ | 45,084 | $ | 3,272 | $ | 10,883 | |||||||||||||||||||
| Incurred as of December 31, | Payable as of December 31, | ||||||||||||||||||
| 2017 | 2016 | 2015 | 2017 | 2016 | |||||||||||||||
| Expensed | |||||||||||||||||||
| Acquisition fees and expenses | $ | — | $ | 6,324 | $ | 11,438 | $ | — | $ | — | |||||||||
| Operating expenses | 2,336 | 1,622 | 1,911 | 658 | 18 | ||||||||||||||
| Asset management fees | 8,027 | 6,413 | 2,624 | — | 807 | ||||||||||||||
| Property management fees | 1,799 | 1,052 | 333 | 158 | 143 | ||||||||||||||
| Performance distributions | 2,394 | — | — | 2,394 | — | ||||||||||||||
| Advisory Fees | 2,550 | — | — | 762 | — | ||||||||||||||
| Capitalized/Offering | |||||||||||||||||||
Acquisition fees and expenses (1) | 1,099 | 7,606 | — | — | — | ||||||||||||||
| Organization and offering expense | 192 | — | 3,150 | 192 | — | ||||||||||||||
| Other costs advanced by the Advisor | 662 | 304 | 2,598 | 285 | 12 | ||||||||||||||
Preferred offering costs (2) | — | — | 375 | — | — | ||||||||||||||
Selling commissions (3) | 1,128 | 11,397 | 16,303 | — | 54 | ||||||||||||||
Dealer Manager fees (4) | 393 | 3,949 | 7,303 | — | 18 | ||||||||||||||
| Stockholder servicing fee | 660 | 17,449 | 25 | 12,377 | 16,020 | ||||||||||||||
Advisor Advances: (5) | |||||||||||||||||||
| Organization and offering expenses | 179 | 2,634 | 382 | 8 | 2,477 | ||||||||||||||
Dealer Manager fees | 853 | 8,069 | 765 | 62 | 2,932 | ||||||||||||||
| Total | $ | 22,272 | $ | 66,819 | $ | 47,207 | $ | 16,896 | $ | 22,481 | |||||||||
Dealer Manager Agreement
Subject to the Dealer Manager Agreement, the Company will pay to the Dealer Manager selling commissions of up to 3.0% of the total purchase price for each sale of Class T shares and selling commissions of up to 3.5% of the total purchase price for each sale of Class S shares. The Company will not pay to the Dealer Manager any selling commissions in respect of the purchase of any Class D shares, Class I shares or DRP shares. The Company also will pay to the Dealer Manager dealer manager fees of up to 0.5% of the total purchase price for each sale of Class T shares. The Company will not pay to the Dealer Manager any dealer manager fees in respect of the purchase of any Class S shares, Class D shares, Class I shares or DRP shares. Substantially all of the selling commissions and dealer manager fees may be reallowed by the Dealer Manager to the participating broker-dealers who sold the shares giving rise to such selling commissions and dealer manager fees.
Conflicts of Interest
Affiliated Dealer Manager
Since Griffin Capital Securities, LLC, the different share classes are as follows: (i) with respect to the outstanding Class T shares equal to 1/365th of 1.0% of the Average NAV of the outstanding Class T shares for each day, consisting of an advisor distribution fee of 1/365th of 0.75% and a dealer distribution fee of 1/365th of 0.25% of the Average NAV of the Class T shares for each day; (ii) with respect to the outstanding Class S shares equal to 1/365th of 1.0% of the Average NAV of the outstanding Class S shares for each day; and (iii) with respect to the outstanding Class D shares equal to 1/365th of 0.25% of the Average NAV of the outstanding Class D shares for each day. The Company will not pay a distribution fee with respect to the outstanding Class I shares.
Administrative Services Agreement
In connection with the EA Merger, the Company Actassumed, as the successor of 1940, as amendedEA-1 and the EA-1 Operating Partnership, an Administrative Services Agreement (the "1940 Act""Administrative Services Agreement"). Because these persons have competing demands on their time, pursuant to which GCC and resources, they may have conflicts of interest in allocating their time between the Company’s businessGC LLC continue to provide office space and these other activities.
GCEAR Operating
F-35
GRIFFIN CAPITAL ESSENTIAL ASSET REIT, II, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 20172020
(Dollars in thousands unless otherwise noted and excluding per share amounts)amounts
Partnership, Griffin Capital Essential Asset TRS, Inc., and GRECO, which may include, without limitation, the Sponsor;shared information technology, human resources, legal, due diligence, marketing, customer service, events, operations, accounting and (3) influenceadministrative support services set forth in the Administrative Services Agreement. The Company pays GCC a monthly amount based on the actual costs anticipated to be incurred by GCC for the provision of such office space and services until the Company elects to provide such space and/or services for itself or through another provider, which amount is initially $0.2 million per month, based on an approved budget. Such costs are reconciled quarterly and a full review of the fee structure undercosts will be performed at least annually. In addition, the Advisory Agreement and distribution structureCompany will directly pay or reimburse GCC for the actual cost of any reasonable third-party expenses incurred in connection with the operating partnership agreementprovision of such services.
Certain Conflict Resolution Procedures
Every transaction that could resultthe Company enters into with affiliates is subject to an inherent conflict of interest. The Board may encounter conflicts of interest in actions not necessarilyenforcing the Company's rights against any affiliate in the long-term best interestevent of a default by or disagreement with an affiliate or in invoking powers, rights or options pursuant to any agreement between the Company and affiliates.See the Company's Code of Ethics available at the "Corporate Governance" subpage of the Company's stockholders. The board of directors has adopted the Sponsor’s acquisition allocation policy as to the allocation of acquisition opportunities among GCEAR and the Company, which is as follows:
The Company willleases commercial and industrial space to tenants primarily under non-cancelable operating leases that generally contain provisions for minimum base rents plus reimbursement for certain operating expenses. Total minimum lease payments are recognized in rental income on a straight-line basis over the term of the related lease and estimated reimbursements from tenants for real estate taxes, insurance, common area maintenance and other recoverable operating expenses are recognized in rental income in the period that the expenses are incurred.
The Company recognized $314.1 million, $291.4 million and $247.4 million of lease income related to operating lease payments for the year ended December 31, 2020, 2019 and 2018, respectively.
The Company's current leases have expirations ranging from 2021 to 2044. The following table sets forth the undiscounted cash flows for future minimum base rents to be dependent onreceived under operating leases as of December 31, 2020.
| As of December 31, 2020 | |||||
| 2021 | $ | 300,861 | |||
| 2022 | 302,912 | ||||
| 2023 | 289,261 | ||||
| 2024 | 249,419 | ||||
| 2025 | 208,153 | ||||
| Thereafter | 937,408 | ||||
| Total | $ | 2,288,014 | |||
The future minimum base rents in the Advisortable above excludes tenant reimbursements of operating expenses, amortization of adjustments for deferred rent receivables and the Dealer Manager for certain services that are essential toamortization of above/below-market lease intangibles.
Lessee
As of December 31, 2020, the Company includingleased 3 parcels of land located in Arizona under long-term ground leases with expiration dates of September 2102, December 2095, and September 2102 with no options to renew. The Company leases office space as part of conducting day-to-day business in Chicago. The Company's office space lease has a remaining lease term of approximately five years and no option to renew.
The Company incurred operating lease costs of approximately $3.7 million and $2.8 million for the saleyear ended December 31, 2020 and 2019 respectively, which are included in "Property Operating Expense" in the accompanying consolidated statement of operations. Total cash paid for amounts included in the measurement of operating lease liabilities was $1.6 million and $1.2 million for the years ended December 31, 2020 and 2019, respectively.
F-36
GRIFFIN CAPITAL ESSENTIAL ASSET REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2020
(Dollars in thousands unless otherwise noted and excluding per share amounts
The following table sets forth the weighted-average for the lease term and the discount rate as of December 31, 2020 and 2019:
| As of | |||||||||||
| Lease Term and Discount Rate | December 31, 2020 | December 31, 2019 | |||||||||
| Weighted-average remaining lease term in years. | 80.1 | 80.9 | |||||||||
Weighted-average discount rate (1) | 4.98 | % | 4.98 | % | |||||||
(1) Because the rate implicit in each of the Company's sharesleases was not readily determinable, the Company used an incremental borrowing rate. In determining the Company's incremental borrowing rate for each lease, the Company considered recent rates on secured borrowings, observable risk-free interest rates and credit spreads correlating to the Company's creditworthiness, the impact of common stock available for issue,collateralization and the identification, evaluation, negotiation, purchase and dispositionterm of properties and other investments, managementeach of the daily operationsCompany's lease agreements.
Maturities of the Company’s real estate portfolio, and other general and administrative responsibilities. In the event that these companies are unable to provide the respective services, the Company will be required to obtain such services from other resources.lease liabilities as of December 31, 2020 were as follows:
| December 31, 2020 | |||||
| 2021 | $ | 1,632 | |||
| 2022 | 1,675 | ||||
| 2023 | 1,741 | ||||
| 2024 | 1,776 | ||||
| 2025 | 1,727 | ||||
| Thereafter | 285,011 | ||||
| Total undiscounted lease payments | 293,562 | ||||
| Less imputed interest | (247,916) | ||||
| Total lease liabilities | $ | 45,646 | |||
13. Commitments and Contingencies
Litigation
From time to time, the Company may become subject to legal proceedings, claims and litigation arising in the ordinary course of business. The Company is not a party to any material legal proceedings, nor is the Company aware of any pending or threatened litigation that would have a material adverse effect on the Company’s business, operating results, cash flows or financial condition should such litigation be resolved unfavorably.
15. Subsequent Events
DRP Offering
As of February 24, 2021, the endCompany had issued 33,532,756 shares of each month during the period as determinedCompany’s common stock pursuant to the DRP offerings for approximately $323.1 million (includes historical amounts sold by EA-1 prior to the Company's Chief Executive Officer.EA Merger).
Cash Distributions
F-37
GRIFFIN CAPITAL ESSENTIAL ASSET REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2020
(Dollars in thousands unless otherwise noted and excluding per share amounts
On December 4, 2017,17, 2020, January 26, 2021 and February 25, 2021, the Company’s board of directorsBoard declared cash distributions in the amount of $0.00150684932$0.000958904 per day ($0.35 per share annualized), subject to adjustments for class-specific expenses, per Class E share, Class T share, Class S share, Class D share, Class I share, Class A share, Class AA share and Class AAA on the outstanding sharesshare of common stock, payable tofor stockholders of record atsuch classes as of the close of each business on each day duringof the period from January 1, 20182021 through January 31, 2021, February 1, 2021 through February 28, 2021, and March 1, 2021 through March 31, 2018. Such2021, respectively. The Company paid such January distributions payable to each stockholder of record will be paid on February 25, 2021, and intends to pay such date after the endFebruary and March distributions to each stockholder of each month during the periodrecord at such time in March 2021 and April 2021, respectively, as determined by the Company'sCompany’s Chief Executive Officer.
| 2017 | ||||||||||||||||
| First Quarter | Second Quarter | Third Quarter | Fourth Quarter | |||||||||||||
| Total revenue | $ | 25,972 | $ | 26,546 | $ | 27,349 | $ | 27,514 | ||||||||
| Net income | $ | 3,124 | $ | 3,365 | $ | 3,099 | $ | 1,531 | ||||||||
| Net income attributable to common stockholders | $ | 3,123 | $ | 3,364 | $ | 3,098 | $ | 1,531 | ||||||||
Net income per share (1) | $ | 0.04 | $ | 0.04 | $ | 0.04 | $ | 0.03 | ||||||||
| 2016 | ||||||||||||||||
| First Quarter | Second Quarter | Third Quarter | Fourth Quarter | |||||||||||||
| Total revenue | $ | 12,502 | $ | 13,330 | $ | 16,334 | $ | 20,646 | ||||||||
| Net (loss)/income | $ | (1,141 | ) | $ | (2,825 | ) | $ | (2,736 | ) | $ | 595 | |||||
| Net (loss)/income attributable to common stockholders | $ | (1,140 | ) | $ | (2,824 | ) | $ | (2,735 | ) | $ | 595 | |||||
Net (loss)/income per share (1) | $ | (0.03 | ) | $ | (0.06 | ) | $ | (0.05 | ) | $ | 0.01 | |||||
F-38
GRIFFIN CAPITAL ESSENTIAL ASSET REIT, II, INC.
SCHEDULE III
REAL ESTATE ASSETS AND ACCUMULATED DEPRECIATION AND AMORTIZATION
(Dollars in thousands unless otherwise noted)thousands)
Initial Cost to Company (1) | Total Adjustment to Basis (2) | Gross Carrying Amount at December 31, 2020 | Life on which depreciation in latest income statement is computed | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Property | Property Type | State | Encumbrances (3) | Land | Building and Improvements | Building and Improvements | Land | Building and Improvements (2) | Total | Accumulated Depreciation and Amortization | Date of Construction | Date of Acquisition | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Plainfield | Office | IL | $ | 0 | $ | 3,709 | $ | 22,209 | $ | 7,344 | $ | 3,709 | $ | 29,552 | $ | 33,261 | $ | 15,568 | N/A | 6/18/2009 | 5-40 years | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Renfro | Industrial | SC | 12,548 | 1,400 | 18,182 | 2,012 | 1,400 | 20,194 | 21,594 | 9,595 | N/A | 6/18/2009 | 5-40 years | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Emporia Partners | Industrial | KS | 1,627 | 274 | 7,567 | 962 | 274 | 8,530 | 8,804 | 3,216 | N/A | 8/27/2010 | 5-40 years | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| AT&T | Office | WA | 24,167 | 6,770 | 32,420 | 718 | 6,770 | 33,138 | 39,908 | 11,085 | N/A | 1/31/2012 | 5-40 years | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Westinghouse | Office | PA | 20,449 | 2,650 | 26,745 | 54 | 2,650 | 26,799 | 29,449 | 9,550 | N/A | 3/22/2012 | 5-40 years | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| TransDigm | Industrial | NJ | 4,276 | 3,773 | 9,030 | 411 | 3,773 | 9,441 | 13,214 | 3,056 | N/A | 5/31/2012 | 5-40 years | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Atrium II | Office | CO | 8,830 | 2,600 | 13,500 | 10,267 | 2,600 | 23,767 | 26,367 | 6,864 | N/A | 6/29/2012 | 5-40 years | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Zeller Plastik | Industrial | IL | 8,365 | 2,674 | 13,229 | 651 | 2,674 | 13,881 | 16,555 | 4,239 | N/A | 11/8/2012 | 5-40 years | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Northrop Grumman | Office | OH | 10,139 | 1,300 | 16,188 | 39 | 1,300 | 16,227 | 17,527 | 6,887 | N/A | 11/13/2012 | 5-40 years | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Health Net | Office | CA | 12,548 | 4,182 | 18,072 | 324 | 4,182 | 18,396 | 22,578 | 8,851 | N/A | 12/18/2012 | 5-40 years | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Comcast | Office | CO | 14,105 | (5) | 3,146 | 22,826 | 1,788 | 3,146 | 24,614 | 27,760 | 11,021 | N/A | 1/11/2013 | 5-40 years | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 500 Rivertech | Office | WA | 0 | 3,000 | 9,000 | 6,784 | 3,000 | 15,784 | 18,784 | 5,535 | N/A | 2/15/2013 | 5-40 years | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Schlumberger | Office | TX | 28,221 | 2,800 | 47,752 | 1,285 | 2,800 | 49,037 | 51,837 | 13,537 | N/A | 5/1/2013 | 5-40 years | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| UTC | Office | NC | 22,306 | 1,330 | 37,858 | 0 | 1,330 | 37,858 | 39,188 | 11,482 | N/A | 5/3/2013 | 5-40 years | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Avnet | Industrial | AZ | 18,644 | 1,860 | 31,481 | 47 | 1,860 | 31,528 | 33,388 | 8,068 | N/A | 5/29/2013 | 5-40 years | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Cigna | Office | AZ | 39,000 | (5) | 8,600 | 48,102 | 133 | 8,600 | 48,235 | 56,835 | 14,678 | N/A | 6/20/2013 | 5-40 years | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Amazon - Arlington Heights | Industrial | IL | 0 | 7,697 | 21,843 | 5,879 | 7,697 | 27,722 | 35,419 | 7,194 | N/A | 8/13/2013 | 5-40 years | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Verizon | Office | NJ | 24,559 | 5,300 | 36,768 | 14,032 | 5,300 | 50,800 | 56,100 | 17,817 | N/A | 10/3/2013 | 5-40 years | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Fox Head | Office | CA | 0 | 3,672 | 23,230 | 0 | 3,672 | 23,230 | 26,902 | 5,916 | N/A | 10/29/2013 | 5-40 years | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2500 Windy Ridge | Office | GA | 0 | 5,000 | 50,227 | 17,864 | 5,000 | 68,091 | 73,091 | 17,417 | N/A | 11/5/2013 | 5-40 years | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| General Electric | Office | GA | 0 | 5,050 | 51,396 | 132 | 5,050 | 51,529 | 56,579 | 12,746 | N/A | 11/5/2013 | 5-40 years | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Atlanta Wildwood | Office | GA | 0 | 4,241 | 23,414 | 6,114 | 4,241 | 29,528 | 33,769 | 10,079 | N/A | 11/5/2013 | 5-40 years | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Community Insurance | Office | OH | 0 | 1,177 | 22,323 | 3,725 | 1,177 | 26,047 | 27,224 | 6,016 | N/A | 11/5/2013 | 5-40 years | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Anthem | Office | OH | 0 | 850 | 8,892 | 175 | 850 | 9,067 | 9,917 | 3,016 | N/A | 11/5/2013 | 5-40 years | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| JPMorgan Chase | Office | OH | 0 | 5,500 | 39,000 | 978 | 5,500 | 39,978 | 45,478 | 11,296 | N/A | 11/5/2013 | 5-40 years | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Initial Cost to Company | Cost Capitalized Subsequent to Acquisition | Gross Carrying Amount at December 31, 2017 | Life on which depreciation in latest income statement is computed | |||||||||||||||||||||||||||||||||||||||
| Property | Property Type | ST | Encumbrances | Land | Building and Improvements(1) | Building and Improvements | Land | Building and Improvements | Total | Accumulated Depreciation and Amortization | Date of Construction | Date of Acquisition | ||||||||||||||||||||||||||||||
| Owens Corning | Industrial | NC | $ | 3,300 | $ | 575 | $ | 5,167 | $ | — | $ | 575 | $ | 5,167 | $ | 5,742 | $ | 485 | N/A | 3/9/2015 | 5-40 years | |||||||||||||||||||||
| Westgate II | Office | TX | 34,200 | 3,732 | 55,101 | — | 3,732 | 55,101 | 58,833 | 6,488 | N/A | 4/1/2015 | 5-40 years | |||||||||||||||||||||||||||||
| Administrative Office of Pennsylvania Courts | Office | PA | 6,070 | 1,207 | 8,936 | — | 1,207 | 8,936 | 10,143 | 994 | N/A | 4/22/2015 | 5-40 years | |||||||||||||||||||||||||||||
| American Express Center | Data Center/Office | AZ | 54,900 | 5,750 | 113,670 | — | 5,750 | 113,670 | 119,420 | 17,706 | N/A | 5/11/2015 | 5-40 years | |||||||||||||||||||||||||||||
| MGM Corporate Center | Office | NV | 18,180 | 4,260 | 28,705 | 405 | 4,260 | 29,110 | 33,370 | 3,387 | N/A | 5/27/2015 | 5-40 years | |||||||||||||||||||||||||||||
| American Showa | Industrial | OH | 10,320 | 1,453 | 15,747 | — | 1,453 | 15,747 | 17,200 | 1,475 | N/A | 5/28/2015 | 5-40 years | |||||||||||||||||||||||||||||
| Huntington Ingalls | Industrial | VA | — | 5,415 | 29,836 | 18 | 5,415 | 29,854 | 35,269 | 2,778 | N/A | 6/26/2015 | 5-40 years | |||||||||||||||||||||||||||||
| Wyndham | Office | NJ | — | 5,696 | 76,532 | — | 5,696 | 76,532 | 82,228 | 6,601 | N/A | 6/26/2015 | 5-40 years | |||||||||||||||||||||||||||||
| Exel | Distribution Center | OH | — | 1,988 | 13,958 | — | 1,988 | 13,958 | 15,946 | 1,461 | N/A | 6/30/2015 | 5-40 years | |||||||||||||||||||||||||||||
| Rapiscan Systems | Office | MA | — | 2,350 | 9,482 | — | 2,350 | 9,482 | 11,832 | 1,132 | N/A | 7/1/2015 | 5-40 years | |||||||||||||||||||||||||||||
| FedEx Freight | Industrial | OH | — | 2,774 | 25,913 | — | 2,774 | 25,913 | 28,687 | 2,331 | N/A | 7/22/2015 | 5-40 years | |||||||||||||||||||||||||||||
| Aetna | Office | AZ | — | 1,853 | 20,481 | — | 1,853 | 20,481 | 22,334 | 1,243 | N/A | 7/29/2015 | 5-40 years | |||||||||||||||||||||||||||||
| Bank of America I | Office | CA | — | 5,491 | 23,514 | 138 | 5,491 | 23,652 | 29,143 | 3,724 | N/A | 8/14/2015 | 5-40 years | |||||||||||||||||||||||||||||
| Bank of America II | Office | CA | — | 9,206 | 20,204 | — | 9,206 | 20,204 | 29,410 | 3,674 | N/A | 8/14/2015 | 5-40 years | |||||||||||||||||||||||||||||
| Atlas Copco | Office | MI | — | 1,480 | 16,490 | — | 1,480 | 16,490 | 17,970 | 1,626 | N/A | 10/1/2015 | 5-40 years | |||||||||||||||||||||||||||||
| Toshiba TEC | Office | NC | — | 4,130 | 36,821 | — | 4,130 | 36,821 | 40,951 | 2,691 | N/A | 1/21/2016 | 5-40 years | |||||||||||||||||||||||||||||
| NETGEAR | Office | CA | — | 20,726 | 25,887 | 43 | 20,726 | 25,930 | 46,656 | 2,148 | N/A | 5/17/2016 | 5-40 years | |||||||||||||||||||||||||||||
| Nike | Office | OR | — | 5,988 | 42,397 | 24 | 5,988 | 42,421 | 48,409 | 4,603 | N/A | 6/16/2016 | 5-40 years | |||||||||||||||||||||||||||||
| Zebra Technologies | Office | IL | — | 5,238 | 56,526 | — | 5,238 | 56,526 | 61,764 | 3,843 | N/A | 8/1/2016 | 5-40 years | |||||||||||||||||||||||||||||
| WABCO | Industrial | SC | — | 1,302 | 12,598 | — | 1,302 | 12,598 | 13,900 | 682 | N/A | 9/14/2016 | 5-40 years | |||||||||||||||||||||||||||||
| IGT | Office | NV | — | 6,325 | 64,441 | 40 | 6,325 | 64,481 | 70,806 | 2,695 | N/A | 9/27/2016 | 5-40 years | |||||||||||||||||||||||||||||
| 3M | Industrial | IL | — | 5,320 | 62,247 | — | 5,320 | 62,247 | 67,567 | 2,475 | N/A | 10/25/2016 | 5-40 years | |||||||||||||||||||||||||||||
| Amazon | Industrial | OH | — | 5,331 | 85,770 | — | 5,331 | 85,770 | 91,101 | 2,903 | N/A | 11/18/2016 | 5-40 years | |||||||||||||||||||||||||||||
| Zoetis | Office | NJ | — | 3,375 | 42,265 | — | 3,375 | 42,265 | 45,640 | 1,749 | N/A | 12/16/2016 | 5-40 years | |||||||||||||||||||||||||||||
| Southern Company | Office | AL | — | 6,605 | 122,679 | 45 | 6,605 | 122,724 | 129,329 | 3,488 | N/A | 12/22/2016 | 5-40 years | |||||||||||||||||||||||||||||
S-1
Initial Cost to Company (1) | Total Adjustment to Basis (2) | Gross Carrying Amount at December 31, 2020 | Life on which depreciation in latest income statement is computed | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Property | Property Type | State | Encumbrances (3) | Land | Building and Improvements | Building and Improvements | Land | Building and Improvements (2) | Total | Accumulated Depreciation and Amortization | Date of Construction | Date of Acquisition | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Sterling Commerce Center | Office | OH | 0 | 4,750 | 32,769 | 5,400 | 4,750 | 38,170 | 42,920 | 13,049 | N/A | 11/5/2013 | 5-40 years | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Aetna (Arlington) | Office | TX | 36,199 | (5) | 3,000 | 12,330 | 663 | 3,000 | 12,994 | 15,994 | 4,843 | N/A | 11/5/2013 | 5-40 years | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| CHRISTUS Health | Office | TX | 0 | 1,950 | 46,922 | 377 | 1,950 | 47,299 | 49,249 | 15,805 | N/A | 11/5/2013 | 5-40 years | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Roush Industries | Office | MI | 0 | 875 | 11,375 | 2,492 | 875 | 13,867 | 14,742 | 3,937 | N/A | 11/5/2013 | 5-40 years | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Parkland Center | Office | WI | 0 | 3,100 | 26,348 | 11,040 | 3,100 | 37,387 | 40,487 | 17,841 | N/A | 11/5/2013 | 5-40 years | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 1200 Morris | Office | PA | 0 | 2,925 | 18,935 | 2,708 | 2,925 | 21,643 | 24,568 | 8,235 | N/A | 11/5/2013 | 5-40 years | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| United HealthCare | Office | MO | 0 | 2,920 | 23,510 | 8,969 | 2,920 | 32,478 | 35,398 | 8,865 | N/A | 11/5/2013 | 5-40 years | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Intermec (Northpointe Corporate Center II) | Office | WA | 0 | 1,109 | 6,066 | 4,576 | 1,109 | 10,642 | 11,751 | 3,831 | N/A | 11/5/2013 | 5-40 years | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Comcast (Northpointe Corporate Center I) | Office | WA | 39,650 | (5) | 2,292 | 16,930 | 2,324 | 2,292 | 19,254 | 21,546 | 5,486 | N/A | 11/5/2013 | 5-40 years | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Farmers | Office | KS | 0 | 2,750 | 17,106 | 816 | 2,750 | 17,923 | 20,673 | 6,400 | N/A | 12/27/2013 | 5-40 years | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2200 Channahon Road | Industrial | IL | 0 | 6,000 | 46,511 | (24,957) | 2,066 | 25,488 | 27,554 | 14,718 | N/A | 5-40 years | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Digital Globe | Office | CO | 0 | 8,600 | 83,400 | 0 | 8,600 | 83,400 | 92,000 | 22,299 | N/A | 1/14/2014 | 5-40 years | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Waste Management | Office | AZ | 0 | 0 | 16,515 | 82 | 0 | 16,597 | 16,597 | 5,390 | N/A | 1/16/2014 | 5-40 years | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Wyndham Worldwide | Office | NJ | 0 | 6,200 | 91,153 | 2,494 | 6,200 | 93,647 | 99,847 | 19,388 | N/A | 4/23/2014 | 5-40 years | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| ACE Hardware Corporation HQ | Office | IL | 22,750 | (5) | 6,900 | 33,945 | 0 | 6,900 | 33,945 | 40,845 | 8,693 | N/A | 4/24/2014 | 5-40 years | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Equifax | Office | MO | 0 | 1,850 | 12,709 | 578 | 1,850 | 13,287 | 15,137 | 4,624 | N/A | 5/20/2014 | 5-40 years | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| American Express | Office | AZ | 0 | 15,000 | 45,893 | 5,408 | 15,000 | 51,300 | 66,300 | 19,104 | N/A | 5/22/2014 | 5-40 years | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Circle Star | Office | CA | 0 | 22,789 | 68,950 | 4,704 | 22,789 | 73,654 | 96,443 | 24,810 | N/A | 5/28/2014 | 5-40 years | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Vanguard | Office | NC | 0 | 2,230 | 31,062 | 819 | 2,230 | 31,881 | 34,111 | 8,614 | N/A | 6/19/2014 | 5-40 years | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Parallon | Office | FL | 6,971 | 1,000 | 16,772 | 0 | 1,000 | 16,772 | 17,772 | 4,519 | N/A | 6/25/2014 | 5-40 years | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| TW Telecom | Office | CO | 0 | 10,554 | 35,817 | 1,474 | 10,554 | 37,292 | 47,846 | 10,947 | N/A | 8/1/2014 | 5-40 years | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Equifax II | Office | MO | 0 | 2,200 | 12,755 | 266 | 2,200 | 13,022 | 15,222 | 3,920 | N/A | 10/1/2014 | 5-40 years | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Mason I | Office | OH | 0 | 4,777 | 18,489 | 746 | 4,777 | 19,235 | 24,012 | 2,928 | N/A | 11/7/2014 | 5-40 years | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Wells Fargo (Charlotte) | Office | NC | 26,975 | (5) | 2,150 | 40,806 | 46 | 2,150 | 40,852 | 43,002 | 9,743 | N/A | 12/15/2014 | 5-40 years | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| GE Aviation | Office | OH | 0 | 4,400 | 61,681 | 0 | 4,400 | 61,681 | 66,081 | 15,656 | N/A | 2/19/2015 | 5-40 years | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Westgate III | Office | TX | 0 | 3,209 | 75,937 | 0 | 3,209 | 75,937 | 79,146 | 16,145 | N/A | 4/1/2015 | 5-40 years | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2275 Cabot Drive | Office | IL | 0 | 2,788 | 16,200 | (10,796) | 373 | 7,818 | 8,191 | 6,504 | N/A | 6/10/2015 | 5-40 years | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Franklin Center | Office | MD | — | 6,989 | 46,875 | 1,436 | 6,989 | 48,311 | 55,300 | 9,780 | N/A | 6/10/2015 | 5-40 years | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 4650 Lakehurst Court | Office | OH | 0 | 2,943 | 22,651 | 808 | 2,943 | 23,459 | 26,402 | 8,308 | N/A | 6/10/2015 | 5-40 years | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
S-2
| Allstate | Office | CO | — | 1,808 | 14,090 | 200 | 1,808 | 14,290 | 16,098 | 679 | N/A | 1/31/2017 | 5-40 years | |||||||||||||||||||||||||||||
| MISO | Office | IN | — | 3,104 | 26,014 | — | 3,104 | 26,014 | 29,118 | 844 | N/A | 5/15/2017 | 5-40 years | |||||||||||||||||||||||||||||
Total (3) | $ | 126,970 | $ | 122,482 | $ | 1,055,471 | $ | 913 | $ | 122,482 | $ | 1,056,384 | $ | 1,178,866 | $ | 83,905 | ||||||||||||||||||||||||||
Initial Cost to Company (1) | Total Adjustment to Basis (2) | Gross Carrying Amount at December 31, 2020 | Life on which depreciation in latest income statement is computed | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Property | Property Type | State | Encumbrances (3) | Land | Building and Improvements | Building and Improvements | Land | Building and Improvements (2) | Total | Accumulated Depreciation and Amortization | Date of Construction | Date of Acquisition | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Miramar | Office | FL | 0 | 4,488 | 19,979 | 2,233 | 4,488 | 22,212 | 26,700 | 5,145 | N/A | 6/10/2015 | 5-40 years | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Royal Ridge V | Office | TX | 21,385 | (5) | 1,842 | 22,052 | 3,667 | 1,842 | 25,719 | 27,561 | 5,507 | N/A | 6/10/2015 | 5-40 years | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Duke Bridges | Office | TX | 27,475 | (5) | 8,239 | 51,395 | 7,867 | 8,239 | 59,263 | 67,502 | 11,167 | N/A | 6/10/2015 | 5-40 years | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Houston Westway II | Office | TX | 0 | 3,961 | 78,668 | 1,461 | 3,961 | 80,129 | 84,090 | 19,740 | N/A | 6/10/2015 | 5-40 years | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Houston Westway I | Office | TX | 0 | 6,540 | 30,703 | (2,647) | 2,668 | 16,175 | 18,843 | 6,425 | N/A | 6/10/2015 | 5-40 years | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Atlanta Perimeter | Office | GA | 69,461 | (5) | 8,382 | 96,718 | 957 | 8,382 | 97,675 | 106,057 | 31,017 | N/A | 5-40 years | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| South Lake at Dulles | Office | VA | 0 | 9,666 | 74,098 | 26,501 | 9,666 | 100,599 | 110,265 | 18,592 | N/A | 6/10/2015 | 5-40 years | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Four Parkway | Office | IL | 0 | 4,339 | 37,298 | 4,228 | 4,339 | 41,526 | 45,865 | 11,510 | N/A | 6/10/2015 | 5-40 years | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Highway 94 | Industrial | MO | 14,689 | 5,637 | 25,280 | 0 | 5,637 | 25,280 | 30,917 | 6,306 | N/A | 11/6/2015 | 5-40 years | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Heritage III | Office | TX | 0 | 1,955 | 15,540 | 5,436 | 1,955 | 20,976 | 22,931 | 3,788 | N/A | 12/11/2015 | 5-40 years | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Heritage IV | Office | TX | 0 | 2,330 | 26,376 | 4,744 | 2,330 | 31,120 | 33,450 | 6,209 | N/A | 12/11/2015 | 5-40 years | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Samsonite | Industrial | FL | 20,165 | 5,040 | 42,490 | 11 | 5,040 | 42,501 | 47,541 | 7,711 | N/A | 12/11/2015 | 5-40 years | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Restoration Hardware | Industrial | CA | 78,000 | (5) | 15,463 | 36,613 | 37,693 | 15,463 | 74,305 | 89,768 | 18,432 | N/A | 1/14/2016 | 5-40 years | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| HealthSpring | Office | TN | 20,208 | 8,126 | 31,447 | 43 | 8,126 | 31,490 | 39,616 | 6,971 | N/A | 4/27/2016 | 5-40 years | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| LPL | Office | SC | 0 | 4,612 | 86,352 | 0 | 4,612 | 86,352 | 90,964 | 7,821 | N/A | 11/30/2017 | 5-40 years | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| LPL | Office | SC | 0 | 1,274 | 41,509 | 0 | 1,273 | 41,509 | 42,782 | 3,760 | N/A | 11/30/2017 | 5-40 years | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Quaker | Industrial | FL | 0 | 5,433 | 55,341 | 0 | 5,433 | 55,341 | 60,774 | 4,760 | N/A | 3/13/2018 | 5-40 years | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| McKesson | Office | AZ | 0 | 312 | 69,760 | 0 | 312 | 69,760 | 70,072 | 9,879 | N/A | 4/10/2018 | 5-40 years | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Shaw Industries | Industrial | GA | 0 | 5,465 | 57,116 | 0 | 5,465 | 57,116 | 62,581 | 4,737 | N/A | 5/3/2018 | 5-40 years | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| GEAR Entities | Land | WA | 0 | 1,584 | 0 | 0 | 1,584 | 0 | 1,584 | 0 | N/A | 3/17/2016 | N/A | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Owens Corning | Industrial | NC | 3,295 | 867 | 4,418 | 901 | 867 | 5,319 | 6,186 | 500 | N/A | 5/1/2019 | 5-40 years | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Westgate II | Office | TX | 34,152 | 7,716 | 48,422 | 870 | 7,716 | 49,292 | 57,008 | 5,047 | N/A | 5/1/2019 | 5-40 years | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Administrative Office of Pennsylvania Courts | Office | PA | 6,061 | 1,246 | 9,626 | 498 | 1,246 | 10,125 | 11,371 | 972 | N/A | 5/1/2019 | 5-40 years | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| American Express Center | Office | AZ | 54,823 | 10,595 | 82,098 | 3,109 | 10,595 | 85,207 | 95,802 | 9,882 | - | 5/1/2019 | 5-40 years | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| MGM Corporate Center | Office | NV | 18,154 | 4,546 | 25,825 | 1,223 | 4,546 | 27,049 | 31,595 | 2,823 | - | 5/1/2019 | 5-40 years | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| American Showa | Industrial | OH | 10,306 | 1,214 | 16,538 | 2,427 | 1,214 | 18,965 | 20,179 | 1,588 | N/A | 5/1/2019 | 5-40 years | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Huntington Ingalls | Industrial | VA | 0 | 6,213 | 29,219 | 2,670 | 6,213 | 31,889 | 38,102 | 2,712 | - | 5/1/2019 | 5-40 years | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Wyndham | Office | NJ | 0 | 9,677 | 71,316 | 1,742 | 9,677 | 73,058 | 82,735 | 5,678 | N/A | 5/1/2019 | 5-40 years | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Exel | Industrial | OH | 0 | 978 | 14,137 | 2,568 | 978 | 16,705 | 17,683 | 1,941 | N/A | 5/1/2019 | 5-40 years | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
S-3
Initial Cost to Company (1) | Total Adjustment to Basis (2) | Gross Carrying Amount at December 31, 2020 | Life on which depreciation in latest income statement is computed | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Property | Property Type | State | Encumbrances (3) | Land | Building and Improvements | Building and Improvements | Land | Building and Improvements (2) | Total | Accumulated Depreciation and Amortization | Date of Construction | Date of Acquisition | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Rapiscan Systems | Office | MA | 0 | 2,006 | 10,270 | 484 | 2,006 | 10,755 | 12,761 | 1,013 | N/A | 5/1/2019 | 5-40 years | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Aetna | Office | AZ | 0 | 2,332 | 18,486 | 1,598 | 2,332 | 20,084 | 22,416 | 2,003 | N/A | 5/1/2019 | 5-40 years | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Atlas Copco | Office | MI | 0 | 1,156 | 18,297 | 1,505 | 1,156 | 19,802 | 20,958 | 1,729 | N/A | 5/1/2019 | 5-40 years | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Toshiba TEC | Office | NC | 0 | 1,916 | 36,374 | 2,423 | 1,916 | 38,796 | 40,712 | 3,246 | N/A | 5/1/2019 | 5-40 years | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| NETGEAR | Office | CA | 0 | 22,600 | 28,859 | 1,700 | 22,600 | 30,559 | 53,159 | 3,799 | N/A | 5/1/2019 | 5-40 years | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Nike | Office | OR | 0 | 8,186 | 41,184 | 2,164 | 8,187 | 43,347 | 51,534 | 5,512 | - | 5/1/2019 | 5-40 years | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Zebra Technologies | Office | IL | 0 | 5,927 | 58,688 | 1,255 | 5,927 | 59,943 | 65,870 | 6,168 | N/A | 5/1/2019 | 5-40 years | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| WABCO | Industrial | SC | 0 | 1,226 | 13,902 | 839 | 1,226 | 14,741 | 15,967 | 860 | N/A | 5/1/2019 | 5-40 years | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| IGT | Office | NV | 45,300 | (7) | 5,673 | 67,610 | 2,021 | 5,673 | 69,631 | 75,304 | 4,501 | - | 5/1/2019 | 5-40 years | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 3M | Industrial | IL | 43,600 | (7) | 5,802 | 75,758 | 6,391 | 5,802 | 82,148 | 87,950 | 4,388 | N/A | 5/1/2019 | 5-40 years | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Amazon - Etna | Industrial | OH | 61,500 | (7) | 4,773 | 95,475 | 11,546 | 4,773 | 107,021 | 111,794 | 6,799 | N/A | 5/1/2019 | 5-40 years | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Zoetis | Office | NJ | 0 | 3,718 | 44,082 | 735 | 3,718 | 44,817 | 48,535 | 3,268 | N/A | 5/1/2019 | 5-40 years | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Southern Company | Office | AL | 99,600 | (7) | 7,794 | 157,724 | 1,457 | 7,794 | 159,181 | 166,975 | 7,615 | N/A | 5/1/2019 | 38 years | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Allstate | Office | CO | 0 | 3,109 | 13,096 | 553 | 3,109 | 13,649 | 16,758 | 1,214 | N/A | 5/1/2019 | 5-40 years | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| MISO | Office | IN | 0 | 3,725 | 25,848 | 971 | 3,725 | 26,820 | 30,545 | 2,074 | N/A | 5/1/2019 | 5-40 years | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| McKesson II | Office | AZ | 0 | 0 | 36,959 | 4,681 | 0 | 41,640 | 41,640 | 2,794 | N/A | 9/20/2019 | 5-40 years | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Pepsi Bottling Ventures | Industrial | NC | 18,590 | 3,407 | 31,783 | 954 | 3,407 | 32,734 | 36,141 | 1,033 | N/A | 2/5/2020 | 5-40 years | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Others (6) | 0 | 0 | 0 | 95 | 0 | 95 | 95 | 26 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Total all properties (4) | $ | 1,029,093 | $ | 455,895 | $ | 3,616,395 | $ | 253,765 | $ | 445,674 | $ | 3,864,628 | $ | 4,310,302 | $ | 817,773 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
(1)Building and improvements include tenant origination and absorption costs.
(2)Consists of capital expenditure, real estate development costs, and impairment charges.
(3)Amount does not include the net loan valuation discount of $0.6 million related to the debt assumed in the Highway 94, Samsonite and HealthSpring property acquisitions, as well as Owens Corning, Westgate II, AOPC, IPC/TRWC (AMEX), MGM, American Showa, BAML and Pepsi Bottling Ventures.
(4)As of December 31, 2020, the aggregate cost of real estate the Company and consolidated subsidiaries owned for federal income tax purposes was approximately $4.1 billion (unaudited).
(5)The BOA Loan is secured by cross-collateralized and cross-defaulted first mortgage liens on the properties.
(6)Represents furniture & fixtures for the Company's office in Chicago.
(7)The BOA/KeyBank Loan is secured by cross-collateralized and cross-defaulted first mortgage liens on the properties.
S-4
| Activity for the year ended December 31, | Activity for the Year Ended December 31, | |||||||||||||||||||||||||||
| 2017 | 2016 | 2015 | 2020 | 2019 | 2018 | |||||||||||||||||||||||
| Real estate facilities | Real estate facilities | |||||||||||||||||||||||||||
| Balance at beginning of year | $ | 1,133,055 | $ | 516,965 | $ | — | Balance at beginning of year | $ | 4,278,433 | $ | 3,073,364 | $ | 2,869,328 | |||||||||||||||
| Acquisitions | 45,016 | 615,972 | 516,965 | Acquisitions | 36,144 | 1,305,998 | 193,430 | |||||||||||||||||||||
| Improvements | 576 | 38 | — | |||||||||||||||||||||||||
| Construction-in-progress | 219 | 80 | — | |||||||||||||||||||||||||
| Construction costs and improvements | Construction costs and improvements | 72,306 | 51,440 | 26,883 | ||||||||||||||||||||||||
| Impairment provision | Impairment provision | (23,472) | (30,734) | 0 | ||||||||||||||||||||||||
| Sale of real estate assets | Sale of real estate assets | (53,109) | (121,635) | (16,277) | ||||||||||||||||||||||||
| Balance at end of year | $ | 1,178,866 | $ | 1,133,055 | $ | 516,965 | Balance at end of year | $ | 4,310,302 | $ | 4,278,433 | $ | 3,073,364 | |||||||||||||||
| Accumulated depreciation | Accumulated depreciation | |||||||||||||||||||||||||||
| Balance at beginning of year | $ | 39,955 | $ | 12,061 | $ | — | Balance at beginning of year | $ | 668,104 | $ | 538,412 | $ | 426,752 | |||||||||||||||
| Depreciation and amortization expense | 43,950 | 27,894 | 12,061 | Depreciation and amortization expense | 161,056 | 153,425 | 119,168 | |||||||||||||||||||||
| Less: Non-real estate assets depreciation expense | Less: Non-real estate assets depreciation expense | (4,619) | (7,769) | (3,584) | ||||||||||||||||||||||||
| Less: Sale of real estate assets depreciation expense | Less: Sale of real estate assets depreciation expense | (6,768) | (15,964) | (3,924) | ||||||||||||||||||||||||
| Balance at end of year | $ | 83,905 | $ | 39,955 | $ | 12,061 | Balance at end of year | $ | 817,773 | $ | 668,104 | $ | 538,412 | |||||||||||||||
| Real estate facilities, net | $ | 1,094,961 | $ | 1,093,100 | $ | 504,904 | Real estate facilities, net | $ | 3,492,529 | $ | 3,610,329 | $ | 2,534,952 | |||||||||||||||
S-5