Griffin Capital Essential Asset REIT, Inc. - FORM 10-Q - November 13, 2017

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
____________________________________________________

FORM 10-Q
____________________________________________________
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2017
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                     to                     
Commission File Number: 000-54377
_______________________________________________
Griffin Capital Essential Asset REIT, Inc.
(Exact name of Registrant as specified in its charter)
________________________________________________
Maryland
 
26-3335705
(State or other jurisdiction of
incorporation or organization)
 
(IRS Employer
Identification No.)

Griffin Capital Plaza
1520 E. Grand Ave

El Segundo, California 90245
(Address of principal executive offices)
(310) 469-6100
(Registrant’s telephone number)

__________________________________________________
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.    Yes  x     No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer
 
¨
 
Accelerated filer
 
¨
Non-accelerated filer
 
x  (Do not check if a smaller reporting company)
 
Smaller reporting company
 
¨
Emerging growth company
 
¨
 
 
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨ 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of November 10, 2017: 170,110,994 shares of common stock, $0.001 par value per share.

1

FORM 10-Q
GRIFFIN CAPITAL ESSENTIAL ASSET REIT, INC.
TABLE OF CONTENTS
 
 
Page No.
 
 
Item 1.
Financial Statements:
 
 
 
 
 
 
 
Item 2.
Item 3.
Item 4.
 
Item 1.
Item 1A.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.

2

PART I. FINANCIAL INFORMATION
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

Certain statements contained in this Form 10-Q of Griffin Capital Essential Asset REIT, Inc., other than historical facts, may be considered forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). We intend for all such forward-looking statements to be covered by the applicable safe harbor provisions for forward-looking statements contained in Section 27A of the Securities Act and Section 21E of the Exchange Act. Such forward-looking statements may discuss, among other things, our future capital expenditures, distributions and acquisitions (including the amount and nature thereof), business strategies, the expansion and growth of our operations, our net sales, gross margin, operating expenses, operating income, net income, cash flow, financial condition, impairments, expenditures, capital structure, organizational structure, and other developments and trends of the real estate industry. Such statements are based on a number of assumptions involving judgments with respect to, among other things, future economic, competitive, and market conditions, all of which are difficult or impossible to predict accurately. To the extent that our assumptions differ from actual results, our ability to meet such forward-looking statements, including our ability to generate positive cash flow from operations and provide distributions to stockholders, our ability to find suitable investment properties, and our ability to be in compliance with certain debt covenants, may be significantly hindered. Therefore, such statements are not intended to be a guarantee of our performance in future periods. Such forward-looking statements can generally be identified by our use of forward-looking terminology such as “may,” “will,” “expect,” “intend,” “anticipate,” “estimate,” “believe,” “continue,” or other similar words. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date this report is filed with the Securities and Exchange Commission (the "SEC"). We cannot guarantee the accuracy of any such forward-looking statements contained in this Form 10-Q, and we do not intend to publicly update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise, except as required by applicable securities laws and regulations.
See the risk factors identified in the “Risk Factors” section of our Annual Report on Form 10-K for the year ended December 31, 2016 as filed with the SEC for a discussion of some, although not all, of the risks and uncertainties that could cause actual results to differ materially from those presented in our forward-looking statements.

3

GRIFFIN CAPITAL ESSENTIAL ASSET REIT, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited; in thousands, except share amounts)

September 30, 2017

December 31, 2016
ASSETS



Cash and cash equivalents
$
32,563


$
43,442

Restricted cash
97,986


12,859

Real estate:



Land
336,725


340,145

Building and improvements
1,914,610


1,909,918

Tenant origination and absorption cost
475,505


479,001

Construction in progress
6,370


5,326

Total real estate
2,733,210


2,734,390

Less: accumulated depreciation and amortization
(399,387
)

(319,149
)
Total real estate, net
2,333,823


2,415,241

Real estate assets and other assets held for sale, net
275,718


279,530

Investments in unconsolidated entities
39,561


46,313

Intangible assets, net
19,756


28,481

Deferred rent
43,976


37,591

Deferred leasing costs, net
19,648


13,424

Other assets
21,947


17,922

Total assets
$
2,884,978


$
2,894,803

LIABILITIES AND EQUITY



Debt:



Mortgages payable
$
668,559


$
343,461

Term Loan
711,370


710,489

Revolver Loan
144,404


393,585

Total debt
1,524,333


1,447,535

Restricted reserves
9,303


8,876

Accrued expenses and other liabilities
59,411


60,875

Redemptions payable
37,559

 
11,565

Distributions payable
6,231


6,377

Due to affiliates
3,984


2,467

Below market leases, net
25,065


29,606

Liabilities of real estate assets held for sale
5,793


6,973

Total liabilities
1,671,679


1,574,274

Commitments and contingencies (Note 11)



Noncontrolling interests subject to redemption, 531,000 units eligible towards redemption as of September 30, 2017 and December 31, 2016
4,887


4,887

Common stock subject to redemption
42,070


92,058

Stockholders’ equity:



Common Stock, $0.001 par value; 700,000,000 shares authorized; 173,476,566 and 176,032,871 shares outstanding, as of September 30, 2017 and December 31, 2016
174


176

Additional paid-in capital
1,561,671


1,561,516

Cumulative distributions
(424,552
)

(333,829
)
Accumulated earnings (deficit)
1,761


(29,750
)
Accumulated other comprehensive loss
(817
)

(4,643
)
Total stockholders’ equity
1,138,237


1,193,470

Noncontrolling interests
28,105


30,114

Total equity
1,166,342


1,223,584

Total liabilities and equity
$
2,884,978


$
2,894,803

See accompanying notes.

4

GRIFFIN CAPITAL ESSENTIAL ASSET REIT, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited; in thousands, except share and per share amounts)
 
Three Months Ended 
 September 30,

Nine Months Ended 
 September 30,
 
2017

2016

2017

2016
Revenue:







Rental income
$
66,437


$
66,894


$
197,647


$
201,064

Lease termination income
—


995


12,845


1,211

Property expense recoveries
18,695


18,847


54,120


57,781

Total revenue
85,132


86,736


264,612


260,056

Expenses:







Asset management fees to affiliates
5,921


5,921


17,786


17,599

Property management fees to affiliates
2,453


2,373


7,519


7,164

Property operating expense
13,028


12,233


36,782


36,347

Property tax expense
10,916


10,876


33,465


33,114

Acquisition fees and expenses to non-affiliates
—


7


—


541

Acquisition fees and expenses to affiliates
—


—


—


1,239

General and administrative expenses
1,509


1,153


5,753


4,525

Corporate operating expenses to affiliates
676


578


1,983


1,431

Depreciation and amortization
28,235


34,217


88,783


96,904

Impairment provision
—


—


5,675


—

Total expenses
62,738


67,358


197,746


198,864

Income before other income and (expenses)
22,394


19,378


66,866


61,192

Other income (expenses):







Interest expense
(12,692
)

(12,405
)

(37,232
)

(37,249
)
Other income
260


623


495


2,692

Loss from investment in unconsolidated entities
(517
)

(465
)

(1,511
)

(1,203
)
Gain on acquisition of unconsolidated entity
—


—


—


666

Gain from disposition of assets
—


—


4,293


—

Net income
9,445


7,131


32,911


26,098

Less: Net income attributable to noncontrolling interests
(326
)

(246
)

(1,134
)

(896
)
Net income attributable to controlling interest
9,119


6,885


31,777


25,202

Distributions to redeemable noncontrolling interests attributable to common stockholders
(90
)

(90
)

(266
)

(268
)
Net income attributable to common stockholders
$
9,029


$
6,795


$
31,511


$
24,934

Net income attributable to common stockholders per share, basic and diluted
$
0.05


$
0.04


$
0.18


$
0.14

Weighted average number of common shares outstanding, basic and diluted
173,661,904


175,570,072


174,787,551


175,443,680

Distributions declared per common share
$
0.17


$
0.17


$
0.51


$
0.51

See accompanying notes.

5

GRIFFIN CAPITAL ESSENTIAL ASSET REIT, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited; in thousands)

 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
2017
 
2016
 
2017
 
2016
Net income
$
9,445

 
$
7,131

 
$
32,911

 
$
26,098

Other comprehensive income (loss):
 
 
 
 
 
 
 
Equity in other comprehensive income (loss) of unconsolidated joint venture
311

 
327

 
489

 
(456
)
Change in fair value of swap agreements
748

 
6,494

 
3,471

 
(17,606
)
Total comprehensive income
10,504

 
13,952

 
36,871

 
8,036

Distributions to redeemable noncontrolling interests attributable to common stockholders
(90
)
 
(90
)
 
(266
)
 
(268
)
Less: comprehensive income attributable to noncontrolling interests
(361
)
 
(480
)
 
(1,268
)
 
(274
)
Comprehensive income attributable to common stockholders
$
10,053

 
$
13,382

 
$
35,337

 
$
7,494

See accompanying notes.




6


GRIFFIN CAPITAL ESSENTIAL ASSET REIT, INC.
CONSOLIDATED STATEMENTS OF EQUITY
(Unaudited)
(In thousands, except share data)
 
 
 
 
 
 
 
 
 
 
 
Accumulated Other Comprehensive Loss
 
 
 
 
 
 
 
Common Stock
 
Additional
Paid-In
Capital
 
Cumulative
Distributions
 
Accumulated (Deficit)
Earnings
 
 
Total
Stockholders’
Equity
 
Non-
controlling
Interests
 
Total
Equity
 
Shares
 
Amount
 
BALANCE December 31, 2015
175,184,519

 
$
175

 
$
1,561,499

 
$
(212,031
)
 
$
(55,035
)
 
$
(6,839
)
 
$
1,287,769

 
$
21,318

 
$
1,309,087

Stock-based compensation
1,333

 
—

 
18

 
—

 
—

 
—

 
18

 
—

 
18

Distributions to common stockholders
—

 
—

 
—

 
(69,624
)
 
—

 
—

 
(69,624
)
 
—

 
(69,624
)
Issuance of shares for distribution reinvestment plan
5,011,974

 
5

 
52,169

 
(52,174
)
 
—

 
—

 
—

 
—

 
—

Repurchase of common stock
(4,164,955
)
 
(4
)
 
(41,439
)
 
—

 
—

 
—

 
(41,443
)
 
—

 
(41,443
)
Additions to common stock subject to redemption
—

 
—

 
(10,731
)
 
—

 
—

 
—

 
(10,731
)
 
—

 
(10,731
)
Issuance of limited partnership units
—

 
—

 
—

 
—

 
—

 
—

 
—

 
11,941

 
11,941

Distributions to noncontrolling interests
—

 
—

 
—

 
—

 
—

 
—

 
—

 
(4,124
)
 
(4,124
)
Distributions to noncontrolling interests subject to redemption
—

 
—

 
—

 
—

 
—

 
—

 
—

 
(11
)
 
(11
)
Net income
—

 
—

 
—

 
—

 
25,285

 
—

 
25,285

 
912

 
26,197

Other comprehensive income
—

 
—

 
—

 
—

 
—

 
2,196

 
2,196

 
78

 
2,274

BALANCE December 31, 2016
176,032,871

 
$
176

 
$
1,561,516

 
$
(333,829
)
 
$
(29,750
)
 
$
(4,643
)
 
$
1,193,470

 
$
30,114

 
$
1,223,584

Stock-based compensation
13,000

 
—

 
153

 
—

 
—

 
—

 
153

 
—

 
153

Distributions to common stockholders
—

 
—

 
—

 
(53,285
)
 
—

 
—

 
(53,285
)
 
—

 
(53,285
)
Issuance of shares for distribution reinvestment plan
3,585,985

 
4

 
37,434

 
(37,438
)
 
—

 
—

 
—

 
—

 
—

Repurchase of common stock
(6,155,290
)
 
(6
)
 
(61,426
)
 
—

 
—

 
—

 
(61,432
)
 
—

 
(61,432
)
Additions to common stock subject to redemption
—

 
—

 
23,994

 
—

 
—

 
—

 
23,994

 
—

 
23,994

Distributions to noncontrolling interests
—

 
—

 
—

 
—

 
—

 
—

 
—

 
(3,267
)
 
(3,267
)
Distributions to noncontrolling interests subject to redemption
—

 
—

 
—

 
—

 
—

 
—

 
—

 
(10
)
 
(10
)
Net income
—

 
—

 
—

 
—

 
31,511

 
—

 
31,511

 
1,134

 
32,645

Other comprehensive income
—

 
—

 
—

 
—

 
—

 
3,826

 
3,826

 
134

 
3,960

BALANCE September 30, 2017
173,476,566

 
$
174

 
$
1,561,671

 
$
(424,552
)
 
$
1,761

 
$
(817
)
 
$
1,138,237

 
$
28,105

 
$
1,166,342

See accompanying notes.

7

GRIFFIN CAPITAL ESSENTIAL ASSET REIT, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited; in thousands)
 
Nine Months Ended
 
September 30,
 
2017
 
2016
Operating Activities:
 
 
 
Net income
$
32,911

 
$
26,098

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation of building and building improvements
42,244

 
42,302

Amortization of leasing costs and intangibles, including ground leasehold interests
46,539

 
54,602

Amortization of above and below market leases
1,310

 
2,219

Amortization of deferred financing costs
2,102

 
2,004

Amortization of debt premium
(422
)
 
(170
)
Amortization of deferred revenue
—

 
(1,228
)
Deferred rent
(8,508
)
 
(11,864
)
Write off of tenant improvement reserve
—


(900
)
Termination fee revenue - receivable from tenant
(12,845
)
 
—

Gain from acquisition of unconsolidated entity
—

 
(666
)
Gain from sale of depreciable operating property
(4,293
)
 
—

Unrealized loss (gain) on interest rate swap
48

 
(21
)
Loss from investment in unconsolidated entities
1,511

 
1,203

Impairment provision
5,675

 
—

Stock-based compensation
153

 
14

Change in operating assets and liabilities:
 
 
 
Deferred leasing costs and other assets
1,767

 
3,437

Restricted cash
(1,003
)
 
6,013

Accrued expenses and other liabilities
281

 
(9,513
)
Due to affiliates, net
1,517

 
(5,418
)
Net cash provided by operating activities
108,987

 
108,112

Investing Activities:
 
 
 
Acquisition of properties, net
—

 
(7,897
)
Proceeds from disposition of properties
10,245

 
—

Real estate funds held for exchange
—

 
47,031

Reserves for tenant improvements
(6,422
)
 
1,965

Improvements to real estate
(421
)
 
(6,758
)
Payments for construction-in-progress, net
(8,435
)
 
(7,045
)
Mortgage receivable from affiliate
—

 
25,741

Distributions of capital from investment in unconsolidated entities
5,730

 
5,933

Net cash provided by investing activities
697

 
58,970

Financing Activities:
 
 
 
Proceeds from borrowings - Bank of America Loan
297,725

 
—

Proceeds from borrowings - Term Loan
—

 
75,000

Proceeds from borrowings - Revolver Loan
44,000

 
40,100

Principal payoff of secured indebtedness - Mortgage Debt
(41,462
)
 
(17,375
)
Principal payoff of secured indebtedness - Revolver Loan
(294,054
)
 
(139,344
)
Partial principal payoff of secured indebtedness - TW Telecom mortgage loan
(324
)
 
—

Principal amortization payments on secured indebtedness
(4,781
)
 
(3,363
)
Deferred financing costs
(3,261
)
 
(740
)
Purchase of noncontrolling interest
—

 
(18,129
)
Repurchase of common stock
(61,432
)
 
(29,933
)
Distributions to noncontrolling interests
(3,556
)
 
(3,244
)
Distributions to common stockholders
(53,418
)
 
(51,991
)
Net cash used in financing activities
(120,563
)
 
(149,019
)
Net (decrease) increase in cash and cash equivalents
(10,879
)
 
18,063

Cash and cash equivalents at the beginning of the period
43,442

 
21,944

Cash and cash equivalents at the end of the period
$
32,563

 
$
40,007

Supplemental Disclosures of Significant Non-cash Transactions:
 
 
 
Increase (decrease) in fair value swap agreement
$
3,423

 
$
(17,312
)
Limited partnership units of the operating partnership issued in conjunction with the acquisition of real estate assets by affiliates
$
—

 
$
11,941

Mortgage debt assumed in conjunction with the contribution of real estate assets
$
—

 
$
22,441

Distributions to redeemable noncontrolling interests attributable to common stockholders as reflected on the consolidated statements of operations
$
266

 
$
268

Common stock issued pursuant to the distribution reinvestment plan
$
37,438

 
$
39,252

Common stock redemptions funded subsequent to period-end
$
37,559

 
$
11,598

See accompanying notes.

8
GRIFFIN CAPITAL ESSENTIAL ASSET REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2017
(Unaudited; dollars in thousands unless otherwise noted)


1.
Organization
Griffin Capital Essential Asset REIT, Inc., a Maryland corporation (the "Company"), was formed on August 28, 2008 under the Maryland General Corporation Law and qualified as a real estate investment trust ("REIT") commencing with the year ended December 31, 2010. The Company was organized primarily with the purpose of acquiring single tenant properties that are essential to the tenant’s business and used a substantial amount of the net proceeds from the Public Offerings (as defined below) to invest in these properties. The Company’s year end is December 31.
Griffin Capital Company, LLC, a Delaware limited liability company (the "Sponsor"), has sponsored the Company’s Public Offerings. The Sponsor, which was formerly known as Griffin Capital Corporation, began operations in 1995 to engage principally in acquiring 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 Advisor, LLC, a Delaware limited liability company (the "Advisor"), was formed on August 27, 2008. Griffin Capital Real Estate Company, LLC ("GRECO"), is the sole member of the Advisor, and Griffin Capital, LLC ("GC") is the sole member of GRECO. The Company has entered into an advisory agreement for the Public Offerings (as amended and restated, the "Advisory Agreement"), which states that the Advisor is responsible for managing the Company’s affairs on a day-to-day basis and identifying and making acquisitions and investments on behalf of the Company. The officers of the Advisor are also officers of the Sponsor. The Advisory Agreement has a one-year term, and it may be renewed for an unlimited number of successive one-year periods by the Company's board of directors.
The Company’s property manager is Griffin Capital Essential Asset Property Management, LLC, a Delaware limited liability company (the “Property Manager”), which was formed on August 28, 2008 to manage the Company’s properties. The Property Manager derives substantially all of its income from the property management services it performs for the Company.
From 2009 to 2014, the Company offered shares of common stock pursuant to a private placement offering to accredited investors (the "Private Offering") and two public offerings, consisting of an initial public offering and a follow-on offering (together, the "Public Offerings"), which included shares for sale pursuant to the distribution reinvestment plan ("DRP"). The Company issued 126,592,885 total shares of its common stock for gross proceeds of approximately $1.3 billion pursuant to the Private Offering and Public Offerings.
On May 7, 2014, the Company filed a Registration Statement on Form S-3 with the SEC for the registration of $75.0 million in shares for sale pursuant to the DRP (the “2014 DRP Offering”). On September 22, 2015, the Company filed a Registration Statement on Form S-3 with the SEC for the registration of $100.0 million in shares for sale pursuant to the DRP (the “2015 DRP Offering”). On June 9, 2017, the Company filed a Registration Statement on Form S-3 with the SEC for the registration of $104.4 million in shares for sale pursuant to the DRP (the "2017 DRP Offering," and together with the 2014 DRP Offering and 2015 DRP Offering, the "DRP Offerings"). The 2017 DRP Offering may be terminated at any time upon 10 days’ prior written notice to stockholders.
As of September 30, 2017, the Company had issued 185,550,510 shares of common stock. The Company has received aggregate gross offering proceeds of approximately $1.5 billion from the sale of shares in the Private Offering, the Public Offerings, and the DRP Offerings. There were 173,476,566 shares outstanding at September 30, 2017, including shares issued pursuant to the DRP, less shares redeemed pursuant to the share redemption program. As of September 30, 2017 and December 31, 2016, the Company had issued approximately $199.8 million and $162.4 million, respectively, in shares pursuant to the DRP, which are classified on the consolidated balance sheets as common stock subject to redemption, net of redemptions paid of approximately $120.2 million and $58.8 million, respectively, and redemptions payable totaling approximately $37.6 million and $11.6 million, respectively, which are included in accrued expenses and other liabilities on the consolidated balance sheets. Since inception and through September 30, 2017, the Company had redeemed 12,073,944 shares of common stock for approximately $120.2 million pursuant to the share redemption program.
Griffin Capital Essential Asset Operating Partnership, L.P., a Delaware limited partnership (the "Operating Partnership"), was formed on August 29, 2008. The Operating Partnership owns, directly or indirectly, all of the properties that the Company has acquired. The Advisor purchased an initial 99% limited partnership interest in the Operating Partnership for $0.2 million, and the Company contributed the initial one thousand dollars capital contribution, received from the Advisor, to the Operating

9
GRIFFIN CAPITAL ESSENTIAL ASSET REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2017
(Unaudited; dollars in thousands unless otherwise noted)

Partnership in exchange for a 1% general partner interest. As of September 30, 2017, the Company owned approximately 96% of the limited partnership units of the Operating Partnership, and, as a result of the contribution of five properties to the Company, the Sponsor and certain of its affiliates, including certain officers of the Company, owned approximately 2% of the limited partnership units of the Operating Partnership. Approximately 2.1 million units are owned by the Company’s Chief Executive Officer and Chairman, Kevin A. Shields. The remaining approximately 2% of the limited partnership units are owned by unaffiliated third parties. No limited partnership units of the Operating Partnership have been redeemed during the nine months ended September 30, 2017 and year ended December 31, 2016. The Operating Partnership may conduct certain activities through the Company’s taxable REIT subsidiary, Griffin Capital Essential Asset TRS, Inc., a Delaware corporation (the "TRS"), formed on September 2, 2008, which is a wholly-owned subsidiary of the Operating Partnership. The TRS had no activity as of September 30, 2017.

10
GRIFFIN CAPITAL ESSENTIAL ASSET REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2017
(Unaudited; dollars in thousands unless otherwise noted)

2.
Basis of Presentation and Summary of Significant Accounting Policies
There have been no significant changes to the Company’s accounting policies since the Company filed its audited financial statements in its Annual Report on Form 10-K for the year ended December 31, 2016 (except as noted below). For further information about the Company’s accounting policies, refer to the Company’s consolidated financial statements and notes thereto for the year ended December 31, 2016 included in the Company’s Annual Report on Form 10-K filed with the SEC.
The accompanying unaudited 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”) for interim financial information as contained in the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”), and in conjunction with rules and regulations of the SEC. Certain information and footnote disclosures required for annual financial statements have been condensed or excluded pursuant to SEC rules and regulations. Accordingly, the unaudited consolidated financial statements do not include all of the information and footnotes required by GAAP for complete financial statements. The unaudited 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 interim period. Operating results for the three and nine months ended September 30, 2017 are not necessarily indicative of the results that may be expected for the year ending December 31, 2017. These unaudited consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016. The unaudited consolidated financial statements include accounts and related adjustments of the Company, the Operating Partnership and the TRS, if applicable, which are, in the opinion of management, of a normal recurring nature and necessary for a fair presentation of the Company’s financial position for the interim period. All significant intercompany accounts and transactions have been eliminated in consolidation.
The consolidated financial statements of the Company include all accounts of the Company, the Operating Partnership, and its subsidiaries. Intercompany transactions are not shown on the consolidated statements. However, each property owning entity is a wholly owned subsidiary which is a special purpose entity, 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.
Real Estate Purchase Price Allocation
In January 2017, the FASB issued Accounting Standards Update ("ASU") 2017-01, Business Combinations, (see “Recently Issued Accounting Pronouncements” below) that clarifies the framework for determining whether an integrated set of assets and activities meets the definition of a business. The revised framework establishes a screen for determining whether an integrated set of assets and activities is a business and narrows the definition of a business, which is expected to result in fewer transactions being accounted for as business combinations. Acquisitions of integrated sets of assets and activities that do not meet the definition of a business are accounted for as asset acquisitions. This update is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2017, with early adoption permitted for transactions that have not been reported in previously issued (or available to be issued) financial statements.
The Company adopted this accounting standard early effective January 1, 2017. As a result of the Company's adoption of ASU 2017-01, Business Combinations, the Company anticipates that many of its future acquisitions (if any) will be treated as asset acquisitions, which will result in a lower amount of acquisition-related costs being expensed on the Company's consolidated statement of operations, as the majority of those costs will be capitalized and included as part of the relative fair value allocation of the purchase price. However, since the Company's acquisition activity at this stage is substantially reduced, the impact of ASU 2017-01, Business Combinations, is expected to be insignificant to its financial statements.

11
GRIFFIN CAPITAL ESSENTIAL ASSET REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2017
(Unaudited; dollars in thousands unless otherwise noted)

Revenue Recognition
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 the Company's estimate of the property's operating expenses for the year, pro 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 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 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.

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 the remaining useful life of the unamortized lease-related costs.
Use of Estimates
The preparation of the consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could materially differ from those estimates.
Change in Consolidated Financial Statements Presentation
Certain amounts in the Company's prior period consolidated financial statements have been reclassified to conform to the current period presentation. Property expense recovery reimbursements are presented gross on the statement of operations for all periods presented. Certain amounts in the Company's prior period consolidated financial statements have been reclassified to conform to the current period presentation. See Assets Held for Sale in Note 3, Real Estate.

12
GRIFFIN CAPITAL ESSENTIAL ASSET REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2017
(Unaudited; dollars in thousands unless otherwise noted)

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 September 30, 2017 and December 31, 2016, there were no material common stock equivalents that would have a dilutive effect on earnings (loss) per share for common stockholders.
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 one reportable segment.
Recently Issued Accounting Pronouncements
In August 2017, the FASB issued an ASU that simplifies hedge accounting. The purpose of this updated guidance is to better align a company’s financial reporting for hedging 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.
Under existing standards a quantitative assessment is made on an ongoing basis to determine if a hedge is highly effective in offsetting changes in cash flows associated with the hedged item. Under the new standard, entities will still be required to perform an initial quantitative test. However, the new standard allows entities to elect to subsequently perform only a qualitative assessment unless facts and circumstances change.
The ASU is effective for reporting periods beginning after December 15, 2018, with early adoption permitted. For cash flow hedges in existence at the date of adoption, an entity is required to apply a cumulative-effect adjustment for previously recognized ineffectiveness from retained earnings to accumulated other comprehensive income, as of the beginning of the fiscal year when an entity adopts the amendments in this ASU.
The Company utilizes interest rate hedge agreements to hedge a portion of exposure to variable interest rates primarily associated with borrowings based on LIBOR. As a result, all interest rate hedge agreements are designated as cash flow hedges. During the three and nine months ended September 30, 2017 and September 30, 2016, the ineffectiveness related to the Company's interest rate hedge agreements was immaterial. Therefore, the Company does not believe this ASU would have an impact on operating results for the nine months ended September 30, 2017.
In January 2017, the FASB issued ASU 2017-01, Business Combinations, that clarified the definition of a business. The ASU is effective for reporting periods beginning after December 15, 2017, with early adoption permitted. The Company adopted this update on January 1, 2017. Refer to “Real Estate Purchase Price Allocation” above for a discussion of this accounting pronouncement.
In February 2016, the FASB issued ASU 2016-02, Leases ("ASU 2016-02"). ASU 2016-02 amends the existing accounting standards for lease accounting, including requiring lessees to recognize most leases on their balance sheets and making targeted changes to lessor accounting. ASU 2016-02 will be effective beginning in the first quarter of 2019. Early adoption of ASU 2016-02 as of its issuance is permitted. The new leases standard requires a modified retrospective transition approach for all leases existing at, or entered into after, the date of initial application, with an option to use certain transition relief. The Company is currently conducting an evaluation of the impact of the guidance on the Company's consolidated financial statements and related disclosures. The Company currently believes that the adoption of the standard will not significantly change the accounting for operating leases on the Company's consolidated balance sheets where the Company is the lessor, and that such leases will be accounted for in a similar method to existing standards with the underlying leased asset being reported and recognized as a real estate asset. The Company currently expects that certain non-lease components will need to be accounted for separately from the lease components, with the lease components continuing to be recognized on a

13
GRIFFIN CAPITAL ESSENTIAL ASSET REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2017
(Unaudited; dollars in thousands unless otherwise noted)

straight-line basis over the term of the lease and certain non-lease components (such as common area maintenance and provision of utilities) being accounted for under the new revenue recognition guidance in ASU 2014-09 discussed below, even when revenue for such non-lease components is not separately stipulated in the lease. The Company is evaluating whether the bifurcation of non-lease components will affect the timing or recognition of certain lease revenues. Additionally, the Company is analyzing its current ground lease obligation under ASU 2016-02. The Company has done a preliminary assessment and continues to evaluate the potential impact the guidance may have on its condensed consolidated financial statements and related disclosures and will adopt ASU 2016-02 as of January 1, 2019.
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606) (“ASU 2014-09”). ASU 2014-09 replaces substantially all industry-specific revenue recognition requirements and converges areas under this topic with International Financial Reporting Standards. ASU 2014-09 implements a five-step process for customer contract revenue recognition that focuses on transfer of control, as opposed to transfer of risk and rewards. ASU 2014-09 also requires enhanced disclosures regarding the nature, amount, timing, and uncertainty of revenues and cash flows from contracts with customers. Other major provisions in ASU 2014-09 include capitalizing and amortizing certain contract costs, ensuring the time value of money is considered in the applicable transaction price, and allowing estimates of variable consideration to be recognized before contingencies are resolved in certain circumstances. ASU 2014-09 was originally effective for reporting periods beginning after December 31, 2016 (for public entities). On April 1, 2015, the FASB voted to defer the effective date of ASU 2014-09 by one year, to annual reporting periods beginning after December 15, 2017. On July 9, 2015, the FASB affirmed its proposal to defer the effective date to annual reporting periods beginning after December 15, 2017, although entities may elect to adopt the standard as of the original effective date. The Company intends to adopt the guidance using the modified retrospective approach for the fiscal year beginning January 1, 2018. The Company anticipates no impact upon adoption of the new accounting guidance on its consolidated financial statements relating to the recognition of gains and losses on the sale of real estate assets as the Company’s current accounting for such transactions is consistent with the new guidance’s core principle. Rental income from leasing arrangements is a substantial portion of the Company’s revenue, is specifically excluded from ASU 2014-09 and will be governed by the applicable lease codification (ASU 2016-02). In conjunction with the adoption of the leasing guidance, the Company is currently in the process of evaluating certain variable payment terms included in these lease arrangements which are governed by ASU 2014-09.
In March 2016, the FASB issued ASU 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net). The amendments clarify how an entity should identify the unit of accounting (i.e., the specified good or service) for the principal versus agent evaluation, and how it should apply the control principle to certain types of arrangements, such as service transactions, by explaining what a principal controls before the specified good or service is transferred to the customer. The effective date and transition requirements for the amendments are the same as the effective date and transition requirements of ASU 2014-09. The Company intends to adopt the guidance using the modified retrospective approach for the fiscal year beginning January 1, 2018. The Company anticipates no impact upon adoption of the new accounting guidance on its consolidated financial statements relating to the recognition of reporting revenue gross versus net on its consolidated financial statements as the Company’s current accounting for such transactions is consistent with the new guidance’s core principle.
3.
Real Estate
As of September 30, 2017, the Company’s real estate portfolio consisted of 74 properties in 20 states consisting substantially of office, warehouse, and manufacturing facilities and 2 land parcels held for future development with a combined acquisition value of approximately $3.0 billion, including the allocation of the purchase price to above and below-market lease valuation.

14
GRIFFIN CAPITAL ESSENTIAL ASSET REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2017
(Unaudited; dollars in thousands unless otherwise noted)

Future Minimum Contractual Rent Payments
The future minimum contractual rent payments pursuant to the current lease terms are shown in the table below. The Company's current leases have expirations ranging from 2017 to 2042.
 
As of September 30, 2017
Remaining 2017
$
62,290

2018
251,335

2019
227,779

2020
205,642

2021
190,366

Thereafter
916,411

Total
$
1,853,823

Intangibles
The Company allocated a portion of the acquired and contributed real estate asset value to in-place lease valuation and tenant origination and absorption cost as of September 30, 2017 and December 31, 2016:
 
September 30, 2017
 
December 31, 2016
In-place lease valuation (above market)
$
43,443

 
$
46,605

In-place lease valuation (above market) - accumulated amortization
(25,840
)
 
(20,297
)
In-place lease valuation (above market), net
17,603

 
26,308

Ground leasehold interest (below market)
2,255

 
2,254

Ground leasehold interest (below market) - accumulated amortization
(102
)
 
(81
)
Ground leasehold interest (below market), net
2,153

 
2,173

Intangible assets, net
$
19,756

 
$
28,481

In-place lease valuation (below market)
$
(49,774
)
 
$
(49,774
)
In-place lease valuation (below market) - accumulated amortization
24,709

 
20,168

In-place lease valuation (below market), net
$
(25,065
)
 
$
(29,606
)
Tenant origination and absorption cost
$
475,505

 
$
479,001

Tenant origination and absorption cost - accumulated amortization
(228,976
)
 
(187,145
)
Tenant origination and absorption cost, net
$
246,529

 
$
291,856

The following table sets forth the estimated annual amortization (income) expense for in-place lease valuation, net, tenant origination and absorption costs, ground leasehold improvements, and other leasing costs as of September 30, 2017 for the next five years:
Year
 
In-place lease valuation, net
 
Tenant origination and absorption costs
 
Ground leasehold improvements
 
Other leasing costs
 Remaining 2017
 
$
93

 
$
13,121

 
$
7

 
$
636

2018
 
$
(744
)
 
$
49,756

 
$
27

 
$
1,997

2019
 
$
(1,853
)
 
$
41,104

 
$
27

 
$
2,017

2020
 
$
(782
)
 
$
31,814

 
$
27

 
$
2,033

2021
 
$
(644
)
 
$
27,285

 
$
27

 
$
1,988

Tenant and Portfolio Risk
The Company monitors the credit of all tenants to stay abreast of any material changes in credit quality. The Company monitors tenant credit by (1) reviewing the credit ratings of tenants (or their parent companies) that are rated by nationally recognized rating agencies; (2) reviewing financial statements and related metrics and information that are publicly available or

15
GRIFFIN CAPITAL ESSENTIAL ASSET REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2017
(Unaudited; dollars in thousands unless otherwise noted)

that are required to be provided pursuant to the lease; (3) monitoring news reports and press releases regarding the tenants and their underlying business and industry; and (4) monitoring the timeliness of rent collections.
2500 Windy Ridge Parkway
In January 2017, Coca-Cola Refreshments USA, Inc. terminated their lease at the 2500 Windy Ridge Parkway property located in Atlanta, Georgia (an office facility); consequently, the Company released Coca-Cola Refreshments USA, Inc. from any and all obligations under the lease in-place effective December 31, 2016. In exchange, the Company agreed to a fee of $12.8 million, which is included in lease termination income on the consolidated statements of operations for the nine months ended September 30, 2017. The fee is being paid in quarterly installments over a two year period equal to $1.6 million per quarter. The Company received the first payment on January 31, 2017. During the year ended December 31, 2016, and as a result of the lease termination, the Company accelerated approximately $3.4 million of unamortized in-place lease intangible assets that were recorded as part of the purchase price allocation when the property was acquired and approximately$0.4 million of deferred rent.
400 Bertha Lamme Drive
During the nine months ended September 30, 2017, as a result of Westinghouse Electric Company, LLC filing for bankruptcy, the Company recorded an impairment provision of approximately $5.7 million related to the lease intangibles as it was determined that the carrying value of these assets would not be recoverable. In determining the fair value of intangible lease assets, the Company considered Level 3 inputs. 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.
Sale of Property
12669 Encinitas Avenue
On June 30, 2017, the Company sold the ITT property located in Los Angeles, California for total proceeds of $10.0 million, less closing costs and other closing credits. The carrying value of the property on the closing date was approximately $5.4 million. Upon the sale of the property, the Company recognized a gain of approximately $4.0 million.
Assets Held for Sale
As of September 30, 2017, two properties, the One Century Place property located in Nashville, Tennessee, and the DreamWorks property located in Los Angeles, California met the criteria to be classified as held for sale. Therefore, the Company classified the properties as held for sale, net, on the consolidated balance sheets at the lower of its (i) carrying amount or (ii) fair value less costs to sell as of September 30, 2017. The One Century Place and DreamWorks properties are included in continuing operations in the consolidated statements of operations as both properties did not meet the prerequisite requirements to be classified as discontinued operations.
The following summary presents the major components of assets and liabilities related to the real estate held for sale as of the nine months ended September 30, 2017 and year ended December 31, 2016:

16
GRIFFIN CAPITAL ESSENTIAL ASSET REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2017
(Unaudited; dollars in thousands unless otherwise noted)

 
 
Balance as of
 
 
September 30, 2017
 
December 31, 2016
Restricted cash
 
$
561

 
$
561

Real Estate:
 
 
 
 
Land
 
34,412

 
34,412

Building and improvements
 
193,115

 
192,867

Tenant origination and absorption cost
 
62,645

 
62,645

Construction in progress
 
75

 
76

Total real estate
 
290,247

 
290,000

Less: accumulated depreciation and amortization
 
(25,164
)
 
(19,403
)
Total real estate, net
 
265,083

 
270,597

Intangible assets, net
 
521

 
567

Deferred rent
 
7,934

 
6,309

Deferred leasing costs, net
 
645

 
715

Other assets
 
974

 
781

Total assets
 
$
275,718

 
$
279,530

 
 
 
 
 
Restricted reserves
 
$
561

 
$
561

Accrued expenses and other liabilities
 
3,022

 
4,130

Due to affiliates
 
255

 
252

Below market leases, net
 
1,955

 
2,030

Total liabilities
 
$
5,793

 
$
6,973

The following is a summary of the income included in the Company's income from continuing operations for the three and nine months ended September 30, 2017 and 2016, from the DreamWorks and One Century Place properties classified as held for sale, which did not qualify as discontinued operations:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2017
 
2016
 
2017
 
2016
Total revenues
$
7,434

 
$
7,008

 
$
22,266

 
$
21,539

Operating expenses
(2,226
)
 
(2,077
)
 
(7,334
)
 
(6,624
)
Total revenues less operating expenses from assets classified as "held for sale"
5,208

 
4,931

 
14,932

 
14,915

Depreciation and amortization expense
(1,277
)
 
(4,788
)
 
(5,836
)
 
(7,717
)
Income from assets classified as "held for sale"
$
3,931

 
$
143

 
$
9,096

 
$
7,198



17
GRIFFIN CAPITAL ESSENTIAL ASSET REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2017
(Unaudited; dollars in thousands unless otherwise noted)

4.
Investments
Investment in Unconsolidated Entities
Digital Realty Trust, Inc.
On September 9, 2014, the Company, through a special purpose entity ("SPE"), wholly-owned by the Operating Partnership, acquired an 80% interest in a joint venture with an affiliate of Digital Realty Trust, Inc. 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 "Property"). The 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 five years.
The joint venture currently uses an interest rate swap to manage its interest rate risk associated with its variable rate debt. The interest rate swap is designated as an interest rate hedge of its exposure to the volatility associated with interest rates. As a result of the hedge designation and in satisfying the requirement for cash flow hedge accounting, the joint venture records changes in the fair value in accumulated other comprehensive income. In conjunction with the investment in the joint venture discussed above, the Company recognized its 80% share, or approximately $0.5 million of other comprehensive income for the nine months ended September 30, 2017.
The interest discussed above is deemed to be a variable interest in a variable interest entity ("VIE"), and, based on an evaluation of the variable interest against the criteria for consolidation, the Company determined that it is not the primary beneficiary of the investment, as the Company does not have power to direct the activities of the entity that most significantly affect its performance. As such, the interest in the VIE is recorded using the equity method of accounting in the accompanying consolidated financial statements. Under the equity method, the investment in the unconsolidated entity is 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.
As of September 30, 2017, the balance of the investment is shown below:
 
 
Digital Realty
Joint Venture
Balance as of December 31, 2016
 
$
46,313

Other comprehensive income
 
489

Net loss
 
(1,511
)
Distributions
 
(5,730
)
Balance as of September 30, 2017
 
$
39,561


18
GRIFFIN CAPITAL ESSENTIAL ASSET REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2017
(Unaudited; dollars in thousands unless otherwise noted)

5.
Debt
As of September 30, 2017 and December 31, 2016, the Company’s debt consisted of the following:
 
 
Balance as of
 
 
 
 
 
 
 
 
September 30, 2017
 
December 31, 2016
 
Contractual
Interest 
Rate (1)
 
Loan
Maturity
 
Effective Interest Rate (2)
Plainfield loan
 
$
—

 
$
18,932

 
—
 
—
 
—
Emporia Partners loan
 
3,080

 
3,377

 
5.88%
 
September 2023
 
5.96%
Ace Hardware loan
 
—

 
22,922

 
—
 
—
 
—
Highway 94 loan
 
17,561

 
18,175

 
3.75%
 
August 2024
 
4.62%
Samsonite loan
 
23,172

 
23,786

 
6.08%
 
September 2023
 
5.22%
HealthSpring loan
 
21,810

 
22,149

 
4.18%
 
April 2023
 
4.59%
Midland loan
 
104,670

 
105,600

 
3.94%
 
April 2023
 
4.06%
AIG loan
 
109,691

 
110,640

 
4.96%
 
February 2029
 
5.06%
TW Telecom loan
 
19,384

 
20,353

 
LIBO Rate +2.45% (3)
 
August 2019
 
3.93%
Bank of America loan
 
375,000

 
—

 
3.77%
 
August 2027
 
3.98%
Total Mortgage Debt
 
674,368

 
345,934

 
 
 
 
 
 
Term Loan
 
715,000

 
715,000

 
LIBO Rate +1.40% (3)
 
July 2020
 
2.85%
Revolver Loan
 
147,355

 
397,409

 
LIBO Rate +1.45% (3)
 
July 2020 (4)
 
3.46%
Total Debt
 
1,536,723


1,458,343

 
 
 
 
 
 
Unamortized Deferred Financing
Costs and Discounts, net
 
(12,390
)
 
(10,808
)
 
 
 
 
 
 
Total Debt, net
 
$
1,524,333

 
$
1,447,535

 
 
 
 
 
 
(1)
Including the effect of interest rate swap agreements with a total notional amount of $825.0 million, the weighted average interest rate as of September 30, 2017 was 3.47% for the Company’s fixed-rate and variable-rate debt combined and 3.50% for the Company’s fixed-rate debt only.
(2)
Reflects the effective interest rate as of September 30, 2017 and includes the effect of amortization of discounts/premiums and deferred financing costs.
(3)
The LIBO Rate as of September 30, 2017 was 1.23%.
(4)
The Revolver Loan has an initial term of four years, maturing on July 20, 2019, and may be extended for a one-year period if certain conditions are met and upon payment of an extension fee. See discussion below.
Unsecured Credit Facility
On July 20, 2015, the Company, through the Operating Partnership, entered into a credit agreement (the "Unsecured Credit Agreement ") with a syndicate of lenders, co-led by KeyBank National Association ("KeyBank"), Bank of America, N.A. ("Bank of America"), Fifth Third Bank ("Fifth Third"), and BMO Harris Bank, N.A. ("BMO Harris"), under which KeyBank serves as administrative agent and Bank of America, Fifth Third, and BMO Harris serve as co-syndication agents, and KeyBanc Capital Markets, Merrill Lynch, Pierce, Fenner & Smith Incorporated ("Merrill Lynch"), Fifth Third, and BMO Capital Markets serve as joint bookrunners and joint lead arrangers. Pursuant to the Unsecured Credit Agreement, the Company was provided with a $1.14 billion senior unsecured credit facility (the "Unsecured Credit Facility"), consisting of a $500.0 million senior unsecured revolver (the "Revolver Loan") and a $640.0 million senior unsecured term loan (the "Term Loan"). The Unsecured Credit Facility may be increased up to $860.0 million, in minimum increments of $50.0 million, for a maximum of $2.0 billion by increasing either the Revolver Loan, the Term Loan, or both. The Revolver Loan has an initial term of four years, maturing on July 20, 2019, and may be extended for a one-year period if certain conditions are met and upon payment of an extension fee. The Term Loan has a term of five years, maturing on July 20, 2020.
On March 29, 2016, the Company exercised its right to increase the total commitments, pursuant to the Unsecured Credit Agreement. As a result, the total commitments on the Term Loan increased from $640.0 million to $715.0 million.

19
GRIFFIN CAPITAL ESSENTIAL ASSET REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2017
(Unaudited; dollars in thousands unless otherwise noted)

In March 2017, the Company, through the Operating Partnership, drew an additional $23.0 million to pay off the remaining balance of the Ace Hardware loan.
In September 2017, the Company, through the Operating Partnership, drew an additional $21.0 million to pay down the remaining $18.7 million Plainfield loan balance and the remaining proceeds were used to fund operations.
In September 2017, the Company paid down approximately $294.1 million of the Unsecured Credit Facility, as further described below.
Bank of America Loan
On September 29, 2017, the Company, through ten special purpose entities wholly owned by the Operating Partnership, entered into a loan agreement with Bank of America (together with its successors and assigns, the "Lender") in which the Company borrowed $375.0 million (the “Bank of America Loan”).
The Company utilized approximately $294.1 million of the funds provided by the Bank of America Loan to pay down a portion of the Company's Unsecured Credit Facility. In connection with this pay down of the Unsecured Credit Facility, KeyBank released eight special purpose entities owned by the Operating Partnership from their obligations as guarantors under the Unsecured Credit Facility. The Bank of America Loan is secured by cross-collateralized and cross-defaulted first mortgage liens on the properties (or in the case of one property, on the special purpose entity's leasehold interest in the property) with the following tenants: ACE Hardware Corporation; Christus Health; Comcast of Washington; Connecticut General; General Electric Company; NEC Corporation of America; Restoration Hardware, Inc.; State Farm Mutual Automobile Insurance Co.; T-Mobile West LLC; and WellsFargo Bank, National Association (each, a "Secured Property"). In addition, the Company entered into a nonrecourse carve-out guaranty agreement. Approximately $77.3 million of the loan proceeds are being held in an interest-bearing escrow account classified as restricted cash, with the Lender until such time as certain conditions related to one of the Secured Properties are satisfied. Subsequent to September 30, 2017, the $77.3 million was released to the Company.
In addition to their first mortgage lien, the Lender also has a security interest in all other property relating to the ownership, use, maintenance or operation of the improvements on each Secured Property and all rents, profits and revenues from each Secured Property.
The Bank of America Loan has a term of 10 years, maturing on October 1, 2027. The Bank of America Loan bears interest at a rate of 3.77% and requires monthly payments of interest only. Commencing September 1, 2019, the Bank of America Loan may be prepaid but only if such prepayment is made in full (with certain exceptions), subject to certain conditions set forth in the loan agreement, including 30 days' prior notice to the Lender and payment of a prepayment premium in addition to all unpaid principal and accrued interest to the date of such prepayment. Commencing on April 1, 2027, the Bank of America Loan may be prepaid in whole or in part, subject to satisfaction of certain conditions, including 30 days' prior notice to the Lender, without payment of any prepayment premium.
The Company paid processing fees, as well as certain other closing costs, including legal fees, of approximately $3.0 million in connection with the Bank of America Loan.
Debt Covenant Compliance
Pursuant to the terms of the Company's mortgage loans and Unsecured Credit Facility, the Operating Partnership, in consolidation with the Company, is subject to certain loan compliance covenants. The Company was in compliance with all of its debt covenants as of September 30, 2017.

20
GRIFFIN CAPITAL ESSENTIAL ASSET REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2017
(Unaudited; dollars in thousands unless otherwise noted)

6.
Interest Rate Contracts
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 entered 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 value 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 July 9, 2015, the Company executed three interest rate swap agreements to hedge the variable cash flows associated with certain existing or forecasted LIBO Rate-based variable-rate debt, including the Company's Unsecured Credit Facility. Three interest rate swaps are effective for the periods from July 9, 2015 to July 1, 2020, January 1, 2016 to July 1, 2018, and July 1, 2016 to July 1, 2018, and have notional amounts of $425.0 million, $300.0 million, and $100.0 million, respectively.
The effective portion of changes in the fair value of derivatives designated and that qualify as cash flow hedges is recorded in accumulated other comprehensive income ("AOCI") and is subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. The Company's derivatives were used to hedge the variable cash flows associated with existing variable-rate debt and forecasted issuances of debt. The ineffective portion of the change in fair value of the derivatives is recognized directly in earnings.
The following table sets forth a summary of the interest rate swaps at September 30, 2017 and December 31, 2016:
 
 
 
 
 
 
 
 
Fair Value (1)
Derivative Instrument
 
Effective Date
 
Maturity Date
 
Interest Strike Rate
 
September 30, 2017

December 31, 2016
Assets/(Liabilities):
 
 
 
 
 
 
 
 
 
 
Interest Rate Swap
 
7/9/2015
 
7/1/2020
 
1.69%
 
$
204

 
$
(1,630
)
Interest Rate Swap
 
1/1/2016
 
7/1/2018
 
1.32%
 
187

 
(907
)
Interest Rate Swap
 
7/1/2016
 
7/1/2018
 
1.50%
 
(69
)
 
(564
)
Total
 
 
 
 
 
 
 
$
322

 
$
(3,101
)
(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 September 30, 2017, derivatives in a liability/asset position are included in the line item "Accrued expenses and other liabilities/Other assets," respectively, in the consolidated balance sheets at fair value.
The following table sets forth the impact of the interest rate swaps on the consolidated statements of operations for the periods presented:
 
Nine Months Ended
 
September 30, 2017
Interest Rate Swap in Cash Flow Hedging Relationship:
 
Amount of gain recognized in AOCI on derivatives (effective portion)
$
142

Amount of loss reclassified from AOCI into earnings under “Interest expense” (effective portion)
$
3,330

Amount of loss recognized in earnings under “Interest expense” (ineffective portion and amount excluded from effectiveness testing)
$
(16
)

21
GRIFFIN CAPITAL ESSENTIAL ASSET REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2017
(Unaudited; dollars in thousands unless otherwise noted)

During the 12 months subsequent to September 30, 2017, the Company estimates that an additional $0.9 million of expense will be recognized from AOCI into earnings.
Certain agreements with the derivative counterparties contain a provision where if the Company defaults on any of the Company's indebtedness, including default where repayment of the indebtedness has not been accelerated by the lender within a specified time period, then the Company could also be declared in default on its derivative obligations.
As of September 30, 2017 and December 31, 2016, the fair value of interest rate swaps in a net asset position/net liabilities, which excludes any adjustment for nonperformance risk related to these agreements, was approximately $0.3 million and $3.1 million, respectively. As of September 30, 2017 and December 31, 2016, the Company had not posted any collateral related to these agreements.
7.
Accrued Expenses and Other Liabilities
Accrued expenses and other liabilities consisted of the following as of September 30, 2017 and December 31, 2016:
 
 
September 30, 2017

December 31, 2016
Prepaid rent
 
$
14,619

 
$
14,790

Real estate taxes payable
 
21,632

 
22,845

Interest payable
 
9,032

 
7,606

Other liabilities
 
14,128

 
15,634

Total
 
$
59,411

 
$
60,875

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 nine months ended September 30, 2017 and year ended December 31, 2016.
The following tables set forth the assets and liabilities that the Company measures at fair value on a recurring basis by level within the fair value hierarchy as of September 30, 2017 and December 31, 2016:
Assets/(Liabilities)
 
Total Fair Value
 
Quoted Prices in Active Markets for Identical Assets and Liabilities
 
Significant Other Observable Inputs
 
Significant Unobservable Inputs
September 30, 2017
 
 
 
 
 
 
 
 
Interest Rate Swap Asset
 
$
391

 
$
—

 
391

 
$
—

Interest Rate Swap Liability
 
$
(69
)
 
$
—

 
$
(69
)
 
$
—

December 31, 2016
 

 
 
 

 
 
Interest Rate Swap Liability
 
$
(3,101
)
 
$
—

 
$
(3,101
)
 
$
—

Financial Instruments Disclosed at Fair Value

22
GRIFFIN CAPITAL ESSENTIAL ASSET REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2017
(Unaudited; dollars in thousands unless otherwise noted)

Financial instruments as of September 30, 2017 and December 31, 2016 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 September 30, 2017 and December 31, 2016. The fair value of the three mortgage loans in the table below is estimated by discounting each 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 debt 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.
 
September 30, 2017
 
December 31, 2016
 
Fair Value
 
Carrying Value (1)
 
Fair Value
 
Carrying Value (1)
AIG loan
$
112,864

 
$
109,691

 
$
113,052

 
$
110,640

Highway 94 loan
16,657

 
17,561

 
17,073

 
18,175

Samsonite loan
23,886

 
23,172

 
24,349

 
23,786

(1)
The carrying values do not include the debt premium/(discount) or deferred financing costs as of September 30, 2017 and December 31, 2016. See Note 5, Debt, for details.
9.
Equity
Common Equity
As of September 30, 2017, the Company had received aggregate gross offering proceeds of approximately $1.5 billion from the sale of shares in the Private Offering, the Public Offerings, and the DRP Offerings, as discussed in Note 1, Organization. There were 173,476,566 shares outstanding at September 30, 2017, including shares issued pursuant to the DRP, less shares redeemed pursuant to the share redemption program discussed below.
Distribution Reinvestment Plan (DRP)
The Company has adopted the DRP, which allows stockholders to have distributions otherwise distributable to them invested in additional shares of common stock. No sales commissions or dealer manager fee will be paid on shares sold through the DRP. The Company may amend or terminate the DRP for any reason at any time upon 10 days' prior written notice to stockholders.
As of September 30, 2017 and December 31, 2016, the Company had issued approximately $199.8 million and $162.4 million in shares of common stock, respectively, under the DRP, pursuant to the Private Offering, the Public Offerings, and the DRP Offerings.
Share Redemption Program
The Company has adopted a share redemption program ("SRP") that enables stockholders to sell their stock to the Company in limited circumstances. As long as the common stock is not listed on a national securities exchange or over-the-counter market, stockholders who have held their stock for at least one year may, under certain circumstances, be able to have all or any portion of their shares of stock redeemed by the Company. During any calendar year, the Company will not redeem more than 5.0% of the weighted average number of shares outstanding during the prior calendar year. The cash available for redemption will be limited to the proceeds from the sale of shares pursuant to the DRP.

If the Company cannot purchase all shares presented for redemption in any quarter, based upon insufficient cash available or the limit on the number of shares the Company may redeem during any calendar year, the Company will attempt to honor 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

23
GRIFFIN CAPITAL ESSENTIAL ASSET REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2017
(Unaudited; dollars in thousands unless otherwise noted)

requests. The Company will treat the unsatisfied portion of the redemption request 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 to the Company's transfer agent prior to the last day of the new quarter. The Company will determine whether sufficient funds are available or have 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.
As the use of the proceeds from the DRP for redemptions is outside the Company’s control, the net proceeds from the DRP are considered to be temporary equity and are presented as common stock subject to redemption on the accompanying consolidated balance sheets. The cumulative proceeds from the DRP, net of any redemptions, will be computed at each reporting date and will be classified as temporary equity on the Company’s consolidated balance sheets. As noted above, the SRP is limited to proceeds from new permanent equity from the sale of shares pursuant to the DRP.
Pursuant to the SRP, the redemption price per share shall be the lesser of (i) the amount paid for the shares or (ii) 95% of the NAV of the shares. Shares redeemed in connection with the death or qualifying disability of a stockholder may be repurchased at 100% of the NAV of the shares. The redemption price per share will be as of the last business day of the applicable quarter.
Redemption requests will be honored on or about the last business day of the month following the end of each quarter. Requests for redemption must be received on or prior to the end of the quarter in order for the Company to repurchase the shares as of the end of the following month. The following table summarizes share redemption activity during the three and nine months ended September 30, 2017 and 2016:
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2017
 
2016
 
2017
 
2016
Shares of common stock redeemed
 
2,936,150

 
1,390,973

 
6,155,290

 
3,014,538

Weighted average price per share
 
$
9.97

 
$
9.95

 
$
9.98

 
$
9.93

Since inception and through September 30, 2017, the Company had redeemed 12,073,944 shares of common stock for approximately $120.2 million at a weighted average price per share of $9.96 pursuant to the SRP.
During the three months ended September 30, 2017, the Company received requests for the redemption of common stock of approximately 3,878,396 shares, which exceeded the annual limitation of 5.0% of the weighted average number of shares outstanding during the prior calendar year by approximately 104,999 shares. The Company processed the redemption requests according to the SRP policy described above and redeemed 97% of the shares requested at a weighted average price per share of $9.92. Those stockholders who were subject to pro rata treatment of their redemption requests had approximately 95% of their requests satisfied. The remaining portion of such requests will be carried forward to the next redemption period. The Company’s board of directors may choose to amend, suspend, or terminate the SRP upon 30 days' written notice at any time.
Noncontrolling Interests
Noncontrolling interests represent limited partnership interests in the Operating Partnership in which the Company is the general partner. General partnership units and limited partnership units of the Operating Partnership were issued as part of the initial capitalization of the Operating Partnership, and limited partnership units were issued in conjunction with management's contribution of certain assets, as well as other contributions, as discussed in Note 1, Organization.
As of September 30, 2017, noncontrolling interests were approximately 3% of total shares and weighted average shares outstanding (both measures assuming limited partnership units were converted to common stock). The Company has evaluated the terms of the limited partnership interests in the Operating Partnership and as a result, has classified limited partnership interests issued in the initial capitalization and in conjunction with the contributed assets 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

24
GRIFFIN CAPITAL ESSENTIAL ASSET REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2017
(Unaudited; dollars in thousands unless otherwise noted)

noncontrolling interest that fails to qualify as permanent equity has 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.
The Operating Partnership issued 6.6 million limited partnership units to affiliated parties and unaffiliated third parties in exchange for certain properties and 0.1 million limited partnership units to unaffiliated third parties unrelated to property contributions. To the extent the contributors should elect to redeem all or a portion of their Operating Partnership units, pursuant to the terms of the respective contribution agreement, such redemption shall be at a per unit value equivalent to the price at which the contributor acquired its limited partnership units in the respective transaction.
The limited partners of the 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 Operating Partnership, the Company, to redeem their limited partnership units for cash equal to the value of an equivalent number of shares, or, at the Company’s option, purchase their limited partnership units by issuing one share of the Company’s common stock for the original redemption value of each limited partnership unit redeemed. These rights may not be exercised under certain circumstances which could cause the Company to lose its REIT election. There were no redemption requests during the nine months ended September 30, 2017 and year ended December 31, 2016. 
The following summarizes the activity for noncontrolling interests recorded as equity for the nine months ended September 30, 2017 and year ended December 31, 2016:
 
Nine Months Ended September 30, 2017

Year Ended December 31, 2016
Beginning balance
$
30,114

 
$
21,318

Contribution/issuance of noncontrolling interests
—

 
11,941

Distributions to noncontrolling interests
(3,267
)
 
(4,124
)
Allocated distributions to noncontrolling interests subject to redemption
(10
)
 
(11
)
Net income
1,134

 
912

Other comprehensive income
134

 
78

Ending balance
$
28,105

 
$
30,114

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 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.

25
GRIFFIN CAPITAL ESSENTIAL ASSET REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2017
(Unaudited; dollars in thousands unless otherwise noted)

10.
Related Party Transactions
The following table summarizes the related party costs and fees incurred, paid and due to affiliates as of September 30, 2017 and due to affiliates as of December 31, 2016:
 
As of December 31, 2016

Nine Months Ended September 30, 2017
 
Payable
 
Incurred
 
Paid
 
Payable
Advisor and Property Manager fees
 
 
 
 
 
 
 
Operating expenses
$
—

 
$
1,983

 
$
628

 
$
1,355

Asset management fees
1,802

 
16,162

 
16,171

 
1,793

Property management fees
665

 
6,846

 
6,798

 
713

Leasing commissions
—


1,752

 
1,752

 
—

Costs advanced by the Advisor
—

 
419

 
296

 
123

Total, net of real estate assets held for sale
$
2,467

 
$
27,162

 
$
25,645

 
$
3,984

Asset Management fees related to real estate held for sale
180


1,624


1,625

 
179

Property management fees related to real estate held for sale
72


673


672

 
73

Total
$
2,719

 
$
29,459

 
$
27,942

 
$
4,236

Advisory Agreement
The Company currently does not have nor does it expect to have any employees. The Advisor will be primarily responsible for managing the business affairs and carrying out the directives of the Company’s board of directors. The Company entered into an advisory agreement with the Advisor. The Advisory Agreement entitles the Advisor to specified fees and expense reimbursements upon the provision of certain services with regard to the Public Offerings and investment of funds in real estate properties, among other services, including as reimbursement for organizational and offering costs incurred by the Advisor on the Company’s behalf and reimbursement of certain costs and expenses incurred by the Advisor in providing services to the Company.
Management Compensation
The following table summarizes the compensation and fees the Company has paid or may pay to the Advisor, the Property Manager, and the Sponsor and other affiliates, including amounts to reimburse costs for providing services.
Type of Compensation
(Recipient)
  
Determination of Amount
Acquisition Fees and Expenses
(Advisor)
  
Under the Advisory Agreement, the Advisor receives acquisition fees equal to 2.5%, and reimbursement for actual acquisition related expenses incurred by the Advisor of up to 0.50% of the contract purchase price, as defined therein, of each property acquired by the Company, and reimbursement for actual acquisition expenses incurred on the Company's behalf, including certain payroll costs for acquisition-related efforts by the Advisor's personnel, as defined in the agreements. In addition, the Company pays acquisition expenses to unaffiliated third parties equal to approximately 0.60% of the purchase price of the Company's properties. The acquisition fee and acquisition expenses paid by the Company shall be reasonable and in no event exceed an amount equal to 6% of the contract purchase price, unless approved by a majority of the independent directors.

26
GRIFFIN CAPITAL ESSENTIAL ASSET REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2017
(Unaudited; dollars in thousands unless otherwise noted)

Disposition Fee
(Advisor)
 
In the event that the Company sells any or all of its properties (or a portion thereof), or all or substantially all of the business or securities of the Company are transferred or otherwise disposed of by way of a merger or other similar transaction, the Advisor will be entitled to receive a disposition fee if the Advisor or an affiliate provides a substantial amount of the services (as determined by a majority of the Company's directors, including a majority of the independent directors) in connection with such transaction. The disposition fee the Advisor or such affiliate shall be entitled to receive at closing will be equal to the lesser of: (1) 3% of the Contract Sales Price, as defined in the Advisory Agreement or (2) 50% of the Competitive Commission, as defined in the Advisory Agreement; provided, however, that in connection with certain types of transactions described further in the Advisory Agreement, the disposition fee shall be subordinated to Invested Capital (as defined in the operating partnership agreement). The disposition fee may be paid in addition to real estate commissions or other commissions paid to non-affiliates, provided that the total real estate commissions or other commissions (including the disposition fee) paid to all persons by the Company or the operating partnership shall not exceed an amount equal to the lesser of (i) 6% of the aggregate Contract Sales Price or (ii) the Competitive Commission.
Asset Management Fee
(Advisor)
  
The Advisor receives an annual asset management fee for managing the Company’s assets equal to 0.75% of the Average Invested Assets, defined as the aggregate carrying value of the assets invested before reserves for depreciation. The fee will be computed based on the average of these values at the end of each month. The asset management fees are earned monthly.
Operating Expenses
(Advisor)
  
The Advisor and its affiliates are entitled to reimbursement, at cost, for actual expenses incurred by them on behalf of the Company in connection with their provision of administrative services, including related personnel costs; provided, however, the Advisor must reimburse the Company for the amount, if any, by which total operating expenses (as defined), including advisory fees, paid during the previous 12 months then ended exceeded the greater of: (i) 2% of the Company’s average invested assets for that 12 months then ended; or (ii) 25% of the Company’s net income, before any additions to reserves for depreciation, bad debts or other expenses connected with the acquisition and disposition of real estate interests and before any gain from the sale of the Company’s assets, for that fiscal year, unless the Company’s board of directors has determined that such excess expenses were justified based on unusual and non-recurring factors.
Operating expenses for the three and nine months ended September 30, 2017 included approximately $0.2 million and $0.5 million, respectively, to reimburse the Advisor and its affiliates a portion of the compensation paid by the Advisor and its affiliates for the Company's principal financial officer, Javier F. Bitar, executive vice president, David C. Rupert, and vice president and general counsel, Mary P. Higgins, for services provided to the Company, for which the Company does not pay the Advisor a fee. In addition, the Company incurred approximately $0.03 million and $0.1 million, respectively, for reimbursable expenses to the Advisor for services provided to the Company by certain of its other executive officers during the three and nine months ended September 30, 2017. The reimbursable expenses include components of salaries, bonuses, benefits and other overhead charges and are based on the percentage of time each such executive officer spends on the Company's affairs.
Property Management Fees
(Property Manager)
  
The Property Manager is entitled to receive a fee for its services in managing the Company’s properties up to 3% of the gross monthly revenues from the properties plus reimbursement of the costs of managing the properties. The Property Manager, in its sole and absolute discretion, can waive all or a part of any fee earned. In the event that the Property Manager assists with the development or redevelopment of a property, the Company may pay a separate market-based fee for such services. In the event that the Company contracts directly with a non-affiliated third-party property manager with respect to a particular property, the Company will pay the Property Manager an oversight fee equal to 1% of the gross revenues of the property managed. In no event will the Company pay both a property management fee to the Property Manager and an oversight fee to the Property Manager with respect to a particular property.
In addition, the Company may pay the Property Manager or its designees a leasing fee in an amount equal to the fee customarily charged by others rendering similar services in the same geographic area. The Company may also pay the Property Manager or its designees a construction management fee for planning and coordinating the construction of any tenant directed improvements for which the Company is responsible to perform pursuant to lease concessions, including tenant-paid finish-out or improvements. The Property Manager shall also be entitled to a construction management fee of 5% of the cost of improvements.

27
GRIFFIN CAPITAL ESSENTIAL ASSET REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2017
(Unaudited; dollars in thousands unless otherwise noted)

Subordinated Share of Net Sale Proceeds (Advisor) (1)
 
Payable to the Advisor in cash upon the sale of a property after the Company's stockholders receive a return of capital plus a 6% cumulative, non-compounded return. The share of net proceeds from the sale of property is 5% if stockholders are paid a return of capital plus 6% to 8% annual cumulative non-compounding return, 10% if stockholders are paid a return of capital plus 8% to 10% annual cumulative non-compounding return, or 15% if stockholders are paid a return of capital plus 10% or more annual cumulative non-compounding return.
Subordinated Incentive Listing Distribution (Advisor) (1)
 
Payable to the Advisor no earlier than 7 months and no later than 19 months following a listing of the shares on a national securities exchange, based upon the market value of the Company's shares during a period of 30 trading days commencing after the first day of the 6th month, but no later than the last day of the 18th month following a listing, the commencement date of which shall be chosen by the Advisor in its sole discretion, and after the Company's stockholders receive a return of capital plus a 6% cumulative, non-compounded return. The distribution share is 5% if stockholders are paid a return of capital plus 6% to 8% annual cumulative non-compounding return, 10% if stockholders are paid a return of capital plus 8% to 10% annual cumulative non-compounding return, or 15% if stockholders are paid a return of capital plus 10% or more annual cumulative non-compounding return, and is payable in cash, shares of the Company's stock, units of limited partnership interest in the Operating Partnership, or a combination thereof.
Subordinated Distribution Due Upon Termination
(Advisor)

 
Payable to the Advisor (in cash, shares of the Company's stock, units of limited partnership interest in the Operating Partnership, or a combination thereof), 1/3rd within 30 days of the date of involuntary termination of the Advisory Agreement, 1/3rd upon the one year anniversary of such date, and 1/3rd upon the two year anniversary of such date. Calculated based upon appraised value of properties less the fair value of the underlying debt, and plus or minus net current assets or net current liabilities, respectively, and payable after the Company's stockholders receive a return of capital plus a 6% cumulative, non-compounded return. The distribution share is 5% if stockholders are paid a return of capital plus 6% to 8% annual cumulative non-compounding return, 10% if stockholders are paid a return of capital plus 8% to 10% annual cumulative non-compounding return, or 15% if stockholders are paid a return of capital plus 10% or more annual cumulative non-compounding return.
Upon a voluntary termination of the Advisory Agreement, the Advisor will not be entitled to receive the Subordinated Distribution Due Upon Termination but instead will be entitled to receive at the time of the applicable liquidity event a distribution equal to the applicable Subordinated Share of Net Sale Proceeds, Subordinated Incentive Listing Distribution, or Subordinated Distribution Due Upon Extraordinary Transaction.
Subordinated Distribution Due Upon Extraordinary Transaction
(Advisor) (1)

 
Payable to the Advisor upon the closing date of an Extraordinary Transaction (as defined in the Operating Partnership Agreement); payable in cash, shares of the Company's stock, units of limited partnership in the Operating Partnership, or a combination thereof after the Company's stockholders receive a return of capital plus a 6% cumulative, non-compounded return. The distribution share is 5% if stockholders are paid a return of capital plus 6% to 8% annual cumulative non-compounding return, 10% if stockholders are paid a return of capital plus 8% to 10% annual cumulative non-compounding return, or 15% if stockholders are paid a return of capital plus 10% or more annual cumulative non-compounding return.
Sponsor Break-Even Amount
(Sponsor)

 
In the event of a merger of the Advisor into the Company or one of its affiliates in anticipation of listing or a merger with an already-listed entity, any merger consideration paid to the Company's sponsor or its affiliates in excess of unreturned and unreimbursed capital invested by the Company's sponsor and its affiliates into the Company, the Advisor, the Company's dealer manager, or affiliates, relating in any way to the business organization of the Company, the Operating Partnership, or any offering of the Company, shall be subordinated to the return of stockholders' invested capital. Such excess merger consideration shall be paid in stock that may not be traded for one year from the date of receipt, and such stock shall be held in escrow pending the occurrence of certain conditions outlined further in the Operating Partnership Agreement.

(1)
The Advisor cannot earn more than one incentive distribution. Any receipt by the Advisor of subordinated share of net sale proceeds (for anything other than a sale of the entire portfolio) will reduce the amount of the subordinated distribution due upon termination, the subordinated incentive listing distribution and the subordinated distribution due upon extraordinary transaction.
Conflicts of Interest
The Sponsor, Advisor, Property Manager and their officers and certain of their key personnel and their respective affiliates currently serve as key personnel, advisors, managers and sponsors or co-sponsors to some or all of 13 other programs affiliated

28
GRIFFIN CAPITAL ESSENTIAL ASSET REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2017
(Unaudited; dollars in thousands unless otherwise noted)

with the Sponsor, including Griffin Capital Essential Asset REIT II, Inc. ("GCEAR II"), Griffin-American Healthcare REIT III, Inc. ("GAHR III"), and Griffin-American Healthcare REIT IV, Inc. ("GAHR IV"), each of which are publicly-registered, non-traded real estate investment trusts, and Griffin Institutional Access Real Estate Fund (“GIA Real Estate Fund”) and Griffin Institutional Access Credit Fund ("GIA Credit Fund"), both of which are non-diversified, closed-end management investment companies that are operated as interval funds under the Investment Company Act of 1940 (the "1940 Act"). Because these persons have competing demands on their time and resources, they may have conflicts of interest in allocating their time between the Company’s business and these other activities.
Some of the material conflicts that the Sponsor, Advisor, and Property Manager and their key personnel and their respective affiliates will face are (1) competing demand for time of the Advisor’s executive officers and other key personnel from the Sponsor and other affiliated entities; (2) determining if certain investment opportunities should be recommended to the Company or another program sponsored or co-sponsored by the Sponsor; and (3) influence of the fee structure under the Advisory Agreement and the distribution structure under the Operating Partnership Agreement that could result in actions not necessarily in the long-term best interest 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 the Company and GCEAR II, which is based on the following factors:
•the investment objectives of each program;
•the amount of funds available to each program;
•the financial impact of the acquisition on each program, including each program’s earnings and distribution ratios;
•various strategic considerations that may impact the value of the investment to each program;
•the effect of the acquisition on concentration/diversification of each program’s investments; and
•the income tax effects of the purchase to each program.
In the event all acquisition allocation factors have been exhausted and an investment opportunity remains equally suitable for the Company and GCEAR II, the Sponsor will offer the investment opportunity to the REIT that has had the longest period of time elapse since it was offered an investment opportunity.
If the Sponsor no longer sponsors the Company, then, in the event that an investment opportunity becomes available that is suitable, under all of the factors considered by the Advisor, for both GCEAR II and one or more other entities affiliated with the Sponsor, the Sponsor has agreed to present such investment opportunities to GCEAR II first, prior to presenting such opportunities to any other programs sponsored by or affiliated with the Sponsor. In determining whether or not an investment opportunity is suitable for more than one program, the Advisor, subject to approval by the board of directors, shall examine, among others, the following factors:
•anticipated cash flow of the property to be acquired and the cash requirements of each program;
•effect of the acquisition on diversification of each program’s investments;
•policy of each program relating to leverage of properties;
•income tax effects of the purchase to each program;
•size of the investment;
•no significant increase in the cost of financing; and
•amount of funds available to each program and the length of time such funds have been available for investment.
Economic Dependency
The Company will be dependent on the Advisor for certain services that are essential to the Company, including the identification, evaluation, negotiation, purchase and disposition of properties and other investments, management of the daily operations of the Company’s real estate portfolio, and other general and administrative responsibilities. In the event that the Advisor is unable to provide the services, the Company will be required to obtain such services from other resources.

29
GRIFFIN CAPITAL ESSENTIAL ASSET REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2017
(Unaudited; dollars in thousands unless otherwise noted)

11.
Commitments and Contingencies
Ground Lease Obligations
The Company acquired a property on January 16, 2014 that is subject to a ground lease with an expiration date of December 31, 2095. The Company incurred rent expense of approximately $0.3 million for the nine months ended September 30, 2017 and 2016, related to the ground lease. As of September 30, 2017, the remaining required payments under the terms of the ground lease are as follows:
 
September 30, 2017
Remaining 2017
$
50

2018
198

2019
198

2020
198

2021
198

Thereafter
33,849

Total
$
34,691

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.
12.
Declaration of Distributions
During the quarter ended September 30, 2017, the Company paid distributions in the amount of $0.001901096 per day per share on the outstanding shares of common stock payable to stockholders of record at the close of business on each day during the period from July 1, 2017 through September 30, 2017. Such distributions were paid on a monthly basis, on or about the first day of the month, for the month then-ended.
On September 14, 2017, the Company’s board of directors declared distributions in the amount of $0.001901096 per day per share on the outstanding shares of common stock payable to stockholders of record at the close of business on each day during the period from October 1, 2017 through December 31, 2017. Such distributions payable to each stockholder of record during a month will be paid on such date of the following month as the Company’s Chief Executive Officer may determine.
13.
Subsequent Events
Offering Status
As of November 10, 2017, the Company had issued 17,588,040 shares of the Company’s common stock pursuant to the DRP Offerings for approximately $181.0 million.
Sale of One Century Plaza
On October 19, 2017, the Company sold the One Century Plaza property located in Nashville, Tennessee for total proceeds of $100.0 million, less closing costs and other closing credits. The carrying value of the property on the closing date was approximately $67.9 million. Upon the sale of the property, the Company recognized a gain of approximately $32.1 million.
Determination of Estimated Value Per Share

On October 24, 2017, the Company's board of directors approved an estimated value per share of the Company's common stock of $10.04 based on the estimated value of the Company's assets less the estimated value of the liabilities, or net asset value, divided by the number of shares outstanding on a fully diluted basis, calculated as of June 30, 2017. The Company is providing this estimated value per share to assist broker dealers in connection with their obligations under applicable Financial Industry Regulatory Authority rules with respect to customer account statements. This valuation was performed in accordance with the methodology provided in Practice Guideline 2013-01, Valuations of Publicly Registered Non-Listed REITs, issued by the Investment Program Association in April 2013, in addition to guidance from the SEC. See the Company's Current Report on Form 8-K filed with the SEC on October 27, 2017 for a description of the methodologies and assumptions used to determine, and the limitations of, the estimated value per share.

30

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following “Management’s Discussion and Analysis of Financial Condition and Results of Operations” should be read in conjunction with the Company’s consolidated financial statements and the notes thereto contained in Part I of this Quarterly Report on Form 10-Q, as well as Management’s Discussion and Analysis of Financial Condition and Results of Operations, Consolidated Financial Statements, and the notes thereto contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016. See also “Cautionary Note Regarding Forward Looking Statements” preceding Part I. As used herein, “we,” “us,” and “our” refer to Griffin Capital Essential Asset REIT, Inc.
Overview
We are a public, non-traded REIT that invests primarily in business essential properties significantly occupied by a single tenant, diversified by corporate credit, physical geography, product type and lease duration. We have no employees and are externally advised and managed by an affiliate, Griffin Capital Essential Asset Advisor, LLC, our Advisor.
On August 28, 2008, our Advisor purchased 100 shares of common stock for $1,000 and became our initial stockholder. From 2009 to 2014, we offered shares of common stock pursuant to a private placement offering to accredited investors (the "Private Offering") and two public offerings, consisting of an initial public offering and a follow-on offering (together, the "Public Offerings"), which included shares for sale pursuant to the distribution reinvestment plan ("DRP"). We issued 126,592,885 total shares of our common stock for gross proceeds of approximately $1.3 billion pursuant to the Private Offering and Public Offerings.
On May 7, 2014, we filed a Registration Statement on Form S-3 with the SEC for the registration of $75.0 million in shares for sale pursuant to the DRP (the “2014 DRP Offering”). On September 22, 2015, we filed a Registration Statement on Form S-3 with the SEC for the registration of $100.0 million in shares for sale pursuant to the DRP (the “2015 DRP Offering”). On June 9, 2017, we filed a Registration Statement on Form S-3 with the SEC for the registration of $104.4 million in shares for sale pursuant to the DRP (the "2017 DRP Offering," and together with the 2014 DRP Offering and 2015 DRP Offering, the "DRP Offerings"). In connection with the DRP Offerings, we had issued 17,177,657 shares of our common stock for gross proceeds of approximately $176.9 million through September 30, 2017. The 2017 DRP Offering may be terminated at any time upon 10 days’ prior written notice to stockholders.
As of September 30, 2017, our real estate portfolio, including our two properties held for sale, consisted of 74 properties in 20 states and 91 lessees consisting substantially of office, warehouse, and manufacturing facilities and two land parcels held for future development with a combined acquisition value of approximately $3.0 billion, including the allocation of the purchase price to above and below-market lease valuation. Our annualized net rent for the 12-month period subsequent to September 30, 2017 was approximately $229.2 million with approximately 65.8% generated by properties leased to tenants and/or guarantors or whose non-guarantor parent companies have investment grade or equivalent ratings. Our portfolio, based on square footage, is approximately 96.6% leased as of September 30, 2017, with a weighted average remaining lease term of 6.9 years, average annual rent increases of approximately 2.1%, and a debt to total real estate acquisition value of 51.4%.

31

Revenue Concentration
No lessee or property, based on annualized net rent for the 12-month period subsequent to September 30, 2017, pursuant to the respective in-place leases, was greater than 6% as of September 30, 2017.
The percentage of annualized net rent for the 12-month period subsequent to September 30, 2017, by state, based on the respective in-place leases, is as follows (dollars in thousands):
State
 
Annualized
Net Rent
(unaudited)
 
Number of
Properties
 
Percentage of
Annualized
Net Rent
California

$
36,166


6


15.8
%
Texas

31,967


10


14.0

Illinois

22,277


8


9.7

Ohio

21,840


8


9.5

Colorado

17,179


6


7.5

Georgia

16,808


4


7.3

Arizona

12,205


4


5.3

New Jersey

11,222


3


4.9

Tennessee

10,324


2


4.5

North Carolina

8,099


3


3.5

Missouri

7,244


4


3.2

All others (1)

33,852


16


14.8

Total
 
$
229,183

 
74

 
100.0
%
(1)
All others account for less than 3% of total annualized net rent on an individual basis.

32

The percentage of annualized net rent for the 12-month period subsequent to September 30, 2017, by industry, based on the respective in-place leases, is as follows (dollars in thousands): 
Industry (1)
 
Annualized
Net Rent
(unaudited)
 
Number of
Lessees
 
Percentage of
Annualized
Net Rent
Capital Goods
 
$
41,510

 
13


18.1
%
Insurance
 
26,000

 
12


11.3

Media
 
23,429

 
4


10.2

Telecommunication Services
 
22,819

 
7


10.0

Health Care Equipment & Services
 
19,086

 
9


8.3

Software & Services
 
14,911

 
5


6.5

Diversified Financials
 
10,598

 
4


4.6

Energy
 
10,425

 
4


4.5

Retailing
 
9,582

 
2


4.2

Consumer Services
 
8,382

 
4


3.7

Consumer Durables & Apparel
 
7,955

 
3


3.5

Technology, Hardware & Equipment
 
7,910

 
4


3.5

All others (2)
 
26,576

 
20


11.6

Total
 
$
229,183

 
91

 
100.0
%
(1)
Industry classification based on the Global Industry Classification Standard.
(2)
All others account for less than 3% of total annualized net rent on an individual basis.
The tenant lease expirations by year based on annualized net rent for the 12-month period subsequent to September 30, 2017 are as follows (dollars in thousands):
Year of Lease Expiration
 
Annualized
Net Rent
(unaudited)
 
Number of
Lessees
 
Approx. Square Feet
 
Percentage of
Annualized
Net Rent
2018

$
14,319

 
10

 
1,948,300

 
6.2
%
2019

22,714

 
8

 
1,317,100

 
9.9

2020

20,361

 
10

 
1,664,800

 
8.9

2021

11,542

 
7

 
1,106,500

 
5.0

2022

19,629

 
9

 
1,373,900

 
8.6

2023

18,160

 
7

 
1,162,200

 
7.9

Thereafter

122,458

 
40

 
9,560,400

 
53.5

Vacant
 
—

 
—

 
641,900

 
—

Total
 
$
229,183

 
91

 
18,775,100

 
100.0
%


33

Critical Accounting Policies
We have established accounting policies which conform to generally accepted accounting principles in the United States (“GAAP”) as contained in the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification. 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.
For further information about our critical accounting policies, refer to our consolidated financial statements and notes thereto for the year ended December 31, 2016 included in our Annual Report on Form 10-K filed with the SEC.
Recently Issued Accounting Pronouncements
See Note 2, Summary of Significant Accounting Policies and Basis of Presentation, to the consolidated financial statements for the impact of new accounting standards.
Results of Operations
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 6.2% of our annualized base rental revenue will expire during the period from October 1, 2017 to December 31, 2018. 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 October 1, 2017 to December 31, 2018, 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 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 our Annual Report on Form 10-K for the year ended December 31, 2016.
Same Store Analysis
For the three months ended September 30, 2017, our "Same Store" portfolio consisted of 74 properties, encompassing approximately 18.8 million square feet, with an acquisition value of $3.0 billion. 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 the 74 properties for the three months ended September 30, 2017 and 2016 (dollars in thousands):
 
Three Months Ended September 30,
 
Increase/(Decrease)
 
Percentage
Change
 
2017
 
2016
 
Rental income
$
66,437

 
$
66,894

 
$
(457
)
 
(1
)%
Lease termination income
—

 
995

 
(995
)
 
(100
)%
Property expense recoveries
18,695

 
18,847

 
(152
)
 
(1
)%
Asset management fees to affiliates
5,921

 
5,921

 
—

 
0
 %
Property management fees to affiliates
2,453

 
2,373

 
80

 
3
 %
Property operating expense
13,028

 
12,233

 
795

 
6
 %
Property tax expense
10,916

 
10,876

 
40

 
0
 %
Depreciation and amortization
28,235

 
34,217

 
(5,982
)
 
(17
)%
Interest expense
2,607

 
3,303

 
(696
)
 
(21
)%
Lease Termination Income
The decrease in lease termination income of approximately $1.0 million is primarily the result of a lease termination during the third quarter of 2016.

34

Property Operating Expenses
Property operating expenses include insurance, repairs and maintenance, security, janitorial, landscaping, and other administrative expenses incurred to operate our properties. The total increase of approximately $0.8 million compared to the same period a year ago is primarily a result of timing on expenses incurred during 2017.
Depreciation and Amortization
The decrease of approximately $6.0 million as compared to the same period in the prior year is primarily the result of (1) $3.5 million related to two properties reclassified as held for sale during the three months ended September 30, 2017 and no depreciation expense recorded; (2) approximately $1.6 million additional amortization of intangibles as a result of early lease terminations in the prior year and assets fully depreciated in the current year; (3) approximately $0.6 million of amortization expense being recognized over a longer period related to a lease extension; and (4) approximately $0.3 million related to the sale of a property on June 30, 2017; offset by (5) $0.5 million related to intangibles placed in service subsequent to September 30, 2016.
Comparison of the Nine Months Ended September 30, 2017 and 2016
For the nine months ended September 30, 2017, our "Same Store" portfolio consisted of 73 properties, encompassing approximately 18.6 million square feet, with an acquisition value of $2.9 billion. The following table provides a comparative summary of the results of operations for the 73 properties for the nine months ended September 30, 2017 and 2016 (dollars in thousands):
 
Nine Months Ended September 30,
 
Increase/(Decrease)
 
Percentage
Change
 
2017
 
2016
 
Rental income
$
195,427

 
$
199,379

 
$
(3,952
)
 
(2
)%
Lease termination income
12,845

 
1,211

 
11,634

 
961
 %
Property expense recoveries
53,024

 
57,312

 
(4,288
)
 
(7
)%
Asset management fees to affiliates
16,675

 
16,579

 
96

 
1
 %
Property management fees to affiliates
7,306

 
7,065

 
241

 
3
 %
Property operating expense
36,055

 
35,980

 
75

 
0
 %
Property tax expense
32,983

 
33,031

 
(48
)
 
0
 %
Impairment provision
5,675

 
—

 
5,675

 
100
 %
Depreciation and amortization
87,637

 
95,860

 
(8,223
)
 
(9
)%
Interest expense
7,242

 
9,526

 
(2,284
)
 
(24
)%
Lease Termination Income
The increase in lease termination income of approximately $11.6 million is primarily the result of a lease termination on the 2500 Windy Ridge Parkway property during the first quarter of 2017.
Property Expense Recoveries
The decrease in property expense recoveries of $4.3 million compared to the same period a year ago is primarily the result of (1) approximately $2.1 million related to a lease termination during the first quarter of 2017; (2) approximately $2.0 million related to timing of operating expense recoveries incurred and prior year reconciliations; offset by (3) increases in property value assessments of approximately $1.0 million.
Impairment Provision
The increase in impairment provision expense is a result of Westinghouse Electric Company, LLC filing for bankruptcy in the current period. We recorded an impairment provision of approximately $5.7 million related to the lease intangibles as it was determined that the carrying value of these assets would more than likely not be recoverable.

35

Depreciation and Amortization
The decrease of approximately $8.2 million as compared to the same period in the prior year is primarily the result of (1) approximately $6.8 million in amortization of intangibles as a result of early lease terminations in the prior year; (2) $1.9 million related to two properties reclassified as held for sale during the nine months ended September 30, 2017; offset by (3) approximately $0.6 million of amortization expense being recognized over a longer period related to a lease extension; (4) $0.5 million related to intangibles placed in service subsequent to September 30, 2016.
Interest Expense
The decrease of approximately $2.3 million as compared to the same period in the prior year is primarily the result of five mortgage loan payoffs subsequent to September 30, 2016.
Portfolio Analysis
As of September 30, 2017, we owned 74 properties and have completed the offering stage of our life cycle. We may continue to draw from our Unsecured Credit Facility to acquire assets that adhere to our investment criteria.
Comparison of the Three Months Ended September 30, 2017 and 2016
The following table provides summary information about our results of operations for the three months ended September 30, 2017 and 2016 (dollars in thousands):
 
 
Three Months Ended September 30,
 
Increase/(Decrease)
 
Percentage
Change
 
 
2017
 
2016
 
Rental income
 
$
66,437

 
$
66,894

 
$
(457
)
 
(1
)%
Lease termination income
 
—

 
995

 
(995
)
 
(100
)%
Property expense recoveries
 
18,695

 
18,847

 
(152
)
 
(1
)%
Asset management fees to affiliates
 
5,921

 
5,921

 
—

 
0
 %
Property management fees to affiliates
 
2,453

 
2,373

 
80

 
3
 %
Property operating expense
 
13,028

 
12,233

 
795

 
6
 %
Property tax expense
 
10,916

 
10,876

 
40

 
0
 %
Acquisition fees and expenses to non-affiliates
 
—

 
7

 
(7
)
 
(100
)%
General and administrative expenses
 
1,509

 
1,153

 
356

 
31
 %
Corporate operating expenses to affiliates
 
676

 
578

 
98

 
17
 %
Depreciation and amortization
 
28,235

 
34,217

 
(5,982
)
 
(17
)%
Interest expense
 
12,692

 
12,405

 
287

 
2
 %
Lease Termination Income
The decrease in lease termination income of approximately $1.0 million is primarily the result of a lease termination during the third quarter of 2016.
Property Operating Expenses
Property operating expenses include insurance, repairs and maintenance, security, janitorial, landscaping, and other administrative expenses incurred to operate our properties. The total increase of approximately $0.8 million compared to the same period a year ago is primarily a result of timing on expenses incurred during 2017.
General and Administrative Expenses
General and administrative expenses for the three months ended September 30, 2017 increased by approximately $0.4 million compared to the same period a year ago primarily as a result of higher state taxes.

36

Depreciation and Amortization
The decrease of approximately $6.0 million as compared to the same period in the prior year is primarily the result of (1) $3.5 million related to two properties reclassified as held for sale during the three months ended September 30, 2017 and no depreciation expense recorded; (2) approximately $1.6 million in additional amortization of intangibles as a result of early lease terminations in the prior year and assets fully depreciated in the current year; offset by (3) $0.5 million related to intangibles placed in service subsequent to September 30, 2016 and (4) the sale of a property on June 30, 2017.
Comparison of the Nine Months Ended September 30, 2017 and 2016
The following table provides summary information about our results of operations for the nine months ended September 30, 2017 and 2016 (dollars in thousands):
 
 
Nine Months Ended September 30,
 
Increase/(Decrease)
 
Percentage
Change
 
 
2017
 
2016
 
Rental income
 
$
197,647

 
$
201,064

 
$
(3,417
)
 
(2
)%
Lease termination income

12,845


1,211

 
11,634

 
961
 %
Property expense recoveries
 
54,120

 
57,781

 
(3,661
)
 
(6
)%
Asset management fees to affiliates
 
17,786

 
17,599

 
187

 
1
 %
Property management fees to affiliates
 
7,519

 
7,164

 
355

 
5
 %
Property operating expense
 
36,782

 
36,347

 
435

 
1
 %
Property tax expense
 
33,465

 
33,114

 
351

 
1
 %
Acquisition fees and expenses to non-affiliates
 
—

 
541

 
(541
)
 
(100
)%
Acquisition fees and expenses to affiliates
 
—

 
1,239

 
(1,239
)
 
(100
)%
General and administrative expenses
 
5,753

 
4,525

 
1,228

 
27
 %
Corporate operating expenses to affiliates
 
1,983

 
1,431

 
552

 
39
 %
Depreciation and amortization
 
88,783

 
96,904

 
(8,121
)
 
(8
)%
Impairment provision
 
5,675

 
—

 
5,675

 
100
 %
Interest expense
 
37,232

 
37,249

 
(17
)
 
0
 %
Lease Termination Income
The increase in lease termination income of approximately $11.6 million is primarily the result of a lease termination on the 2500 Windy Ridge Parkway property during the first quarter of 2017.
Property Expense Recoveries
Recoverable Expenses decreased by approximately $3.7 million compared to the same period in the prior year primarily as a result of (1) approximately $2.1 million related to a lease termination during the first quarter of 2017; (2) approximately $2.0 million related to timing of operating expense recoveries incurred and prior year reconciliations; offset by (3) increases in property value assessments of approximately $1.0 million.
Acquisition Fees and Expenses
Real estate acquisition fees and expenses to non-affiliates and affiliates decreased by approximately $1.8 million for the nine months ended September 30, 2017 compared to the same period a year ago due to no acquisition activity in the current period.
General and Administrative Expenses
General and administrative expenses for the nine months ended September 30, 2017 increased by approximately $1.2 million compared to the same period a year ago primarily as a result of higher state taxes.

37

Corporate Operating Expenses to Affiliates
Corporate operating expenses to affiliates for the nine months ended September 30, 2017 increased by approximately $0.6 million compared to the same period a year ago primarily as a result of an increase in personnel and rent costs incurred by our Advisor, which are allocated to us.
Impairment Provision
During the nine months ended September 30, 2017 as a result of Westinghouse Electric Company, LLC filing for bankruptcy, we recorded an impairment provision of approximately $5.7 million related to the lease intangibles as it was determined that the carrying value of these assets would more than likely not be recoverable.
Funds from Operations and Modified 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. Additionally, publicly registered, non-listed REITs typically have a significant amount of acquisition activity and are substantially more dynamic during their initial years of investment and operation. While other start-up entities may also experience significant acquisition activity during their initial years, we believe that non-listed REITs are unique in that they have a limited life with targeted exit strategies within a relatively limited time frame after the acquisition activity ceases. Our board of directors is in the process of determining whether it is appropriate for us to achieve a liquidity event (i.e., listing of our shares of common stock on a national securities exchange, a merger or sale, the sale of all or substantially all of our assets, or another similar transaction). We do not intend to continuously purchase assets and intend to have a limited life. The decision whether to engage in any liquidity event is in the sole discretion of our board of directors.
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 funds from operations (“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 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.
The Investment Program Association (“IPA”) issued Practice Guideline 2010-01 (the “IPA MFFO Guideline”) on November 2, 2010, which extended financial measures to include modified funds from operations (“MFFO”). In computing MFFO, FFO is adjusted for certain non-operating cash items such as acquisition fees and expenses and certain non-cash items such as straight-line rent, amortization of in-place lease valuations, amortization of discounts and premiums on debt investments, nonrecurring impairments of real estate-related investments, mark-to-market adjustments included in net income (loss), and nonrecurring gains or losses included in net income (loss) from the extinguishment or sale of debt, hedges, foreign exchange, derivatives or securities holdings where trading of such holdings is not a fundamental attribute 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.
Management is responsible for managing interest rate, hedge and foreign exchange risk. 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

38

realized, and which are not reflective of on-going operations and are therefore typically adjusted for when assessing operating performance.
We adopted the IPA MFFO Guideline as management believes that MFFO is a beneficial indicator of our on-going portfolio performance and ability to sustain our current distribution level. More specifically, MFFO isolates the financial results of the REIT’s operations. MFFO, however, is not considered an appropriate measure of historical earnings as it excludes certain significant costs that are otherwise included in reported earnings. Further, since the measure is based on historical financial information, MFFO for the period presented may not be indicative of future results or our future ability to pay our dividends. By providing FFO and MFFO, we present information that assists investors in aligning their analysis with management’s analysis of long-term operating activities. MFFO also allows for a comparison of the performance of our portfolio with other REITs that are not currently engaging in acquisitions, as well as a comparison of our performance with that of other non-traded REITs, as MFFO, or an equivalent measure, is routinely reported by non-traded REITs, and we believe often used by analysts and investors for comparison purposes. As explained below, management’s evaluation of our operating performance excludes items considered in the calculation of MFFO based on the following economic considerations:
•
Straight-line rent. Most of our leases provide for periodic minimum rent payment increases throughout the term of the lease. In accordance with GAAP, these periodic minimum rent payment increases during the term of a lease are recorded to rental revenue on a straight-line basis in order to reconcile the difference between accrual and cash basis accounting. As straight-line rent is a GAAP non-cash adjustment and is included in historical earnings, FFO is adjusted for the effect of straight-line rent to arrive at MFFO as a means of determining operating results of our portfolio.
•
Amortization of in-place lease valuation. Acquired in-place leases are valued as above-market or below-market as of the date of acquisition based on the present value 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 for above-market leases. 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. As this item is a non-cash adjustment and is included in historical earnings, FFO is adjusted for the effect of the amortization of in-place lease valuation to arrive at MFFO as a means of determining operating results of our portfolio.
•
Acquisition-related costs. We were organized primarily with the purpose of acquiring or investing in income-producing real property in order to generate operational income and cash flow that will allow us to provide regular cash distributions to our stockholders. In the process, we incur non-reimbursable affiliated and non-affiliated acquisition-related costs, which in accordance with GAAP are capitalized and included as part of the relative fair value when the property acquisition meets the definition of an asset acquisition or are expensed as incurred and are included in the determination of income (loss) from operations and net income (loss), for property acquisitions accounted for as a business combination. These costs have been funded with cash proceeds from our Public Offerings or included as a component of the amount borrowed to acquire such real estate. If we acquire a property after all offering proceeds from our Public Offerings have been invested, there will not be any offering proceeds to pay the corresponding acquisition-related costs. Accordingly, unless our Advisor determines to waive the payment of any then-outstanding acquisition-related costs otherwise payable to our Advisor, such costs will be paid from additional debt, operational earnings or cash flow, net proceeds from the sale of properties, or ancillary cash flows. In evaluating the performance of our portfolio over time, management employs business models and analyses that differentiate the costs to acquire investments from the investments’ revenues and expenses. Acquisition-related costs may negatively affect our operating results, cash flows from operating activities and cash available to fund distributions during periods in which properties are acquired, as the proceeds to fund these costs would otherwise be invested in other real estate related assets. By excluding acquisition-related costs, MFFO may not provide an accurate indicator of our operating performance during periods in which acquisitions are made. However, it can provide an indication of our on-going ability to generate cash flow from operations and continue as a going concern after we cease to acquire properties on a frequent and regular basis, which can be compared to the MFFO of other non-listed REITs that have completed their acquisition activity and have similar operating characteristics to ours. Management believes that excluding these costs from MFFO provides investors with supplemental performance information that is consistent with the performance models and analysis used by management.
•
Financed termination fee, net of payments received. We believe that a fee received from a tenant for terminating a lease is appropriately included as a component of rental revenue and therefore included in MFFO. If, however, the termination fee is to be paid over time, we believe the recognition of such termination fee into income should not be included in MFFO. Alternatively, we believe that the periodic amount paid by the tenant in subsequent periods to satisfy the termination fee obligation should be included in MFFO.
•
Gain or loss from the extinguishment of debt. We use debt as a partial source of capital to acquire properties in our portfolio. As a term of obtaining this debt, we will pay financing costs to the respective lender. Financing costs are

39

presented on the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts and amortized into interest expense on a straight-line basis over the term of the debt. We consider the amortization expense to be a component of operations if the debt was used to acquire properties. From time to time, we may cancel certain debt obligations and replace these canceled debt obligations with new debt at more favorable terms to us. In doing so, we are required to write off the remaining capitalized financing costs associated with the canceled debt, which we consider to be a cost, or loss, on extinguishing such debt. Management believes that this loss is considered an event not associated with our operations, and therefore, deems this write off to be an exclusion from MFFO.
•
Unrealized gains (losses) on derivative instruments. These adjustments include unrealized gains (losses) from mark-to-market adjustments on interest rate swaps and losses due to hedge ineffectiveness.  The change in fair value of interest rate swaps not designated as a hedge and the change in fair value of the ineffective portion of interest rate swaps are non-cash adjustments recognized directly in earnings and are included in interest expense.  We have excluded these adjustments in our calculation of MFFO to more appropriately reflect the economic impact of our interest rate swap agreements
For all of these reasons, we believe the non-GAAP measures of FFO and MFFO, 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 MFFO 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. Additionally, MFFO has limitations as a performance measure in an offering such as ours where the price of a share of common stock is a stated value. The use of MFFO 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. MFFO is useful in assisting management and investors in assessing our on-going ability to generate cash flow from operations and continue as a going concern now that our Public Offerings have been completed and our portfolio is in place. Further, we believe MFFO is useful in comparing the sustainability of our operating performance now that our Public Offerings have been completed and we expect our acquisition activity over the near term to be less vigorous, with the sustainability of the operating performance of other real estate companies that are not as involved in acquisition activities. However, MFFO is not a useful measure in evaluating NAV because impairments are taken into account in determining NAV but not in determining MFFO. Therefore, FFO and MFFO should not be viewed as more prominent measures 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 MFFO 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.

40

Our calculation of FFO and MFFO is presented in the following table for the three and nine months ended September 30, 2017 and 2016 (in thousands):
 
Three Months Ended September 30,

Nine Months Ended September 30,
 
2017

2016

2017

2016
Net income
$
9,445


$
7,131


$
32,911


$
26,098

Adjustments:







Depreciation of building and improvements
13,948


15,297


42,244


42,302

Amortization of leasing costs and intangibles
14,280


18,913


46,518


54,581

Impairment provision
—


—


5,675


—

Equity interest of depreciation of building and improvements - unconsolidated entities
620


618


1,857


1,868

Equity interest of amortization of intangible assets - unconsolidated entities
1,165


1,182


3,512


3,569

Gain from sale of depreciable operating property
—


—


(4,293
)

—

Gain on acquisition of unconsolidated entity
—


—


—


(666
)
FFO
$
39,458


$
43,141


$
128,424


$
127,752

 Distributions to non-controlling interest
(1,194
)

(1,194
)

(3,543
)

(3,299
)
FFO, adjusted for redeemable preferred and noncontrolling interest distributions
$
38,264


$
41,947


$
124,881


$
124,453

Reconciliation of FFO to MFFO:







Adjusted FFO
$
38,264


$
41,947


$
124,881


$
124,453

Adjustments:







Acquisition fees and expenses to non-affiliates
—


7


—


541

Acquisition fees and expenses to affiliates
—


—


—


1,239

Revenues in excess of cash received (straight-line rents)
(3,443
)

(2,941
)

(8,508
)

(11,864
)
Amortization of above market rent
589


646


1,310


2,219

Amortization of debt premium/(discount)
8


—


(422
)

—

Amortization of ground leasehold interests
7


7


21


21

Revenues in excess of cash received
—


(900
)

(12,845
)

(1,102
)
Financed termination fee payments received
3,211


484


10,177


1,036

Amortization of deferred revenue
—


—


—


(1,228
)
Equity interest of revenues in excess of cash received (straight-line rents) - unconsolidated entities
(31
)

(137
)

(280
)

(598
)
Unrealized gain on derivatives
(11
)

(21
)

(16
)

(21
)
Equity interest of amortization of above market rent - unconsolidated entities
741


744


2,229


2,240

MFFO
$
39,335


$
39,836


$
116,547


$
116,936



41

Liquidity and Capital Resources
Long-Term Liquidity and Capital Resources
On a long-term basis, our principal demands for funds will be for the payment of operating and capital expenses, including costs associated with re-leasing a property, distributions, and for the payment of debt service on our outstanding indebtedness, including repayment of the Unsecured Credit Facility and property secured mortgage loans. Generally, cash needs for items, other than property acquisitions, will be met from operations and the 2017 DRP Offering. Our Advisor will evaluate potential additional property acquisitions and engage in negotiations with sellers on our behalf. After a purchase contract is executed that contains specific terms, the property will not be purchased until the successful completion of due diligence, which includes review of the title insurance commitment, an appraisal and an environmental analysis. In some instances, the proposed acquisition will require the negotiation of final binding agreements, which may include financing documents. During this period, we may decide to repay debt as allowed under the loan agreements or temporarily invest in certain investments that could yield lower returns than the properties. These lower returns may affect our ability to make distributions.
Unsecured Credit Facility
On July 20, 2015, we, through our Operating Partnership, entered into a credit agreement (the "Unsecured Credit Agreement") with a syndicate of lenders, co-led by KeyBank National Association ("KeyBank"), Bank of America, N.A. ("Bank of America"), Fifth Third Bank ("Fifth Third"), and BMO Harris Bank, N.A. ("BMO Harris"), under which KeyBank serves as administrative agent and Bank of America, Fifth Third, and BMO Harris serve as co-syndication agents, and KeyBank Capital Markets, Merrill Lynch, Pierce, Fenner & Smith Incorporated ("Merrill Lynch"), Fifth Third, and BMO Capital Markets serve as joint bookrunners and joint lead arrangers. Pursuant to the Unsecured Credit Agreement, we were provided with a $1.14 billion senior unsecured credit facility (the "Unsecured Credit Facility"), consisting of a $500.0 million senior unsecured revolver (the "Revolver Loan") and a $640.0 million senior unsecured term loan (the "Term Loan"). The Unsecured Credit Facility may be increased up to $860.0 million, in minimum increments of $50.0 million, for a maximum of $2.0 billion by increasing either the Revolver Loan, the Term Loan, or both. The Revolver Loan has an initial term of four years, maturing on July 20, 2019, and may be extended for a one-year period if certain conditions are met and upon payment of an extension fee. The Term Loan has a term of five years, maturing on July 20, 2020.
The Unsecured Credit Facility has an interest rate calculated based on LIBOR plus the applicable LIBOR margin or Base Rate plus the applicable Base Rate margin, both as provided in the Unsecured Credit Agreement. The applicable LIBOR margin and Base Rate margin are dependent on whether the interest rate is calculated prior to or after we have received an investment grade senior unsecured credit rating of BBB-/Baa3 from Standard & Poors, Moody's, or Fitch, and we have elected to utilize the investment grade pricing list, as provided in the Unsecured Credit Agreement. Otherwise, the applicable LIBOR margin will be based on a leverage ratio computed in accordance with our quarterly compliance package and communicated to KeyBank. The Base Rate is calculated as the greater of (i) the KeyBank Prime rate or (ii) the Federal Funds rate plus 0.50%. Payments under the Unsecured Credit Facility are interest only and are due on the first day of each quarter.
On March 29, 2016, the Company exercised its right to increase the total commitments, pursuant to the Unsecured Credit Agreement, by entering into the Increase Agreement. As a result, the total commitments on the Term Loan increased from $640.0 million to $715.0 million.
In March 2017, the Company, through the Operating Partnership, drew an additional $23.0 million to pay off the remaining balance of the Ace Hardware loan.
In September 2017, the Company, through the Operating Partnership, drew an additional $21.0 million to pay down the remaining $18.7 million Plainfield loan balance and the remaining proceeds were used to fund operations.
In September 2017, the Company paid down approximately $294.1 million of the Unsecured Credit Facility, as further described below.
As of September 30, 2017, the remaining capacity pursuant to the Revolver Loan was $352.6 million.

42

Bank of America Loan
On September 29, 2017, we, through ten special purpose entities wholly owned by our Operating Partnership, entered into a loan agreement with Bank of America (together with its successors and assigns, the "Lender") in which we borrowed $375.0 million (the “Bank of America Loan”).
We utilized approximately $294.1 million of the funds provided by the Bank of America Loan to pay down a portion of our Unsecured Credit Facility. In connection with this pay down of the Unsecured Credit Facility, KeyBank released eight special purpose entities owned by our Operating Partnership from their obligations as guarantors under the Unsecured Credit Facility. The Bank of America Loan is secured by cross-collateralized and cross-defaulted first mortgage liens on the properties (or in the case of one property, on the special purpose entity's leasehold interest in the property) with the following tenants: ACE Hardware Corporation; Christus Health; Comcast of Washington; Connecticut General; General Electric Company; NEC Corporation of America; Restoration Hardware, Inc.; State Farm Mutual Automobile Insurance Co.; T-Mobile West LLC; and WellsFargo Bank, National Association (each, a "Secured Property"). In addition, we entered into a nonrecourse carve-out guaranty agreement. Approximately $77.3 million of the loan proceeds are being held in an interest-bearing escrow account with the Lender until such time as certain conditions related to one of the Secured Properties are satisfied. Subsequent to September 30, 2017, the $77.3 million was released to us.
In addition to their first mortgage lien, the Lender also has a security interest in all other property relating to the ownership, use, maintenance or operation of the improvements on each Secured Property and all rents, profits and revenues from each Secured Property.
The Bank of America Loan has a term of 10 years, maturing on October 1, 2027. The Bank of America Loan bears interest at a rate of 3.77%. The Bank of America Loan requires monthly payments of interest only. Commencing September 1, 2019, the Bank of America Loan may be prepaid but only if such prepayment is made in full (with certain exceptions), subject to certain conditions set forth in the loan agreement, including 30 days' prior notice to the Lender and payment of a prepayment premium in addition to all unpaid principal and accrued interest to the date of such prepayment. Commencing on April 1, 2027, the Bank of America Loan may be prepaid in whole or in part, subject to satisfaction of certain conditions, including 30 days' prior notice to the Lender, without payment of any prepayment premium.
Derivative Instruments
As discussed in Note 6, Interest Rate Contracts, to the consolidated financial statements, on July 9, 2015, we executed three interest rate swap agreements to hedge the variable cash flows associated with certain existing or forecasted LIBO Rate-based variable-rate debt, including our Unsecured Credit Facility. Three interest rate swaps are effective for the periods from July 9, 2015 to July 1, 2020, January 1, 2016 to July 1, 2018, and July 1, 2016 to July 1, 2018, and have notional amounts of $425.0 million, $300.0 million, and $100.0 million, respectively.
The effective portion of changes in the fair value of derivatives designated and that qualify as cash flow hedges is recorded in accumulated other comprehensive loss ("AOCL") and is subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. Derivatives were used to hedge the variable cash flows associated with existing variable-rate debt and forecasted issuances of debt. The ineffective portion of the change in fair value of the derivatives is recognized directly in earnings.
The following table sets forth a summary of the interest rate swaps at September 30, 2017 and December 31, 2016 (dollars in thousands):
 
 
 
 
 
 
 
 
Fair Value (1)
Derivative Instrument
 
Effective Date
 
Maturity Date
 
Interest Strike Rate
 
September 30, 2017
 
December 31, 2016
Assets/(Liabilities):
 
 
 
 
 
 
 
 
 
 
Interest Rate Swap
 
7/9/2015
 
7/1/2020
 
1.69%
 
$
204

 
$
(1,630
)
Interest Rate Swap
 
1/1/2016
 
7/1/2018
 
1.32%
 
187

 
(907
)
Interest Rate Swap
 
7/1/2016
 
7/1/2018
 
1.50%
 
(69
)
 
(564
)
Total
 
 
 
 
 
 
 
$
322

 
$
(3,101
)

43

(1)
We record 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 September 30, 2017, derivatives in a liability/asset position are included in the line item "Accrued expenses and other liabilities/Other assets," respectively, in the consolidated balance sheets at fair value.
Other Potential Future Sources of Capital
Other potential future sources of capital include proceeds from potential private or public offerings of our stock or limited partnership units of our Operating Partnership, proceeds from secured or unsecured financings from banks or other lenders, including debt assumed in a real estate acquisition transaction, proceeds from the sale of properties and undistributed funds from operations. If necessary, we may use financings or other sources of capital in the event of unforeseen significant capital expenditures. To the extent we are not able to secure additional financing in the form of a credit facility or other third party source of liquidity, we will be heavily dependent upon our current financing, our 2017 DRP Offering, and income from operations.
Contractual Commitments and Contingencies
The following is a summary of our contractual obligations as of September 30, 2017 (in thousands):
 
Payments Due During the Years Ending December 31,
 
 
Total
 
2017
 
2018-2019
 
2020-2021
 
Thereafter
 
Outstanding debt obligations (1)
$
1,536,723

 
$
1,740

(4) 
$
32,012

(4) 
$
876,448

(5) 
$
626,523

(6) 
Interest on outstanding debt obligations (2)
312,158

  
25,664

 
86,296

 
70,024

 
130,174

 
Interest rate swaps (3)
5,873

 
605

 
4,144

 
1,124

 
—

 
Ground lease obligations
34,692

 
50

 
396

 
396

 
33,850

 
Total
$
1,889,446

  
$
28,059

 
$
122,848

 
$
947,992

 
$
790,547

 
(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 September 30, 2017. Projected interest payments on the Revolver Loan and Term Loan are based on the contractual interest rate in effect at September 30, 2017.
(3)
The interest rate swaps contractual commitment was calculated based on the swap rate less the LIBOR.
(4)
Amount includes payment of the balance of the TW Telecom loan, which matures in 2019.
(5)
Amount also includes payment of the Term Loan which matures in 2020 and the Revolver Loan which matures in 2020, assuming the one-year extension is exercised.
(6)
Amount includes payment of the balances of:
•the Midland, Emporia Partners, Samsonite, and HealthSpring loans, all of which mature in 2023,
•the Highway 94 loan, which matures in 2024, and
•the AIG loan, which matures in 2029.
Short-Term Liquidity and Capital Resources
We expect to meet our short-term operating liquidity requirements with remaining proceeds raised in our 2017 DRP Offering, operating cash flows generated from our properties, and draws from our Unsecured Credit Facility. All advances from our Advisor will be repaid, without interest, as funds are available after meeting our current liquidity requirements, subject to the limitations on reimbursement.
Our cash and cash equivalent balances decreased by approximately $10.9 million during the nine months ended September 30, 2017 and were primarily used in or provided by the following:
Operating 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. During the nine months ended September 30, 2017, we generated $109.0 million compared to $108.1 million for the nine months ended September 30, 2016. Net cash provided in operating activities before changes in operating assets and liabilities for the nine months ended September 30, 2017 decreased by approximately $7.2 million to approximately $106.4 million compared to approximately $113.6 million for the nine months ended September 30, 2016. The decrease is primarily related to a decrease in occupancy of approximately 2.4%.
Investing Activities. During the nine months ended September 30, 2017, we generated approximately $0.7 million in cash provided by investing activities compared to approximately $59.0 million provided by investing activities during the same period in 2016. The $58.3 million decrease in cash provided by investing activities is primarily related to the following:

44

•$47.0 million related to the release of proceeds during the prior period that were held by a third party intermediary from the sale of two properties upon the completion of the tax-deferred real estate exchange, as permitted by Section 1031 of the Internal Revenue Code; and
•$25.7 million repayment of a mortgage loan receivable from an affiliated party during the prior period;
•$8.4 million in disbursements of cash reserves related to tenant improvements;
offset by
•$12.8 million decrease in cash paid for property acquisitions, payments for construction in progress and improvements to real estate; and
•$10.2 million increase in proceeds from disposition of assets in the current period.
Financing Activities. During the nine months ended September 30, 2017, we used approximately $120.6 million of cash in financing activities compared to approximately $149.0 million in cash used in financing activities during the same period in 2016. The decrease in cash used in financing activities of $28.4 million is primarily comprised of the following:
•$297.7 million increase in proceeds from borrowings under the Bank of American loan;
•$18.1 million decrease in payments made to purchase the noncontrolling interest related to the Restoration Hardware project;
offset by
•$154.7 million increase in principal repayments under the Unsecured Credit Facility;
•$71.1 million decrease in proceeds from borrowings under the Unsecured Credit Facility;
•$24.1 million increase in principal payoff of mortgage debt;
•$31.5 million increase in repurchases of common stock; and
•$1.7 million increase in distribution payments to common stockholders and noncontrolling interests due to an increase in shares issued.
Distributions and Our Distribution Policy
Distributions will be paid to our stockholders as of the record date selected by our board of directors. We expect to continue to pay distributions monthly based on daily declaration and record dates. 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 of directors, which will be directed, in substantial part, by its obligation to cause us to comply with the REIT requirements of the Internal Revenue 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;
•our ability to keep our properties occupied;
•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.

45

Distributions may be funded with operating cash flow from our properties, offering proceeds raised in future public offerings (if any), or a combination thereof. From inception and through September 30, 2017, we funded 93% of our cash distributions from cash flows 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 flow provided by operating activities during the nine months ended September 30, 2017 and year ended December 31, 2016 (dollars in thousands):
 
Nine Months Ended September 30, 2017
 
 
 
Year Ended December 31, 2016
 
 
Distributions paid in cash — noncontrolling interests
$
3,556

 
 
 
$
4,425

 
 
Distributions paid in cash — common stockholders
53,418

 
 
 
69,463

 
 
Distributions of DRP
37,438

 
 
 
52,174

 
 
Total distributions
$
94,412

(1) 
 
 
$
126,062

 
 
Source of distributions (2)
 
 
 
 
 
 
 
Cash flows provided by operations
$
56,974

  
60
%
 
$
73,888

 
59
%
Offering proceeds from issuance of common stock pursuant to the DRP
37,438

  
40
%
 
52,174

 
41
%
Total sources
$
94,412

(3) 
100
%
 
$
126,062

 
100
%
(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 distributions declared but not paid as of September 30, 2017 were $6.2 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 nine months ended September 30, 2017, we paid and declared distributions of approximately $90.7 million to common stockholders including shares issued pursuant to the DRP and approximately $3.5 million to the limited partners of our Operating Partnership, as compared to FFO, adjusted for noncontrolling interest distributions and MFFO for the nine months ended September 30, 2017 of approximately $124.9 million and $116.5 million, respectively. The payment of distributions from sources other than FFO or MFFO 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.
Off-Balance Sheet Arrangements
As of September 30, 2017, we had no off-balance sheet transactions, nor do we currently have any such arrangements or obligations.
Subsequent Events
See Note 13, Subsequent Events, to the consolidated financial statements.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE 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. We expect that the primary market risk to which we will be exposed is interest rate risk, including the risk of changes in the underlying rates on our variable rate debt.
In order to modify and manage the interest rate characteristics of our outstanding debt and to limit the effects of interest rate risks on our operations, we may 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.
Our future earnings and fair values relating to financial instruments are primarily dependent upon prevalent market rates of interest, such as LIBO Rate. However, our interest rate swap agreements are intended to reduce the effects of interest rate changes. The effect of a 1% increase in interest rates, assuming a LIBO Rate floor of 0%, on our variable-rate debt, including our Unsecured Credit Facility and our mortgage loan, after considering the effect of our interest rate swap agreements would decrease our future earnings and cash flows by approximately $0.6 million annually.

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As of September 30, 2017, our debt consisted of approximately $1.5 billion, in fixed rate debt (including the interest rate swaps) and approximately $56.7 million in variable rate debt (excluding unamortized deferred financing cost and discounts, net, of approximately $12.4 million). As of December 31, 2016, our debt consisted of approximately $1.2 billion in fixed rate debt (including the interest rate swaps) and approximately $307.8 million in variable rate debt (excluding unamortized deferred financing cost and discounts, net, of approximately $10.8 million). These instruments were entered into for other than trading purposes.
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 4. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
As of the end of the period covered by this report, 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 report to ensure that information required to be disclosed in the reports we file and submit under the Securities and Exchange Act of 1934 (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
There have been no changes in our internal control over financial reporting that occurred during the quarter ended September 30, 2017 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 1A. RISK FACTORS
In addition to the other information set forth in this Quarterly Report on Form 10-Q, you should carefully consider the risk factors discussed in Part I, Item 1A, "Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2016 as filed with the SEC on March 15, 2017. There have been no material changes from the risk factors set forth in such Annual Report. However, the risks and uncertainties that the Company faces are not limited to those set forth in such Annual Report.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
As noted in Note 9, Equity – Share Redemption Program, we adopted a SRP that enables stockholders to sell their stock to us in limited circumstances. As long as the common stock is not listed on a national securities exchange or over-the-counter market, stockholders who have held their stock for at least one year may, under certain circumstances, be able to have all or any portion of their shares of stock redeemed by us. During any calendar year, we will not redeem more than 5.0% of the weighted average number of shares outstanding during the prior calendar year. The cash available for redemption will be limited to the proceeds from the sale of shares pursuant to the DRP.

47

If we cannot purchase all shares presented for redemption in any quarter, based upon insufficient cash available or the limit on the number of shares we may redeem during any calendar year, we will attempt to honor 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. 
Redemption requests will be honored on or about the last business day of the month following the end of each quarter. Requests for redemption must be received on or prior to the end of the quarter in order for us to repurchase the shares as of the end of the following month. Since inception and through September 30, 2017, we had redeemed 12,073,944 shares of common stock for approximately $120.2 million at a weighted average price per share of $9.96 pursuant to the SRP. During the nine months ended September 30, 2017, we had redeemed 6,155,290 shares of common stock for approximately $61.4 million at a weighted average price per share of $9.98 pursuant to the SRP. Our board of directors may choose to amend, suspend, or terminate the SRP upon 30 days' written notice at any time.
During the quarter ended September 30, 2017, we redeemed shares as follows:0
For the Month Ended
 
Total
Number of
Shares
Redeemed
 
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
July 31, 2017
 
2,936,150

 
$
9.97

 
2,936,150

 
(1) 
August 31, 2017
 
—

 
—

 
—

 
(1) 
September 30, 2017
 
—

 
—

 
—

 
(1) 
(1)
A description of the maximum number of shares that may be purchased under our share redemption program is included in the narrative preceding this table.
During the three months ended September 30, 2017, the Company received requests for the redemption of common stock of approximately 3,878,396 shares, which exceeded the annual limitation of 5.0% of the weighted average number of shares outstanding during the prior calendar year by approximately 104,999 shares. The Company processed the redemption requests according to the SRP policy described above and redeemed 97% of the shares requested at a weighted average price per share of $9.92. Those stockholders who were subject to pro rata treatment of their redemption requests had approximately 95% of their requests satisfied. The remaining portion of such requests will be carried forward to the next redemption period. The Company’s board of directors may choose to amend, suspend, or terminate the SRP upon 30 days' written notice at any time.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5. OTHER INFORMATION
(a)
During the quarter ended September 30, 2017, there was no information required to be disclosed in a report on Form 8-K which was not disclosed in a report on Form 8-K.
(b)
The Company's Amended and Restated Bylaws revise the procedures required for a stockholder to nominate directors or propose other matters to be considered at an annual meeting and expand upon the information that must be included in the notice about the requesting stockholder, the proposed nominee and any stockholder associated person. With respect to any stockholder-proposed nominee for election at an annual meeting, the notice of the nomination must be accompanied by a certificate from the proposed nominee regarding the nominee’s willingness to serve and must attach a completed nominee questionnaire including all of the information that would be required to be disclosed in a proxy statement relating to an election of directors under the federal securities laws.


48

ITEM 6. EXHIBITS
The exhibits required to be filed with this report are set forth on the Exhibit Index hereto and incorporated by reference herein.
EXHIBIT INDEX
The following exhibits are included in this Quarterly Report on Form 10-Q for the period ended September 30, 2017 (and are numbered in accordance with Item 601 of Regulation S-K).
Exhibit
No.
  
Description
  

  


 
 
 

 

 

 

 

  
  
  
  
101*
  
The following Griffin Capital Essential Asset REIT, Inc. financial information for the period ended September 30, 2017 formatted in XBRL (eXtensible Business Reporting Language): (i) Consolidated Balance Sheets (unaudited), (ii) Consolidated Statements of Operations (unaudited), (iii) Consolidated Statements of Comprehensive income (loss) (unaudited), (iv) Consolidated Statements of Equity (unaudited), (v) Consolidated Statements of Cash Flows (unaudited) and (vi) Notes to Consolidated Financial Statements (unaudited).
*
 
Filed herewith.
**
 
Furnished herewith.


49

SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
 
GRIFFIN CAPITAL ESSENTIAL ASSET REIT, INC.
(Registrant)

Dated:
November 13, 2017
By:
 
/s/ Javier F. Bitar
 
 
 
 
Javier F. Bitar
 
 
 
 
On behalf of the Registrant and as Chief Financial Officer and Treasurer (Principal Financial and Accounting Officer)

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Griffin Capital Essential Asset REIT, Inc. Reports