Griffin Capital Essential Asset REIT, Inc. - FORM 10-Q - May 14, 2018

Attached files

file filename
EX-32.2 - EXHIBIT 32.2 - Griffin Capital Essential Asset REIT, Inc.gcear03312018ex322.htm
EX-32.1 - EXHIBIT 32.1 - Griffin Capital Essential Asset REIT, Inc.gcear03312018ex321.htm
EX-31.2 - EXHIBIT 31.2 - Griffin Capital Essential Asset REIT, Inc.gcear03312018ex312.htm
EX-31.1 - EXHIBIT 31.1 - Griffin Capital Essential Asset REIT, Inc.gcear03312018ex311.htm
EX-10.1 - EXHIBIT 10.1 - Griffin Capital Essential Asset REIT, Inc.exhibit101.htm

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 March 31, 2018
¨
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 May 10, 2018: 165,709,032 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 Part II, Item 1A of this Form 10-Q and in the “Risk Factors” section of our Annual Report on Form 10-K for the year ended December 31, 2017 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)

March 31, 2018

December 31, 2017
ASSETS



Cash and cash equivalents
$
48,938


$
40,735

Restricted cash
110,205


174,132

Real estate:



Land
347,457


342,021

Building and improvements
2,076,093


2,024,865

Tenant origination and absorption cost
499,752


495,364

Construction in progress
13,346


7,078

Total real estate
2,936,648


2,869,328

Less: accumulated depreciation and amortization
(453,507
)

(426,752
)
Total real estate, net
2,483,141


2,442,576

Investments in unconsolidated entities
34,894


37,114

Intangible assets, net
17,051


18,269

Deferred rent
48,895


46,591

Deferred leasing costs, net
20,222


19,755

Other assets
27,313


24,238

Total assets
$
2,790,659


$
2,803,410

LIABILITIES AND EQUITY



Debt:



Mortgages payable
$
646,419


$
666,920

Term Loan
712,007


711,697

Revolver Loan
26,721


7,467

Total debt
1,385,147


1,386,084

Restricted reserves
8,894


8,701

Redemptions payable
64,432

 
20,382

Distributions payable
6,642


6,409

Due to affiliates
3,725


3,545

Below market leases, net
22,629


23,581

Accrued expenses and other liabilities
61,593


64,133

Total liabilities
1,553,062


1,512,835

Commitments and contingencies (Note 11)



Noncontrolling interests subject to redemption; 531,000 units eligible towards redemption as of March 31, 2018 and December 31, 2017
4,887


4,887

Common stock subject to redemption
1,249


33,877

Stockholders’ equity:



Common Stock, $0.001 par value; 700,000,000 shares authorized; 172,043,872 and 170,906,111 shares outstanding, as of March 31, 2018 and December 31, 2017, respectively
172


171

Additional paid-in capital
1,561,713


1,561,694

Cumulative distributions
(483,835
)

(454,526
)
Accumulated earnings
117,226


110,907

Accumulated other comprehensive income
5,804


2,460

Total stockholders’ equity
1,201,080


1,220,706

Noncontrolling interests
30,381


31,105

Total equity
1,231,461


1,251,811

Total liabilities and equity
$
2,790,659


$
2,803,410

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 March 31,
 
2018

2017
Revenue:



Rental income
$
60,085


$
66,099

Lease termination income
2,702


12,845

Property expense recoveries
17,612


17,764

Total revenue
80,399


96,708

Expenses:



Property operating expense
11,323


12,004

Property tax expense
11,019


11,013

Asset management fees to affiliates
5,708


5,933

Property management fees to affiliates
2,312


2,528

General and administrative expenses
1,442


1,544

Corporate operating expenses to affiliates
834


628

Depreciation and amortization
27,319


30,596

Impairment provision
—


5,675

Total expenses
59,957


69,921

Income before other income and (expenses)
20,442


26,787

Other income (expenses):



Interest expense
(13,337
)

(12,068
)
Other income
55


99

Loss from investment in unconsolidated entities
(519
)

(512
)
Net income
6,641


14,306

Net (income) attributable to noncontrolling interests
(234
)

(492
)
Net income attributable to controlling interest
6,407


13,814

Distributions to redeemable noncontrolling interests attributable to common stockholders
(88
)

(88
)
Net income attributable to common stockholders
$
6,319


$
13,726

Net income attributable to common stockholders per share, basic and diluted
$
0.04


$
0.08

Weighted average number of common shares outstanding, basic and diluted
171,300,001


176,032,879

Distributions declared per common share
$
0.17


$
0.17

See accompanying notes.

5

GRIFFIN CAPITAL ESSENTIAL ASSET REIT, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited; in thousands)
 
Three Months Ended March 31,
 
2018
 
2017
Net income
$
6,641

 
$
14,306

Other comprehensive income:
 
 
 
Equity in other comprehensive income (loss) of unconsolidated joint venture
227

 
172

Change in fair value of swap agreements
3,239

 
2,925

Total comprehensive income
10,107

 
17,403

Distributions to redeemable noncontrolling interests attributable to common stockholders
(88
)
 
(88
)
Comprehensive (income) attributable to noncontrolling interests
(356
)
 
(598
)
Comprehensive income attributable to common stockholders
$
9,663

 
$
16,717

See accompanying notes.




6


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

Deferred equity compensation
13,000

 
—

 
173

 
—

 
—

 
—

 
173

 
—

 
173

Distributions to common stockholders
—

 
—

 
—

 
(71,156
)
 
—

 
—

 
(71,156
)
 
—

 
(71,156
)
Issuance of shares for distribution reinvestment plan
4,791,485

 
5

 
49,536

 
(49,541
)
 
—

 
—

 
—

 
—

 
—

Repurchase of common stock
(9,931,245
)
 
(10
)
 
(98,896
)
 
—

 
—

 
—

 
(98,906
)
 
—

 
(98,906
)
Reduction of common stock subject to redemption
—

 
—

 
49,365

 
—

 
—

 
—

 
49,365

 
—

 
49,365

Distributions to noncontrolling interests
—

 
—

 
—

 
—

 
—

 
—

 
—

 
(4,369
)
 
(4,369
)
Distributions to noncontrolling interests subject to redemption
—

 
—

 
—

 
—

 
—

 
—

 
—

 
(13
)
 
(13
)
Net income
—

 
—

 
—

 
—

 
140,657

 
—

 
140,657

 
5,120

 
145,777

Other comprehensive income
—

 
—

 
—

 
—

 
—

 
7,103

 
7,103

 
253

 
7,356

Balance December 31, 2017
170,906,111

 
$
171

 
$
1,561,694

 
$
(454,526
)
 
$
110,907

 
$
2,460

 
$
1,220,706

 
$
31,105

 
$
1,251,811

Deferred equity compensation
—

 
—

 
20

 
—

 
—

 
—

 
20

 
—

 
20

Distributions to common stockholders
—

 
—

 
—

 
(17,875
)
 
—

 
—

 
(17,875
)
 
—

 
(17,875
)
Issuance of shares for distribution reinvestment plan
1,138,825

 
1

 
11,433

 
(11,434
)
 
—

 
—

 
—

 
—

 
—

Repurchase of common stock
(1,064
)
 
—

 
(11
)
 
—

 
—

 
—

 
(11
)
 
—

 
(11
)
Reduction of common stock subject to redemption
—

 
—

 
(11,423
)
 
—

 
—

 
—

 
(11,423
)
 
—

 
(11,423
)
Distributions to noncontrolling interests
—

 
—

 
—

 
—

 
—

 
—

 
 
 
(1,077
)
 
(1,077
)
Distributions to noncontrolling interests subject to redemption
—

 
—

 
—

 
—

 
—

 
—

 
—

 
(3
)
 
(3
)
Net income
—

 
—

 
—

 
—

 
6,319

 
—

 
6,319

 
234

 
6,553

Other comprehensive income
—

 
—

 
—

 
—

 
—

 
3,344

 
3,344

 
122

 
3,466

Balance March 31, 2018
172,043,872

 
$
172

 
$
1,561,713

 
$
(483,835
)
 
$
117,226

 
$
5,804

 
$
1,201,080

 
$
30,381

 
$
1,231,461

See accompanying notes.

7

GRIFFIN CAPITAL ESSENTIAL ASSET REIT, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited; in thousands)
 
Three Months Ended March 31,
 
2018
 
2017
Operating Activities:
 
 
 
Net income
$
6,641

 
$
14,306

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation of building and building improvements
13,779

 
14,085

Amortization of leasing costs and intangibles, including ground leasehold interests
13,540

 
16,511

Amortization of above and below market leases
(244
)
 
405

Amortization of deferred financing costs and debt premium
795

 
323

Amortization of swap interest
31

 
—

Deferred rent
(2,304
)
 
(2,584
)
Termination fee revenue - receivable from tenant, net
—

 
(12,845
)
Unrealized loss on interest rate swap
2

 
4

Loss from investment in unconsolidated entities
519

 
512

Impairment provision
—

 
5,675

Stock-based compensation
20

 
55

Change in operating assets and liabilities:
 
 
 
Deferred leasing costs and other assets
456

 
5,786

Restricted reserves
168

 
182

Accrued expenses and other liabilities
(4,364
)
 
(5,756
)
Due to affiliates, net
180

 
1,115

Net cash provided by operating activities
29,219

 
37,774

Investing Activities:
 
 
 
Acquisition of properties, net
(60,266
)
 
—

Real estate acquisition deposits
(1,350
)
 
—

Reserves for tenant improvements
25

 
25

Improvements to real estate
—

 
(511
)
Payments for construction-in-progress
(4,727
)
 
(782
)
Distributions of capital from investment in unconsolidated entities
1,928

 
1,922

Net cash (used in) provided by investing activities
(64,390
)
 
654

Financing Activities:
 
 
 
Proceeds from borrowings - Revolver Loan
19,000

 
23,000

Principal payoff of secured indebtedness - Mortgage Debt
(18,954
)
 
(22,820
)
Principal amortization payments on secured indebtedness
(1,761
)
 
(1,168
)
Deferred financing costs
(17
)
 
(100
)
Repurchase of common stock
(11
)
 
(11,564
)
Distributions to noncontrolling interests
(1,168
)
 
(1,168
)
Distributions to common stockholders
(17,642
)
 
(17,432
)
Net cash used in financing activities
(20,553
)
 
(31,252
)
Net (decrease) increase in cash, cash equivalents and restricted cash
(55,724
)
 
7,176

Cash, cash equivalents and restricted cash at the beginning of the period
214,867

 
56,862

Cash, cash equivalents and restricted cash at the end of the period
$
159,143

 
$
64,038

Supplemental Disclosures of Significant Non-cash Transactions:
 
 
 
Increase in fair value swap agreement
$
3,205

 
$
3,114

Common stock issued pursuant to the distribution reinvestment plan
$
11,434

 
$
12,554

Common stock redemptions funded subsequent to period-end
$
64,432

 
$
20,497

See accompanying notes.

8
GRIFFIN CAPITAL ESSENTIAL ASSET REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2018
(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 is the sole member of GRECO. The Company has entered into an advisory agreement with the Advisor (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. The Company also issued approximately 41,800,000 shares of its common stock upon the consummation of the merger of Signature Office REIT, Inc. in June 2015.
On May 7, 2014, the Company filed a Registration Statement on Form S-3 with the Securities and Exchange Commission ("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 10 million 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, which may be provided through the Company's filings with the SEC.
As of March 31, 2018, the Company had issued 187,894,834 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 172,043,872 shares outstanding at March 31, 2018, including shares issued pursuant to the DRP, less shares redeemed pursuant to the share redemption program ("SRP"). As of March 31, 2018 and December 31, 2017, the Company had issued approximately $223.4 million and $211.9 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 $157.7 million, and redemptions payable totaling approximately $64.4 million and $20.4 million, respectively. Since inception and through March 31, 2018, the Company had redeemed 15,850,962 shares of common stock for approximately $157.7 million pursuant to the SRP.
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
March 31, 2018
(Unaudited; dollars in thousands unless otherwise noted)

Partnership in exchange for a 1% general partner interest. As of March 31, 2018, 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 three months ended March 31, 2018 and year ended December 31, 2017. 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 March 31, 2018.

10
GRIFFIN CAPITAL ESSENTIAL ASSET REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2018
(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, 2017. 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, 2017 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 months ended March 31, 2018 are not necessarily indicative of the results that may be expected for the year ending December 31, 2018. 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, 2017.
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, which 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.
Use of Estimates
The preparation of the unaudited consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the unaudited consolidated financial statements and accompanying notes. Actual results could materially differ from those estimates.
Change in Consolidated Financial Statements Presentation
During the year ended December 31, 2017, the Company elected to early adopt Accounting Standards Update ("ASU") No. 2016-18, Restricted Cash ("ASU No. 2016-18"). As a result, the Company no longer presents transfers between cash and restricted cash in the consolidated statements of cash flows. Instead, restricted cash is included with cash and cash equivalents when reconciling the beginning of period and end of period total amounts shown on the consolidated statements of cash flows.
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 March 31, 2018 and December 31, 2017, 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.

11
GRIFFIN CAPITAL ESSENTIAL ASSET REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2018
(Unaudited; dollars in thousands unless otherwise noted)

Recently Issued Accounting Pronouncements
In August 2017, the FASB issued ASU No. 2017-12, Derivatives and Hedging ("ASU No. 2017-12"). 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.
This ASU is effective for reporting periods beginning after December 15, 2018, with early adoption permitted. The Company elected to early adopt ASU No. 2017-12 for the reporting period ending March 31, 2018. The adoption of ASU No. 2017-12 did not have a material effect on the Company's financial position or statement of operations.
In February 2016, the FASB issued ASU No. 2016-02, Leases ("ASU No. 2016-02"). ASU No. 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 No. 2016-02 will direct how the Company accounts for payments from the elements of leases that are generally fixed and determinable at the inception of the lease (“Fixed Lease Payments”) while ASU No. 2014-09 (defined below) will direct how the Company accounts for the non-lease components of lease contracts, primarily expense reimbursements (“Non-Lease Payments”) and the accounting for the disposition of real estate facilities. ASU No. 2016-02 will be effective beginning in the first quarter of 2019. Early adoption of ASU No. 2016-02 as of its issuance is permitted.
ASU No. 2016-02 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. Based on the required adoption date of January 1, 2019, the modified retrospective method for ASU No. 2016-02 requires application of the standard to all leases that exist at, or commence after, January 1, 2017 (beginning of the earliest comparative period presented in the 2019 financial statements), with a cumulative adjustment to the opening balance of accumulated earnings (deficit) on January 1, 2017, for the effect of applying the standard at the date of initial application, and restatement of the amounts presented prior to January 1, 2019.
The FASB has also issued a proposed amendment to the standard that would provide an entity an optional transition method to initially account for the impact of the adoption of the standard with a cumulative adjustment to accumulated earnings (deficit) on January 1, 2019 (the effective date of ASU No. 2016-02), rather than January 1, 2017, which would eliminate the need to restate amounts presented prior to January 1, 2019. Under ASU No. 2016-02, an entity may elect a practical expedient package, which states that: (a) an entity need not reassess whether any expired or existing contracts are leases or contain leases; (b) an entity need not reassess the lease classification for any expired or existing leases; and (c) an entity need not reassess initial direct costs for any existing leases. These three practical expedients are available as a single election that must be elected as a package and must be consistently applied to all existing leases at the date of adoption. The FASB has also tentatively noted in its May 2017 board meeting minutes that lessors that adopt this package of practical expedients are not expected to reassess expired or existing leases at the date of initial application, which is January 1, 2017 under ASU No. 2016-02, or January 1, 2019, if the Company elects the optional transition method. The FASB noted that the transition provisions generally enable entities to “run off” their existing leases for the remainder of the lease term, which would effectively eliminate the need to calculate adjustment to the opening balance of accumulated earnings (deficit).
In March 2018, the FASB approved a proposal to the drafting of an amendment to ASU No. 2016-02 to allow lessors to elect, as a practical expedient, not to allocate the total consideration to lease and non-lease components based on their relative standalone selling prices. If adopted, this single-lease component practical expedient will allow lessors to elect a combined single-lease component presentation if (i) the timing and pattern of transfer of the lease component and the non-lease component(s) associated with it are the same, and (ii) the lease component would be classified as an operating lease if it were accounted for separately. Non-lease components that do not meet the criteria of this practical expedient and combined

12
GRIFFIN CAPITAL ESSENTIAL ASSET REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2018
(Unaudited; dollars in thousands unless otherwise noted)

components in which the non-lease component is the predominant component will be accounted for under the new ASU No. 2016-02.
The Company does not expect that ASU No. 2016-02 will impact the Company's accounting for Fixed Lease Payments because the Company's accounting policy is currently consistent with the provisions of the standard. The Company is currently evaluating the impact of the standard as it relates to Non-Lease Payments. If the practical expedient mentioned above is adopted and the Company elects it, the Company expects payments for expense reimbursements that qualify as Non-Lease Payments will be presented under a single lease component presentation. However, without the proposed practical expedient, the Company expects these reimbursements would be separated into Fixed Lease Payments and Non-Lease Payments. Under ASU No. 2016-02, reimbursements relating to property taxes and insurances are Fixed Lease Payments as the payments relate to the right to use the leased assets, while reimbursements relating to maintenance activities and common area expense are Non-Lease Payments and would be accounted under ASU No. 2014-09 upon the adoption of the ASU No. 2016-02 as these payments for goods or services are transferred separately from the right to use the underlying assets.
Additionally, the Company is analyzing its current ground lease obligation under ASU No. 2016-02. The Company has done a preliminary assessment and continues to evaluate the potential impact the guidance may have on its consolidated financial statements and related disclosures and will adopt ASU No. 2016-02 as of January 1, 2019.
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606) (“ASU No. 2014-09”). ASU No. 2014-09 replaces substantially all industry-specific revenue recognition requirements and converges areas under this topic with International Financial Reporting Standards. ASU No. 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 No. 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 No. 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 No. 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 No. 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 adopted the guidance using the modified retrospective approach for the fiscal year beginning on January 1, 2018. The impact of the adoption of the new accounting guidance was minimal on the Company's consolidated financial statements relating to the recognition of gains and losses on the sale of real estate assets was minimal 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 No. 2014-09 and will be governed by the applicable lease codification, ASU No. 2016-02. In March 2016, the FASB issued ASU No. 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net) ("ASU No. 2016-08"). 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 No. 2014-09 described above. The Company adopted the guidance using the modified retrospective approach for the fiscal year beginning on January 1, 2018. The impact of the adoption of the new accounting guidance was minimal on the Company's consolidated financial statements relating to the recognition of reporting revenue gross versus net on the Company's consolidated financial statements as the Company’s current accounting for such transactions is consistent with the new guidance’s core principle.

13
GRIFFIN CAPITAL ESSENTIAL ASSET REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2018
(Unaudited; dollars in thousands unless otherwise noted)

3.     Real Estate
As of March 31, 2018, the Company’s real estate portfolio consisted of 74 properties in 20 states consisting substantially of office, warehouse, and manufacturing facilities and two land parcels held for future development with a combined acquisition value of approximately $2.9 billion, including the allocation of the purchase price to above and below-market lease valuation.
Depreciation expense for buildings and improvements for the three months ended March 31, 2018 was $13.8 million. Amortization expense for intangibles, including, but not limited to, tenant origination and absorption costs for the three months ended March 31, 2018 was $13.5 million.
2018 Acquisitions
The purchase price and other acquisition items for the property acquired during the three months ended March 31, 2018 are shown below:
Property
 
Location
 
Tenant/Major Lessee
 
Acquisition Date
 
Purchase Price
 
Approx. Square Feet
 
Acquisition Fees and Expenses (1)
 
Year of Lease Expiration
Quaker
 
Lakeland, Florida
 
Quaker Sales and Distribution, Inc.
 
3/13/2018
 
$
59,600

 
605,400
 
$
1,777

 
2028
(1)
The Advisor is entitled to receive acquisition fees equal to 2.5% and acquisition expense reimbursement of up to 0.5% of the contract purchase price for each acquisition. In addition, the Company incurred third-party costs associated with the acquisition of the Quaker property.

Real Estate - Valuation and Purchase Price Allocation
The Company allocates the purchase price to the relative fair value of the tangible assets of a property by valuing the property as if it were vacant. This “as-if vacant” value is estimated using an income, or discounted cash flow, approach that relies upon Level 3 inputs, which are unobservable inputs based on the Company's review of the assumptions a market participant would use. These Level 3 inputs include discount rates, capitalization rates, market rents and comparable sales data for similar properties. Estimates of future cash flows are based on a number of factors including historical operating results, known and anticipated trends, and market and economic conditions. In calculating the “as-if vacant” value for acquisitions completed during the three months ended March 31, 2018, the Company used a discount rate of 6.25%.
In determining the fair value of intangible lease assets or liabilities, the Company also considers Level 3 inputs. Acquired above and below-market leases are valued based on the present value of the difference between prevailing market rates and the in-place rates measured over a period equal to the remaining term of the lease for above-market leases and the initial term plus the term of any below-market fixed rate renewal options for below-market leases, if applicable. The estimated fair value of acquired in-place at-market tenant leases are the costs that would have been incurred to lease the property to the occupancy level of the property at the date of acquisition. Such estimates include the value associated with leasing commissions, legal and other costs, as well as the estimated period necessary to lease such property that would be incurred to lease the property to its occupancy level at the time of its acquisition. Acquisition costs associated with asset acquisitions are capitalized in the period they are incurred.
The following summarizes the purchase price allocation of the Quaker property acquired during the three months ended March 31, 2018:

14
GRIFFIN CAPITAL ESSENTIAL ASSET REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2018
(Unaudited; dollars in thousands unless otherwise noted)

Property
 
Land
 
Building and improvements
 
Tenant origination and absorption costs
 
In-place lease valuation - above (below) market
 
Total
Quaker (1)
 
$
5,433

 
$
50,953

 
$
4,387

 
$
(502
)
 
$
60,271


(1)
The Company evaluated the transaction above under the clarified framework for determining whether an integrated set of assets and activities meets the definition of a business, pursuant to ASU No. 2017-01, Business Combinations, issued in January 2017, which the Company early-adopted effective January 1, 2017. Acquisitions that do not meet the definition of a business are accounted for as asset acquisitions. Since the transaction above lacked a substantive process, the transaction did not meet the definition of a business and consequently was accounted for as an asset acquisition. The Company allocated the total consideration (including acquisition costs of approximately $1.8 million) to the individual assets and liabilities acquired on a relative fair value basis.




15
GRIFFIN CAPITAL ESSENTIAL ASSET REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2018
(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 2018 to 2036.
 
As of March 31, 2018
Remaining 2018
$
175,605

2019
213,644

2020
191,392

2021
176,840

2022
167,341

Thereafter
683,113

Total
$
1,607,935

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, net of the write-off of intangibles, as of March 31, 2018 and December 31, 2017:
 
March 31, 2018
 
December 31, 2017
In-place lease valuation (above market)
$
43,826

 
$
43,826

In-place lease valuation (above market) - accumulated amortization
(28,914
)
 
(27,703
)
In-place lease valuation (above market), net
14,912

 
16,123

Ground leasehold interest (below market)
2,255

 
2,255

Ground leasehold interest (below market) - accumulated amortization
(116
)
 
(109
)
Ground leasehold interest (below market), net
2,139

 
2,146

Intangible assets, net
$
17,051

 
$
18,269

In-place lease valuation (below market)
$
(50,276
)
 
$
(49,774
)
In-place lease valuation (below market) - accumulated amortization
27,647

 
26,193

In-place lease valuation (below market), net
$
(22,629
)
 
$
(23,581
)
Tenant origination and absorption cost
$
499,752

 
$
495,364

Tenant origination and absorption cost - accumulated amortization
(255,577
)
 
(242,601
)
Tenant origination and absorption cost, net
$
244,175

 
$
252,763

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 March 31, 2018 for the next five years:
Year
 
In-place lease valuation, net
 
Tenant origination and absorption costs
 
Ground leasehold improvements
 
Other leasing costs
Remaining 2018
 
$
(682
)
 
$
38,901

 
$
27

 
$
2,502

2019
 
$
(1,827
)
 
$
42,818

 
$
27

 
$
3,321

2020
 
$
(741
)
 
$
33,857

 
$
27

 
$
3,296

2021
 
$
(601
)
 
$
28,688

 
$
27

 
$
3,015

2022
 
$
(1,093
)
 
$
24,931

 
$
27

 
$
2,675

Tenant and Portfolio Risk

16
GRIFFIN CAPITAL ESSENTIAL ASSET REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2018
(Unaudited; dollars in thousands unless otherwise noted)

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 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.
Restricted Cash
In conjunction with acquisition of certain assets, as required by certain lease provisions or certain lenders in conjunction with an acquisition or debt financing, or credits received by the seller of certain assets, the Company assumed or funded reserves for specific property improvements and deferred maintenance, re-leasing costs, and taxes and insurance, which are included on the consolidated balance sheets as restricted cash. Additionally, an ongoing replacement reserve is funded by certain tenants pursuant to each tenant’s respective lease as follows:
 
Balance as of
 
March 31, 2018
 
 December 31, 2017
Tenant improvement reserves 
$
12,609

 
$
13,635

Midland mortgage loan repairs reserves
391

 
391

Real estate tax reserve
553

 
2,097

Property insurance reserve (Emporia Partners)
337

 
225

Rent Abatement Reserve
213

 
341

Restricted deposits/Leasing commission reserve
335

 
345

Midland mortgage loan restricted lockbox
2,424

 
2,158

1031 Exchange Funds (1)
93,343

 
154,940

Total
$
110,205

 
$
174,132

(1)
Section 1031 of the Internal Revenue Code of 1986, as amended ("1031 Exchanges"). Represents cash proceeds from a disposition that are temporarily held at the qualified intermediary for purposes of facilitating potential Section 1031 Exchanges. The Company's acquisition during the three months ended March 31, 2018 was funded by proceeds from the 1031 exchange fund. The Company closed two additional property acquisitions subsequent to March 31, 2018 to completely fulfill the 1031 Exchange. See Note 13, Subsequent Events, for details.
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 $0.2 million of other comprehensive income for the three months ended March 31, 2018.

17
GRIFFIN CAPITAL ESSENTIAL ASSET REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2018
(Unaudited; dollars in thousands unless otherwise noted)

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. The Company's maximum exposure to losses associated with its unconsolidated investment is primarily limited to its carrying value in the investment.
As of March 31, 2018, the balance of the investment is shown below:
 
 
Digital Realty
Joint Venture
Balance as of December 31, 2017
 
$
37,114

Net loss
 
(519
)
Distributions
 
(1,928
)
Other comprehensive income
 
227

Balance as of March 31, 2018
 
$
34,894

5.
Debt
As of March 31, 2018 and December 31, 2017, the Company’s debt consisted of the following:
 
March 31, 2018
 
December 31, 2017
 
Contractual
Interest 
Rate (1)
 
Loan
Maturity
 
Effective Interest Rate (2)
TW Telecom loan (3)
$
—

 
$
19,169

 
—
 
—
 
—%
HealthSpring loan
 
21,574

 
21,694

 
4.18%
 
April 2023
 
4.59%
Midland loan
 
103,721

 
104,197

 
3.94%
 
April 2023
 
4.08%
Emporia Partners loan
 
2,874

 
2,978

 
5.88%
 
September 2023
 
5.96%
Samsonite loan
 
22,747

 
22,961

 
6.08%
 
September 2023
 
5.16%
Highway 94 loan
 
17,141

 
17,352

 
3.75%
 
August 2024
 
4.64%
Bank of America loan
 
375,000

 
375,000

 
3.77%
 
October 2027
 
3.96%
AIG loan
 
108,855

 
109,275

 
4.96%
 
February 2029
 
5.07%
Total Mortgage Debt
 
651,912

 
672,626

 
 
 
 
 
 
Term Loan
 
715,000

 
715,000

 
LIBOR+1.40% (4)
 
July 2020
 
3.52%
Revolver Loan
 
29,153

 
10,153

 
LIBOR +1.45% (4)
 
July 2020 (4)
 
4.17%
Total Debt
 
1,396,065


1,397,779

 
 
 
 
 
 
Unamortized Deferred Financing Costs and Discounts, net
 
(10,918
)
 
(11,695
)
 
 
 
 
 
 
Total Debt, net
$
1,385,147

 
$
1,386,084

 
 
 
 
 
 
(1)
Including the effect of interest rate swap agreements with a total notional amount of $725.0 million, the weighted average interest rate as of March 31, 2018 was 3.52% for the Company’s fixed-rate and variable-rate debt combined and 3.53% for the Company’s fixed-rate debt only.
(2)
Reflects the effective interest rate as of March 31, 2018 and includes the effect of amortization of discounts/premiums and deferred financing costs.
(3)
In March 2018, the Company, through the Operating Partnership, paid off the remaining balance of the TW Telecom loan.
(4)
The effective rate as of March 31, 2018 was 1.67%.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.


18
GRIFFIN CAPITAL ESSENTIAL ASSET REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2018
(Unaudited; dollars in thousands unless otherwise noted)

Unsecured Credit Facility
On July 20, 2015, the Company, through the Operating Partnership, entered into an amended and restated credit agreement, as amended by that certain first amendment to amended and restated credit agreement dated as of February 12, 2016 (as amended, 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.
Bank of America Loan
On September 29, 2017, the Company, through ten SPEs wholly owned by the Operating Partnership, entered into a loan agreement with Bank of America, N.A. (together with its successors and assigns, the "Lender") in which the Company borrowed $375.0 million (the “Bank of America Loan”). The Bank of America Loan is secured by cross-collateralized and cross-defaulted first mortgage liens on ten properties. 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.
Debt Covenant Compliance
Pursuant to the terms of the Company's mortgage loans, Unsecured Credit Facility, and Bank of America Loan 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 March 31, 2018.
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 enters 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
The Company has entered into interest rate swap agreements to hedge the variable cash flows associated with certain existing or forecasted London Interbank Offered Rate ("LIBOR")-based variable-rate debt, including the Company's Unsecured Credit Facility. The change in the fair value of derivatives designated and qualifying as cash flow hedges is initially recorded in AOCI and is subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. Amounts reported in accumulated other comprehensive income ("AOCI") related to derivatives will be reclassified to interest expense as interest payments are made on the Company's variable-rate debt.

19
GRIFFIN CAPITAL ESSENTIAL ASSET REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2018
(Unaudited; dollars in thousands unless otherwise noted)

The following table sets forth a summary of the interest rate swaps at March 31, 2018 and December 31, 2017:
 
 
 
 
 
 
 
 
Fair Value (1)
Derivative Instrument
 
Effective Date
 
Maturity Date
 
Interest Strike Rate
 
March 31, 2018

December 31, 2017
Assets
 
 
 
 
 
 
 
 
 
 
Interest Rate Swap
 
7/9/2015
 
7/1/2020
 
1.69%
 
$
6,466

 
$
3,255

Interest Rate Swap
 
1/1/2016
 
7/1/2018
 
1.32%
 
452

 
458

Total
 
 
 
 
 
 
 
$
6,918

 
$
3,713

(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 March 31, 2018, derivatives in an asset position are included in the line item "Other assets" 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:
 
Three Months Ended March 31,
 
2018
 
2017
Interest Rate Swap in Cash Flow Hedging Relationship:
 
 
 
Amount of (gain) loss recognized in AOCI on derivatives
$
(3,329
)
 
$
1,353

Amount of gain (loss) reclassified from AOCI into earnings under “Interest expense”
$
90

 
$
(1,572
)
Total interest expense presented in the consolidated statement of operations in which the effects of cash flow hedges are recorded
$
13,337

 
$
12,068

During the 12 months subsequent to March 31, 2018, the Company estimates that an additional $2.4 million of income 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 March 31, 2018 and December 31, 2017, the fair value of interest rate swaps in a net asset position, which excludes any adjustment for nonperformance risk related to these agreements, was approximately $6.9 million and $3.7 million, respectively. As of March 31, 2018 and December 31, 2017, 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 March 31, 2018 and December 31, 2017:
 
 
March 31, 2018

December 31, 2017
Prepaid rent
 
$
13,701

 
$
16,312

Real estate taxes payable
 
18,272

 
21,317

Interest payable
 
7,925

 
7,924

Other liabilities
 
21,695

 
18,580

Total
 
$
61,593

 
$
64,133


20
GRIFFIN CAPITAL ESSENTIAL ASSET REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2018
(Unaudited; dollars in thousands unless otherwise noted)

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 three months ended March 31, 2018 and the year ended December 31, 2017.
The following tables set forth the assets that the Company measures at fair value on a recurring basis by level within the fair value hierarchy as of March 31, 2018 and December 31, 2017:
Assets/(Liabilities)
 
Total Fair Value
 
Quoted Prices in Active Markets for Identical Assets and Liabilities
 
Significant Other Observable Inputs
 
Significant Unobservable Inputs
March 31, 2018
 
 
 
 
 
 
 
 
Interest Rate Swap Asset
 
$
6,918

 
$
—

 
$
6,918

 
$
—

December 31, 2017
 

 
 
 

 
 
Interest Rate Swap Asset
 
$
3,713

 
$
—

 
$
3,713

 
$
—

Financial Instruments Disclosed at Fair Value
Financial instruments as of March 31, 2018 and December 31, 2017 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 March 31, 2018 and December 31, 2017. The fair value of the two 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.
 
March 31, 2018
 
December 31, 2017
 
Fair Value

Carrying Value (1)
 
Fair Value
 
Carrying Value (1)
Highway 94 loan
$
16,308


$
17,141

 
$
16,484

 
$
17,352

Samsonite loan
$
23,450


$
22,747

 
$
23,851

 
$
22,961

(1)
The carrying values do not include the debt premium/(discount) or deferred financing costs as of March 31, 2018 and December 31, 2017. See Note 5, Debt, for details.

21
GRIFFIN CAPITAL ESSENTIAL ASSET REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2018
(Unaudited; dollars in thousands unless otherwise noted)

9.
Equity
Common Equity
As of March 31, 2018, 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 172,043,872 shares outstanding at March 31, 2018, including shares issued pursuant to the DRP, less shares redeemed pursuant to the SRP discussed below.
Distribution Reinvestment Plan (DRP)
The Company has adopted the DRP, which allows stockholders to have dividends and other 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, which may be provided through the Company's filings with the SEC.
As of March 31, 2018 and December 31, 2017, the Company had issued approximately $223.4 million and $211.9 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 $157.7 million, and redemptions payable totaling approximately $64.4 million and $20.4 million, respectively.
Share Redemption Program
The Company has adopted the 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. Only those stockholders who purchased their shares from the Company or received their shares from the Company (directly or indirectly) through one or more non-cash transactions may be able to participate in the SRP. During any calendar year, the Company will not redeem more than 5% 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 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 the SRP has reached the 5% share limit as soon as practicable after the end of each quarter, but in any event prior to the applicable payment date.
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.

22
GRIFFIN CAPITAL ESSENTIAL ASSET REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2018
(Unaudited; dollars in thousands unless otherwise noted)

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 months ended March 31, 2018 and 2017:
 
 
Three Months Ended March 31,
 
 
2018
 
2017
Shares of common stock redeemed
 
1,064

 
1,155,532

Weighted average price per share
 
$
10.44

 
$
10.01

During the three months ended March 31, 2018, the Company received requests for the redemption of common stock of approximately 6,718,544 shares. Such requests from the quarter were paid out in April 2018. During the three months ended March 31, 2018, the Company redeemed 1,064 shares of common stock for approximately $0.01 million at a weighted average price per share of $10.44 pursuant to the SRP. Since inception and through March 31, 2018, the Company had redeemed 15,850,962 shares of common stock for approximately $157.7 million at a weighted average price per share of $9.95 pursuant to the SRP. Since inception and through June 30, 2017, the Company honored all redemption requests. During the quarter ended September 30, 2017, the Company reached the 5% annual limitation of the SRP for 2017. The Company processed the redemption requests according to the SRP policy described above and carried forward the requests not processed. As the 5% maximum was reached for the quarter ended September 30, 2017, the Company did not process any redemption requests for the quarter ended December 31, 2017. During the year ended December 31, 2017, the Company redeemed 9,931,245 shares of common stock for approximately $98.9 million at a weighted average price per share of $9.96. The Company has funded all redemptions using proceeds from the sale of shares pursuant to the DRP. The Company’s board of directors may choose to amend, suspend, or terminate the SRP upon 30 days' written notice at any time, which may be provided through the Company's filings with the SEC.
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 March 31, 2018, noncontrolling interests were approximately 3.51% of total shares and 3.52% of 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 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

23
GRIFFIN CAPITAL ESSENTIAL ASSET REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2018
(Unaudited; dollars in thousands unless otherwise noted)

the Company to lose its REIT election. There were no unit redemption requests during the three months ended March 31, 2018 and year ended December 31, 2017. 
The following summarizes the activity for noncontrolling interests recorded as equity for the three months ended March 31, 2018 and year ended December 31, 2017:
 
Three Months Ended March 31, 2018

Year Ended December 31, 2017
Beginning balance
$
31,105

 
$
30,114

Distributions to noncontrolling interests
(1,077
)
 
(4,369
)
Allocated distributions to noncontrolling interests subject to redemption
(3
)
 
(13
)
Net income
234

 
5,120

Other comprehensive income
122

 
253

Ending balance
$
30,381

 
$
31,105

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.
10.
Related Party Transactions
Summarized below are the related party costs incurred by the Company for the three months ended March 31, 2018 and 2017, respectively, and any related amounts payable as of March 31, 2018 and December 31, 2017:
 
Incurred for the Three Months Ended March 31,
Payable as of March 31,
 
Payable as of December 31,
 
2018
 
2017
 
2018
 
2017
Expensed
 
 
 
 
 
 
 
Operating expenses
$
834

 
$
628

 
$
834

 
$
670

Asset management fees
5,708

 
5,933

 
1,907

 
1,878

Property management fees
2,312

 
2,528

 
730

 
730

Costs advanced by the Advisor
254

 
403

 
254

 
267

Capitalized
 
 
 
 
 
 
 
Acquisition fees (1) 
1,687

 
—

 
—

 
—

Leasing commissions
—

 
287

 
—

 
—

Total
$
10,795

 
$
9,779

 
$
3,725

 
$
3,545

(1)
Acquisition fees related to the Quaker acquisition were capitalized as the acquisition did not meet the business combination criteria.

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.

24
GRIFFIN CAPITAL ESSENTIAL ASSET REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2018
(Unaudited; dollars in thousands unless otherwise noted)

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 agreement. 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.
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, 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. For the three months ended March 31, 2018 and 2017, the Company’s total operating expenses did not exceed the 2 %/25 % guideline.
Operating expenses for the three months ended March 31, 2018 included approximately $0.15 million, 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 assistant secretary, Howard S. Hirsch, for services provided to the Company, for which the Company does not pay the Advisor a fee. In addition, the Company incurred approximately $0.07 million and $0.03 million, respectively, for reimbursable expenses to the Advisor for services provided to the Company by certain of its other executive officers during the three months ended March 31, 2018 and 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.

25
GRIFFIN CAPITAL ESSENTIAL ASSET REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2018
(Unaudited; dollars in thousands unless otherwise noted)

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.
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.

26
GRIFFIN CAPITAL ESSENTIAL ASSET REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2018
(Unaudited; dollars in thousands unless otherwise noted)

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 12 other programs affiliated 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, as amended (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.

27
GRIFFIN CAPITAL ESSENTIAL ASSET REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2018
(Unaudited; dollars in thousands unless otherwise noted)

If the Sponsor no longer sponsors GCEAR II, then, in the event that an investment opportunity becomes available that is suitable, under all of the factors considered by the Advisor, for both the Company and one or more other entities affiliated with the Sponsor, the Sponsor has agreed to present such investment opportunities to the Company 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.
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 $0.1 million for the three months ended March 31, 2018 and 2017, related to the ground lease. As of March 31, 2018, the remaining required payments under the terms of the ground lease are as follows:
 
March 31, 2018
Remaining 2018
$
149

2019
198

2020
198

2021
198

2022
218

Thereafter
33,631

Total
$
34,592

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.

28
GRIFFIN CAPITAL ESSENTIAL ASSET REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2018
(Unaudited; dollars in thousands unless otherwise noted)

12.
Declaration of Distributions
During the quarter ended March 31, 2018, 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 January 1, 2018 through March 31, 2018. Such distributions were paid on a monthly basis, on or about the first day of the month, for the month then-ended.
On March 7, 2018, 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 April 1, 2018 through June 30, 2018. 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 May 10, 2018, the Company had issued 19,895,312 shares of the Company’s common stock pursuant to the DRP Offerings for approximately $204.2 million.
Declaration of Distributions
On May 9, 2018, 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 July 1, 2018 through September 30, 2018. 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.

Acquisition of McKesson Property
On April 10, 2018, the Company acquired two, two-story, Class "A" office buildings totaling approximately 271,085 square feet situated on a 30.87-acre site located in Scottsdale, Arizona (the "McKesson Property"). The McKesson Property was developed as a build-to-suit for McKesson Corporation ("McKesson") and is leased in its entirety to McKesson. The purchase price for the McKesson Property was $67.0 million, plus closing costs. The acquisition of the McKesson Property serves as a replacement property for an exchange under the 1031 Exchange, related to the Company's recent sale of DreamWorks Animation’s Headquarters and Studio Campus for $290.0 million.
Acquisition of Shaw Property
On May 3, 2018, the Company acquired a single-story, Class "A" industrial building totaling approximately 1.0 million square feet situated on a 69.54-acre site located in Port Wentworth, Georgia, which is part of the Savannah Metropolitan Statistical Area (the "Shaw Property"). The Shaw Property was developed as a build-to-suit for Shaw Industries, Inc. (the "Sub-tenant") and is leased in its entirety to the Sub-tenant with a parent guarantee from Shaw Industries Group, Inc. The purchase price for the property was $56.5 million, plus closing costs. The acquisition of the Shaw Property serves as the last replacement property for an exchange under the 1031 Exchange, related to the Company's recent sale of DreamWorks Animation’s Headquarters and Studio Campus for $290.0 million.



29

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, 2017. 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 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 Offering to accredited investors and two Public Offerings, consisting of an initial public offering and a follow-on offering, which included shares for sale pursuant to the 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.
As of March 31, 2018, our real estate portfolio, consisted of 74 properties in 20 states and 81 lessees consisting substantially of office, warehouse, and manufacturing facilities and 2 land parcels held for future development with a combined acquisition value of approximately $2.9 billion, including the allocation of the purchase price to above and below-market lease valuation. Our net rent for the 12-month period subsequent to March 31, 2018 was approximately $214.7 million with approximately 60.5% generated by properties leased to tenants and/or guarantors or whose non-guarantor parent companies have investment grade or what management believes are generally equivalent ratings. Our portfolio, based on square footage, is approximately 95.5% leased as of March 31, 2018, with a weighted average remaining lease term of 6.4 years, average annual rent increases of approximately 2.1%, and a debt to total real estate acquisition value of 48.2%.

30

Revenue Concentration
No lessee or property, based on net rent for the 12-month period subsequent to March 31, 2018, pursuant to the respective in-place leases, was greater than 7% as of March 31, 2018.
The percentage of net rent for the 12-month period subsequent to March 31, 2018, by state, based on the respective in-place leases, is as follows (dollars in thousands):
State
 
Net Rent
(unaudited)
 
Number of
Properties
 
Percentage of
Net Rent
Texas

$
29,880


10


13.9
%
California

22,752


5


10.6

Ohio

21,716


8


10.1

Illinois

19,134


8


8.9

Colorado

17,983


6


8.4

Georgia

16,048


4


7.5

Arizona

12,305


4


5.7

New Jersey

11,345


3


5.3

South Carolina

9,976


2


4.6

Florida

8,382


4


3.9

All Others (1)

45,146


20


21.1

Total
 
$
214,667

 
74

 
100.0
%
(1)
All others account for less than 4% of total net rent on an individual basis.

31

The percentage of net rent for the 12-month period subsequent to March 31, 2018, by industry, based on the respective in-place leases, is as follows (dollars in thousands): 
Industry (1)
 
Net Rent
(unaudited)
 
Number of
Lessees
 
Percentage of
Net Rent
Capital Goods
 
$
38,565

 
12


18.0
%
Telecommunication Services
 
23,343

 
7


10.9

Insurance
 
22,413

 
9


10.4

Health Care Equipment & Services
 
18,878

 
9


8.8

Diversified Financials
 
18,229

 
5


8.5

Software & Services
 
14,910

 
6


6.9

Media
 
10,125

 
3


4.7

Retailing
 
9,649

 
2


4.5

Energy
 
9,431

 
3


4.4

Consumer Services
 
8,030

 
2


3.7

Technology, Hardware & Equipment
 
8,009

 
4


3.7

Consumer Durables & Apparel
 
7,999

 
3


3.7

All others (2)
 
25,086

 
16


11.8

Total
 
$
214,667

 
81

 
100.0
%
(1)
Industry classification based on the Global Industry Classification Standard.
(2)
All others account for less than 3% of total net rent on an individual basis.
The tenant lease expirations by year based on net rent for the 12-month period subsequent to March 31, 2018 are as follows (dollars in thousands):
Year of Lease Expiration
 
Net Rent
(unaudited)
 
Number of
Lessees
 
Approx. Square Feet
 
Percentage of
Net Rent
Remaining 2018

$
4,529

 
3

 
1,129,100

 
2.1
%
2019

24,506

(1) 
10

 
1,387,000

 
11.4

2020

19,719

 
8

 
1,469,100

 
9.2

2021

16,356

(1) 
7

 
1,565,600

 
7.6

2022

12,036

 
6

 
816,000

 
5.6

2023

8,903

(1) 
4

 
655,400

 
4.1

Thereafter

128,618

 
43

 
10,955,100

 
60.0

Vacant
 
—

 
—

 
856,000

 
—

Total
 
$
214,667

 
81

 
18,833,300

 
100.0
%
(1)
Included in the net rent amount is approximately 140,400 square feet related to a lease expiring in 2019 with the remaining square footage expiring in 2021 and 2023. We included the lessee in the number of lessees in 2019.


32

Critical Accounting Policies
We have established accounting policies which conform to GAAP in the United States as contained in the FASB ASC. The preparation of our consolidated financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses. If our judgment or interpretation of the facts and circumstances relating to the various transactions had been different, it is possible that different estimates would have been applied, thus resulting in a different presentation of the financial statements. Additionally, other companies may use different estimates and assumptions that may impact the comparability of our financial condition and results of operations to those companies.
For further information about our critical accounting policies, refer to our consolidated financial statements and notes thereto for the year ended December 31, 2017 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.
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 6.9% of our base rental revenue will expire during the period from April 1, 2018 to March 31, 2019. 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 April 1, 2018 to March 31, 2019, 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, 2017.
Same Store Analysis
For the three months ended March 31, 2018, our "Same Store" portfolio consisted of 72 properties, encompassing approximately 17.8 million square feet, with an acquisition value of $2.7 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 72 properties for the three months ended March 31, 2018 and 2017 (dollars in thousands):
 
Three Months Ended March 31,
 
Increase/(Decrease)
 
Percentage
Change
 
2018
 
2017
 
Rental income
$
57,626

 
$
59,275

 
$
(1,649
)
 
(3
)%
Lease termination income
2,702

 
12,845

 
(10,143
)
 
100
 %
Property expense recoveries
17,041

 
17,376

 
(335
)
 
(2
)%
Property operating expense
11,312

 
11,243

 
69

 
1
 %
Property tax expense
10,433

 
10,409

 
24

 
0
 %
Asset management fees to affiliates
5,148

 
5,094

 
54

 
1
 %
Property management fees to affiliates
2,246

 
2,287

 
(41
)
 
(2
)%
Depreciation and amortization
26,062

 
28,303

 
(2,241
)
 
(8
)%
Interest expense
2,404

 
2,686

 
(282
)
 
(10
)%
Lease Termination Income
The decrease in lease termination income of approximately $10.1 million is primarily the result of a lease termination of approximately $12.8 million on the 2500 Windy Ridge Parkway property in the prior period; offset by $2.7 million in termination income related to the 333 East Lake Street and 2500 Windy Ridge Parkway properties.

33

Depreciation and Amortization
The decrease of approximately $2.2 million as compared to the same period in the prior year is primarily the result of additional amortization of intangibles as a result of early lease terminations in the prior year and assets fully depreciated in the current year.
Interest Expense
The decrease of approximately $0.3 million as compared to the same period in the prior year is primarily the result of one mortgage loan payoff during the third quarter of 2017.
Portfolio Analysis
As of March 31, 2018, 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 March 31, 2018 and 2017
The following table provides summary information about our results of operations for the three months ended March 31, 2018 and 2017 (dollars in thousands):
 
 
Three Months Ended March 31,
 
Increase/(Decrease)
 
Percentage
Change
 
 
2018
 
2017
 
Rental income
 
$
60,085

 
$
66,099

 
$
(6,014
)
 
(9
)%
Lease termination income
 
2,702

 
12,845

 
(10,143
)
 
(79
)%
Property expense recoveries
 
17,612

 
17,764

 
(152
)
 
(1
)%
Property operating expense
 
11,323

 
12,004

 
(681
)
 
(6
)%
Property tax expense
 
11,019

 
11,013

 
6

 
0
 %
Asset management fees to affiliates
 
5,708

 
5,933

 
(225
)
 
(4
)%
Property management fees to affiliates
 
2,312

 
2,528

 
(216
)
 
(9
)%
General and administrative expenses
 
1,442

 
1,544

 
(102
)
 
(7
)%
Corporate operating expenses to affiliates
 
834

 
628

 
206

 
33
 %
Depreciation and amortization
 
27,319

 
30,596

 
(3,277
)
 
(11
)%
Impairment provision

—

 
5,675

 
(5,675
)
 
(100
)%
Interest expense
 
13,337

 
12,068

 
1,269

 
11
 %
Rental Income
The decrease in rental income of approximately $6.0 million compared to the same period a year ago is primarily the result of (1) approximately $8.2 million as a result of two properties sold during the fourth quarter of 2017 and terminations/expired leases subsequent to March 31, 2017; and (2) approximately $0.5 million in reduction of occupied space; offset by (3) approximately $2.5 million as a result of two acquisitions subsequent to March 31, 2017.
Lease Termination Income
The decrease in lease termination income of approximately $10.1 million is primarily the result of a lease termination of approximately $12.8 million on the 2500 Windy Ridge Parkway property in the prior period; offset by $2.7 million in termination income related to the 333 East Lake Street and 2500 Windy Ridge Parkway properties.
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 decrease of approximately $0.7 million compared to the same period a year ago is primarily a result of two properties sold during the fourth quarter of 2017.

34

Property Management Fees to Affiliates
The decrease in property management fees to affiliates of approximately $0.2 million is primarily the result of two properties sold during the fourth quarter of 2017.
General and Administrative Expenses
General and administrative expenses for the three months ended March 31, 2018 decreased by approximately $0.1 million compared to the same period a year ago primarily as a result of lower estimated state taxes in the current year.
Corporate Operating Expenses to Affiliates
Corporate operating expenses to affiliates for the three months ended March 31, 2018 increased by approximately $0.2 million as a result of an increase in allocated personnel and rent costs incurred by our Advisor.
Depreciation and Amortization
The decrease of approximately $3.3 million as compared to the same period in the prior year is primarily the result of (1) approximately $2.3 million related to two properties sold during the fourth quarter of 2017; and (2) approximately $1.9 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) $0.9 million related to intangibles placed in service subsequent to March 31, 2017.
Interest Expense
The increase of approximately $1.3 million in interest expense as compared to the same period in the prior year is primarily the result of (1) approximately $2.9 million as a result of the Bank of America loan; and (2) approximately $1.5 million in higher LIBO rates; offset by (3) approximately $1.9 million in Revolver Loan interest expense due to pay downs during 2017 and the current year; and (4) approximately $1.5 million as a result of the novation of an interest rate swap during the fourth quarter of 2017.
Funds from Operations and Adjusted Funds from Operations
Our management believes that historical cost accounting for real estate assets in accordance with GAAP implicitly assumes that the value of real estate assets diminishes predictably over time. Since real estate values have historically risen or fallen with market conditions, many industry investors and analysts have considered the presentation of operating results for real estate companies that use historical cost accounting to be insufficient.
Management is responsible for managing interest rate, hedge and foreign exchange risks. To achieve our objectives, we may borrow at fixed rates or variable rates. In order to mitigate our interest rate risk on certain financial instruments, if any, we may enter into interest rate cap agreements or other hedge instruments and in order to mitigate our risk to foreign currency exposure, if any, we may enter into foreign currency hedges. We view fair value adjustments of derivatives, impairment charges and gains and losses from dispositions of assets as non-recurring items or items which are unrealized and may not ultimately be realized, and which are not reflective of ongoing operations and are therefore typically adjusted for when assessing operating performance.
In order to provide a more complete understanding of the operating performance of a REIT, the National Association of Real Estate Investment Trusts (“NAREIT”) promulgated a measure known as 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.

35

Beginning with the three months ended March 31, 2018, we are now using Adjusted Funds from Operations (“AFFO”) as a non-GAAP financial measure to evaluate our operating performance. We previously used Modified Funds from Operations as a non-GAAP measure of operating performance.  Management decided to replace the Modified Funds from Operations measure with AFFO because AFFO provides investors with supplemental performance information that is consistent with the performance models and analysis used by management. We also believe that AFFO is a recognized measure of sustainable operating performance by the REIT industry. Further, we believe AFFO is useful in comparing the sustainability of our operating performance with the sustainability of the operating performance of other real estate companies.
Management believes that AFFO is a beneficial indicator of our ongoing portfolio performance and ability to sustain our current distribution level. More specifically, AFFO isolates the financial results of the Company's operations. AFFO, 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, AFFO for the period presented may not be indicative of future results or our future ability to pay our dividends. By providing FFO and AFFO, we present information that assists investors in aligning their analysis with management’s analysis of long-term operating activities. As explained below, management’s evaluation of our operating performance excludes items considered in the calculation of AFFO 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 AFFO 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 AFFO 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. By excluding acquisition-related costs, AFFO 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 AFFO 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 AFFO provides investors with supplemental performance information that is consistent with the performance models and analyses 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 AFFO. 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 AFFO. Alternatively, we believe that the periodic amount paid by the tenant in subsequent periods to satisfy the termination fee obligation should be included in AFFO.
•
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 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 AFFO.

36

•
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 the fair value of interest rate swaps not designated as a hedge and the change in the 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 AFFO 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 AFFO, in addition to income (loss) from operations, net income (loss) and cash flows from operating activities, as defined by GAAP, are helpful supplemental performance measures and useful to investors in evaluating the performance of our real estate portfolio. However, a material limitation associated with FFO and AFFO 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 AFFO. The use of AFFO 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. AFFO is useful in assisting management and investors in assessing our ongoing ability to generate cash flow from operations and continue as a going concern in future operating periods, and in particular, after the offering and acquisition stages are complete. However, FFO and AFFO are not useful measures in evaluating NAV because impairments are taken into account in determining NAV but not in determining FFO and AFFO. Therefore, FFO and AFFO should not be viewed as a more prominent measure of performance than income (loss) from operations, net income (loss) or to cash flows from operating activities and each should be reviewed in connection with GAAP measurements.
Neither the SEC, NAREIT, nor any other applicable regulatory body has opined on the acceptability of the adjustments contemplated to adjust FFO in order to calculate AFFO and its use as a non-GAAP performance measure. In the future, the SEC or NAREIT may decide to standardize the allowable exclusions across the REIT industry, and we may have to adjust the calculation and characterization of this non-GAAP measure.
Our calculation of FFO and AFFO is presented in the following table for the three months ended March 31, 2018 and 2017 (in thousands):
 
Three Months Ended March 31,
 
2018

2017
Net income
$
6,641


$
14,306

Adjustments:



Depreciation of building and improvements
13,779


14,085

Amortization of leasing costs and intangibles
13,533


16,504

Impairment provision
—


5,675

Equity interest of depreciation of building and improvements - unconsolidated entities
634


618

Equity interest of amortization of intangible assets - unconsolidated entities
1,162


1,176

FFO
$
35,749

 
$
52,364

Distributions to noncontrolling interest
(1,168
)

(1,168
)
FFO, net of noncontrolling interest distributions
$
34,581


$
51,196

Reconciliation of FFO to AFFO:



FFO, net of noncontrolling interest distributions
$
34,581

 
$
51,196

Adjustments:



Revenues in excess of cash received (straight-line rents)
(2,304
)

(2,584
)
Amortization of above/(below) market rent
(244
)

405

Amortization of debt premium/(discount)
8


(438
)
Amortization of ground leasehold interests
7


7

Revenues in excess of cash received
—


(12,845
)
Financed termination fee payments received
1,606


1,896

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

(137
)
Unrealized (gain) on derivatives
—


(17
)
Equity interest of amortization of above market rent - unconsolidated entities
739


744

AFFO
$
34,362


$
38,227


37

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 our Unsecured Credit Facility, Bank of America Loan, 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 the Unsecured Credit Agreement with a syndicate of lenders, co-led by KeyBank, Bank of America, Fifth Third, and 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, 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 and a $640.0 million senior unsecured 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 (as defined below) 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 (as defined in the Unsecured Credit Agreement) or (ii) the Federal Funds rate (as defined in the Unsecured Credit Agreement) 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, we exercised our 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.
As of March 31, 2018, the remaining capacity pursuant to the Revolver Loan was $183.4 million.
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, N.A. in which we borrowed $375.0 million. The Bank of America Loan is secured by cross-collateralized and cross-defaulted first mortgage liens on ten properties. 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.
Derivative Instruments
As discussed in Note 6, Interest Rate Contracts, to the consolidated financial statements, we entered into interest rate swap agreements to hedge the variable cash flows associated with certain existing or forecasted, LIBOR-based variable-rate debt, including our Unsecured Credit Facility. The effective portion of changes in the fair value of derivatives designated and that qualify as cash flow hedges is recorded in AOCI and is subsequently reclassified into earnings in the period that the hedged

38

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 the fair value of the derivatives is recognized directly in earnings.
The following table sets forth a summary of the interest rate swaps at March 31, 2018 and December 31, 2017 (dollars in thousands):
 
 
 
 
 
 
 
 
Fair Value (1)
Derivative Instrument
 
Effective Date
 
Maturity Date
 
Interest Strike Rate
 
March 31, 2018
 
December 31, 2017
Assets
 
 
 
 
 
 
 
 
 
 
Interest Rate Swap
 
7/9/2015
 
7/1/2020
 
1.69%
 
$
6,466

 
$
3,255

Interest Rate Swap
 
1/1/2016
 
7/1/2018
 
1.32%
 
452

 
458

Total
 
 
 
 
 
 
 
$
6,918

 
$
3,713

(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 March 31, 2018, derivatives in an asset position are included in the line item "Other assets" 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 March 31, 2018 (in thousands):
 
Payments Due During the Years Ending December 31,
 
Total
 
2018
 
2019-2020
 
2021-2022
 
Thereafter
Outstanding debt obligations (1)
$
1,396,066

 
$
4,728

 
$
757,604

 
$
14,767

 
$
618,967

Interest on outstanding debt obligations (2)
288,889

  
38,245

 
96,764

 
51,925

 
101,955

Interest rate swaps (3)
171

 
55

 
116

 
—

 
—

Ground lease obligations
34,592

 
149

 
396

 
416

 
33,631

Total
$
1,719,718

  
$
43,177

 
$
854,880

 
$
67,108

 
$
754,553

(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 March 31, 2018. Projected interest payments on the Revolver Loan and Term Loan are based on the contractual interest rate in effect at March 31, 2018.
(3)
The interest rate swaps contractual commitment was calculated based on the swap rate less the LIBOR.
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, cash equivalents and restricted cash balances decreased by approximately $55.7 million during the three months ended March 31, 2018 and were primarily used in or provided by the following:

39

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 three months ended March 31, 2018, we generated $29.2 million of net cash provided by operating activities compared to $37.8 million for the three months ended March 31, 2017. Net cash provided by operating activities before changes in operating assets and liabilities for the three months ended March 31, 2018 decreased by approximately $3.6 million to approximately $32.8 million compared to approximately $36.4 million for the three months ended March 31, 2017. The decrease is primarily related to a decrease in occupancy of approximately 2.2%.
Investing Activities. During the three months ended March 31, 2018, we used approximately $64.4 million in cash provided by investing activities compared to approximately $0.7 million provided by investing activities during the same period in 2017. The $65.1 million decrease in cash provided by investing activities is primarily related to the following:
•$64.2 million increase in cash paid for property acquisition and payments for construction in progress; and
•$1.4 million increase in cash paid for acquisition deposits;
offset by
•$0.5 million decrease in cash paid for improvements to real estate.

Financing Activities. During the three months ended March 31, 2018, we used approximately $20.6 million of cash in financing activities compared to approximately $31.3 million in cash used in financing activities during the same period in 2017. The decrease in cash used in financing activities of $10.7 million is primarily comprised of the following:
•$3.9 million decrease in principal payoff of mortgage debt; and
•$11.6 million decrease in repurchases of common stock;
offset by
•$4.0 million decrease in proceeds from borrowings under the Unsecured Credit Facility;
•$0.6 million increase in principal amortization payments on secured indebtedness; and
•$0.2 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.

40

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 March 31, 2018, 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 three months ended March 31, 2018 and year ended December 31, 2017 (dollars in thousands):
 
Three Months Ended March 31, 2018
 
 
 
Year Ended December 31, 2017
 
 
Distributions paid in cash — noncontrolling interests
$
1,168

 
 
 
$
4,737

 
 
Distributions paid in cash — common stockholders
17,642

 
 
 
71,124

 
 
Distributions of DRP
11,434

 
 
 
49,541

 
 
Total distributions
$
30,244

(1) 
 
 
$
125,402

 
 
Source of distributions (2)
 
 
 
 
 
 
 
Cash flows provided by operations
$
18,810

  
62
%
 
$
75,861

 
60
%
Offering proceeds from issuance of common stock pursuant to the DRP
11,434

  
38
%
 
49,541

 
40
%
Total sources
$
30,244

(3) 
100
%
 
$
125,402

 
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 March 31, 2018 were $6.6 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 three months ended March 31, 2018, we paid and declared distributions of approximately $29.1 million to common stockholders including shares issued pursuant to the DRP and approximately $1.2 million to the limited partners of our Operating Partnership, as compared to FFO, net of noncontrolling interest distributions and AFFO for the three months ended March 31, 2018 of approximately $34.6 million and $34.4 million, respectively. The payment of distributions from sources other than FFO or AFFO may reduce the amount of proceeds available for investment and operations or cause us to incur additional interest expense as a result of borrowed funds.
Off-Balance Sheet Arrangements
As of March 31, 2018, 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. Our current indebtedness consists of our Unsecured Credit Facility, Bank of America Loan and property secured mortgages. These instruments were entered into for other than trading purposes.
Our interest rate risk management objectives will be to limit the impact of interest rate changes on earnings and cash flows and to lower overall borrowing costs. To achieve our objectives, we may borrow at fixed rates or variable rates. We may also utilize a variety of financial instruments, including interest rate swap agreements, caps, floors, and other interest rate exchange contracts. We will not enter into these financial instruments for speculative purposes. The use of these types of instruments to hedge a portion of our exposure to changes in interest rates carries additional risks, such as counterparty credit risk and the legal enforceability of hedging contracts.
On July 9, 2015, we (through our Operating Partnership) executed three interest rate swap agreements to hedge the variable cash flows associated with certain existing or forecasted LIBOR-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,

41

respectively. Due to our pay down of a significant portion of our Unsecured Credit Facility, effective as of November 1, 2017, we novated the $100.0 million swap agreement to an affiliated party.

As of March 31, 2018, our debt consisted of approximately $1.4 billion, in fixed rate debt (including the interest rate swaps) and approximately $19.2 million in variable rate debt (excluding unamortized deferred financing cost and discounts, net, of approximately $10.9 million). As of December 31, 2017, our debt consisted of approximately $1.4 billion in fixed rate debt (including the interest rate swaps) and approximately $19.3 million in variable rate debt (excluding unamortized deferred financing cost and discounts, net, of approximately $11.7 million). Changes in interest rates have different impacts on the fixed and variable rate debt. A change in interest rates on fixed rate debt impacts its fair value but has no effect on interest incurred or cash flows. A change in interest rates on variable rate debt could affect the interest incurred and cash flows and its fair value.
Our future earnings and fair values relating to variable rate financial instruments are primarily dependent upon prevalent market rates of interest, such as LIBOR. However, our interest rate swap agreements are intended to reduce the effects of interest rate changes. An increase of 100 basis points in interest rates on our variable-rate debt, assuming a LIBOR floor of 0%, including our Unsecured Credit Facility and our mortgage loans, after considering the effect of our interest rate swap agreements, would decrease our future earnings and cash flows by approximately $3.5 million annually.
Interest rate risk amounts were determined by considering the impact of hypothetical interest rates on our financial instruments. These analyses do not consider the effect of any change in overall economic activity that could occur. Further, in the event of a change of that magnitude, we may take actions to further mitigate our exposure to the change. However, due to the uncertainty of the specific actions that would be taken and their possible effects, these analyses assume no changes in our financial structure.
ITEM 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 March 31, 2018 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, 2017 as filed with the SEC on March 9, 2018. The following risk factor replaces the risk factor regarding FFO and MFFO disclosed in such Annual Report. Except as presented below, 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.

42

We disclose FFO and AFFO, each a non-GAAP financial measure, in communications with investors, including documents filed with the SEC; however, FFO and AFFO are not equivalent to our net income or loss or cash flow from operations as determined under GAAP, and stockholders should consider GAAP measures to be more relevant to our operating performance.
We use and we disclose to investors, FFO and AFFO, which are non-GAAP financial measures. FFO and AFFO are not equivalent to our net income or loss or cash flow from operations as determined in accordance with GAAP, and investors should consider GAAP measures to be more relevant in evaluating our operating performance and ability to pay distributions. FFO and AFFO and GAAP net income differ because FFO and AFFO exclude gains or losses from sales of property and asset impairment write-downs, and add back depreciation and amortization and adjustments for unconsolidated partnerships and joint ventures. AFFO further adjusts for straight-line rental income, amortization of in-place lease valuation, acquisition-related costs, financed termination fee, net, unrealized gains or losses on derivative instruments, and gain or loss from extinguishment of debt.
Because of these differences, FFO and AFFO may not be accurate indicators of our operating performance. In addition, FFO and AFFO are not indicative of cash flow available to fund cash needs and investors should not consider FFO and AFFO as alternatives to cash flows from operations or an indication of our liquidity, or indicative of funds available to fund our cash needs, including our ability to pay distributions to our stockholders.
Neither the SEC nor any other regulatory body has passed judgment on the acceptability of the adjustments that we use to calculate FFO and AFFO. Also, because not all companies calculate FFO and AFFO the same way, comparisons with other companies may not be meaningful.

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. Only those stockholders who purchased their shares from us or received their shares from us (directly or indirectly) through one or more non-cash transactions may be able to participate in the SRP. 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.
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. We 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 our transfer agent prior to the last day of the new quarter. We will determine whether sufficient funds are available or the SRP has reached the 5% share limit as soon as practicable after the end of each quarter, but in any event prior to the applicable payment date. 
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 us to repurchase the shares as of the end of the following month. Since inception and through March 31, 2018, we had redeemed 15,850,962 shares of common stock for approximately $157.7 million at a weighted average price per share of $9.95 pursuant to the SRP. Since inception and through June 30, 2017, we honored all redemption requests. During the quarter ended September 30, 2017, we reached the 5% annual limitation of the SRP for 2017. We processed the redemption requests according to the SRP policy described above and carried forward the requests not processed. As the 5% maximum was reached for the quarter ended September 30, 2017, we did not process any redemption requests for the quarter ended December 31, 2017. During the three months ended March 31, 2018,

43

we had redeemed 1,064 shares of common stock for approximately $0.01 million at a weighted average price per share of $10.44 pursuant to the SRP. During the year ended December 31, 2017, the Company redeemed 9,931,245 shares of common stock for approximately $98.9 million at a weighted average price per share of $9.96. We have funded all redemptions using proceeds from the sale of shares pursuant to our DRP. Our board of directors may choose to amend, suspend, or terminate the SRP upon 30 days' written notice at any time, which may be provided through our filings with the SEC.
During the quarter ended March 31, 2018, we redeemed shares as follows:
For the Month Ended
 
Total
Number of
Shares
Redeemed
 
Weighted Average
Price Paid
per Share
 
Total Number of
Shares Redeemed as
Part of Publicly
Announced Plans or
Programs
 
Maximum Number (or
Approximate Dollar Value)
of Shares (or Units) that May
 Yet Be Purchased Under the Plans or Programs
January 31, 2018
 
1,064

 
$
10.44

 
1,064

 
(1) 
February 28, 2018
 
—

 
—

 
—

 
(1) 
March 31, 2018
 
—

 
—

 
—

 
(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.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5. OTHER INFORMATION
(a)
During the quarter ended March 31, 2018, 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)
During the quarter ended March 31, 2018, there were no material changes to the procedures by which security holders may recommend nominees to our board of directors.
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 March 31, 2018 (and are numbered in accordance with Item 601 of Regulation S-K).

44

Exhibit
No.
  
Description
 
  
  
  
  
101*
  
The following Griffin Capital Essential Asset REIT, Inc. financial information for the period ended March 31, 2018 formatted in XBRL (eXtensible Business Reporting Language): (i) Consolidated Balance Sheets (unaudited), (ii) Consolidated Statements of Operations (unaudited), (iii) Consolidated Statements of Comprehensive Income (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.


45

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:
May 14, 2018
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)

46

Griffin Capital Essential Asset REIT, Inc. Reports