Black Creek Diversified Property Fund Inc. - FORM 10-Q

Attached files

file	filename
EX-99.1 - EXHIBIT 99.1 - Black Creek Diversified Property Fund Inc.	q310q2018ex-991.htm
EX-32.1 - EXHIBIT 32.1 - Black Creek Diversified Property Fund Inc.	q310q2018ex-321.htm
EX-31.2 - EXHIBIT 31.2 - Black Creek Diversified Property Fund Inc.	q310q2018ex-312.htm
EX-31.1 - EXHIBIT 31.1 - Black Creek Diversified Property Fund Inc.	q310q2018ex-311.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

_______________________________________

FORM 10-Q

_______________________________________

(Mark One)


ý	Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended September 30, 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 No. 000-52596

_______________________________________

BLACK CREEK DIVERSIFIED PROPERTY FUND INC.

(Exact name of registrant as specified in its charter)

_______________________________________



Maryland	30-0309068
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
518 Seventeenth Street, 17th Floor Denver, CO	80202
(Address of principal executive offices)	(Zip Code)

Registrant’s telephone number, including area code: (303) 228-2200

_______________________________________

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 ý No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). Yes ý No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):



Large accelerated filer	☐	Accelerated filer	☐	Smaller reporting company	☐
Non-accelerated filer	ý			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 ý

As of November 5, 2018, there were 2,753,724 shares of the registrant’s Class T common stock, 9,081,139 shares of the registrant’s Class S common stock, 2,750,232 shares of the registrant’s Class D common stock, 36,908,042 shares of the registrant’s Class I common stock and 78,462,614 shares of the registrant’s Class E common stock outstanding.

Table of Contents

BLACK CREEK DIVERSIFIED PROPERTY FUND INC.

TABLE OF CONTENTS



		Page
PART I. FINANCIAL INFORMATION
Item 1.	Financial Statements:
	Condensed Consolidated Balance Sheets as of September 30, 2018 (unaudited) and December 31, 2017	3
	Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2018 and 2017 (unaudited)	4
	Condensed Consolidated Statements of Comprehensive (Loss) Income for the Three and Nine Months Ended September 30, 2018 and 2017 (unaudited)	5
	Condensed Consolidated Statement of Equity for the Nine Months Ended September 30, 2018 (unaudited)	6
	Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2018 and 2017 (unaudited)	7
	Notes to Condensed Consolidated Financial Statements (unaudited)	8
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	20
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	34
Item 4.	Controls and Procedures	35
PART II. OTHER INFORMATION
Item 1A.	Risk Factors	35
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	35
Item 5.	Other Information	37
Item 6.	Exhibits	38

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PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

BLACK CREEK DIVERSIFIED PROPERTY FUND INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

໿



	As of
(in thousands, except per share data)	September 30, 2018			December 31, 2017
	(Unaudited)
ASSETS
Net investment in real estate properties	$	1,500,358		$	1,540,270
Debt-related investments, net	10,800			11,147
Cash and cash equivalents	8,914			10,475
Restricted cash	6,816			8,541
Other assets	54,342			37,673
Total assets	$	1,581,230		$	1,608,106
LIABILITIES AND EQUITY
Liabilities
Accounts payable and accrued expenses	$	29,197		$	22,334
Debt, net	1,010,287			1,012,108
Intangible lease liabilities, net	48,866			52,629
Other liabilities	67,939			28,309
Total liabilities	1,156,289			1,115,380
Commitments and contingencies (Note 9)
Equity
Stockholders’ equity:
Preferred stock, $0.01 par value—200,000 shares authorized, none issued and outstanding	—			—
Class E common stock, $0.01 par value—500,000 shares authorized, 80,654 shares and 93,695 shares issued and outstanding, respectively	807			937
Class T common stock, $0.01 par value—500,000 shares authorized, 2,620 shares and 2,062 shares issued and outstanding, respectively	26			21
Class S common stock, $0.01 par value—500,000 shares authorized, 7,419 shares and 64 shares issued and outstanding, respectively	74			1
Class D common stock, $0.01 par value—500,000 shares authorized, 2,696 shares and 2,510 shares issued and outstanding, respectively	27			25
Class I common stock, $0.01 par value—500,000 shares authorized, 35,558 shares and 34,135 shares issued and outstanding, respectively	355			341
Additional paid-in capital	1,190,003			1,224,061
Distributions in excess of earnings	(856,598		)	(818,608		)
Accumulated other comprehensive income (loss)	9,391			(909		)
Total stockholders’ equity	344,085			405,869
Noncontrolling interests	80,856			86,857
Total equity	424,941			492,726
Total liabilities and equity	$	1,581,230		$	1,608,106

See accompanying Notes to Condensed Consolidated Financial Statements.

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BLACK CREEK DIVERSIFIED PROPERTY FUND INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)



	For the Three Months Ended September 30,						For the Nine Months Ended September 30,
(in thousands, except per share data)	2018			2017			2018			2017
Revenues:
Rental revenues	$	49,505		$	49,478		$	140,421		$	152,022
Debt-related income	170			194			514			654
Total revenues	49,675			49,672			140,935			152,676
Operating expenses:
Rental expenses	15,192			17,516			46,315			51,520
Real estate-related depreciation and amortization	14,961			16,927			43,202			53,661
General and administrative expenses	2,076			2,760			6,888			7,034
Advisory fees, related party	3,877			3,274			11,132			10,215
Impairment of real estate property	6,600			—			13,400			1,116
Total operating expenses	42,706			40,477			120,937			123,546
Other (expenses) income:
Interest expense	(12,166		)	(11,346		)	(35,704		)	(31,193		)
Gain on sale of real property	1,398			670			13,832			11,022
Other income (expense)	42			(664		)	(272		)	(862		)
Total other expenses	(10,726		)	(11,340		)	(22,144		)	(21,033		)
Net (loss) income	(3,757		)	(2,145		)	(2,146		)	8,097
Net loss (income) attributable to noncontrolling interests	292			185			161			(1,591		)
Net (loss) income attributable to common stockholders	$	(3,465	)	$	(1,960	)	$	(1,985	)	$	6,506

Weighted-average shares outstanding—basic	128,506			139,925			128,269			144,998
Weighted-average shares outstanding—diluted	139,345			151,739			139,340			156,918

Net (loss) income attributable to common stockholders per common share—basic and diluted	$	(0.03	)	$	(0.01	)	$	(0.02	)	$	0.04

See accompanying Notes to Condensed Consolidated Financial Statements.

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BLACK CREEK DIVERSIFIED PROPERTY FUND INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME

(Unaudited)



	For the Three Months Ended September 30,						For the Nine Months Ended September 30,
(in thousands)	2018			2017			2018			2017
Net (loss) income	$	(3,757	)	$	(2,145	)	$	(2,146	)	$	8,097
Change from cash flow hedging derivatives	2,627			948			10,871			2,360
Comprehensive (loss) income	(1,130		)	(1,197		)	8,725			10,457
Comprehensive loss (income) attributable to noncontrolling interests	120			169			(623		)	(1,664		)
Comprehensive (loss) income attributable to common stockholders	$	(1,010	)	$	(1,028	)	$	8,102		$	8,793

See accompanying Notes to Condensed Consolidated Financial Statements.

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BLACK CREEK DIVERSIFIED PROPERTY FUND INC.

CONDENSED CONSOLIDATED STATEMENT OF EQUITY

(Unaudited)

໿



	Stockholders’ Equity
						Additional Paid-in Capital			Distributions in Excess of Earnings			Accumulated Other Comprehensive (Loss) Income			Noncontrolling Interests			Total Equity

	Common Stock
(in thousands)	Shares		Amount
Balance as of December 31, 2017	132,466		$	1,325		$	1,224,061		$	(818,608	)	$	(909	)	$	86,857		$	492,726
Adoption of ASU 2017-12	—		—			—			(213		)	213			—			—
Adjusted balance as of January 1, 2018	132,466		1,325			1,224,061			(818,821		)	(696		)	86,857			492,726
Net loss	—		—			—			(1,985		)	—			(161		)	(2,146		)
Unrealized gain on derivative instruments	—		—			—			—			10,087			784			10,871
Issuance of common stock, net of offering costs	14,887		149			103,087			—			—			—			103,236
Share-based compensation, net of forfeitures	42		—			(85		)	—			—			—			(85		)
Redemptions of common stock	(18,448	)	(185		)	(137,400		)	—			—			—			(137,585		)
Amortization of share-based compensation	—		—			744			—			—			—			744
Distributions declared on common stock and noncontrolling interests	—		—			—			(35,792		)	—			(3,202		)	(38,994		)
Redemptions of noncontrolling interests	—		—			(404		)	—			—			(3,422		)	(3,826		)
Balance as of September 30, 2018	128,947		$	1,289		$	1,190,003		$	(856,598	)	$	9,391		$	80,856		$	424,941

See accompanying Notes to Condensed Consolidated Financial Statements.

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BLACK CREEK DIVERSIFIED PROPERTY FUND INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)



	For the Nine Months Ended September 30,
(in thousands)	2018			2017
Operating activities:
Net (loss) income	$	(2,146	)	$	8,097
Adjustments to reconcile net income to net cash provided by operating activities:
Real estate-related depreciation and amortization	43,202			53,661
Gain on disposition of real estate property	(13,832		)	(11,022		)
Lease termination fee	15,008			—
Impairment of real estate property	13,400			1,116
Other	(6,409		)	5,241
Changes in operating assets and liabilities	3,356			(8,342		)
Net cash provided by operating activities	52,579			48,751
Investing activities:
Real estate acquisitions	(36,853		)	(39,538		)
Capital expenditures	(27,532		)	(18,801		)
Proceeds from disposition of real estate property	66,269			37,054
Principal collections on debt-related investments	326			3,915
Other	(1,565		)	(1,492		)
Net cash provided by (used in) investing activities	645			(18,862		)
Financing activities:
Proceeds from mortgage notes	—			300,469
Repayments of mortgage notes	(1,547		)	(162,037		)
Net repayments of line of credit	(2,000		)	(34,000		)
Redemptions of common stock	(137,585		)	(110,665		)
Distributions on common stock	(21,557		)	(30,086		)
Proceeds from issuance of common stock	97,816			12,486
Offering costs for issuance of common stock	(5,665		)	(3,425		)
Distributions to noncontrolling interest holders	(3,202		)	(6,560		)
Redemption of OP Unit holder interests	(3,826		)	(3,427		)
Other	21,056			319
Net cash used in financing activities	(56,510		)	(36,926		)
Net decrease in cash, cash equivalents and restricted cash	(3,286		)	(7,037		)
Cash, cash equivalents and restricted cash, at beginning of period	19,016			21,146
Cash, cash equivalents and restricted cash, at end of period	$	15,730		$	14,109

See accompanying Notes to Condensed Consolidated Financial Statements.

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BLACK CREEK DIVERSIFIED PROPERTY FUND INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. BASIS OF PRESENTATION

Unless the context otherwise requires, the “Company,” “we,” “our,” or “us” refers to Black Creek Diversified Property Fund Inc. and its consolidated subsidiaries.

The accompanying unaudited condensed consolidated financial statements included herein have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). Accordingly, certain disclosures normally included in the annual audited financial statements prepared in accordance with accounting principles generally accepted in the U.S. (“GAAP”) have been omitted. As such, the accompanying unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes contained in our Annual Report on Form 10-K for the year ended December 31, 2017, filed with the SEC on March 7, 2018 (“2017 Form 10-K”).

Recently Adopted Accounting Standards

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, “Revenue from Contracts with Customers (Topic 606)” (“ASU 2014-09”), which provides guidance for revenue recognition and supersedes the revenue recognition requirements in Topic 605, “Revenue Recognition.” The standard is based on the principle that a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. The guidance specifically excludes revenue derived from lease contracts from its scope. ASU 2014-09 also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. The effective date for the standard was for annual reporting periods beginning after December 15, 2017 and interim periods therein. We adopted the standard when it became effective for us, as of the reporting period beginning January 1, 2018. We elected the package of practical expedients, and accordingly did not reallocate contract consideration to lease components within the scope of the existing lease guidance when we adopted ASU 2014-09. The adoption of ASU 2014-09 did not have a significant impact on our condensed consolidated financial statements.

In January 2016, the FASB issued ASU No. 2016-01, “Financial Instruments-Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities” (“ASU 2016-01”), which requires: (i) all equity investments to be measured at fair value with changes in fair value recognized in net income; (ii) requires an entity to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments; and (iii) eliminates the requirement for public entities to disclose the methods and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet. ASU 2016-01 was effective for annual and interim reporting periods beginning after December 15, 2017. Early adoption was permitted for the accounting guidance on financial liabilities under the fair value option. We adopted this guidance effective January 1, 2018. The adoption of this guidance did not have a significant impact on our condensed consolidated financial statements.

In August 2016, the FASB issued ASU No. 2016-15 “Statement of Cash Flows (Topic 230)” (“ASU 2016-15”), which provided guidance on eight cash flow classification issues and on reducing diversity in how certain cash receipts and cash payments are presented and classified in the statement of cash flows. Current GAAP does not include specific guidance on these eight cash flow classification issues. In November 2016, the FASB issued ASU 2016-18 “Statement of Cash Flows (Topic 230): Restricted Cash,” (“ASU 2016-18”) which requires companies to include restricted cash and restricted cash equivalents with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. ASU 2016-18 requires a disclosure of a reconciliation between the statement of financial position and the statement of cash flows when the statement of financial position includes more than one line item for cash, cash equivalents, restricted cash, and restricted cash equivalents. Entities with material restricted cash and restricted cash equivalents balances are required to disclose the nature of the restrictions. ASU 2016-15 and ASU 2016-18 became effective for annual and interim reporting periods beginning after December 15, 2017, with early adoption permitted. We adopted these standards as of January 1, 2018 and as required, retrospectively applied the guidance in ASU 2016-18 to the prior periods presented, which resulted in a decrease of $5.1 million in net cash provided by operating activities, a decrease of $0.8 million in net cash used in investing activities, and a decrease of $5.3 million in net cash used in financing activities on the condensed consolidated statements of cash flows for the nine months ended September 30, 2017.

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In August 2017, the FASB issued ASU 2017-12, “Derivatives and Hedging: Targeted Improvements to Accounting for Hedging Activities.” 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. The transition guidance provides companies with the option of early adopting the new standard using a modified retrospective transition method in any interim period after issuance of the update, or alternatively requires adoption for fiscal years beginning after December 15, 2018. We adopted ASU 2017-12 as of the reporting period beginning on January 1, 2018, which resulted in the recognition of a $0.2 million adjustment to accumulated other comprehensive income with a corresponding adjustment to the January 1, 2018 retained earnings balance to recognize the cumulative effect of initially applying this guidance.

In August 2018, the FASB issued ASU No. 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement” (“ASU 2018-13”), which modifies the disclosure requirements on fair value measurements by removing, modifying, or adding certain disclosures. While ASU 2018-13 is effective for all companies beginning after December 15, 2019 and for interim periods within those fiscal years, we early adopted this standard effective September 30, 2018, as permitted. Certain disclosures in ASU 2018-13 are required to be applied on a retrospective basis and others on a prospective basis. The adoption of ASU 2018-13 did not have a significant impact on our condensed consolidated financial statements.

Recently Issued Accounting Standards

In February 2016, the FASB issued ASU No. 2016-02, “Leases (Subtopic 842)” (“ASU 2016-02”), which provides guidance for greater transparency in financial reporting by organizations that lease assets such as real estate, airplanes and manufacturing equipment by requiring such organizations to recognize lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. The accounting for lessors will remain largely unchanged from current GAAP; however, the standard requires that lessors expense, on an as-incurred basis, certain initial direct costs that are not incremental in negotiating a lease. Under existing standards, certain of these costs are capitalizable and therefore this new standard will result in certain of these costs being expensed as incurred after adoption. ASU 2016-02 is effective for annual and interim reporting periods beginning after December 15, 2018, with early adoption permitted. We plan to adopt the standard when it becomes effective for us, as of the reporting period beginning January 1, 2019, and we expect to elect the practical expedients available for implementation under the standard. Under the practical expedients election, we would not be required to reassess: (i) whether an expired or existing contract meets the definition of a lease; (ii) the lease classification at the adoption date for expired or existing leases; and (iii) whether costs previously capitalized as initial direct costs would continue to be amortized. The standard also will require new disclosures within the notes accompanying the consolidated financial statements. Additionally, in January 2018, the FASB issued ASU No. 2018-01, “Leases (Subtopic 842): Land Easement Practical Expedient for Transition to Topic 842” (“ASU 2018-01”), which updates ASU 2016-02 to include land easements under the updated guidance, including the option to elect the practical expedient discussed above. We also plan to adopt ASU 2018-01 when it becomes effective for us, as of the reporting period beginning January 1, 2019, and we expect to elect the practical expedients available for implementation under the standard. Our initial analysis of our lease contracts indicates that the adoption of these standards will not have a material effect on our consolidated financial statements. We are still in the process of evaluating the impact of ASU 2016-02, primarily as it relates to the lease and non-lease components, as well as ASU 2018-01, and related amendments impacting the practical expedients.

2. INVESTMENTS IN REAL ESTATE PROPERTIES

The following tables summarize our consolidated investments in real estate properties:



	As of
(in thousands)	September 30, 2018			December 31, 2017
Land	$	420,470		$	422,564
Buildings and improvements	1,258,188			1,266,069
Intangible lease assets	314,829			340,273
Investment in real estate properties	1,993,487			2,028,906
Accumulated depreciation and amortization	(493,129		)	(488,636		)
Net investment in real estate properties	$	1,500,358		$	1,540,270

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Intangible Lease Assets and Liabilities

Intangible lease assets and liabilities as of September 30, 2018 and December 31, 2017 include the following:



	September 30, 2018									December 31, 2017
(in thousands)	Gross			Accumulated Amortization			Net			Gross			Accumulated Amortization			Net
Intangible lease assets	$	282,416		$	(235,383	)	$	47,033		$	299,406		$	(240,844	)	$	58,562
Above-market lease assets	32,413			(31,043		)	1,370			40,867			(38,740		)	2,127
Below-market lease liabilities	(83,788		)	34,922			(48,866		)	(86,085		)	33,456			(52,629		)

Rental Revenue and Depreciation and Amortization Expense

The following table summarizes straight-line rent adjustments, amortization recognized as an increase (decrease) to rental revenues from above- and below-market lease assets and liabilities, and real estate-related depreciation and amortization expense:



	For the Three Months Ended September 30,						For the Nine Months Ended September 30,
(in thousands)	2018			2017			2018			2017
Increase (decrease) to rental revenue:
Straight-line rent adjustments	$	4,800		$	(109	)	$	10,248		$	(464	)
Above-market lease amortization	(338		)	(641		)	(757		)	(2,155		)
Below-market lease amortization	1,346			1,355			3,764			4,138
Real estate-related depreciation and amortization:
Depreciation expense	$	9,560		$	9,823		$	28,245		$	29,659
Intangible lease asset amortization	5,401			7,104			14,957			24,002

Dispositions

During the nine months ended September 30, 2018, we sold one office property located in Fayetteville, Arkansas, one building from a two-building office property located in Dublin, California, and one land parcel that was part of a retail property located in Apex, North Carolina for net proceeds of $66.3 million. We recorded a total net gain of $13.8 million.

Real Estate Property Impairment

During the nine months ended September 30, 2018, we recorded a total of $13.4 million non-cash impairment charges related to two retail properties. The impairment was a result of: (i) the consideration of potential disposition options for a retail property located in the Jacksonville, Florida market; and (ii) the receipt of an unsolicited offer to purchase a retail property located in the Holbrook, Massachusetts market. Both ultimately resulted in the reduction of our estimated future cash flows below our net book value.

During the nine months ended September 30, 2017, we recorded a $1.1 million non-cash impairment charge related to a consolidated retail property located in the Greater Boston market. Prior to the disposition, we reevaluated the fair value of the property and determined that the net book value of the property exceeded the respective contract sales price less costs to sell the property, resulting in the impairment. The property was disposed of in May 2017.

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3. DEBT

A summary of our debt is as follows:



	Weighted-Average Effective Interest Rate as of					Balance as of
($ in thousands)	September 30, 2018		December 31, 2017		Maturity Date	September 30, 2018			December 31, 2017
Line of credit (1)	3.96	%	3.27	%	January 2019	$	140,000		$	142,000
Term loan (2)	3.56	%	3.25	%	January 2019	275,000			275,000
Term loan (3)	3.94	%	3.94	%	February 2022	200,000			200,000
Fixed-rate mortgage notes(4)	3.57	%	3.89	%	September 2021 - December 2029	174,747			123,794
Floating-rate mortgage notes (5)	4.72	%	3.88	%	January 2020 - August 2023	225,600			278,100
Total principal amount / weighted-average (6)	3.95	%	3.64	%		$	1,015,347		$	1,018,894
Less unamortized debt issuance costs						$	(5,489	)	$	(7,322	)
Add mark-to-market adjustment on assumed debt						429			536
Total debt, net						$	1,010,287		$	1,012,108

Gross book value of properties encumbered by debt						$	596,099		$	590,542

(1)

The effective interest rate is calculated based on the London Interbank Offered Rate (“LIBOR”), plus a margin ranging from 1.40% to 2.30%, depending on our consolidated leverage ratio. As of September 30, 2018, the unused and available portions under the line of credit were approximately $260.0 million and $213.0 million, respectively. The line of credit is available for general business purposes including, but not limited to, refinancing of existing indebtedness and financing the acquisition of permitted investments, including commercial properties.


(2)	The effective interest rate is calculated based on LIBOR, plus a margin ranging from 1.35% to 2.20%, depending on our consolidated leverage ratio. The weighted-average interest rate is the all-in interest rate, including the effects of interest swap agreements relating to approximately $150.0 million in borrowings under this term loan.


(3)	The effective interest rate is calculated based on LIBOR, plus a margin ranging from 1.65% to 2.55%, depending on our consolidated leverage ratio. The weighted-average interest rate is the all-in interest rate and is fixed through interest swap agreements.

(4)

The amount outstanding as of September 30, 2018 includes a $32.6 million floating-rate mortgage note that was subject to an interest rate spread of 1.60% over one-month LIBOR, which we have effectively fixed using an interest rate swap at 3.05% for the term of the borrowing and a $52.4 million floating-rate mortgage note that was subject to an interest rate spread of 1.65% over one-month LIBOR, which we have effectively fixed using an interest rate swap at 2.85% for the term of the borrowing.


(5)	The effective interest rate is calculated based on LIBOR plus a margin. As of September 30, 2018 and December 31, 2017, our floating-rate mortgage notes were subject to a weighted-average interest rate spread of 2.47% and 2.31%, respectively.


(6)	The weighted-average remaining term of our borrowings was approximately 2.2 years as of September 30, 2018.

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As of September 30, 2018, the principal payments due on our debt during each of the next five years and thereafter were as follows:



(in thousands)	Line of Credit (1)		Term Loans (2)		Mortgage Notes		Total
Remainder of 2018	$	—	$	—	$	815	$	815
2019	140,000		275,000		3,344		418,344
2020	—		—		229,088		229,088
2021	—		—		12,372		12,372
2022	—		200,000		3,246		203,246
Thereafter	—		—		151,482		151,482
Total principal payments	$	140,000	$	475,000	$	400,347	$	1,015,347


(1)	The term of the line of credit may be extended pursuant to a one-year extension option, subject to certain conditions.


(2)	The term of the $275.0 million term loan may be extended pursuant to a one-year extension option, subject to certain conditions.

Debt Covenants

Our line of credit, term loans and mortgage note agreements contain various property-level covenants, including customary affirmative and negative covenants. In addition, the line of credit and term loan agreements contain certain corporate level financial covenants, including leverage ratio, fixed charge coverage ratio, and tangible net worth thresholds. We were in compliance with our debt covenants as of September 30, 2018.

Derivative Instruments

To manage interest rate risk for certain of our variable-rate debt, we use interest rate derivative instruments as part of our risk management strategy. These derivatives are designed to mitigate the risk of future interest rate increases by either providing a fixed interest rate or capping the variable interest rate for a limited, pre-determined period of time. Interest rate swaps designated as cash flow hedges involve the receipt of variable-rate amounts from a counterparty in exchange for us making fixed-rate payments over the life of the interest rate swap agreements without exchange of the underlying notional amount. Interest rate caps involve the receipt of variable amounts from a counterparty at the end of each period in which the interest rate exceeds the agreed fixed price. Interest rate caps are not designated as hedges. Certain of our variable-rate borrowings are not hedged, and therefore, to an extent, we have on-going exposure to interest rate movements.

The change in the fair value of derivatives designated and that qualify as cash flow hedges is recorded in accumulated other comprehensive income (loss) (“AOCI”) on the condensed consolidated balance sheets and is subsequently reclassified into earnings as interest expense for the period that the hedged forecasted transaction affects earnings, which is when the interest expense is recognized on the related debt. During the next 12 months, we estimate that approximately $3.8 million will be reclassified as a decrease to interest expense related to active effective hedges of existing floating-rate debt, and we estimate that approximately $0.8 million will be reclassified as an increase to interest expense related to terminated hedges where the likelihood of the originally hedged interest payments remain probable.

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The following table summarizes the location and fair value of our derivative instruments on our condensed consolidated balance sheets:



				Fair Value
($ in thousands)	Number of Contracts	Notional Amount		Other Assets		Other Liabilities
September 30, 2018
Interest rate swaps (1)	15	$	635,015	$	13,459	$	—
Interest rate caps	4	338,450		18		—
Total derivative instruments	19	$	973,465	$	13,477	$	—
December 31, 2017
Interest rate swaps (1) (2)	11	$	435,500	$	4,043	$	60
Interest rate caps	4	338,450		13		—
Total derivative instruments	15	$	773,950	$	4,056	$	60


(1)	Includes four interest rate swaps with a combined notional amount of $200.0 million that will become effective in January 2020.


(2)	Includes one interest rate swap with a notional amount of $52.5 million that became effective in July 2018.

The following table presents the effect of our derivative instruments on our condensed consolidated financial statements:



	For the Three Months Ended September 30,						For the Nine Months Ended September 30,
(in thousands)	2018			2017			2018		2017
Derivative instruments designated as cash flow hedges:
Gain (loss) recognized in AOCI	$	2,559		$	(123	)	$	9,707	$	(1,455	)
Loss reclassified from AOCI into interest expense	68			1,071			1,164		3,815
Total interest expense on the condensed consolidated statements of operations in which the effects of cash flow hedges are recorded	12,166			11,346			35,704		31,193
Derivative instruments not designated as cash flow hedges:
(Loss) gain recognized in income	$	(3	)	$	(14	)	$	6	$	(114	)

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4. FAIR VALUE

We estimate the fair value of our financial instruments using available market information and valuation methodologies we believe to be appropriate for these purposes. Considerable judgment and a high degree of subjectivity are involved in developing these estimates and, accordingly, they are not necessarily indicative of the amounts that we would realize upon disposition.

Fair Value Measurements on a Recurring Basis

The following table presents our financial instruments measured at fair value on a recurring basis:



(in thousands)	Level 1		Level 2		Level 3		Total Fair Value
September 30, 2018
Assets:
Derivative instruments	$	—	$	13,477	$	—	$	13,477
Total assets measured at fair value	$	—	$	13,477	$	—	$	13,477
Liabilities:
Derivative instruments	$	—	$	—	$	—	$	—
Total liabilities measured at fair value	$	—	$	—	$	—	$	—
December 31, 2017
Assets:
Derivative instruments	$	—	$	4,056	$	—	$	4,056
Total assets measured at fair value	$	—	$	4,056	$	—	$	4,056
Liabilities:
Derivative instruments	$	—	$	60	$	—	$	60
Total liabilities measured at fair value	$	—	$	60	$	—	$	60

The following methods and assumptions were used to estimate the fair value of each class of financial instrument:

Derivative Instruments. The derivative instruments are interest rate swaps and interest rate caps whose fair value is estimated using market-standard valuation models. Such models involve using market-based observable inputs, including interest rate curves. We incorporate credit valuation adjustments to appropriately reflect both our nonperformance risk and respective counterparty’s nonperformance risk in the fair value measurements, which we have concluded are not material to the valuation. Due to these derivative instruments being unique and not actively traded, the fair value is classified as Level 2. See “Note 3” above for further discussion of our derivative instruments.

Nonrecurring Fair Value Measurements

As of September 30, 2018 and December 31, 2017, the fair values of cash and cash equivalents, tenant receivables, due from/to affiliates, accounts payable and accrued liabilities, and distributions payable approximate their carrying values because of the short-term nature of these instruments. The table below includes fair values for certain of our financial instruments for which it is practicable to estimate fair value. The carrying values and fair values of these financial instruments were as follows:

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	As of September 30, 2018				As of December 31, 2017
(in thousands)	Carrying Value (1)		Fair Value		Carrying Value (1)		Fair Value
Assets:
Debt-related investments	$	10,794	$	10,822	$	11,120	$	11,250
Liabilities:
Line of credit	$	140,000	$	140,000	$	142,000	$	142,000
Term loans	475,000		475,000		475,000		475,000
Mortgage notes	400,347		397,756		401,894		401,574


(1)	The carrying amount reflects the principal amount outstanding.

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5. STOCKHOLDERS’ EQUITY

Public Offering

A summary of our public offerings (including shares sold through the primary offering and distribution reinvestment plan (“DRIP”)) for the nine months ended September 30, 2018, is as follows:



(in thousands)	Class T		Class S		Class D		Class I		Class E		Total
Amount of gross proceeds raised:
Primary offering	$	5,412	$	55,322	$	2,785	$	34,297	$	—	$	97,816
DRIP	353		304		368		5,239		7,949		14,213
Total offering	$	5,765	$	55,626	$	3,153	$	39,536	$	7,949	$	112,029

Number of shares sold:
Primary offering	704		7,314		372		4,591		—		12,981
DRIP	47		41		49		703		1,066		1,906
Total offering	751		7,355		421		5,294		1,066		14,887

Common Stock

The following table describes the changes in each class of common shares during the nine months ended September 30, 2018:



(in thousands)	Class T Shares		Class S Shares	Class D Shares		Class I Shares		Class E Shares		Total Shares
Balances as of December 31, 2017	2,062		64	2,510		34,135		93,695		132,466
Issuance of common stock:
Primary shares	704		7,314	372		4,591		—		12,981
Distribution reinvestment plan	47		41	49		703		1,066		1,906
Stock-based compensation	—		—	—		42		—		42
Redemptions of common stock	(193	)	—	(235	)	(3,913	)	(14,107	)	(18,448	)
Balances as of September 30, 2018	2,620		7,419	2,696		35,558		80,654		128,947

Distributions

The following table summarizes our distribution activity (including distributions to noncontrolling interests and distributions reinvested in shares of our common stock) for the quarters ended below:



	Amount
(in thousands, except per share data)	Declared per Common Share (1)		Common Stock Distributions Paid in Cash		Other Cash Distributions (2)		Reinvested in Shares		Total Distributions
2018
March 31	$	0.09375	$	7,240	$	1,127	$	4,789	$	13,156
June 30	0.09375		7,137		1,221		4,710		13,068
September 30	0.09375		7,157		1,174		4,738		13,069
Total	$	0.28125	$	21,534	$	3,522	$	14,237	$	39,293
2017
March 31	$	0.09000	$	8,289	$	1,250	$	5,076	$	14,615
June 30	0.09000		8,027		1,300		4,920		14,247
September 30	0.09000		7,549		1,195		4,937		13,681
December 31	0.09000		7,285		1,088		4,775		13,148
Total	$	0.36000	$	31,150	$	4,833	$	19,708	$	55,691


(1)	Amount reflects the total quarterly distribution rate, subject to adjustment for class-specific fees.

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(2)

Includes other cash distributions consisting of: (i) distributions paid to holders of partnership units (“OP Units”) in Black Creek Diversified Property Operating Partnership LP (the “Operating Partnership”); (ii) regular distributions made to our former joint venture partners; and (iii) ongoing distribution fees paid to Black Creek Capital Markets, LLC (the “Dealer Manager”) with respect to Class T, Class S and Class D shares. See “Note 6” for further detail regarding the ongoing distribution fees.

Redemptions and Repurchases

Below is a summary of redemptions and repurchases pursuant to our share redemption program for the nine months ended September 30, 2018 and 2017. Also included in the summary below is the impact of stock repurchases pursuant to our two self-tender offers conducted during 2017. Our board of directors may modify, suspend or terminate our current share redemption programs if it deems such action to be in the best interest of our stockholders.



	For the Nine Months Ended September 30,
(in thousands, except for per share data)	2018			2017
Number of shares requested for redemption or repurchase	18,448			14,712
Number of shares redeemed or repurchased	18,448			14,712
% of shares requested that were redeemed or repurchased	100.0		%	100.0		%
Average redemption or repurchase price per share	$	7.46		$	7.50

6. RELATED PARTY TRANSACTIONS

Summary of Fees and Expenses

The following table summarizes fees and expenses incurred by us for services provided by Black Creek Diversified Property Advisors LLC (the “Advisor”) and its affiliates, and any related amounts payable:



	For the Three Months Ended September 30,				For the Nine Months Ended September 30,				Payable as of
(in thousands)	2018		2017		2018		2017		September 30, 2018		December 31, 2017
Upfront selling commissions	$	411	$	4	$	834	$	29	$	—	$	—
Dealer manager fees	—		79		—		306		—		—
Ongoing distribution fees	150		27		298		65		57		15
Advisory fees	3,795		3,212		10,959		10,153		3,255		954
Advisory fees related to the disposition of real properties	—		1,477		—		1,763		—		—
Other expense reimbursements—Advisor	2,194		2,203		6,584		6,507		1,134		1,988
Other expense reimbursements—Dealer Manager	151		124		583		428		—		—
DST Program advisory fees	82		62		173		62		—		—
DST Program selling commissions	395		107		832		284		—		—
DST Program dealer manager fees	111		36		242		89		—		—
DST Program other reimbursements—Dealer Manager	27		27		65		61		—		—
DST Program facilitation and loan origination fees	94		—		94		—		—		—
Total	$	7,410	$	7,358	$	20,664	$	19,747	$	4,446	$	2,957

Company Restricted Stock Units (“Company RSUs”)

The table below summarizes the unvested Company RSUs as of September 30, 2018, that we have granted to the Advisor in exchange for certain advisory fee and expense reimbursement offsets.



(in thousands, except per share data)	Grant Date	Vesting Date	Number of Unvested Shares	Grant Date Net Asset Value (“NAV”) per Class I Share
Company RSUs	2/4/2016	4/15/2019	57	$	7.41

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7. NET (LOSS) INCOME PER COMMON SHARE

The computation of our basic and diluted net (loss) income per share attributable to common stockholders is as follows:



	For the Three Months Ended September 30,						For the Nine Months Ended September 30,
(in thousands, except per share data)	2018			2017			2018			2017
Net (loss) income attributable to common stockholders—basic	$	(3,465	)	$	(1,960	)	$	(1,985	)	$	6,506
Net (loss) income attributable to OP Units	(292		)	(165		)	(166		)	526
Net (loss) income attributable to common stockholders—diluted	$	(3,757	)	$	(2,125	)	$	(2,151	)	$	7,032
Weighted-average shares outstanding—basic	128,506			139,925			128,269			144,998
Incremental weighted-average shares effect of conversion of OP Units	10,839			11,814			11,071			11,920
Weighted-average shares outstanding—diluted	139,345			151,739			139,340			156,918
Net (loss) income per share attributable to common stockholders:
Basic	$	(0.03	)	$	(0.01	)	$	(0.02	)	$	0.04
Diluted	$	(0.03	)	$	(0.01	)	$	(0.02	)	$	0.04

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8. SUPPLEMENTAL CASH FLOW INFORMATION

Supplemental cash flow information and disclosure of non-cash investing and financing activities is as follows:



	For the Nine Months Ended September 30,
(in thousands)	2018		2017
Distributions reinvested in common stock	$	14,214	$	18,433

Restricted Cash

Restricted cash consists of lender and property-related escrow accounts. The following table presents the components of the beginning of period and end of period cash, cash equivalents and restricted cash reported within the condensed consolidated statements of cash flows:



	For the Nine Months Ended September 30,
(in thousands)	2018		2017
Beginning of period:
Cash and cash equivalents	$	10,475	$	13,864
Restricted cash	8,541		7,282
Cash, cash equivalents and restricted cash	$	19,016	$	21,146
End of period:
Cash and cash equivalents	$	8,914	$	5,841
Restricted cash	6,816		8,268
Cash, cash equivalents and restricted cash	$	15,730	$	14,109

9. COMMITMENTS AND CONTINGENCIES

We and the Operating Partnership are not presently involved in any material litigation nor, to our knowledge, is any material litigation threatened against us or our investments.

Environmental Matters

A majority of the properties we acquire are subject to environmental reviews either by us or the previous owners. In addition, we may incur environmental remediation costs associated with certain land parcels we may acquire in connection with the development of the land. We have acquired certain properties in urban and industrial areas that may have been leased to or previously owned by commercial and industrial companies that discharged hazardous materials. We may purchase various environmental insurance policies to mitigate our exposure to environmental liabilities. We are not aware of any environmental liabilities that we believe would have a material adverse effect on our business, financial condition, or results of operations as of September 30, 2018.

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10. SEGMENT FINANCIAL INFORMATION

Our three reportable segments are office, retail and industrial. Factors used to determine our reportable segments include the physical and economic characteristics of our properties and the related operating activities. Our chief operating decision makers rely primarily on net operating income to make decisions about allocating resources and assessing segment performance. Net operating income is the key performance metric that captures the unique operating characteristics of each segment. Items that are not directly assignable to a segment, such as certain corporate items, are not allocated but reflected as reconciling items.

The following table reflects our total assets by business segment as of September 30, 2018 and December 31, 2017:



	As of
(in thousands)	September 30, 2018		December 31, 2017
Assets:
Office	$	721,424	$	775,917
Retail	685,695		705,696
Industrial	93,239		58,657
Corporate	80,872		67,836
Total assets	$	1,581,230	$	1,608,106

The following table sets forth the financial results by segment for the three and nine months ended September 30, 2018 and 2017:

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(in thousands)	Office			Retail			Industrial			Consolidated
Three Months Ended September 30, 2018
Rental revenues	$	28,795		$	18,497		$	2,213		$	49,505
Rental expenses	(10,622		)	(4,124		)	(446		)	(15,192		)
Net operating income	$	18,173		$	14,373		$	1,767		$	34,313
Real estate-related depreciation and amortization	$	8,714		$	4,935		$	1,312		$	14,961
Three Months Ended September 30, 2017
Rental revenues	$	27,099		$	20,841		$	1,538		$	49,478
Rental expenses	(11,369		)	(5,803		)	(344		)	(17,516		)
Net operating income	$	15,730		$	15,038		$	1,194		$	31,962
Real estate-related depreciation and amortization	$	10,250		$	6,022		$	655		$	16,927
Nine Months Ended September 30, 2018
Rental revenues	$	79,480		$	55,387		$	5,554		$	140,421
Rental expenses	(32,347		)	(12,934		)	(1,034		)	(46,315		)
Net operating income	$	47,133		$	42,453		$	4,520		$	94,106
Real estate-related depreciation and amortization	$	24,709		$	15,608		$	2,885		$	43,202
Nine Months Ended September 30, 2017
Rental revenues	$	84,163		$	63,421		$	4,438		$	152,022
Rental expenses	(33,910		)	(16,344		)	(1,266		)	(51,520		)
Net operating income	$	50,253		$	47,077		$	3,172		$	100,502
Real estate-related depreciation and amortization	$	33,046		$	18,771		$	1,844		$	53,661

We consider net operating income to be an appropriate supplemental performance measure and believe net operating income provides useful information to our investors regarding our financial condition and results of operations because net operating income reflects the operating performance of our properties and excludes certain items that are not considered to be controllable in connection with the management of the properties, such as real estate-related depreciation and amortization, general and administrative expenses, advisory fees, acquisition expenses, impairment charges, interest expense, gains on sale of properties, other income and expense, gains and losses on the extinguishment of debt and noncontrolling interests. However, net operating income should not be viewed as an alternative measure of our financial performance since it excludes such items, which could materially impact our results of operations. Further, our net operating income may not be comparable to that of other real estate companies, as they may use different methodologies for calculating net operating income. Therefore, we believe net income, as defined by GAAP, to be the most appropriate measure to evaluate our overall financial performance.

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The following table is a reconciliation of our reported net income (loss) attributable to common stockholders to our net operating income for the three and nine months ended September 30, 2018 and 2017:



	For the Three Months Ended September 30,						For the Nine Months Ended September 30,
(in thousands)	2018			2017			2018			2017
Net (loss) income attributable to common stockholders	$	(3,465	)	$	(1,960	)	$	(1,985	)	$	6,506
Debt-related income	(170		)	(194		)	(514		)	(654		)
Real estate-related depreciation and amortization	14,961			16,927			43,202			53,661
General and administrative expenses	2,076			2,760			6,888			7,034
Advisory fees, related party	3,877			3,274			11,132			10,215
Impairment of real estate property	6,600			—			13,400			1,116
Interest expense	12,166			11,346			35,704			31,193
Gain on sale of real property	(1,398		)	(670		)	(13,832		)	(11,022		)
Other (income) expense	(42		)	664			272			862
Net (loss) income attributable to noncontrolling interests	(292		)	(185		)	(161		)	1,591
Net operating income	$	34,313		$	31,962		$	94,106		$	100,502

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

References to the terms “we,” “our,” or “us” refer to Black Creek Diversified Property Fund Inc. and its consolidated subsidiaries. The following discussion and analysis should be read together with our unaudited condensed consolidated financial statements and notes thereto included in this Quarterly Report on Form 10-Q.

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q includes certain statements that may be deemed to be “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, or the “Securities Act,” and Section 21E of the Securities Exchange Act of 1934, as amended, or the “Exchange Act.” Such forward-looking statements relate to, without limitation, our future capital expenditures, distributions and acquisitions (including the amount and nature thereof), other developments and trends of the real estate industry, business strategies, and the expansion and growth of our operations. These statements are based on certain assumptions and analyses made by us in light of our experience and our perception of historical trends, current conditions, expected future developments and other factors we believe are appropriate. We intend such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in Section 27A of the Securities Act and Section 21E of the Exchange Act. Such statements are subject to a number of assumptions, risks and uncertainties which may cause our actual results, performance or achievements to be materially different from future results, performance or achievements expressed or implied by these forward-looking statements. Forward-looking statements are generally identifiable by the use of the words “may,” “will,” “should,” “expect,” “anticipate,” “estimate,” “believe,” “intend,” “project,” “continue,” or the negative of these words, or other similar words or terms. Readers are cautioned not to place undue reliance on these forward-looking statements.

Some of the risks and uncertainties that may cause our actual results, performance or achievements to differ materially from those expressed or implied by forward-looking statements include, among others, the following:


•	the impact of macroeconomic trends, such as the unemployment rate and availability of credit, which may have a negative effect on the following, among other things:


•	the fundamentals of our business, including overall market occupancy, tenant space utilization, and rental rates;


•	the financial condition of our tenants, some of which are financial, legal and other professional firms, our lenders, and institutions that hold our cash balances and short-term investments, which may expose us to increased risks of breach or default by these parties; and


•	the value of our real estate assets, which may limit our ability to dispose of assets at attractive prices or obtain or maintain debt financing secured by our properties or on an unsecured basis;


•	general risks affecting the real estate industry (including, without limitation, the inability to enter into or renew leases, dependence on tenants’ financial condition, and competition from other developers, owners and operators of real estate);


•	our ability to effectively raise and deploy proceeds from our ongoing public offerings;


•	risks associated with the demand for liquidity under our share redemption program and our ability to meet such demand;


•	risks associated with the availability and terms of debt and equity financing and the use of debt to fund acquisitions and developments, including the risk associated with interest rates impacting the cost and/or availability of financing;


•	the business opportunities that may be presented to and pursued by us, changes in laws or regulations (including changes to laws governing the taxation of real estate investment trusts (“REITs”));


•	conflicts of interest arising out of our relationships with Black Creek Diversified Property Advisors Group LLC (the “Sponsor”), the Advisor, and their affiliates;


•	changes in accounting principles, policies and guidelines applicable to REITs;


•	environmental, regulatory and/or safety requirements; and


•	the availability and cost of comprehensive insurance, including coverage for terrorist acts.

For further discussion of these and other factors, see Item 1A, “Risk Factors” in our 2017 Form 10-K and our Quarterly Report on Form 10-Q for the period ended March 31, 2018, filed with the SEC on May 11, 2018. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of future events, new information or otherwise.

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OVERVIEW

General

Black Creek Diversified Property Fund Inc. is a NAV-based perpetual life REIT that was formed on April 11, 2005, as a Maryland corporation. We are primarily focused on investing in and operating a diverse portfolio of real property. As of September 30, 2018, our real estate portfolio included 48 properties totaling approximately 7.7 million square feet located in 19 markets throughout the U.S., with 500 tenants. Our real estate portfolio includes three properties placed in Delaware Statutory Trusts, the interests of which are initially owned by a taxable REIT subsidiary of our operating partnership and then sold to third party investors (the “DST Program”). We, through a subsidiary of our operating partnership, hold long-term leasehold interests in these properties pursuant to master leases that are guaranteed by the operating partnership, while third-party investors will ultimately hold interests in the real estate through the Delaware Statutory Trusts.

We have operated and elected to be treated as a REIT for U.S. federal income tax purposes, commencing with the taxable year ended December 31, 2006, and we intend to continue to operate in accordance with the requirements for qualification as a REIT. We utilize an Umbrella Partnership Real Estate Investment Trust (“UPREIT”) organizational structure to hold all or substantially all of our assets through the Operating Partnership.

As a NAV-based perpetual life REIT, we intend to conduct ongoing public primary offerings of our common stock on a perpetual basis. We also intend to conduct an ongoing distribution reinvestment plan offering for our stockholders to reinvest distributions in our shares. From time to time, we intend to file new registration statements on Form S-11 with the SEC to register additional shares of common stock so that we may continuously offer shares of common stock pursuant to Rule 415 under the Securities Act. During the nine months ended September 30, 2018, we raised $97.8 million of gross proceeds from the sale of common stock in our public primary offering and $14.2 million from the sale of common stock under our distribution reinvestment plan. See “Note 5 to the Condensed Consolidated Financial Statements” for more information about our public offerings.

We currently operate in three reportable segments: office, retail and industrial. The following table summarizes our real estate portfolio by segment as of September 30, 2018:



($ and square feet in thousands)	Number of Markets (1)	Number of Properties	Rentable Square Feet	% Leased		Aggregate Fair Value		% of Aggregate Fair Value
Office properties	11	14	3,003	85.3	%	$	1,102,250	53.0	%
Retail properties	8	30	3,231	93.4		869,600		41.8
Industrial properties	4	4	1,423	97.6		108,900		5.2
Total real estate portfolio	19	48	7,657	91.0	%	$	2,080,750	100.0	%


(1)	Reflects the number of unique markets by segment and in total. As such, the total number of markets does not equal the sum of the number of markets by segment as certain segments are located in the same market.

We will continue to focus our investment activities on expanding a high-quality, diversified real estate portfolio throughout the U.S. Although we generally target investments in four primary property categories (office, retail, industrial and multifamily), our charter and bylaws do not preclude us from investing in other types of commercial property, real estate debt, or real estate-related equity securities. Our near-term, investment strategy is likely to prioritize new investments in the industrial and multifamily sectors due to attractive fundamental conditions. We have been focused on selling certain non-strategic office and retail assets. The disposition of these properties has helped us to increase our current allocation to industrial real estate assets and liquidity to pursue new investment opportunities. However, there can be no assurance that we will be successful in this investment strategy, including with respect to any particular asset class. To a lesser extent we may invest in other types of real estate including, but not limited to, hospitality, medical offices, student housing and unimproved land. We currently do not intend in investing in these other types of real estate.

To provide diversification to our portfolio, we have invested and may continue to invest in real estate-related debt, which will generally include mortgage loans secured by real estate, mezzanine debt and other related investments. Any investments in real estate-related securities generally will focus on equity issued by public and private real estate companies and certain other securities, with the primary goal of such investments being the preservation of liquidity in support of our share redemption program.

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Net Asset Value

Our board of directors, including a majority of our independent directors, has adopted valuation procedures that contain a comprehensive set of methodologies to be used in connection with the calculation of our NAV. One fundamental element of the valuation process, the valuation of our real property portfolio, is managed by Altus Group U.S., Inc., an independent valuation firm (the “Independent Valuation Firm”) approved by our board of directors, including a majority of our independent directors. All parties engaged by us in the calculation of our NAV, including the Advisor, are subject to the oversight of our board of directors. As part of this process, our Advisor reviews the estimates of the values of our real property portfolio and real estate-related assets for consistency with our valuation guidelines and the overall reasonableness of the valuation conclusions, and informs our board of directors of its conclusions (as needed, but at least once per year as part of their annual review, described below). Although our Independent Valuation Firm or other pricing sources may consider any comments received from us or our Advisor to their individual valuations, the final estimated values of our real properties or certain other assets and liabilities are determined by the Independent Valuation Firm or other pricing source. Our Independent Valuation Firm is available to meet with our board of directors to review valuation information as well as our valuation guidelines and the operation and results of the valuation process generally. Our board of directors has the right to engage additional valuation firms and pricing sources to review the valuation process or valuations, if deemed appropriate. Every month our senior management team and Altus hold a NAV committee meeting to review the prior month’s adjustments to NAV and discuss any possible changes to the NAV policies and procedures which may be recommended to the board of directors. The information reviewed by this committee is summarized for the audit committee. At least once each calendar year, our board of directors, including a majority of our independent directors, reviews the appropriateness of our valuation procedures. With respect to the valuation of our properties, the Independent Valuation Firm provides the board of directors with periodic valuation reports. From time to time our board of directors, including a majority of our independent directors, may adopt changes to the valuation procedures if it (i) determines that such changes are likely to result in a more accurate reflection of NAV or a more efficient or less costly procedure for the determination of NAV without having a material adverse effect on the accuracy of such determination or (ii) otherwise reasonably believes a change is appropriate for the determination of NAV. We will publicly announce material changes to our valuation procedures or the identity or role of the Independent Valuation Firm. See Exhibit 4.4 of this Quarterly Report on Form 10-Q for a more detailed description of our valuation procedures, including important disclosure regarding real property valuations provided by the Independent Valuation Firm.

The following table sets forth the components of NAV for the Company as of September 30, 2018 and June 30, 2018. As used below, “Fund Interests” means our Class T shares, Class S shares, Class D shares, Class I shares, and Class E shares, along with the OP Units held by third parties, and “Aggregate Fund NAV” means the NAV of all of the Fund Interests.



	As of
(in thousands)	September 30, 2018			June 30, 2018
Office properties	$	1,102,250		$	1,094,400
Retail properties	869,600			864,500
Industrial properties	108,900			106,200
Total investments	$	2,080,750		$	2,065,100
Cash and other assets, net of other liabilities	(14,205		)	2,152
Debt obligations	(1,012,756		)	(1,026,289		)
Aggregate Fund NAV	$	1,053,789		$	1,040,963
Total Fund Interests outstanding	139,727			139,061

The following table shows the NAV per Fund Interest as of September 30, 2018:



(in thousands, except per Fund Interest data)	Total		Class T Shares		Class S Shares		Class D Shares		Class I Shares		Class E Shares		Class E OP Units
As of September 30, 2018
Monthly NAV	$	1,053,789	$	19,764	$	55,950	$	20,330	$	268,170	$	608,275	$	81,300
Fund Interests outstanding	139,727		2,620		7,419		2,696		35,558		80,654		10,780
NAV Per Fund Interest	$	7.54	$	7.54	$	7.54	$	7.54	$	7.54	$	7.54	$	7.54

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When the fair value of our real estate assets is calculated for the purposes of determining our NAV per share, the calculation is done using the fair value principles detailed within the FASB Accounting Standards Codification under Topic 820, Fair Value Measurements and Disclosures (“ASC Topic 820”). However, our valuation procedures and our NAV are not subject to GAAP and will not be subject to independent audit.

Our valuation procedures, which address specifically each category of our assets and liabilities and are applied separately from the preparation of our financial statements in accordance with GAAP, involve adjustments from historical cost. There are certain factors which cause NAV to be different from net book value on a GAAP basis. Most significantly, the valuation of our real estate assets, which is the largest component of our NAV calculation, is provided to us by the Independent Valuation Firm on a monthly basis. For GAAP purposes, these assets are generally recorded at depreciated or amortized cost. In addition, we value our debt-related investments and real estate-related liabilities generally in accordance with fair value standards under GAAP. An example that will cause our NAV to differ from our GAAP net book value includes the straight-lining of rent, which results in a receivable for GAAP purposes that is not included in the determination of our NAV. Third party appraisers may value our individual real estate assets using appraisal standards that deviate from fair value standards under GAAP. The use of such appraisal standards may cause our NAV to deviate from GAAP fair value principles. We did not develop our valuation procedures with the intention of complying with fair value concepts under GAAP and, therefore, there could be differences between our fair values and the fair values derived from the principal market or most advantageous market concepts of establishing fair value under GAAP.

Under GAAP, we record liabilities for ongoing distribution fees (i) that we currently owe the Dealer Manager under the terms of our Dealer Manager agreement and (ii) for an estimate that we may pay to the Dealer Manager in future periods for shares of our common stock. As of September 30, 2018, we estimated approximately $6.2 million of ongoing distribution fees were potentially payable to the Dealer Manager. We do not deduct the liability for estimated future distribution fees in our calculation of NAV since we intend for our NAV to reflect our estimated value on the date that we determine our NAV. Accordingly, our estimated NAV at any given time does not include consideration of any estimated future distribution fees that may become payable after such date.

We include no discounts to our NAV for the illiquid nature of our shares, including the limitations on our stockholders’ ability to redeem shares under our share redemption program, our ability to redeem shares under our share redemption program and our ability to suspend or terminate our share redemption program at any time. Our NAV generally does not consider exit costs (e.g. selling costs and commissions related to the sale of a property) that would likely be incurred if our assets and liabilities were liquidated or sold today. While we may use market pricing concepts to value individual components of our NAV, our per share NAV is not derived from the market pricing information of open-end real estate funds listed on stock exchanges.

Please note that our NAV is not a representation, warranty or guarantee that: (i) we would fully realize our NAV upon a sale of our assets; (ii) shares of our common stock would trade at our per share NAV on a national securities exchange; and (iii) a stockholder would be able to realize the per share NAV if such stockholder attempted to sell his or her shares to a third party.

The valuation for our real properties as of September 30, 2018 was provided by the Independent Valuation Firm in accordance with our valuation procedures and determined starting with the appraised value. The aggregate real property valuation of $2.1 billion compares to a GAAP basis of real properties (net of intangible lease liabilities and before accumulated amortization and depreciation) of $1.91 billion, representing an increase of approximately $171.1 million or 9.0%. Certain key assumptions that were used by our Independent Valuation Firm in the discounted cash flow analysis are set forth in the following table based on weighted averages by property type.



	Office		Retail		Industrial		Weighted-Average Basis
Exit capitalization rate	6.37	%	6.45	%	6.13	%	6.39	%
Discount rate / internal rate of return (“IRR”)	7.17	%	6.99	%	7.24	%	7.10	%
Annual market rent growth rate	3.04	%	2.90	%	2.82	%	2.97	%
Average holding period (years)	10.2		10.1		9.4		10.1

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A change in the rates used would impact the calculation of the value of our real properties. For example, assuming all other factors remain constant, the changes listed below would result in the following effects on the value of our real properties:



Input	Hypothetical Change	Office		Retail		Industrial		Weighted-Average Values
Exit capitalization rate (weighted-average)	0.25% decrease	2.72	%	2.43	%	2.86	%	2.60	%
	0.25% increase	(2.51	)%	(2.24	)%	(2.62	)%	(2.40	)%
Discount rate (weighted-average)	0.25% decrease	2.06	%	1.95	%	1.83	%	2.00	%
	0.25% increase	(2.02	)%	(1.90	)%	(1.79	)%	(1.96	)%

The valuation of our debt obligations as of September 30, 2018 was in accordance with fair value standards under GAAP. The key assumption used in the discounted cash flow analysis was the market interest rate. Market interest rates relating to the underlying debt obligations are based on unobservable Level 3 inputs, which we have determined to be our best estimate of current market interest rates of similar instruments. The weighted-average market interest rate used in the September 30, 2018 valuation was 4.01%.

A change in the market interest rates used would impact the calculation of the fair value of our debt obligations. For example, assuming all other factors remain constant, a decrease in the weighted-average market interest rate rate of 0.25% would increase the fair value of our debt obligations by approximately 0.13%. Alternatively, assuming all other factors remain constant, an increase in the weighted-average market interest rate rate of 0.25% would decrease the fair value of our debt obligations by approximately 0.24%.

RESULTS OF OPERATIONS

Summary of 2018 Activities

During the nine months ended September 30, 2018, we completed the following activities:


•	Our NAV increased from $7.41 per share as of December 31, 2017 to $7.54 per share as of September 30, 2018.


•	We acquired one industrial property comprising 0.4 million square feet for an aggregate purchase price of $37.5 million.


•	We sold one office property located in Fayetteville, Arkansas, one building from a two-building office property located in Dublin, California, and one land parcel that was part of a retail property located in Apex, North Carolina for net proceeds of $66.3 million. We recorded a total net gain of $13.8 million.


•	As of September 30, 2018, our leverage ratio was approximately 48.5% of the fair value of our real property and debt-related investments (determined in accordance with our valuation procedures) inclusive of property and entity-level debt.


•	We leased 1,087,000 square feet, which included 503,000 square feet of new and 584,000 square feet of renewals. This leasing activity contributed to the increase in our real estate portfolio’s leased percentage from 87.0% as of December 31, 2017 to 91.0% as of September 30, 2018.

•

Tenant improvements and leasing commissions related to our new leases were approximately $34.2 million and $11.0 million, respectively, or $31.48 and $10.11 per square foot, respectively. Of these leases, 740,000 square feet were considered comparable leases, with average straight-line rent growth of 15.8%, and tenant improvements and incentives of approximately $54.46 per square foot. Comparable leases comprise leases for which prior leases were in place for the same suite within twelve months of executing a new lease. Comparable leases must have terms of at least six months and the square footage of the suite occupied by the prior tenant cannot be more or less than 50% different from the size of the new lease’s suite.


•	We redeemed 18.4 million shares of common stock at a weighted-average purchase price of $7.46 per share for an aggregate amount of $137.6 million.

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Results for the Three and Nine Months Ended September 30, 2018 Compared to the Same Periods in 2017

The following table summarizes our results of operations for the three and nine months ended September 30, 2018, as compared to the three and nine months ended September 30, 2017. We evaluate the performance of consolidated operating properties we own and manage using a same store analysis because the population of properties in this analysis is consistent from period to period, thereby eliminating the effects of any material changes in the composition of the aggregate portfolio on performance measures. We have defined the same store portfolio to include consolidated operating properties owned for the entirety of both the current and prior reporting periods for which the operations had been stabilized. Other operating properties not meeting the same store criteria are reflected in the non-same store portfolio. The same store operating portfolio for the three month periods presented below reflect properties owned as of July 1, 2017 and for the nine month periods presented below reflect properties owned as of January 1, 2017. Both same store operating portfolios for the three month and nine month periods presented below include 45 properties totaling approximately 7.0 million square feet, which portfolio represented 90.9% of total rentable square feet as of September 30, 2018.



	For the Three Months Ended September 30,											For the Nine Months Ended September 30,
(in thousands)	2018			2017			$ Change			% Change		2018			2017			$ Change			% Change
Rental revenues:
Same store properties	$	47,867		$	44,127		$	3,740		8.5	%	$	136,309		$	135,045		$	1,264		0.9	%
Non-same store properties	1,638			5,351			(3,713		)	(69.4	)	4,112			16,977			(12,865		)	(75.8	)
Total rental revenues	49,505			49,478			27			0.1		140,421			152,022			(11,601		)	(7.6	)
Rental expenses:
Same store properties	(14,757		)	(15,573		)	816			(5.2	)	(44,556		)	(45,646		)	1,090			(2.4	)
Non-same store properties	(435		)	(1,943		)	1,508			(77.6	)	(1,759		)	(5,874		)	4,115			(70.1	)
Total rental expenses	(15,192		)	(17,516		)	2,324			(13.3	)	(46,315		)	(51,520		)	5,205			(10.1	)
Net operating income:
Same store properties	33,110			28,554			4,556			16.0		91,753			89,399			2,354			2.6
Non-same store properties	1,203			3,408			(2,205		)	(64.7	)	2,353			11,103			(8,750		)	(78.8	)
Total net operating income	34,313			31,962			2,351			7.4		94,106			100,502			(6,396		)	(6.4	)
Other income and (expenses):
Debt-related income	170			194			(24		)	(12.4	)	514			654			(140		)	(21.4	)
Real estate-related depreciation and amortization	(14,961		)	(16,927		)	1,966			(11.6	)	(43,202		)	(53,661		)	10,459			(19.5	)
General and administrative expenses	(2,076		)	(2,760		)	684			(24.8	)	(6,888		)	(7,034		)	146			(2.1	)
Advisory fees, related party	(3,877		)	(3,274		)	(603		)	18.4		(11,132		)	(10,215		)	(917		)	9.0
Impairment of real estate property	(6,600		)	—			(6,600		)	100.0		(13,400		)	(1,116		)	(12,284		)	1,100.7
Interest expense	(12,166		)	(11,346		)	(820		)	7.2		(35,704		)	(31,193		)	(4,511		)	14.5
Gain on sale of real estate property	1,398			670			728			108.7		13,832			11,022			2,810			25.5
Other income (expense)	42			(664		)	706			(106.3	)	(272		)	(862		)	590			(68.4	)
Total other expenses	(38,070		)	(34,107		)	(3,963		)	11.6		(96,252		)	(92,405		)	(3,847		)	4.2
Net (loss) income	(3,757		)	(2,145		)	(1,612		)	75.2		(2,146		)	8,097			(10,243		)	(126.5	)
Net loss (income) attributable to noncontrolling interests	292			185			107			57.8		161			(1,591		)	1,752			(110.1	)
Net (loss) income attributable to common stockholders	$	(3,465	)	$	(1,960	)	$	(1,505	)	76.8	%	$	(1,985	)	$	6,506		$	(8,491	)	(130.5	)%
Same store supplemental data:
Same store average percentage leased	90.5		%	91.6		%						89.9		%	92.1		%
Same store average annualized base rent per square foot	$	20.83		$	21.20							$	30.08		$	32.03

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Rental Revenues. Rental revenues are comprised of base rent, straight-line rent, amortization of above- and below-market lease assets and liabilities, and tenant reimbursement revenue. Total rental revenues remained constant for the three months ended September 30, 2018 and decreased by $11.6 million for the nine months ended September 30, 2018, as compared to the same periods in 2017. During the three months ended September 30, 2018, as compared to the same period in 2017, same store rental revenues increased by $3.7 million primarily due to rental revenues recorded during the three months ended September 30, 2018 associated with two lease terminations (the “Lease Terminations”). The Lease Terminations were comprised of: (i) $14.0 million of consideration received in June 2018 at our Campus Road Office Center property, which is amortized in to rental revenues on a straight-line basis through April 2019; and (ii) $1.0 million of consideration received in August 2018 at our Bala Pointe property. which is amortized in to rental revenues on a straight-line basis through December 2018. Additionally, the same store rental revenues increase during the periods under comparison was driven by an increase in average percentage leased at our 655 Montgomery and Park Place office properties, partially offset by the expiration of the Charles Schwab & Co., Inc. (“Schwab”) lease in September 2017. Schwab was our largest tenant at September 30, 2017 and leased 100% of our 594,000 square foot 3 Second Street office property. The increase in same store rental revenues was offset by a $3.7 million decrease in non-same store rental revenues driven by 10 dispositions during 2017 and three dispositions during 2018, partially offset by our two acquisitions during 2017 and one acquisition during 2018.

The $11.6 million decrease in rental revenues during the nine months ended September 30, 2018, as compared to the same period in 2017, was primarily attributable to a $12.9 million decrease in rental revenues related to our non-same store properties during the periods under comparison, which was a result of acquisition and disposition activity mentioned above. The decrease in non-same store rental revenues was partially offset by a $1.3 million increase in same store rental revenues during the nine months ended September 30, 2018, as compared to the same period in 2017, which was primarily due to rental revenues recorded during the period related to the Lease Terminations described above and an increase in average percentage leased at our 655 Montgomery and Park Place office properties during the periods under comparison. This increase in same store rental revenues was partially offset by the Schwab lease expiration in September 2017, as well as a lower average percentage leased and average annualized base rent per square foot for our same store portfolio, which decreased from 92.1% and $32.03, respectively, for the nine months ended September 30, 2017 to 89.9% and $30.08, respectively, for the nine months ended September 30, 2018.

The following table presents the components of our consolidated rental revenues:



	For the Three Months Ended September 30,										For the Nine Months Ended September 30,
(in thousands)	2018		2017			$ Change			% Change		2018		2017			$ Change			% Change
Base rent	$	33,643	$	37,793		$	(4,150	)	(11.0	)%	$	96,814	$	115,622		$	(18,808	)	(16.3	)%
Straight-line rent	4,800		(109		)	4,909			(4,503.7	)	10,248		(464		)	10,712			(2,308.6	)
Amortization of above- and below-market intangibles	1,008		714			294			41.2		3,007		1,983			1,024			51.6
Tenant recovery income	8,696		9,865			(1,169		)	(11.8	)	26,600		30,911			(4,311		)	(13.9	)
Other	1,358		1,215			143			11.8		3,752		3,970			(218		)	(5.5	)
Total rental revenues	$	49,505	$	49,478		$	27		0.1	%	$	140,421	$	152,022		$	(11,601	)	(7.6	)%

Rental Expenses. Rental expenses include certain property operating expenses typically reimbursed by our tenants, such as real estate taxes, property insurance, property management fees, repair and maintenance, and include certain non-recoverable expenses, such as consulting services and roof repairs. Total rental expenses decreased by $2.3 million and $5.2 million for the three and nine months ended September 30, 2018, respectively, as compared to the same periods in 2017, which was primarily attributable to our non-same store portfolio resulting from our disposition activity during 2017 and 2018, partially offset by our acquisition activity during those same periods. For the three and nine months ended September 30, 2018, same store rental expenses decreased, as compared to the same period in 2017, as a result of a decrease in property taxes associated with lower property values and a decrease in bad debt expenses related to the current-year receipt of tenant payments.

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The following table presents the various components of our rental expenses:



	For the Three Months Ended September 30,									For the Nine Months Ended September 30,
(in thousands)	2018		2017		$ Change			% Change		2018		2017		$ Change			% Change
Real estate taxes	$	5,721	$	7,193	$	(1,472	)	(20.5	)%	$	18,210	$	21,380	$	(3,170	)	(14.8	)%
Repairs and maintenance	4,811		4,533		278			6.1		14,605		14,474		131			0.9
Utilities	2,070		2,138		(68		)	(3.2	)	5,388		5,962		(574		)	(9.6	)
Property management fees	1,110		1,226		(116		)	(9.5	)	3,236		3,747		(511		)	(13.6	)
Insurance	392		376		16			4.3		1,053		1,139		(86		)	(7.6	)
Other	1,088		2,050		(962		)	(46.9	)	3,823		4,818		(995		)	(20.7	)
Total rental expenses	$	15,192	$	17,516	$	(2,324	)	(13.3	)%	$	46,315	$	51,520	$	(5,205	)	(10.1	)%

Other Expenses. Other expenses increased by $4.0 million and $3.8 million for the the three and nine months ended September 30, 2018, respectively, as compared to the same periods in 2017, primarily due to:


•	Impairment of real estate property of $6.6 million and $13.4 million recorded during the three and nine months ended September 30, 2018, respectively.

•

Real estate-related depreciation and amortization decrease of $2.0 million and $10.5 million for the three and nine months ended September 30, 2018, respectively, as compared to the same periods in 2017. These decreases were primarily attributable to $1.8 million and $5.5 million of intangible lease asset amortization recorded during the three and nine months ended September 30, 2017, respectively, associated with Schwab’s lease, which reached full amortization at lease expiration on September 30, 2017. The remaining decrease during the nine months ended September 30, 2018, as compared to the same period in 2017, resulted from net disposition activity during the periods under comparison.


•	An increase in interest expense of $4.5 million during the nine months ended September 30, 2018, as compared to the same period in 2017, that was primarily attributable to higher LIBOR rates as evidenced by a higher aggregate weighted-average interest rate of 3.95% as of September 30, 2018, as compared to 3.44% as of September 30, 2017.


•	Gain on sale of real property increase of $0.7 million and $2.8 million for the three and nine months ended September 30, 2018, as compared to the same periods in 2017.

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Segment Summary for the Three and Nine Months Ended September 30, 2018 Compared to the Same Periods in 2017

Our segments are based on our internal reporting of operating results used to assess performance based on the type of our properties. Our markets are aggregated into three reportable segments: office, retail and industrial. These segments are comprised of the markets by which management and its operating teams conduct and monitor business. See “Note 10 to the Condensed Consolidated Financial Statements” for further information on our segments. Management considers rental revenues and net operating income (“NOI”) aggregated by segment to be the appropriate way to analyze performance. See “Additional Measures of Performance” below for detail regarding the use of NOI. The following table summarizes certain operating trends in our consolidated properties by segment:



	For the Three Months Ended September 30,											For the Nine Months Ended September 30,
(in thousands)	2018			2017			$ Change			% Change		2018			2017			$ Change			% Change
Rental revenues:
Office	$	28,794		$	25,775		$	3,019		11.7	%	$	79,209		$	79,314		$	(105	)	(0.1	)%
Retail	18,473			17,752			721			4.1		55,300			53,931			1,369			2.5
Industrial	600			600			—			—		1,800			1,800			—			—
Total same store rental revenues	47,867			44,127			3,740			8.5		136,309			135,045			1,264			0.9
Non-same store properties	1,638			5,351			(3,713		)	(69.4	)	4,112			16,977			(12,865		)	(75.8	)
Total rental revenues	$	49,505		$	49,478		$	27		0.1	%	$	140,421		$	152,022		$	(11,601	)	(7.6	)%
NOI:
Office	$	18,181		$	15,085		$	3,096		20.5	%	$	47,557		$	47,421		$	136		0.3	%
Retail	14,339			12,879			1,460			11.3		42,424			40,206			2,218			5.5
Industrial	590			590			—			—		1,772			1,772			—			—
Total same store NOI	33,110			28,554			4,556			16.0		91,753			89,399			2,354			2.6
Non-same store properties	1,203			3,408			(2,205		)	(64.7	)	2,353			11,103			(8,750		)	(78.8	)
Total NOI	$	34,313		$	31,962		$	2,351		7.4	%	$	94,106		$	100,502		$	(6,396	)	(6.4	)%
Same store average percentage leased:
Office	84.0		%	85.8		%						82.4		%	87.2		%
Retail	94.4			95.0								94.6			94.8
Industrial	100.0			100.0								100.0			100.0
Same store average annualized base rent per square foot:
Office	$	30.00		$	30.75							$	41.89		$	46.25
Retail	17.65			17.44								26.51			26.33
Industrial	3.31			3.23								4.91			4.79

Office Segment. Our office segment same store NOI increased $3.1 million and remained relatively constant for the three and nine months ended September 30, 2018, respectively, as compared to the same periods in 2017. NOI increased during the three months ended September 30, 2018, as compared to the same period in 2017, primarily as the result of rental revenues recorded during the three months ended September 30, 2018 associated with the Lease Terminations described above and an increase in average percentage leased at our 655 Montgomery and Park Place office properties, which was partially offset by the Schwab lease expiration.

Retail Segment. Our retail segment same store NOI increased $1.5 million and $2.2 million for the three and nine months ended September 30, 2018, respectively, as compared to the same periods in 2017, primarily as a result of an early termination fee received during the third quarter of 2018 at one of our properties, a decrease in property taxes associated with lower property values and a decrease in bad debt expenses related to the current-year receipt of tenant payments. In addition to the impact associated with these drivers, the increase in retail segment same store NOI for the nine months ended September 30, 2018, as compared to the same period in 2017, was also driven by an early lease termination fee received during the first quarter of 2018 and increased leasing activity at two of our properties, which was partially offset by the lease expiration of a single tenant at a property located in the Holbrook, Massachusetts market.

Industrial Segment. Our industrial segment same store NOI did not change between the periods under comparison.

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ADDITIONAL MEASURES OF PERFORMANCE

Net Income and NOI

We define NOI as GAAP rental revenues less GAAP rental expenses. We consider NOI to be an appropriate supplemental performance measure and believe NOI provides useful information to our investors regarding our financial condition and results of operations because NOI reflects the operating performance of our properties and excludes certain items that are not considered to be controllable in connection with the management of the properties, such as real estate-related depreciation and amortization, general and administrative expenses, advisory fees, acquisition expenses, impairment charges, interest expense, gains on sale of properties, other income and expense, gains and losses on the extinguishment of debt and noncontrolling interests. However, NOI should not be viewed as an alternative measure of our financial performance since it excludes such items, which could materially impact our results of operations. Further, our NOI may not be comparable to that of other real estate companies, as they may use different methodologies for calculating NOI. Therefore, we believe net income, as defined by GAAP, to be the most appropriate measure to evaluate our overall financial performance. Refer to “Results of Operations—Results for the Three and Nine Months Ended September 30, 2018 Compared to the Same Periods in 2017” above for a reconciliation of our GAAP net (loss) income to NOI for the three and nine months ended September 30, 2018 and 2017.

Funds From Operations (“FFO”)

We believe that FFO, in addition to net income (loss) and cash flows from operating activities as defined by GAAP, are useful supplemental performance measures that our management uses to evaluate our consolidated operating performance. However, this supplemental, non-GAAP measure should not be considered as an alternative to net income (loss) or to cash flows from operating activities as an indication of our performance and is not intended to be used as a liquidity measure indicative of cash flow available to fund our cash needs, including our ability to make distributions to our stockholders. No single measure can provide users of financial information with sufficient information and only our disclosures read as a whole can be relied upon to adequately portray our financial position, liquidity, and results of operations. In addition, other REITs may define FFO and similar measures differently and choose to treat acquisition-related costs and potentially other accounting line items in a manner different from us due to specific differences in investment and operating strategy or for other reasons.

FFO. As defined by the National Association of Real Estate Investment Trusts (“NAREIT”), FFO is a non-GAAP measure that excludes certain items such as real estate-related depreciation and amortization. We believe FFO is a meaningful supplemental measure of our operating performance that is useful to investors because depreciation and amortization in accordance with GAAP implicitly assumes that the value of real estate assets diminishes predictably over time. By excluding gains or losses on the sale of assets, we believe FFO provides a helpful additional measure of our consolidated operating performance on a comparative basis. We use FFO as an indication of our consolidated operating performance and as a guide to making decisions about future investments.

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The following unaudited table presents a reconciliation of GAAP net (loss) income to NAREIT FFO:



	For the Three Months Ended September 30,						For the Nine Months Ended September 30,
(in thousands, except per share data)	2018			2017			2018			2017
GAAP net (loss) income attributable to common stockholders	$	(3,465	)	$	(1,960	)	$	(1,985	)	$	6,506
GAAP net (loss) income per common share—basic and diluted	$	(0.03	)	$	(0.01	)	$	(0.02	)	$	0.04
Reconciliation of GAAP net (loss) income to NAREIT FFO:
GAAP net (loss) income attributable to common stockholders	$	(3,465	)	$	(1,960	)	$	(1,985	)	$	6,506
Real estate-related depreciation and amortization	14,961			16,927			43,202			53,661
Impairment of real estate property	6,600			—			13,400			1,116
Gain on sale of real estate property	(1,398		)	(670		)	(13,832		)	(11,022		)
Noncontrolling interests’ share of net income	(292		)	(185		)	(161		)	1,591
Noncontrolling interests’ share of NAREIT FFO	(1,276		)	(1,081		)	(3,229		)	(4,018		)
NAREIT FFO attributable to common stockholders—basic	15,130			13,031			37,395			47,834
NAREIT FFO attributable to OP Units	1,276			1,100			3,225			3,923
NAREIT FFO	$	16,406		$	14,131		$	40,620		$	51,757

Weighted-average shares outstanding—basic	128,506			139,925			128,269			144,998
Weighted-average shares outstanding—diluted	139,345			151,739			139,340			156,918

NAREIT FFO per common share—basic and diluted	$	0.12		$	0.09		$	0.29		$	0.33

LIQUIDITY AND CAPITAL RESOURCES

Liquidity

Our primary sources of capital for meeting our cash requirements include debt financings, cash generated from operating activities, net proceeds from our public offerings, and asset sales. Our principal uses of funds are distributions to our stockholders, payments under our debt obligations, redemption payments, acquisition of properties and other investments, and capital expenditures. Over time, we intend to fund a majority of our cash needs, including the repayment of debt and capital expenditures, from operating cash flows and refinancings. As of September 30, 2018, we had approximately $418.3 million of borrowings maturing in the next 12 months. Of this amount, $140.0 million relates to our line of credit and $275.0 million relates to one of our term loans, both of which may be extended pursuant to a one-year extension option, subject to certain conditions. We expect to be able to repay our principal obligations over the next 12 months from operating cash flows and through refinancings, as well as satisfy the certain conditions regarding any future extension options.

The Advisor, subject to the oversight of our board of directors and, under certain circumstances, the investment committee or other committees established by our board of directors, will evaluate potential acquisitions and will engage in negotiations with sellers and lenders on our behalf. Pending investment in property, debt, or other investments, we may decide to temporarily invest any unused proceeds from our public offerings in certain investments that are expected to yield lower returns than those earned on real estate assets. These lower returns may affect our ability to make distributions to our stockholders. Potential future sources of capital include proceeds from secured or unsecured financings from banks or other lenders, proceeds from the sale of assets, and undistributed funds from operations.

We believe that our cash on-hand, anticipated net offering proceeds, proceeds from our line of credit, and other financing and disposition activities should be sufficient to meet our anticipated future acquisition, operating, debt service and distribution and redemption requirements.

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Cash Flows. The following table summarizes our cash flows for the following periods:



	For the Nine Months Ended September 30,
(in thousands)	2018			2017
Total cash provided by (used in):
Operating activities	$	52,579		$	48,751
Investing activities	645			(18,862		)
Financing activities	(56,510		)	(36,926		)
Net decrease in cash	$	(3,286	)	$	(7,037	)

Net cash provided by operating activities increased by approximately $3.8 million for the nine months ended September 30, 2018, compared to the same period in 2017. The increase was primarily due to payments received during the nine months ended September 30, 2018 related to the Lease Terminations described above and rental revenue increases attributable to our two acquisitions during 2017 and one acquisition during 2018, partially offset by lower rental revenues driven by our disposition activity during 2017 and 2018 and the Schwab lease expiration.

Net cash used in investing activities of $18.9 million for the nine months ended September 30, 2017 decreased by approximately $19.5 million to $0.6 million of net cash provided by investing activities for the nine months ended September 30, 2018. This change was the result of an increase in proceeds from our real estate property dispositions described above, which was partially offset by an increase in capital expenditures

Net cash used in financing activities increased by approximately $19.6 million for the nine months ended September 30, 2018, compared to the same period in 2017, primarily due to lower net borrowing activity under our mortgage notes and line of credit as a result of our disposition activity and an increase in redemptions of shares of our common stock, partially offset by an increase in net offering proceeds raised and a decrease in distributions paid to common stockholders and noncontrolling interest holders.

Capital Resources and Uses of Liquidity

In addition to our cash and cash equivalents balances available, our capital resources and uses of liquidity are as follows:

Line of Credit and Term Loans. As of September 30, 2018, we had an aggregate of $875.0 million of commitments under our credit agreements, including $400.0 million under our line of credit and $475.0 million under our two term loans. As of that date, we had: (i) approximately $140.0 million outstanding under our line of credit with a weighted-average effective interest rate of 3.96%; and (ii) $475.0 million outstanding under our term loans with a weighted-average effective interest rate of 3.72%, which includes the effect of the interest rate swap agreements related to $350.0 million in borrowings under our term loans. The unused and available portions under our line of credit were $260.0 million and $213.0 million, respectively. Our $400.0 million line of credit matures in January 2019, and may be extended pursuant to a one-year extension option, subject to certain conditions, including the payment of an extension fee. Our $275.0 million term loan currently matures in January 2019 and our $200.0 million term loan matures in February 2022. In January 2018, we exercised the first of two one-year extension options for our $275.0 million term loan and extended the maturity date to January 2019. Our line of credit is available for general corporate purposes, including but not limited to the refinancing of other debt, payment of redemptions, acquisition and operation of permitted investments. Refer to “Note 3 to the Condensed Consolidated Financial Statements” for additional information regarding our line of credit and term loans.

Mortgage Notes. As of September 30, 2018, we had property-level borrowings of approximately $400.3 million outstanding with a weighted-average remaining term of approximately 3.4 years. These borrowings are secured by mortgages or deeds of trust and related assignments and security interests in the collateralized properties, and had a weighted-average interest rate of 4.22%, which includes the effects of interest rate swap agreements related to two variable-rate mortgage notes aggregating $85.0 million. The proceeds from our mortgage notes were used to partially finance certain of our acquisitions. Refer to “Note 3 to the Condensed Consolidated Financial Statements” for additional information regarding our line of credit and term loans.

Debt Covenants. Our line of credit, term loan and mortgage note agreements contain various property-level covenants, including customary affirmative and negative covenants. In addition, our line of credit and term loan agreements contain certain corporate level financial covenants, including leverage ratio, fixed charge coverage ratio, and tangible net worth thresholds. These covenants may limit our ability to incur additional debt, to make borrowings under our line of credit, or to pay distributions. We were in compliance with our debt covenants as of September 30, 2018.

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Offering Proceeds. For the nine months ended September 30, 2018, the amount of aggregate gross proceeds raised from our public offering (including shares issued pursuant to the distribution reinvestment plan) was $112.0 million ($103.2 million net of direct selling costs).

Distributions. We intend to continue to operate in accordance with the requirements for qualification as a REIT. In order to qualify as a REIT, we are required to distribute at least 90% of our annual taxable income to our stockholders. The payment of distributions is determined by our board of directors and may be adjusted at its discretion at any time. Distribution levels are set by our board of directors at a level it believes to be appropriate and sustainable based upon a review of a variety of factors including the current and anticipated market conditions, current and anticipated future performance and make-up of our investments, our overall financial projections and expected future cash needs. We intend to continue to make distributions on a quarterly basis.

The following table outlines sources used, as determined on a GAAP basis, to pay total gross distributions (which are paid in cash or reinvested in shares of our common stock through our distribution reinvestment plan) for the periods indicated below:



	Amount												Source of Distributions								Total Cash Flows from Operating Activities
(in thousands, except per share data)	Declared per Common Share (1)		Paid in Cash (2)				Reinvested in Shares				Total Distributions		Cash Flows from Operating Activities (3)				Borrowings				Total Cash Flows from Operating Activities
2018
March 31	$	0.09375	$	8,367	63.6	%	$	4,789	36.4	%	$	13,156	$	9,282	70.6	%	$	3,874	29.4	%	$	9,282
June 30	0.09375		8,358		64.0		4,710		36.0		13,068		13,068		100.0		—		—		28,734
September 30	0.09375		8,331		63.7		4,738		36.3		13,069		13,069		100.0		—		—		14,563
Total	$	0.28125	$	25,056	63.8	%	$	14,237	36.2	%	$	39,293	$	35,419	90.1	%	$	3,874	9.9	%	$	52,579
2017
March 31	$	0.09000	$	9,539	65.3	%	$	5,076	34.7	%	$	14,615	$	14,615	100.0	%	$	—	—	%	$	17,422
June 30	0.09000		9,327		65.5		4,920		34.5		14,247		12,787		89.8		1,460		10.2		12,787
September 30	0.09000		8,744		63.9		4,937		36.1		13,681		13,681		100.0		—		—		18,545
December 31	0.09000		8,373		63.7		4,775		36.3		13,148		10,166		77.3		2,982		22.7		10,166
Total	$	0.36000	$	35,983	64.6	%	$	19,708	35.4	%	$	55,691	$	51,249	92.0	%	$	4,442	8.0	%	$	58,920


(1)	Amount reflects the total quarterly distribution rate, subject to adjustment for class-specific fees. Beginning in the third quarter of 2017, distributions were declared and paid as of monthly record dates. These monthly distributions have been aggregated and presented on a quarterly basis.


(2)	Includes other cash distributions consisting of: (i) distributions paid to OP Unit holders; (ii) regular distributions made to our former joint venture partners; and (iii) ongoing distribution fees paid to the Dealer Manager with respect to Class T, Class S and Class D shares.


(3)	Pursuant to new accounting guidance that became effective January 1, 2018, restricted cash is now included with cash and cash equivalents when reconciling beginning-of-period and end-of-period total amounts shown on the statement of cash flows. All prior year periods shown have been updated to conform to the new presentation.

For the three months ended September 30, 2018 and 2017, our FFO was $16.4 million, or 125.5% of our total distributions, and $14.1 million, or 103.3% of our total distributions, respectively. For the nine months ended September 30, 2018 and 2017, our FFO was $40.6 million, or 103.4% of our total distributions, and $51.8 million, or 121.7% of our total distributions, respectively. FFO is a non-GAAP operating metric and should not be used as a liquidity measure. However, management believes the relationship between FFO and distributions may be meaningful for investors to better understand the sustainability of our operating performance compared to distributions made. Refer to “Additional Measures of Performance” above for the definition of FFO, as well as a detailed reconciliation of our GAAP net income to FFO.

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Redemptions. Below is a summary of redemptions and repurchases pursuant to our share redemption program for the nine months ended September 30, 2018 and 2017. Also included in the summary below is the impact of stock repurchases pursuant to our two self-tender offers conducted during 2017. Our board of directors may modify, suspend or terminate our current share redemption programs if it deems such action to be in the best interest of our stockholders. Refer to Part II, Item 2. “Unregistered Sales of Equity Securities and Use of Proceeds—Share Redemption Program” for detail regarding our share redemption program.



	For the Nine Months Ended September 30,
(in thousands, except for per share data)	2018			2017
Number of shares requested for redemption or repurchase	18,448			14,712
Number of shares redeemed or repurchased	18,448			14,712
% of shares requested that were redeemed or repurchased	100.0		%	100.0		%
Average redemption or repurchase price per share	$	7.46		$	7.50

We funded these redemptions from borrowings under our revolving line of credit. We generally repay funds borrowed from our revolving line of credit from a variety of sources including: operating cash flows in excess of our distributions; proceeds from our public offerings; proceeds from the disposition of properties; and other longer-term borrowings.

CONTRACTUAL OBLIGATIONS

A summary of future obligations as of December 31, 2017 was disclosed in our 2017 Form 10-K. Except as otherwise disclosed in “Note 3 to the Condensed Consolidated Financial Statements” relating to our debt obligations, there were no material changes outside the ordinary course of business.

OFF-BALANCE SHEET ARRANGEMENTS

As of September 30, 2018, we had no material off-balance sheet arrangements that have or are reasonably likely to have a material effect on our financial condition, changes in our financial condition, revenues or expenses, results of operations, liquidity, capital expenditures, or capital resources.

RECENTLY ISSUED ACCOUNTING STANDARDS

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CRITICAL ACCOUNTING ESTIMATES

Our unaudited condensed consolidated financial statements have been prepared in accordance with GAAP and in conjunction with the rules and regulations of the SEC. The preparation of our unaudited condensed consolidated financial statements requires significant management judgments, assumptions, and estimates about matters that are inherently uncertain. These judgments affect the reported amounts of assets and liabilities and our disclosure of contingent assets and liabilities at the dates of the condensed consolidated financial statements and the reported amounts of revenue and expenses during the reporting periods. With different estimates or assumptions, materially different amounts could be reported in our condensed consolidated financial statements. Additionally, other companies may utilize different estimates that may impact the comparability of our results of operations to those of companies in similar businesses. For a detailed description of our critical accounting estimates, see Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our 2017 Form 10-K. As of September 30, 2018, our critical accounting estimates have not changed from those described in our 2017 Form 10-K.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Interest Rate Risk

We are exposed to the impact of interest rate changes. Our interest rate risk management objectives are to limit the impact of interest rate changes on earnings and cash flows, and optimize overall borrowing costs. To achieve these objectives, we plan to borrow on a fixed interest rate basis for longer-term debt and utilize interest rate swap agreements on certain variable interest rate debt in order to limit the effects of changes in interest rates on our results of operations. As of September 30, 2018, our debt instruments consisted of borrowings under our line of credit, term loans, and mortgage notes.

Fixed Interest Rate Debt. As of September 30, 2018, our fixed interest rate debt consisted of $174.7 million under our mortgage notes, which included two variable-rate mortgage notes aggregating $85.0 million that we effectively fixed through the use of interest rate swaps for the term of the borrowings; and $350.0 million under our term loans that were effectively fixed through the use of interest rate swaps. In total, our fixed interest rate debt represented 51.7% of our total consolidated debt as of September 30, 2018. Interest rate fluctuations will generally not affect our future earnings or cash flows on our fixed interest rate debt unless such instruments mature or are otherwise terminated. However, interest rate changes could affect the fair value of our fixed interest rate debt. As of September 30, 2018, the fair value and the carrying value of our fixed interest rate debt was $522.2 million and $524.7 million, respectively. The fair value estimate of our fixed interest rate debt was estimated using a discounted cash flow analysis utilizing rates we would expect to pay for debt of a similar type and remaining maturity if the loans were originated on September 30, 2018. As we expect to hold our fixed interest rate debt instruments to maturity, based on the underlying structure of the debt instrument, and the amounts due under such instruments are limited to the outstanding principal balance and any accrued and unpaid interest, we do not expect that market fluctuations in interest rates, and the resulting change in fair value of our fixed interest rate debt instruments, would have a significant impact on our operating cash flows.

Variable Interest Rate Debt. As of September 30, 2018, our consolidated variable interest rate debt consisted of $140.0 million of borrowings under our line of credit, $125.0 million under our term loans and $225.6 million under our mortgage notes, which represented 48.3% of our total consolidated debt. Interest rate changes on our variable-rate debt could impact our future earnings and cash flows, but would not significantly affect the fair value of such debt. As of September 30, 2018, we were exposed to market risks related to fluctuations in interest rates on $490.6 million of consolidated borrowings. A hypothetical 10% change in the average interest rate on the outstanding balance of our variable interest rate debt as of September 30, 2018, would change our annual interest expense by approximately $1.1 million.

Derivative Instruments. As of September 30, 2018, we had 19 outstanding derivative instruments with a total notional amount of $973.5 million. These derivative instruments were comprised of interest rate swaps and interest rate caps that were designed to mitigate the risk of future interest rate increases by either providing a fixed interest rate or capping the variable interest rate for a limited, pre-determined period of time. See “Note 3 to the Condensed Consolidated Financial Statements” for further detail on our derivative instruments. We are exposed to credit risk of the counterparty to our interest rate swap agreements in the event of non-performance under the terms of the agreements. If we were not able to replace these swaps in the event of non-performance by the counterparty, we would be subject to variability of the interest rate on the amount outstanding under our debt that is fixed through the use of the swaps.

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ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

Under the direction of our Chief Executive Officer and Chief Financial Officer, we evaluated the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of September 30, 2018. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of September 30, 2018, our disclosure controls and procedures were effective.

Internal Control Over Financial Reporting

There have not been any changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the three months ended September 30, 2018 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

ITEM 1A. RISK FACTORS

There are no material changes to the risk factors disclosed in our 2017 Form 10-K and our Quarterly Report on Form 10-Q for the period ended June 30, 2018, filed with the SEC on August 13, 2018.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Share Redemption Program

While stockholders may request on a monthly basis that we redeem all or any portion of their shares pursuant to our share redemption program, we are not obligated to redeem any shares and may choose to redeem only some, or even none, of the shares that have been requested to be redeemed in any particular month, in our discretion. In addition, our ability to fulfill redemption requests is subject to a number of limitations. As a result, share redemptions may not be available each month. Under our share redemption program, to the extent we choose to redeem shares in any particular month, we will only redeem shares as of the last calendar day of that month (each such date, a “Redemption Date”). Shares redeemed on the Redemption Date remain outstanding on the Redemption Date and are no longer outstanding on the day following the Redemption Date. Redemptions will be made at the transaction price in effect on the Redemption Date, except that shares that have not been outstanding for at least one year will be redeemed at 95% of the transaction price (an “Early Redemption Deduction”). The Early Redemption Deduction may be waived in certain circumstances including: (i) in the case of redemption requests arising from the death or qualified disability of the holder; (ii) in the event that a stockholder’s shares are redeemed because the stockholder has failed to maintain the $2,000 minimum account balance or (iii) with respect to shares purchased through our distribution reinvestment plan. To have his or her shares redeemed, a stockholder’s redemption request and required documentation must be received in good order by 4:00 p.m. (Eastern time) on the second to last business day of the applicable month. Settlements of share redemptions will be made within three business days of the Redemption Date. An investor may withdraw its redemption request by notifying the transfer agent before 4:00 p.m. (Eastern time) on the last business day of the applicable month.

The total amount of aggregate redemptions of Class T, Class S, Class D, Class I and Class E shares (based on the price at which the shares are redeemed) will be limited during each calendar month to 2% of the aggregate NAV of all classes as of the last calendar day of the previous quarter and in each calendar quarter will be limited to 5% of the aggregate NAV of all classes of shares as of the last calendar day of the previous calendar quarter; provided, however, that every month and quarter each class of our common stock will be allocated capacity within such aggregate limit to allow stockholders in such class to either (a) redeem shares (based on the price at which the shares are redeemed) equal to at least 2% of the aggregate NAV of such share class as of the last calendar day of the previous quarter, or, if more limiting, (b) redeem shares (based on the price at which the shares are redeemed) over the course of a given quarter equal to at least 5% of the aggregate NAV of such share class as of the last calendar day of the previous quarter (collectively referred to herein as the “2% and 5% limits”), which in the second and third months of a quarter could be less than 2% of the NAV of such share class. In the event that we determine to redeem some but not all of the shares submitted for redemption during any month, shares redeemed at the end of the month will be redeemed on a pro rata basis. Even if the class-specific allocations are exceeded for a class, the program may offer such class additional capacity under the aggregate program limits. Redemptions and pro rata treatment, if necessary, will first be applied within the class-specific allocated capacity and then applied on an aggregate basis to the extent there is remaining capacity. All unsatisfied redemption requests must be resubmitted after the start of the next month or quarter, or upon the recommencement of the share redemption program, as applicable.

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For both the aggregate and class-specific allocations described above, (i) provided that the share redemption program has been operating and not suspended for the first month of a given quarter and that all properly submitted redemption requests were satisfied, any unused capacity for that month will carry over to the second month and (ii) provided that the share redemption program has been operating and not suspended for the first two months of a given quarter and that all properly submitted redemption requests were satisfied, any unused capacity for those two months will carry over to the third month. In no event will such carry-over capacity permit the redemption of shares with aggregate value (based on the redemption price per share for the month the redemption is effected) in excess of 5% of the combined NAV of all classes of shares as of the last calendar day of the previous calendar quarter (provided that for these purposes redemptions may be measured on a net basis as described in the paragraph below).

We currently measure the foregoing redemption allocations and limitations based on net redemptions during a month or quarter, as applicable. The term “net redemptions” means, during the applicable period, the excess of our share redemptions (capital outflows) over the proceeds from the sale of our shares (capital inflows). Net redemptions for the class-specific allocations will be based only on the capital inflows and outflows of that class, while net redemptions for the overall program limits would be based on capital inflows and outflows of all classes. Thus, for any given calendar quarter, the maximum amount of redemptions during that quarter will be equal to (i) 5% of the combined NAV of all classes of shares as of the last calendar day of the previous calendar quarter, plus (ii) proceeds from sales of new shares in this offering (including purchases pursuant to our distribution reinvestment plan) and the Class E distribution reinvestment plan offering since the beginning of the current calendar quarter. The same would apply for a given month, except that redemptions in a month would be subject to the 2% limit described above (subject to potential carry-over capacity), and netting would be measured on a monthly basis. With respect to future periods, our board of directors may choose whether the allocations and limitations will be applied to “gross redemptions,” i.e., without netting against capital inflows, rather than to net redemptions. If redemptions for a given month or quarter are measured on a gross basis rather than on a net basis, the redemption limitations could limit the amount of shares redeemed in a given month or quarter despite our receiving a net capital inflow for that month or quarter. In order for our board of directors to change the application of the allocations and limitations from net redemptions to gross redemptions or vice versa, we will provide notice to stockholders in a prospectus supplement or special or periodic report filed by us, as well as in a press release or on our website, at least 10 days before the first business day of the quarter for which the new test will apply. The determination to measure redemptions on a gross basis, or vice versa, will only be made for an entire quarter, and not particular months within a quarter.

Although the vast majority of our assets consist of properties that cannot generally be readily liquidated on short notice without impacting our ability to realize full value upon their disposition, we intend to maintain a number of sources of liquidity including (i) cash equivalents (e.g. money market funds), other short-term investments, U.S. government securities, agency securities and liquid real estate-related securities and (ii) one or more borrowing facilities. We may fund redemptions from any available source of funds, including operating cash flows, borrowings, proceeds from this offering and/or sales of our assets.

Should redemption requests, in our judgment, place an undue burden on our liquidity, adversely affect our operations or risk having an adverse impact on the company as a whole, or should we otherwise determine that investing our liquid assets in real properties or other illiquid investments rather than redeeming our shares is in the best interests of the company as a whole, then we may choose to redeem fewer shares than have been requested to be redeemed, or none at all. Further, our board of directors may modify, suspend or terminate our share redemption program if it deems such action to be in our best interest and the best interest of our stockholders. If the transaction price for the applicable month is not made available by the tenth business day prior to the last business day of the month (or is changed after such date), then no redemption requests will be accepted for such month and stockholders who wish to have their shares redeemed the following month must resubmit their redemption requests. The above description of the share redemption program is a summary of certain of the terms of the share redemption program. Please see the full text of the share redemption program, which is incorporated by reference as Exhibit 4.2 to this Quarterly Report on Form 10-Q, for all the terms and conditions.

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The table below summarizes the redemption activity for the three months ended September 30, 2018:



For the Month Ended	Total Number of Shares Redeemed (1)	Average Price Paid per Share (1)		Total Number of Shares Redeemed as Part of Publicly Announced Plans or Programs (1)	Maximum Number of Shares That May Yet Be Redeemed Pursuant to the Program (2)
July 31, 2018	1,757	$	7.46	1,757	—
August 31, 2018	1,270	7.48		1,270	—
September 30, 2018	1,751	7.50		1,751	—
Total	4,778	$	7.48	4,778	—


(1)	There were no self-tender offers during the three months ended September 30, 2018.


(2)	We limit the number of shares that may be redeemed under the program described above.

ITEM 5. OTHER INFORMATION

Distribution Reinvestment Plan Suitability Requirement

Pursuant to the terms of our distribution reinvestment plan (“DRP”), participants in the DRP must promptly notify us if at any time they fail to meet the current suitability requirements for making an investment in us.

The current suitability standards require that Class E stockholders participating in the DRP other than investors in Arizona, California, Ohio and Oregon have either:


•	a net worth (exclusive of home, home furnishings and automobiles) of $150,000 or more; or


•	a net worth (exclusive of home, home furnishings and automobiles) of at least $45,000 and had during the last tax year, or estimate that such investor will have during the current tax year, a minimum of $45,000 annual gross income.

The current suitability standards require that Class E stockholders participating in the DRP in Arizona, California, Ohio and Oregon have either:


•	a net worth (exclusive of home, home furnishings and automobiles) of $250,000 or more; or


•	a net worth (exclusive of home, home furnishings and automobiles) of at least $70,000 and had during the last tax year, or estimate that such investor will have during the current tax year, a minimum of $70,000 annual gross income.

In addition, Class E stockholders participating in the DRP in Ohio and Oregon must have a net worth of at least 10 times their investment in us and any of our affiliates. The current suitability standards for Class T, Class S, Class D and Class I stockholders participating in the DRP are listed in the section entitled “Suitability Standards” in our current Class T, Class S, Class D and Class I public offering prospectus on file at www.sec.gov and on our website at www.blackcreekdiversified.com.

Stockholders can notify us of any changes to their ability to meet the suitability requirements or change their DRP election by contacting us at Black Creek Diversified Property Fund Inc., Investor Relations, 518 17th Street, Suite 1700, Denver, Colorado 80202, Telephone: (303) 228-2200.

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ITEM 6. EXHIBITS

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Exhibit Number		Description
3.1		Articles of Restatement. Incorporated by reference to Exhibit 3.1 to the Annual Report on Form 10-K filed with the SEC on March 21, 2012.

3.2		Articles of Amendment (name change). Incorporated by reference to Exhibit 3.1 to the Current Report on Form 8-K filed with the SEC on July 12, 2012.

3.3		Articles Supplementary (Class A shares). Incorporated by reference to Exhibit 3.2 to the Current Report on Form 8-K filed with the SEC on July 12, 2012.

3.4		Articles Supplementary (Class W shares). Incorporated by reference to Exhibit 3.3 to the Current Report on Form 8-K filed with the SEC on July 12, 2012.

3.5		Articles Supplementary (Class I shares). Incorporated by reference to Exhibit 3.4 to the Current Report on Form 8-K filed with the SEC on July 12, 2012.

3.6		Certificate of Correction to Articles of Restatement. Incorporated by reference to Exhibit 3.1 to the Current Report on Form 8-K filed with the SEC on March 26, 2014.

3.7		Certificate of Correction to Articles of Restatement. Incorporated by reference to Exhibit 3.1 to the Current Report on Form 8-K filed with the SEC on August 30, 2016.

3.8		Articles of Amendment (revised terms of share classes). Incorporated by reference to Exhibit 3.8 to the Post-Effective Amendment No. 10 to Registration Statement on Form S-11 (File No. 333-197767) filed with the SEC on September 1, 2017.

3.9		Articles of Amendment (name change). Incorporated by reference to Exhibit 3.9 to the Post-Effective Amendment No. 10 to Registration Statement on Form S-11 (File No. 333-197767) filed with the SEC on September 1, 2017.

3.10		Seventh Amended and Restated Bylaws. Incorporated by reference to Exhibit 3.10 to the Post-Effective Amendment No. 10 to Registration Statement on Form S-11 (File No. 333-197767) filed with the SEC on September 1, 2017.

4.1		Fifth Amended and Restated Distribution Reinvestment Plan. Incorporated by reference to Appendix B to the Post-Effective Amendment No. 10 to Registration Statement on Form S-11 (File No. 333-197767) filed with the SEC on September 1, 2017.

4.2		Amended and Restated Share Redemption Program. Incorporated by reference to Exhibit 4.1 to the Current Report on Form 8-K filed with the SEC on October 13, 2017.

4.3		Statement regarding transfer restrictions, preferences, limitations and rights of holders of shares of common stock (to appear on stock certificate or to be sent upon request and without charge to stockholders issued shares without certificates). Incorporated by reference to Exhibit 4.5 to the Post-Effective Amendment No. 10 to Registration Statement on Form S-11 (File No. 333-197767) filed with the SEC on September 1, 2017.

4.4		Valuation Procedures. Incorporated by reference to Exhibit 4.6 to the Post-Effective Amendment No. 10 to Registration Statement on Form S-11 (File No. 333-197767) filed with the SEC on September 1, 2017.

4.5		Multiple Class Plan. Incorporated by reference to Exhibit 4.7 to the Post-Effective Amendment No. 10 to Registration Statement on Form S-11 (File No. 333-197767) filed with the SEC on September 1, 2017.

10.1		Amended and Restated Advisory Agreement (2018), effective as of June 30, 2018. Incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed with the SEC on June 27, 2018.

10.2		Amended and Restated Dealer Manager Agreement between Black Creek Exchange LLC and Black Creek Capital Markets, LLC. Incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the SEC on August 17, 2018.

10.3		Amendment No. 1 to Sixth Amended and Restated Limited Partnership Agreement of Black Creek Diversified Property Operating Partnership LP. Incorporated by reference to Exhibit 10.2 to the Current Report on Form 8-K filed with the SEC on August 17, 2018.

10.4		Facilitation Fee Agreement between Black Creek Exchange LLC and Black Creek Diversified Property Advisors LLC. Incorporated by reference to Exhibit 10.3 to the Current Report on Form 8-K filed with the SEC on August 17, 2018.

10.5		Amendment to Agreement between BC Exchange Manager LLC and BC Exchange Advisor LLC. Incorporated by reference to Exhibit 10.5 to the Current Report on Form 8-K filed with the SEC on August 17, 2018.

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Exhibit Number		Description
10.6		Second Amendment to Assignment Agreement between BC Exchange Manager LLC and BC Exchange Advisor LLC. Incorporated by reference to Exhibit 10.6 to the Current Report on Form 8-K filed with the SEC on August 17, 2018.

31.1*		Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2*		Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1*		Certification of Principal Executive Officer and Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

99.1*		Consent of Altus Group U.S., Inc.

101.1		The following materials from Black Creek Diversified Property Fund Inc.’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2018, filed on November 9, 2018, formatted in XBRL (eXtensible Business Reporting Language): (i) Condensed Consolidated Balance Sheets; (ii) Condensed Consolidated Statements of Operations; (iii) Condensed Consolidated Statements of Comprehensive Income (Loss); (iv) Condensed Consolidated Statement of Equity; (v) Condensed Consolidated Statements of Cash Flows; and (vi) Notes to Condensed Consolidated Financial Statements.

_________________

* Filed or furnished herewith.

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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.



		BLACK CREEK DIVERSIFIED PROPERTY FUND INC.

Date: November 9, 2018	By:	/s/ DWIGHT L. MERRIMAN III
		Dwight L. Merriman III Managing Director, Chief Executive Officer (Principal Executive Officer)

Date: November 9, 2018	By:	/s/ LAINIE P. MINNICK
		Lainie P. Minnick Managing Director, Chief Financial Officer and Treasurer (Principal Financial Officer and Principal Accounting Officer)

Black Creek Diversified Property Fund Inc. - FORM 10-Q - November 9, 2018

Attached files

Black Creek Diversified Property Fund Inc. Reports