PEAE RLTYPAR The following "Management's Discussion and Analysis of Financial Condition and Results of Operations" should be read in conjunction with the Company's consolidated financial statements and the notes thereto contained in Part I of this Quarterly Report on Form 10-Q, as well as Management's Discussion and Analysis of Financial Condition and Results of Operations, Consolidated Financial Statements, and the notes thereto contained in the Company's Annual Report on Form 10-K for the year endedDecember 31, 2020 . OverviewGriffin Capital Essential Asset REIT, Inc. is an internally managed, publicly-registered non-traded REIT. We own and operate a geographically diversified portfolio of strategically-located, high-quality corporate office and industrial properties that are primarily net-leased to single tenants that we have determined to be creditworthy. The GCEAR platform was founded in 2009 and we have since grown to become one of the largest office and industrial-focused net-lease REITs inthe United States . Since our founding, our mission has been consistent - to generate long-term results for our stockholders by combining the durability of high-quality corporate tenants, the stability of net leases and the power of proactive management. To achieve this mission, we leverage the skills and expertise of our employees, who have experience across a range of disciplines including acquisitions, dispositions, asset management, property management, development, finance, law and accounting. They are led by an experienced senior management team with an average of approximately 30 years of commercial real estate experience. OnMarch 1, 2021 , we completed our previously announced acquisition of CCIT II for approximately$1.3 billion , including transaction costs, in a stock-for-stock transaction. This transaction is a continuation of our strategy since inception to strategically grow the portfolio with assets consistent with our investment strategy, improve our portfolio statistics, strengthen the balance sheet, and maximize stockholder value. At the effective time of the CCIT II Merger, each issued and outstanding share of CCIT II Class A common stock and each issued and outstanding share of CCIT II Class T common stock was converted into the right to receive 1.392 shares of our Class E common stock. As ofMarch 31, 2021 , we owned 123 properties (including one land parcel held for future development) in 26 states. Our contractual net rent for the 12-month period subsequent toMarch 31, 2021 is expected to be approximately$359.5 million with approximately 63.5% expected to be generated by properties leased and/or guaranteed, directly or indirectly, by companies we have determined to be creditworthy. As ofMarch 31, 2021 our portfolio was approximately 90.2% leased (based on square footage), 90.1% occupied (based on square footage) with a weighted average remaining lease term of 6.8 years, weighted average annual rent increases of approximately 2.1%. COVID-19 and Outlook We are closely monitoring the impact of the COVID-19 pandemic on all aspects of our business and geographies, including how it will impact our tenants and business partners. The COVID-19 pandemic in many countries, includingthe United States , has significantly adversely impacted global economic activity and has contributed to volatility and negative pressure in financial markets. The global impact of the pandemic has been rapidly evolving and, as cases of COVID-19 have continued to be identified, many countries, includingthe United States , have reacted by instituting various levels of quarantines, business and school closures and travel restrictions. Certain states and cities, including those where we own properties and where our principal place of business is located, have instituted similar measures, including various levels of "shelter in place" rules, and restrictions on the types of business that may continue to operate at full capacity. We cannot predict when restrictions currently in place will be lifted to some extent or entirely. As a result, the COVID-19 pandemic is negatively impacting almost every industry, directly or indirectly, including industries in which we and our tenants operate, which could result in a general decline in rents and an increased incidence of defaults under existing leases. The extent to which federal, state or local governmental authorities grant rent relief or other relief or enact amnesty programs applicable to our tenants in response to the COVID-19 outbreak may exacerbate the negative impacts that a slow down or recession could have on us. Demand for office space nationwide has declined and is likely to continue to decline due to the current economic downturn, bankruptcies, downsizing, layoffs, government regulations and restrictions on travel and permitted businesses operations that may be extended in duration and become recurring, increased usage of teleworking arrangements and cost cutting resulting from the pandemic, which could lead to lower office occupancy. While we did not incur significant disruptions from the COVID-19 pandemic during the three months endedMarch 31, 2021 , we are unable to predict the impact that the COVID-19 pandemic will have on our financial condition, results of operations and cash flows due to numerous uncertainties. These uncertainties include the continued severity, duration, 33 -------------------------------------------------------------------------------- Table of Contents transmission rate and geographic spread of COVID-19 inthe United States , the speed of the vaccine roll-out, effectiveness and willingness of people to take COVID-19 vaccines, the duration of associated immunity and their efficacy against emerging variants and mutations of COVID-19, the extent and effectiveness of other containment measures taken, and the response of the overall economy, the financial markets and the population, particularly in areas in which we operate. If we cannot operate our properties so as to meet our financial expectations, because of these or other risks, we may be prevented from growing the values of our real estate properties, and our financial condition, including our NAV per share, results of operations, cash flows, performance, or our ability to satisfy our debt obligations and/or to maintain our level of distributions to our stockholders may be adversely impacted or disrupted. We cannot predict the impact that the COVID-19 pandemic will have on our tenants and other business partners; however, any material effect on these parties could adversely impact us. As ofMay 5, 2021 , we received January-April 2021 rent payments from 100% of our portfolio. In addition, we have received a number of short-term rent relief inquiries from our tenants, most often in the form of rent deferral inquiries, or requests for further discussion from tenants. We believe some of these inquiries were opportunistic in nature and may not have been as a result of a direct financial need due to the outbreak. As ofMay 5, 2021 , we granted two of these deferral requests in 2020 that deferred three months of rent to be collected during 2021 without interest. While there are no current active short-term rent relief inquiries, we are unable to predict the amount of future rent relief inquiries and the January-April collections and rent relief requests to-date may not be indicative of collections or requests in any future period. Additionally, not all tenant inquiries will ultimately result in lease concessions. While the long-term impact of the COVID-19 pandemic on our business is not yet known, our management believes we are well-positioned from a liquidity perspective with$481.1 million of immediate liquidity as ofMarch 31, 2021 , consisting of$376.5 million undrawn on our$750 million senior unsecured revolving credit facility (the" Revolving Credit Facility") and$104.6 million of cash on hand. Included in these amounts is$125.0 million from our Revolving Credit Facility that we borrowed inApril 2020 for potential upcoming capital expenditure requirements and to provide us with a flexible conservative cash management position. Additionally, our Second Amendment to the Second Amended and Restated Credit Agreement increased our credit facility availability from$1.5 billion to$1.9 billion . See Part I "Item 1A. Risk Factors", contained in our Annual Report on Form 10-K for the year endedDecember 31, 2020 for a further discussion about risks that COVID-19 directly or indirectly may pose to our business. Our primary focus continues to be protecting the health and well-being of our employees and ensuring that there is limited operational disruption as a result of the COVID-19 pandemic. Some of the primary steps we have taken to accomplish these objectives were: (1) initially instituting elective telework arrangements and then following with mandatory telework arrangements with minor exceptions for certain "essential" business functions, (2) capital investment in technology solutions and hardware, as necessary, to allow for a fully remote workforce, (3) mandatory self-quarantines where necessary, (4) recommendations and FAQs to all employees regarding best practices to avoid infection, as well as steps to take in the event of an infection, (5) temporary prohibition of business travel, other than essential business travel approved by management, and (6) creation of an internal COVID-19 task force that meets to discuss additional safety measures to ensure the safe return of our employees to the office, which plans will be finalized in accordance with applicable local guidelines, when such guidelines are established. NAV and NAV per Share Calculation Our Board, including a majority of our independent directors, has adopted valuation procedures, as amended from time to time, that contain a comprehensive set of methodologies to be used in connection with the calculation of our NAV. As a public company, we are required to issue financial statements generally based on historical cost in accordance with generally accepted accounting principles ("GAAP") inthe United States as applicable to our financial statements. To calculate our NAV for the purpose of establishing a purchase and redemption price for our shares, we have adopted a model, as explained below, which adjusts the value of certain of our assets from historical cost to fair value. As a result, our NAV may differ from the amount reported as stockholder's equity on the face of our financial statements prepared in accordance with GAAP. When the fair value of our assets and liabilities are calculated for the purposes of determining our NAV per share, the calculation is generally in accordance with GAAP principles set forth in ASC 820, Fair Value Measurements and Disclosures. However, our valuation procedures and our NAV are not subject to GAAP and will not be subject to independent audit. Our NAV may differ from equity reflected on our audited financial statements, even if we are required to adopt a fair value basis of accounting for GAAP financial statement purposes in the future. Furthermore, no rule or regulation requires that we calculate NAV in a certain way. Although we believe our NAV calculation methodologies are consistent with standard industry practices, there is no established guidance among public REITs, whether listed or not, for calculating NAV in order to establish a purchase and redemption price. As a result, other public REITs may use different methodologies or assumptions to determine NAV. OnFebruary 26, 2020 , our Board approved the temporary suspension of (i) the primary portion of our Follow-On Offering, (as defined below) effectiveFebruary 27, 2020 ; (ii) our share redemption program ("SRP"), effectiveMarch 28, 2020 ; 34 -------------------------------------------------------------------------------- Table of Contents and (iii) our distribution reinvestment plan ("DRP"), effectiveMarch 8, 2020 . Redemptions sought upon a stockholder's death, qualifying disability, or determination of incompetence or incapacitation were honored in the first quarter of 2020 in accordance with the terms of the SRP. The Follow-On Offering terminated with the expiration of the registration statement onSeptember 20, 2020 . OnJuly 16, 2020 , our Board approved the (i) reinstatement of the DRP, effectiveJuly 27, 2020 ; (ii) amendment of the DRP to allow for the use of the most recently published NAV per share of the applicable share class available at the time of reinvestment as the DRP purchase price for each share class; and (iii) partial reinstatement of the SRP, effectiveAugust 17, 2020 . AfterMarch 31, 2020 , we (i) ceased publishing a daily updated estimate of our NAV per share; (ii) are continuing our internal procedures for calculating NAV per share; and (iii) will continue to publish updated estimates of our NAV per share on a quarterly basis. We published our updatedMarch 31, 2021 NAV per share onApril 23, 2021 . Prior to the suspension (and subsequent expiration) of our Follow-On Offering, we were offering to the public four classes of shares of our common stock, Class T shares, Class S shares, Class D shares and Class I shares with NAV-based pricing. The share classes had different selling commissions, dealer manager fees and ongoing distribution fees. Our NAV is calculated for each of these classes and our Class A shares, Class AA shares, Class AAA shares and Class E shares after the end of each business day that theNew York Stock Exchange is open for unrestricted trading, by our NAV accountant,ALPS Fund Services, Inc. , a third-party firm approved by our Board, including a majority of our independent directors. Our Board, including a majority of our independent directors, may replace our NAV accountant with another party, if it is deemed appropriate to do so. Our Board, including a majority of the independent directors, has adopted valuation procedures that contain a comprehensive set of methodologies to be used in connection with the calculation of our NAV. Our most significant source of net income is property income. We accrue estimated income and expenses on a daily basis based on annual budgets as adjusted from time to time to reflect changes in the business throughout the year. For the first month following a property acquisition, we calculate and accrue portfolio income with respect to such property based on the performance of the property before the acquisition and the contractual arrangements in place at the time of the acquisition, as identified and reviewed through our due diligence and underwriting process in connection with the acquisition. For the purpose of calculating our NAV, all organization and offering costs reduce NAV as part of our estimated income and expense accrual. On a periodic basis, our income and expense accruals are adjusted based on information derived from actual operating results. We will include the fair value of our liabilities as part of our NAV calculation. Our liabilities include, without limitation, property-level mortgages, interest rate swaps, accrued distributions, the fees payable to the dealer manager, accounts payable, accrued company-level operating expenses, any company or portfolio-level financing arrangements and other liabilities. Liabilities will be valued using widely accepted methodologies specific to each type of liability. Our mortgage debt and related derivatives, if any, will typically be valued at fair value in accordance with GAAP. Following the calculation and allocation of changes in the aggregate company NAV as described above, NAV for each class is adjusted for accrued distributions and the accrued distribution fee, to determine the current day's NAV. The purchase price of Class T and Class S shares is equal to the applicable NAV per share plus the applicable selling commission and/or dealer manager fee. Selling commissions and dealer manager fees have no effect on the NAV of any class. NAV per share for each class is calculated by dividing such class's NAV at the end of each trading day by the number of shares outstanding for that class on such day. Under GAAP, we accrued the full cost of the distribution fee as an offering cost for Class T, Class S, and Class D shares up to the 9.0% limit at the time such shares were sold. For purposes of NAV, we recognize the distribution fee as a reduction of NAV on a daily basis as such fee is accrued. We intend to reduce the net amount of distributions paid to stockholders by the portion of the distribution fee accrued for such class of shares, so that the result is that although the obligation to pay future distribution fees is accrued on a daily basis and included in the NAV calculation, it is not expected to impact the NAV of the shares because of the adjustment to distributions. 35 -------------------------------------------------------------------------------- Table of Contents Set forth below are the components of our NAV as ofMarch 31, 2021 andDecember 31, 2020 , calculated in accordance with our valuation procedures (in thousands, except share and per share amounts):March 31, 2021
Real Estate Asset Fair Value$ 5,627,947 $
4,277,879
Investments in Unconsolidated Entities 4,100
4,100
Goodwill (Management Company Value) 230,000
230,000
Interest Rate Swap (Unrealized Loss) (39,823)
(56,776)
Perpetual Convertible Preferred Stock (125,000) (125,000) Other Assets, net 60,948 157,182 Total Debt at Fair Value (2,535,135) (2,140,065) NAV$ 3,223,037 $ 2,347,320 Total Shares and OP Units Outstanding 356,040,604 262,196,714 NAV per share $ 9.05 $ 8.95 Our independent valuation firm utilized the following approaches in calculating our NAV in accordance with our valuation procedures: (i) the discounted cash flow approach for 96 of the properties owned by us prior to the acquisition of the CCIT II properties, (ii) the direct capitalization approach for one of our properties owned by us prior to the acquisition of the CCIT II properties, and (iii) the sales comparison approach for the Lynwood land parcel. As the CCIT II portfolio (26 properties) was acquired inMarch 2021 , in accordance with our valuation procedures, the allocated purchase price for each of the 26 properties in the CCIT II portfolio was used in calculating our NAV. The allocated purchase price of all of the CCIT II properties, including transaction costs, was approximately$1.3 billion , which is included in Gross Real Estate Asset Value. Other Assets (Liabilities), net is lower due to cash payments for transaction costs related to the purchase of CCIT II and capital expenditures incurred during the quarter by us. The overall capitalization rate for the one property utilizing the direct capitalization approach for the quarter was 5.25%. The following summarizes the range of cash flow discount rates and terminal capitalization rates for the 96 properties using the discounted cash flow approach: Range Weighted Average Cash Flow Discount Rate (discounted cash flow approach) 5.50% 14.00% 7.55% Terminal Capitalization Rate (discounted cash flow approach) 5.00% 10.00% 6.80% 36
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Table of Contents The following table sets forth the changes to the components of NAV for the Company and the reconciliation of NAV changes for each class of shares (in thousands, except share and per share amounts):
Share Classes
Class T Class S Class D Class I Class E IPO (1) OP Units Total
NAV as of December 31, 2020 $ 5,064 $ 16 $ 285,902 $ 2,347,320 Fund level changes to NAV Unrealized gain on net assets 75 - 5 254 28,242 9,521 4,212 42,309 Unrealized gain (loss) on interest rate swaps 31 - 1 105 11,143 3,935 1,738 16,953 Dividend accrual (36) - (4) (164) (16,089) (6,287) (2,748) (25,328) Class specific changes to NAV Stockholder servicing fees/distribution fees (13) - - - - - - (13) NAV as ofMarch 31, 2021 before share/unit sale/redemption activity$ 5,121 $ 16
Unit sale/redemption activity- Dollars Amount sold$ 21 $ -
$ -$ 847,231 Amount redeemed and to be paid - - - (29) (4,497) (909) - (5,435) NAV as of March 31, 2021$ 5,142 $ 16
Shares/units outstanding as of December 31, 2020 558,106 1,802 41,095 1,900,042 155,212,286 72,644,484 31,838,899 262,196,714 Shares/units sold 2,353 - 304 5,280 94,130,444 315,790 - 94,454,171 Shares/units redeemed - - - (3,259) (504,187) (102,835) - (610,281) Shares/units outstanding as of March 31, 2021 560,459 1,802 41,399 1,902,063 248,838,543 72,857,439 31,838,899 356,040,604
NAV per share as of
0.10 0.10 0.10 0.10 0.10 0.10
NAV per share as of
(1) IPO shares include Class A, Class AA, and Class AAA shares.
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Revenue Concentration
No lessee or property, based on contractual net rents for the 12-month period
subsequent to March 31, 2021 , pursuant to the respective in-place leases, was
greater than 3.2% as of March 31, 2021 .
The percentage of contractual net rents for the 12-month period subsequent to
March 31, 2021 by state, based on the respective in-place leases, is as follows
(dollars in thousands):
Contractual Net Rent(1) Number of Percentage of
State (unaudited) Properties Contractual Net Rent
Texas $ 41,393 15 11.5 %
California 39,102 9 10.9
Arizona 34,063 10 9.5
Ohio 30,200 12 8.4
Georgia 26,235 5 7.3
Illinois 22,846 8 6.4
New Jersey 18,016 5 5.0
North Carolina 17,333 9 4.8
Colorado 15,765 6 4.4
Massachusetts 15,242 5 4.2
All Others (2) 99,279 39 27.6
Total $ 359,474 123 100.0 %
(1) Contractual net rent is based on (a) the contractual base rental payments
assuming the lease requires the tenant to reimburse us for certain operating
expenses or the property is self-managed by the tenant and the tenant is
responsible for all, or substantially all, of the operating expenses; or (b)
contractual rent payments less certain operating expenses that are our
responsibility for the 12-month period subsequent to March 31, 2021 and includes
assumptions that may not be indicative of the actual future performance of a
property, including the assumption that the tenant will perform its obligations
under its lease agreement during the next 12 months.
(2) All others are 4.0% or less of total contractual net rents on an
individual state basis.
The percentage of contractual net rent for the 12-month period subsequent to
March 31, 2021 , by industry, based on the respective in-place leases, is as
follows (dollars in thousands):
Contractual Net
Rent Number of Percentage of
Industry (1) (unaudited) Lessees Contractual Net Rent
Capital Goods $ 48,664 23 13.5 %
Health Care Equipment & Services 31,194 12 8.7
Retailing 30,400 8 8.5
Materials 28,829 8 8.0
Consumer Services 27,558 11 7.7
Insurance 26,497 11 7.4
Telecommunication Services 21,597 6 6.0
Technology Hardware & Equipment 19,730 7 5.5
Diversified Financials 18,766 5 5.2
Consumer Durables & Apparel 18,025 7 5.0
All Others 88,214 38 24.5
Total $ 359,474 136 100.0 %
(1) Industry classification based on the Global Industry Classification
Standard.
(2) All others account for less than 4.8% of total contractual net rents on an
individual industry basis.
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The percentage of contractual net rent for the 12-month period subsequent to
March 31, 2021 , for the top 10 tenants, based on the respective in-place leases,
is as follows (dollars in thousands):
Contractual Net Rent Contractual Percentage of
Tenant (unaudited) Net Rent
General Electric Company $ 11,666 3.2 %
Keurig Green Mountain $ 11,419 3.2 %
Wood Group Mustang, Inc. $ 9,864 2.7 %
Southern Company Services, Inc. $ 8,910 2.5 %
McKesson Corporation $ 8,846 2.5 %
LPL Holdings, Inc. $ 8,320 2.3 %
Freeport Minerals Corporation $ 7,629 2.1 %
State Farm $ 7,385 2.1 %
Digital Globe, Inc. $ 7,306 2.0 %
Restoration Hardware $ 7,144 2.0 %
The tenant lease expirations by year based on contractual net rent for the
12-month period subsequent to March 31, 2021 are as follows (dollars in
thousands):
Contractual Net
Rent Number of Contractual Percentage of
Year of Lease Expiration (1) (unaudited) Lessees Approx. Square Feet Net Rent
2021 $ 2,744 5 332,000 0.8 %
2022 13,613 9 1,049,300 3.8
2023 31,719 12 1,587,300 8.8
2024 48,430 17 4,443,500 13.5
2025 37,243 21 2,776,800 10.4
2026 29,288 9 2,462,700 8.1
>2027 196,437 63 14,985,754 54.6
Vacant - - 3,015,613 -
Total $ 359,474 136 30,652,967 100.0 %
(1) Expirations that occur on the last day of the month are shown as expiring in the subsequent month.
Critical Accounting Policies and Estimates We have established accounting policies which conform to GAAP inthe United States as contained in the FASB ASC. The preparation of our consolidated financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses. If our judgment or interpretation of the facts and circumstances relating to the various transactions had been different, it is possible that different estimates would have been applied, thus resulting in a different presentation of the financial statements. Additionally, other companies may use different estimates and assumptions that may impact the comparability of our financial condition and results of operations to those companies. For further information about our critical accounting policies, refer to our consolidated financial statements and notes thereto for the year endedDecember 31, 2020 included in our Annual Report on Form 10-K filed with theSEC . Recently Issued Accounting Pronouncements See Note 2, Basis of Presentation and Summary of Significant Accounting Policies, to the consolidated financial statements. Results of Operations Overview Our ability to re-lease space subject to expiring leases will impact our results of operations and is affected by economic and competitive conditions in our markets. Leases that comprise approximately 1.1% of our base rental revenue will expire during the period fromApril 1, 2021 toMarch 31, 2022 . We assume, based upon internal renewal probability estimates, that some of our tenants will renew and others will vacate and the associated space will be re-let subject to market leasing 39 -------------------------------------------------------------------------------- Table of Contents assumptions. Using the aforementioned assumptions, we expect that the rental rates on the respective new leases may vary from the rates under existing leases expiring during the period fromApril 1, 2021 toMarch 31, 2022 , thereby resulting in revenue that may differ from the current in-place rents. We are not aware of any other material trends or uncertainties, other than as discussed under "COVID-19 and Outlook" above and other than national economic conditions affecting real estate in general, that may reasonably be expected to have a material impact, favorable or unfavorable, on revenues or income from the acquisition, management and operations of properties other than those listed in Part I, Item 1A., Risk Factors of our Annual Report on Form 10-K for the year endedDecember 31, 2020 . Segment Information The Company internally evaluates all of the properties and interests therein as one reportable segment. Same Store Analysis For the three months endedMarch 31, 2021 , our "Same Store" portfolio consisted of 96 properties, encompassing approximately 26.2 million square feet, with an acquisition value of$4.1 billion and contractual net rent for the 12-month period subsequent toMarch 31, 2021 of$286.4 million . Our "Same Store" portfolio includes properties which were held for a full period for all periods presented. The following table provides a comparative summary of the results of operations for the 96 properties for the three months endedMarch 31, 2021 and 2020 (dollars in thousands): Three Months Ended March 31, Percentage 2021 2020 Increase/(Decrease) Change Rental income$ 93,125 $ 93,201 $ (76) - % Property operating expense 13,352 14,411 (1,059) (7) % Property management fees to non-affiliates 876 863 13 2 % Property tax expense 9,416 9,299 117 1 % Depreciation and amortization 39,198 39,594 (396) (1) % Property Operating Expense The decrease in property operating expense of approximately$1.1 million during the three months endedMarch 31, 2021 compared to the same period a year ago is primarily the result of lower utilities costs at one property (2200 Channahon Road ). Portfolio Analysis Comparison of the Three Months EndedMarch 31, 2021 and 2020 The following table provides summary information about our results of operations for the three months endedMarch 31, 2021 and 2020 (dollars in thousands): Three Months Ended March 31, Percentage 2021 2020 Increase/(Decrease) Change Rental income$ 101,355 $ 95,728 $ 5,627 6 % Property operating expense 14,445 14,971 (526) (4) % Property tax expense 9,679 9,548 131 1 % Property management fees to non-affiliates 981 909 72 8 % General and administrative expenses 9,469 7,665 1,804 24 % Corporate operating expenses to affiliates 625 625 - - % Depreciation and amortization 44,338 41,148 3,190 8 % Impairment provision 4,242 - 4,242 100 % Interest expense 20,685 19,961 724 4 % 40
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Rental Income The increase in rental income of approximately$5.6 million compared to the same period a year ago is primarily the result of (1) approximately$7.9 million primarily related to the CCIT II Merger during the current quarter; (2) approximately$4.3 million in current quarter leasing activity and amendments to existing tenant leases; and (3) approximately$0.4 million in prior year operating expenses concessions expirations and common area management reconciliations; offset by (4) approximately$1.9 million in lower termination income, which includes termination income in the current year from the following tenants:Waste Management of Arizona, Inc. ,Intermec Technologies Corp. , andRandstad Professionals US , compared to the same period a year ago; (5) approximately$2.7 million in expiring leases and terminations; and (6) approximately$2.2 million as a result of two properties sold subsequent toMarch 31, 2020 . Property Operating Expense The decrease in property operating expense of approximately$0.5 million during the three months endedMarch 31, 2021 compared to the same period a year ago is primarily the result of (1) approximately$0.5 million in timing of repair and maintenance services performed; (2) approximately$0.4 million as a result of two properties sold subsequent toMarch 31, 2020 ; offset by (3) approximately$0.4 million related to the CCIT II Merger during the current quarter. Property Management Fees to Non-Affiliates The increase in property management fees to non-affiliates of approximately$0.2 million is a result of the CCIT II Merger during the current quarter. General and Administrative Expenses General and administrative expenses increased by approximately$1.8 million compared to the same period a year ago primarily due to (1) approximately$0.7 million in restricted stock unit expense as a result of units vesting during the three months endedMarch 31, 2021 to our board of directors and the amortization of our 2021 restricted stock unit grants; and (2) approximately$0.6 million increase as a result of an in number of employees and profit sharing expense. Depreciation and Amortization Depreciation and amortization increased by approximately$3.2 million as a result of (1) approximately$4.8 million as a result of the CCIT II Merger during the three months endedMarch 31, 2021 ; (2)$1.3 million related to fixed asset additions subsequent toMarch 31, 2020 and in the current year; offset by (3) approximately$3.1 million related to fully depreciated or sold assets subsequent toMarch 31, 2020 . Impairment Provision The increase in impairment provision of approximately$4.2 million for the three months endedMarch 31, 2021 compared to the same period a year ago is primarily the result of impairments at two properties in the three months endedMarch 31, 2021 :2200 Channahon Road and Houston Westway I. Interest Expense The increase of approximately$0.7 million in interest expense for the three months endedMarch 31, 2021 as compared to the same period in the prior year is primarily the result of the draw on the$400M 5-Year Term Loan 2025 and related interest expenses of approximately$0.6 million . Funds from Operations and Adjusted Funds from Operations Our management believes that historical cost accounting for real estate assets in accordance with GAAP implicitly assumes that the value of real estate assets diminishes predictably over time. Since real estate values have historically risen or fallen with market conditions, many industry investors and analysts have considered the presentation of operating results for real estate companies that use historical cost accounting to be insufficient. Management is responsible for managing interest rate, hedge and foreign exchange risks. To achieve our objectives, we may borrow at fixed rates or variable rates. In order to mitigate our interest rate risk on certain financial instruments, if any, we may enter into interest rate cap agreements or other hedge instruments and in order to mitigate our risk to foreign currency exposure, if any, we may enter into foreign currency hedges. We view fair value adjustments of derivatives, impairment charges and gains and losses from dispositions of assets as non-recurring items or items which are unrealized and may not ultimately be 41 -------------------------------------------------------------------------------- Table of Contents realized, and which are not reflective of ongoing operations and are therefore typically adjusted for when assessing operating performance. In order to provide a more complete understanding of the operating performance of a REIT, theNational Association of Real Estate Investment Trusts ("NAREIT") promulgated a measure known as Funds from Operations ("FFO"). FFO is defined as net income or loss computed in accordance with GAAP, excluding extraordinary items, as defined by GAAP, and gains and losses from sales of depreciable operating property, adding back asset impairment write-downs, plus real estate related depreciation and amortization (excluding amortization of deferred financing costs and depreciation of non-real estate assets), and after adjustment for unconsolidated partnerships, joint ventures and preferred distributions. Because FFO calculations exclude such items as depreciation and amortization of real estate assets and gains and losses from sales of operating real estate assets (which can vary among owners of identical assets in similar conditions based on historical cost accounting and useful-life estimates), they facilitate comparisons of operating performance between periods and between other REITs. As a result, we believe that the use of FFO, together with the required GAAP presentations, provides a more complete understanding of our performance relative to our competitors and a more informed and appropriate basis on which to make decisions involving operating, financing, and investing activities. It should be noted, however, that other REITs may not define FFO in accordance with the current NAREIT definition or may interpret the current NAREIT definition differently than we do, making comparisons less meaningful. Additionally, we use Adjusted Funds from Operations ("AFFO") as a non-GAAP financial measure to evaluate our operating performance. AFFO excludes non-routine and certain non-cash items such as revenues in excess of cash received, amortization of stock-based compensation net, deferred rent, amortization of in-place lease valuation, acquisition-related costs, financed termination fee, net of payments received, gain or loss from the extinguishment of debt, unrealized gains (losses) on derivative instruments, write-off transaction costs and other one-time transactions. FFO and AFFO have been revised to include amounts available to both common stockholders and limits partners for all periods presented. AFFO is a measure used among our peer group, which includes daily NAV REITs. We also believe that AFFO is a recognized measure of sustainable operating performance by the REIT industry. Further, we believe AFFO is useful in comparing the sustainability of our operating performance with the sustainability of the operating performance of other real estate companies. Management believes that AFFO is a beneficial indicator of our ongoing portfolio performance and ability to sustain our current distribution level. More specifically, AFFO isolates the financial results of our operations. AFFO, however, is not considered an appropriate measure of historical earnings as it excludes certain significant costs that are otherwise included in reported earnings. Further, since the measure is based on historical financial information, AFFO for the period presented may not be indicative of future results or our future ability to pay our dividends. By providing FFO and AFFO, we present information that assists investors in aligning their analysis with management's analysis of long-term operating activities. For all of these reasons, we believe the non-GAAP measures of FFO and AFFO, in addition to income (loss) from operations, net income (loss) and cash flows from operating activities, as defined by GAAP, are helpful supplemental performance measures and useful to investors in evaluating the performance of our real estate portfolio. However, a material limitation associated with FFO and AFFO is that they are not indicative of our cash available to fund distributions since other uses of cash, such as capital expenditures at our properties and principal payments of debt, are not deducted when calculating FFO and AFFO. The use of AFFO as a measure of long-term operating performance on value is also limited if we do not continue to operate under our current business plan as noted above. AFFO is useful in assisting management and investors in assessing our ongoing ability to generate cash flow from operations and continue as a going concern in future operating periods, and in particular, after the offering and acquisition stages are complete. However, FFO and AFFO are not useful measures in evaluating NAV because impairments are taken into account in determining NAV but not in determining FFO and AFFO. Therefore, FFO and AFFO should not be viewed as a more prominent measure of performance than income (loss) from operations, net income (loss) or to cash flows from operating activities and each should be reviewed in connection with GAAP measurements. Neither theSEC , NAREIT, nor any other applicable regulatory body has opined on the acceptability of the adjustments contemplated to adjust FFO in order to calculate AFFO and its use as a non-GAAP performance measure. In the future, theSEC or NAREIT may decide to standardize the allowable exclusions across the REIT industry, and we may have to adjust the calculation and characterization of this non-GAAP measure. 42 -------------------------------------------------------------------------------- Table of Contents Our calculation of FFO and AFFO is presented in the following table for the three months endedMarch 31, 2021 and 2020 (dollars in thousands, except per share amounts):
Three Months Ended
2021 2020
Net (loss) income $ (2,991) $ 2,974
Adjustments:
Depreciation of building and improvements 26,546 22,673
Amortization of leasing costs and intangibles 17,863 18,547
Impairment provision 4,242 -
Equity interest of depreciation of building and improvements - unconsolidated entities
- 723
Equity interest of amortization of intangible assets - unconsolidated entities
- 1,158
Loss (Gain) from disposition of assets 6 -
Equity interest of gain on sale - unconsolidated entities (8) -
FFO 45,658 46,075
Distribution to redeemable preferred shareholders (2,359) (2,047)
FFO attributable to common stockholders and limited partners $ 43,299 $ 44,028
Reconciliation of FFO to AFFO:
FFO attributable to common stockholders and limited partners $ 43,299 $ 44,028
Adjustments:
Revenues in excess of cash received, net (451) (3,761)
Amortization of share-based compensation 1,713 984
Deferred rent - ground lease 516 516
Unrealized loss (gain) on investments (6) 136
Amortization of above/(below) market rent, net 651 (763)
Amortization of debt premium/(discount), net 101 104
Amortization of ground leasehold interests (72) (72)
Amortization of other intangibles 127 -
Non-cash earn-out adjustment - (2,581)
Financed termination fee payments received - 1,500
Company's share of revenues in excess of cash received (straight-line rents) - unconsolidated entity
- 234
Company's share of amortization of above market rent - unconsolidated entity
- 924
Dead deal costs 33 50
AFFO available to common stockholders and limited partners $ 45,911 $ 41,299
FFO per share, basic and diluted $ 0.15 $ 0.17
AFFO per share, basic and diluted
$ 0.16
Weighted-average common shares outstanding - basic EPS 263,046,014 229,810,621
Weighted-average OP Units 31,838,889 31,973,272
Weighted-average common shares and OP Units outstanding - basic and
diluted FFO/AFFO 294,884,903 261,783,893
43-------------------------------------------------------------------------------- Table of Contents Liquidity and Capital Resources Property rental income is our primary source of operating cash flow and is dependent on a number of factors including occupancy levels and rental rates, as well as our tenants' ability to pay rent. Our assets provide a relatively consistent level of cash flow that enables us to pay operating expenses, distributions, including preferred equity distribution, redemptions, and for the payment of debt service on our outstanding indebtedness, including repayment of our Second Amended and Restated Credit Agreement, and property secured mortgage loans. Generally, we anticipate that cash needs for items, other than property acquisitions, will be met from funds from operations and our credit facility. We anticipate that cash flows from continuing operations and proceeds from financings, together with existing cash balances, will be adequate to fund our business operations, debt amortization, capital expenditures, and distributions over the next 12 months. Financing Activities Second Amended and Restated Credit Agreement Pursuant to the Second Amended and Restated Credit Agreement dated as ofApril 30, 2019 (as amended by the First Amendment to the Second Amended and Restated Credit Agreement dated as ofOctober 1, 2020 and the Second Amendment to the Second Amended and Restated Credit Agreement dated as ofDecember 18, 2020 , the "Second Amended and Restated Credit Agreement"), withKeyBank, National Association ("KeyBank"), as administrative agent, and a syndicate of lenders, we, throughGriffin Capital Essential Asset Operating Partnership, L.P. , aDelaware limited partnership and a subsidiary of the Company (the "GCEAR Operating Partnership "), as the borrower, have been provided with a$1.9 billion credit facility consisting of the Revolving Credit Facility maturing inJune 2022 with (subject to the satisfaction of certain customary conditions) a one-year extension option, a$200 million senior unsecured term loan maturing inJune 2023 (the "$200M 5-Year Term Loan"), a$400 million senior unsecured term loan maturing inApril 2024 (the "$400M 5-Year Term Loan"), a delayed draw$400 million senior unsecured term loan maturing inDecember 2025 (the "$400M 5-Year Term Loan 2025") (collectively, the "KeyBank Loans"), and a$150 million senior unsecured term loan maturing inApril 2026 (the "$150M 7-Year Term Loan"). The credit facility also provides the option, subject to obtaining additional commitments from lenders and certain other customary conditions, to increase the commitments under the Revolving Credit Facility, increase the existing term loans and/or incur new term loans by up to an additional$600 million in the aggregate. As ofMarch 31, 2021 , the remaining capacity under the Revolving Credit Facility was$376.5 million . Based on the terms of the Second Amended and Restated Credit Agreement as ofMarch 31, 2021 , the interest rate for the credit facility varies based on our consolidated leverage ratio and ranges (a) in the case of the Revolving Credit Facility, from LIBOR plus 1.30% to LIBOR plus 2.20%, (b) in the case of each of the$200M 5-Year Term Loan, the$400M 5-Year Term Loan and the$400M 5-Year Term Loan 2025, from LIBOR plus 1.25% to LIBOR plus 2.15% and (c) in the case of the$150M 7-Year Term Loan, from LIBOR plus 1.65% to LIBOR plus 2.50%. If theGCEAR Operating Partnership obtains an investment grade rating of its senior unsecured long term debt fromStandard & Poor's Rating Services , Moody's Investors Service, Inc., orFitch, Inc. , the applicable LIBOR margin and base rate margin will vary based on such rating and range (i) in the case of the Revolving Credit Facility, from LIBOR plus 0.825% to LIBOR plus 1.55%, (ii) in the case of each of the$200M 5-Year Term Loan, the$400M 5-Year Term Loan and the$400M 5-Year Term Loan 2025, from LIBOR plus 0.90% to LIBOR plus 1.75% and (iii) in the case of the$150M 7-Year Term Loan, from LIBOR plus 1.40% to LIBOR plus 2.35%. The Second Amended and Restated Credit Agreement provides procedures for determining a replacement reference rate in the event that LIBOR is discontinued. See Part I "Item 1A. Risk Factors", of our Annual Report on Form 10-K for the year endedDecember 31, 2020 for a discussion about risks that the replacement of LIBOR with an alternative reference rate may adversely affect interest rates on our current or future indebtedness and may otherwise adversely affect our financial condition and results of operations. OnMarch 1, 2021 , we exercised our right to draw on the$400M 5-Year Term Loan 2025 to repay CCIT II's existing debt balance in connection with the CCIT II Merger. Derivative Instruments As discussed in Note 6, Interest Rate Contracts, to the consolidated financial statements, we entered into interest rate swap agreements to hedge the variable cash flows associated with certain existing or forecasted, LIBOR-based variable-rate debt, including our Second Amended and Restated Credit Agreement. The effective portion of changes in the fair value of derivatives designated and that qualify as cash flow hedges is recorded in accumulated other comprehensive income and is subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. Derivatives were used to hedge the variable cash flows associated with existing variable-rate debt and forecasted issuances of debt. The ineffective portion of the change in the fair value of the derivatives is recognized directly in earnings. 44 -------------------------------------------------------------------------------- Table of Contents The following table sets forth a summary of the interest rate swaps atMarch 31, 2021 andDecember 31, 2020 (dollars in thousands): Fair Value (1) Current Notional Amounts December 31, December 31, Derivative Instrument Effective Date Maturity Date Interest Strike Rate March 31, 2021 2020 March 31, 2021 2020 (Liabilities) Interest Rate Swap 3/10/2020 7/1/2025 0.83% $ (216)$ (2,963) $ 150,000 $ 150,000 Interest Rate Swap 3/10/2020 7/1/2025 0.84% (197) (2,023) 100,000 100,000 Interest Rate Swap 3/10/2020 7/1/2025 0.86% (201) (1,580) 75,000 75,000 Interest Rate Swap 7/1/2020 7/1/2025 2.82% (10,816) (13,896) 125,000 125,000 Interest Rate Swap 7/1/2020 7/1/2025 2.82% (8,690) (11,140) 100,000 100,000 Interest Rate Swap 7/1/2020 7/1/2025 2.83% (8,684) (11,148) 100,000 100,000 Interest Rate Swap 7/1/2020 7/1/2025 2.84% (8,755) (11,225) 100,000 100,000 Total$ (37,559) $ (53,975) $ 750,000 $ 750,000 (1)We record all derivative instruments on a gross basis in the consolidated balance sheets, and accordingly, there are no offsetting amounts that net assets against liabilities. As ofMarch 31, 2021 , derivatives where in a liability position are included in the line item "Interest rate swap liability," in the consolidated balance sheets at fair value. Common Equity Follow-On Offering OnSeptember 20, 2017 , we commenced a follow-on offering of up to$2.2 billion of shares, consisting of up to$2.0 billion of shares in our primary offering and$0.2 billion of shares pursuant to our DRP (collectively, the "Follow-On Offering"). Pursuant to the Follow-On Offering, we offered to the public four new classes of shares of our common stock: Class T shares, Class S shares, Class D shares, and Class I shares with NAV-based pricing. The share classes have different selling commissions, dealer manager fees, and ongoing distribution fees and eligibility requirements. OnFebruary 26, 2020 , our Board approved the temporary suspension of the primary portion of our Follow-On Offering, effectiveFebruary 27, 2020 . The Follow-On Offering terminated with the expiration of the registration statement onSeptember 20, 2020 . Following the termination of the Follow-On Offering, it will no longer be a potential source of liquidity for us. Distribution Reinvestment Plan OnFebruary 26, 2020 , our Board approved the temporary suspension of our DRP, effectiveMarch 8, 2020 . OnJuly 16, 2020 , the Board approved the (i) reinstatement of the DRP, effectiveJuly 27, 2020 ; and (ii) amendment of the DRP to allow for the use of the most recently published NAV per share of the applicable share class available at the time of reinvestment as the DRP purchase price for each share class. OnJuly 17, 2020 , we filed a registration statement on Form S-3 for the registration of up to$100 million in shares pursuant to our DRP (the "DRP Offering"). The DRP Offering may be terminated at any time upon 10 days prior written notice to stockholders. As ofMarch 31, 2021 , we had sold 33,782,573 shares for approximately$325.4 million in our DRP Offering. 45
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Amount
Share Class (dollars in thousands) Shares
Class A $ 7,837 846,370
Class AA 15,474 1,670,921
Class AAA 234 25,328
Class D 15 1,614
Class E 301,312 31,186,771
Class I 348 37,271
Class S - 12
Class T 133 14,286
Total $ 325,353 33,782,573
Share Redemption Program
On February 26, 2020 , our Board approved the temporary suspension of our SRP,
effective March 28, 2020 . Redemptions sought upon a stockholder's death,
qualifying disability, or determination of incompetence or incapacitation were
honored in the first quarter of 2020 in accordance with the terms of the SRP,
and the SRP was officially suspended as of March 28, 2020 for regular
redemptions and subsequent redemptions for death, qualifying disability, or
determination of incompetence or incapacitation after those honored in the first
quarter of 2020.
On July 16, 2020 , the Board approved the partial reinstatement of the SRP,
effective August 17, 2020 , subject to the following limitations: (A) redemptions
will be limited to those sought upon a stockholder's death, qualifying
disability, or determination of incompetence or incapacitation in accordance
with the terms of the SRP, and (B) the quarterly cap on aggregate redemptions
will be equal to the aggregate NAV, as of the last business day of the previous
quarter, of the shares issued pursuant to the DRP during such quarter.
Settlements of share redemptions will be made within the first three business
days of the following quarter. During the three months ended March 31, 2021 , we
redeemed 772,265 shares.
Perpetual Convertible Preferred Shares
Upon consummation of the EA Mergers (as defined in Note 1, Organization, to the
consolidated financial statements), we issued 5,000,000 Series A Preferred
Shares to the Purchaser (defined below). We assumed the purchase agreement (the
"Purchase Agreement") that the entity formerly known as Griffin Capital
Essential Asset REIT, Inc. entered into on August 8, 2018 with SHBNPP Global
Professional Investment Type Private Real Estate Trust No. 13(H) (acting through
Kookmin Bank as trustee) (the "Purchaser") and Shinhan BNP Paribas Asset
Management Corporation , as an asset manager of the Purchaser, pursuant to which
the Purchaser agreed to purchase an aggregate of 10,000,000 shares of EA-1
Series A Cumulative Perpetual Convertible Preferred Stock at a price of $25.00
per share (the "EA-1 Series A Preferred Shares") in two tranches, each
comprising 5,000,000 EA-1 Series A Preferred Shares.
Pursuant to the Purchase Agreement, the Purchaser has agreed to purchase an
additional 5,000,000 Series A Preferred Shares (the "Second Issuance") at a
later date (the "Second Issuance Date") for an additional purchase price of $125
million subject to approval by the Purchaser's internal investment committee and
the satisfaction of certain conditions set forth in the Purchase Agreement.
Pursuant to the Purchaser is generally restricted from transferring the Series A
Preferred Shares or the economic interest in the Series A Preferred Shares for a
period of five years from the applicable closing date.
Distributions for Perpetual Convertible Preferred Shares
Subject to the terms of the applicable articles supplementary, the holder of
the Series A Preferred Shares are entitled to receive distributions quarterly in
arrears at a rate equal to one-fourth (1/4) of the applicable varying rate, as
follows:
i.6.55% from and after August 8, 2018 until August 8, 2023 , or if the Second
Issuance occurs, the five year anniversary of the Second Issuance Date (the
"Reset Date"), subject to paragraphs (iii) and (iv) below;
ii.6.75% from and after the Reset Date, subject to paragraphs (iii) and (iv)
below;
46
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iii.if a listing of our Class E shares of common stock or the Series A Preferred
Shares on a national securities exchange registered under Section 6(a) of the
Exchange Act, does not occur by August 1, 2020 (the "First Triggering Event"),
7.55% from and after August 2, 2020 and 7.75% from and after the Reset Date,
subject to paragraph (iv) below and certain conditions as set forth in the
articles supplementary; or
iv.if such a listing does not occur by August 1, 2021 , 8.05% from and after
August 2, 2021 until the Reset Date, and 8.25% from and after the Reset Date.
As of March 31, 2021 , our annual distribution rate was 7.55% for the Series A
Preferred Shares since no listing of
either our Class E common stock or the Series A Preferred Shares occurred prior
to August 1, 2020 .
Liquidation Preference
Upon any voluntary or involuntary liquidation, dissolution or winding up of the
Company, the holders of the Series A Preferred Shares will be entitled to be
paid out of our assets legally available for distribution to the stockholders,
after payment of or provision for our debts and other liabilities, liquidating
distributions, in cash or property at its fair market value as determined by the
Board, in the amount, for each outstanding Series A Preferred Share equal to
$25.00 per Series A Preferred Share (the "Liquidation Preference"), plus an
amount equal to any accumulated and unpaid distributions to the date of payment,
before any distribution or payment is made to holders of shares of common stock
or any other class or series of equity securities ranking junior to the Series A
Preferred Shares but subject to the preferential rights of holders of any class
or series of equity securities ranking senior to the Series A Preferred Shares.
After payment of the full amount of the Liquidation Preference to which they are
entitled, plus an amount equal to any accumulated and unpaid distributions to
the date of payment, the holders of Series A Preferred Shares will have no right
or claim to any of our remaining assets.
Company Redemption Rights
The Series A Preferred Shares may be redeemed by the Company, in whole or in
part, at our option, at a per share redemption price in cash equal to $25.00 per
Series A Preferred Share (the "Redemption Price"), plus any accumulated and
unpaid distributions on the Series A Preferred Shares up to the redemption date,
plus, a redemption fee of 1.5% of the Redemption Price in the case of a
redemption that occurs on or after the date of the First Triggering Event, but
before August 8, 2023 .
Holder Redemption Rights
In the event we fail to effect a listing of our shares of common stock or Series
A Preferred Shares by August 1, 2023 , the holder of any Series A Preferred
Shares has the option to request a redemption of such shares on or on any date
following August 1, 2023 , at the Redemption Price, plus any accumulated and
unpaid distributions up to the redemption date (the "Redemption Right");
provided, however, that no holder of the Series A Preferred Shares shall have a
Redemption Right if such a listing occurs prior to or on August 1, 2023 .
Conversion Rights
Subject to our redemption rights and certain conditions set forth in the articles supplementary, a holder of the Series A Preferred Shares, at his or her option, will have the right to convert such holder's Series A Preferred Shares into shares of our common stock any time after the earlier of (i)August 8, 2023 , or if the Second Issuance occurs, five years from the Second Issuance Date or (ii) a Change of Control (as defined in the articles supplementary) at a per share conversion rate equal to the Liquidation Preference divided by the then Common Stock Fair Market Value (as defined in the articles supplementary). Other Potential Future Sources of Capital Other potential future sources of capital include proceeds from potential private or public offerings of our stock or common limited partnership units of theGCEAR Operating Partnership ("GCEAR OP Units"), proceeds from secured or unsecured financings from banks or other lenders, including debt assumed in a real estate acquisition transaction, proceeds from the sale of properties and undistributed funds from operations, and entering into joint venture arrangements to acquire or develop facilities. If necessary, we may use financings or other sources of capital in the event of unforeseen significant capital expenditures. To the extent we are not able to secure additional financing in the form of a credit facility or other third party source of liquidity, we will be heavily dependent upon our current financing and income from operations. 47 -------------------------------------------------------------------------------- Table of Contents Liquidity Requirements Our principal liquidity needs for the next 12 months and beyond are to fund: •normal recurring expenses;
•debt service and principal repayment obligations;
•capital expenditures, including tenant improvements and leasing costs;
•redemptions;
•distributions to shareholders, including preferred equity distribution and distributions to holders of GCEAR OP Units; and
•possible acquisitions of properties.
Contractual Commitments and Contingencies The following is a summary of our contractual obligations as ofMarch 31, 2021 (in thousands):
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