Griffin Capital Essential Asset REIT® II Reports 2018 Third Quarter Results

EL SEGUNDO, Calif.–(BUSINESS WIRE)–Griffin Capital Essential Asset REIT II, Inc. (the “REIT”) announced its
operating results for the quarter ended September 30, 2018.

“We continue to rely on the core strengths of our portfolio which allow
us to execute on an investment strategy that provides investors with
consistent income generated from our high-quality corporate tenants,”
said Michael Escalante, Chief Investment Officer, Griffin Capital and
Director and President of the REIT.

As of September 30, 2018, our portfolio consisted of 27 properties (35
buildings) encompassing approximately 7.3 million square feet of space
in 17 states.

Highlights and Accomplishments in Third Quarter
2018 and Results as of September 30, 2018:

Portfolio Overview

  • The total capitalization(1) of our portfolio was
    approximately $1.3 billion.
  • Our weighted average remaining lease term was approximately 9.6 years
    with average annual rent increases of approximately 2.4%.
  • Our portfolio is 100% leased and occupied(2).
  • Approximately 75.8% of our portfolio’s net rental revenue(3)
    was generated by properties leased to tenants and/or guarantors with
    investment grade credit ratings or whose non-guarantor parent
    companies have investment grade credit ratings(4).

Financial Results

  • Total revenue for the quarter ended September 30, 2018 was
    approximately $26.7 million, compared to $27.3 million for the quarter
    ended September 30, 2017.
  • Net loss attributable to common stockholders was approximately $(0.8)
    million or $(0.01) per basic and diluted share for the quarter ended
    September 30, 2018, compared to net income attributable to common
    stockholders of $3.1 million or $0.04 per basic and diluted share for
    the same period in 2017.
  • As of September 30, 2018, the ratio of debt to total real estate
    acquisition value was 43.7%.

Non-GAAP Measures

  • Adjusted funds from operations, or AFFO, was approximately $8.4
    million and $10.3 million for the quarters ended September 30, 2018
    and 2017, respectively. Funds from operations, or FFO(5),
    was approximately $10.5 million and $14.3 million for the quarters
    ended September 30, 2018 and 2017, respectively. Please see the
    financial reconciliation tables and notes at the end of this release
    for more information regarding AFFO and FFO.
  • Our Adjusted EBITDA, as defined per our amended and restated credit
    agreement, was approximately $17.4 million for the quarter ended
    September 30, 2018 with both a fixed charge and interest coverage
    ratio of 3.70. Please see the financial reconciliation tables and
    notes at the end of this release for more information regarding
    Adjusted EBITDA and related ratios.

About Griffin Capital Essential Asset REIT II

Griffin Capital Essential Asset REIT II, Inc. is a publicly registered,
non-traded REIT focused on acquiring a portfolio consisting primarily of
single tenant business essential properties throughout the United
States, diversified by corporate credit, physical geography, product
type, and lease duration. As of September 30, 2018, Griffin Capital
Essential Asset REIT II, Inc. has acquired 35 office and industrial
buildings totaling approximately 7.3 million rentable square feet and
asset acquisition value of approximately $1.1 billion. Griffin Capital
Essential Asset REIT II, Inc. is one of several REITs sponsored or
co-sponsored by Griffin Capital Company, LLC (“Griffin Capital”).

About Griffin Capital Company, LLC

Griffin Capital is a leading alternative investment asset manager that
owns, manages, or co-sponsors approximately $11.2 billion* in assets.
Founded in 1995, the privately held firm is led by a seasoned team of
senior executives with more than two decades of investment and real
estate experience and who collectively have executed more than 650
transactions valued at over $22.0 billion.

The firm manages, sponsors or co-sponsors a suite of carefully curated,
institutional quality investment solutions distributed by Griffin
Capital Securities, LLC to retail investors through a community of
partners, including independent and insurance broker-dealers,
wirehouses, registered investment advisory firms and the financial
advisors who work with these enterprises. Additional information is
available at www.griffincapital.com.

*Includes the property information related to interests held in certain
joint ventures. As of September 30, 2018.

This press release may contain certain forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933, as amended,
and Section 21E of the Securities Exchange Act of 1934, as amended. Such
forward-looking statements can generally be identified by our use of
forward-looking terminology such as “may,” “will,” “expect,” “intend,”
“anticipate,” “estimate,” “believe,” “continue,” or other similar words.
Because such statements include risks, uncertainties and contingencies,
actual results may differ materially from the expectations, intentions,
beliefs, plans or predictions of the future expressed or implied by such
forward-looking statements. These risks, uncertainties and contingencies
include, but are not limited to: uncertainties relating to changes in
general economic and real estate conditions; uncertainties relating to
the implementation of our real estate investment strategy; uncertainties
relating to financing availability and capital proceeds; uncertainties
relating to the closing of property acquisitions; uncertainties related
to the timing and availability of distributions; and other risk factors
as outlined in the REIT’s prospectus, Annual Report on Form 10-K and
Quarterly Reports on Form 10-Q as filed with the Securities and Exchange
Commission (the “SEC”). This is neither an offer nor a solicitation to
purchase securities.

______________________________

1 Total capitalization includes the outstanding debt balance,
plus total equity raised in our public offerings, net of redemptions.
2
There is no guarantee that our properties will remain 100% leased
and occupied.
3 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 September 30, 2018, 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.
4 Approximately
75.8% of our portfolio’s net rental revenue was generated by properties
leased to tenants and/or guarantors with investment grade credit ratings
or whose non-guarantor parent companies have investment grade ratings or
what management believes are generally equivalent ratings. Of the 75.8%
investment grade tenant ratings, 64.0% is from Nationally Recognized
Statistical Rating Organization (NRSRO) credit rating, with the
remaining 11.8% being from a non-NRSRO, but having a rating that we
believe is generally equivalent to an NRSRO investment grade rating.
Bloomberg’s default risk rating is one example of a non-NRSRO rating.
5
FFO, as described by National Association of Real Estate Investment
Trusts (“NAREIT”), is adjusted for non-controlling interest
distributions.

     

  GRIFFIN CAPITAL ESSENTIAL ASSET REIT II, INC.

CONSOLIDATED BALANCE SHEETS

(Unaudited; in thousands, except share amounts)

 

September 30, 2018

December 31, 2017

ASSETS
Cash and cash equivalents $ 33,786 $ 33,164
Restricted cash 14,642 12,886
Real estate:
Land 122,482 122,482
Building and improvements 819,079 815,721
Tenant origination and absorption cost 240,364 240,364
Construction in progress 132   299  
Total real estate 1,182,057 1,178,866
Less: accumulated depreciation and amortization (117,288 ) (83,905 )
Total real estate, net 1,064,769 1,094,961
Intangible assets, net 3,016 3,294
Due from affiliates 1,128 686
Deferred rent 29,851 22,733
Other assets, net 6,862   12,224  
Total assets $ 1,154,054   $ 1,179,948  
LIABILITIES AND EQUITY
Total debt $ 481,573 $ 481,848
Restricted reserves 13,310 13,368
Distributions payable 1,772 1,689
Due to affiliates 18,988 16,896
Below market leases, net 47,506 51,295
Accrued expenses and other liabilities 21,765   19,903  
Total liabilities 584,914 584,999
Common stock subject to redemption 37,401 32,405
Stockholders’ equity:
Common Stock, $0.001 par value – Authorized: 800,000,000; 77,760,266
and 77,175,283 shares outstanding in the aggregate, as of September
30, 2018 and December 31, 2017, respectively
77 76
Additional paid-in capital 657,756 656,705
Cumulative distributions (114,510 ) (82,590 )
Accumulated deficit (13,102 ) (12,672 )
Accumulated other comprehensive income 310   949  
Total stockholders’ equity 530,531 562,468
Noncontrolling interests 1,208   76  
Total equity 531,739   562,544  
Total liabilities and equity $ 1,154,054   $ 1,179,948  
 
     

GRIFFIN CAPITAL ESSENTIAL ASSET REIT II, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited; in thousands, except share and per share amounts)

 

Three Months Ended September 30,

Nine Months Ended September 30,

2018     2017 2018     2017
Revenue:

Rental income

$ 21,928 $ 22,926 $ 65,854 $ 67,211
Property expense recovery 4,785   4,423   13,945   12,671  
Total revenue 26,713   27,349   79,799   79,882  
Expenses:
Property operating 1,866 1,787 5,598 4,886
Property tax 2,449 2,511 7,521 7,244
Property management fees to affiliates 456 452 1,365 1,347
Asset management fees to affiliates 2,485 8,026
Advisory fees to affiliates 2,346 273 6,970 273
Performance distribution allocation to affiliates 2,084 213 6,200 213
General and administrative 775 831 2,446 2,736
Corporate operating expenses to affiliates 806 566 2,168 1,679
Depreciation and amortization 11,252   11,236   33,383   32,710  
Total expenses 22,034   20,354   65,651   59,114  
Income before other income (expenses) 4,679 6,995 14,148 20,768
Other income (expense):
Interest expense (5,464 ) (3,997 ) (14,775 ) (11,445 )
Other income, net 28   101   196   265  
Net (loss) income (757 ) 3,099 (431 ) 9,588
Net loss (income) attributable to noncontrolling interests 1   (1 ) 1   (3 )
Net (loss) income attributable to common stockholders $ (756 ) $ 3,098   $ (430 ) $ 9,585  
Net (loss) income attributable to common stockholders per share,
basic and diluted
$ (0.01 ) $ 0.04   $ (0.01 ) $ 0.13  
Weighted average number of common shares outstanding, basic and
diluted
78,034,852   76,157,963   77,594,234   75,441,620  
Distributions declared per common share $ 0.14   $ 0.14   $ 0.42   $ 0.42  
 

GRIFFIN CAPITAL ESSENTIAL ASSET REIT II, INC.
Funds from
Operations and Adjusted Funds from Operations

(Unaudited)

Funds from Operations and Adjusted Funds from Operations

Our management believes that historical cost accounting for real estate
assets in accordance with generally accepted accounting principle
(“GAAP”) implicitly assumes that the value of real estate assets
diminishes predictably over time. Since real estate values have
historically risen or fallen with market conditions, many industry
investors and analysts have considered the presentation of operating
results for real estate companies that use historical cost accounting to
be insufficient.

Management is responsible for managing interest rate, hedge and foreign
exchange risks. To achieve our objectives, we may borrow at fixed rates
or variable rates. In order to mitigate our interest rate risk on
certain financial instruments, if any, we may enter into interest rate
cap agreements or other hedge instruments and in order to mitigate our
risk to foreign currency exposure, if any, we may enter into foreign
currency hedges. We view fair value adjustments of derivatives,
impairment charges and gains and losses from dispositions of assets as
non-recurring items or items which are unrealized and may not ultimately
be realized, and which are not reflective of ongoing operations and are
therefore typically adjusted for when assessing operating performance.

In order to provide a more complete understanding of the operating
performance of a REIT, the 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.

Beginning with the three months ended March 31, 2018, we are now using
Adjusted Funds from Operations (“AFFO”) as a non-GAAP financial measure
to evaluate our operating performance. We previously used Modified Funds
from Operations as a non-GAAP measure of operating
performance. Management elected to replace the Modified Funds from
Operations (“MFFO”) measure with AFFO, as management believes AFFO
provides investors with an operating performance measure that is
consistent with the performance models and analysis used by management,
including the addition of non-cash performance distributions not defined
in the calculation of MFFO. In addition, AFFO is a measure used among
our peer group, which includes daily Net Asset Value (“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 the
Company’s operations. AFFO, however, is not considered an appropriate
measure of historical earnings as it excludes certain significant costs
that are otherwise included in reported earnings. Further, since the
measure is based on historical financial information, AFFO for the
period presented may not be indicative of future results or our future
ability to pay our dividends. By providing FFO and AFFO, we present
information that assists investors in aligning their analysis with
management’s analysis of long-term operating activities. As explained
below, management’s evaluation of our operating performance excludes
items considered in the calculation of AFFO based on the following
economic considerations:

  • Revenues in excess of cash received, net. Most of our leases provide
    for periodic minimum rent payment increases throughout the term of the
    lease. In accordance with GAAP, these contractual periodic minimum
    rent payment increases during the term of a lease are recorded to
    rental revenue on a straight-line basis in order to reconcile the
    difference between accrual and cash basis accounting. As straight-line
    rent is a GAAP non-cash adjustment and is included in historical
    earnings, FFO is adjusted for the effect of straight-line rent to
    arrive at AFFO as a means of determining operating results of our
    portfolio. In addition, when applicable, in conjunction with certain
    acquisitions, we may enter into a master escrow or lease agreement
    with a seller, whereby the seller is obligated to pay us rent
    pertaining to certain spaces impacted by existing rental abatements.
    In accordance with GAAP, these proceeds are recorded as an adjustment
    to the allocation of real estate assets at the time of acquisition,
    and, accordingly, are not included in revenues, net income, or FFO.
    This application results in income recognition that can differ
    significantly from current contract terms. By adjusting for this item,
    we believe AFFO is reflective of the realized economic impact of our
    leases (including master agreements) that is useful in assessing the
    sustainability of our operating performance.
  • Amortization of in-place lease valuation. Acquired in-place leases are
    valued as above-market or below-market as of the date of acquisition
    based on the present value of the difference between (a) the
    contractual amounts to be paid pursuant to the in-place leases and (b)
    management’s estimate of fair market lease rates for the corresponding
    in-place leases over a period equal to the remaining non-cancelable
    term of the lease for above-market leases. The above-market and
    below-market lease values are capitalized as intangible lease assets
    or liabilities and amortized as an adjustment to rental income over
    the remaining terms of the respective leases. As amortization of
    in-place lease valuation is a non-cash adjustment and is included in
    historical earnings, FFO is adjusted for the effect of the
    amortization to arrive at AFFO as a means of determining operating
    results of our portfolio.
  • Acquisition-related costs. We were organized primarily with the
    purpose of acquiring or investing in income-producing real property in
    order to generate operational income and cash flow that will allow us
    to provide regular cash distributions to our stockholders. In the
    process, we incur non-reimbursable affiliated and non-affiliated
    acquisition-related costs, which in accordance with GAAP are
    capitalized and included as part of the relative fair value when the
    property acquisition meets the definition of an asset acquisition or
    are expensed as incurred and are included in the determination of
    income (loss) from operations and net income (loss), for property
    acquisitions accounted for as a business combination. By excluding
    acquisition-related costs, AFFO may not provide an accurate indicator
    of our operating performance during periods in which acquisitions are
    made. However, it can provide an indication of our on-going ability to
    generate cash flow from operations and continue as a going concern
    after we cease to acquire properties on a frequent and regular basis,
    which can be compared to the AFFO of other non-listed REITs that have
    completed their acquisition activity and have similar operating
    characteristics to ours. Management believes that excluding these
    costs from AFFO provides investors with supplemental performance
    information that is consistent with the performance models and
    analyses used by management.
  • Gain or loss from the extinguishment of debt. We use debt as a partial
    source of capital to acquire properties in our portfolio. As a term of
    obtaining this debt, we will pay financing costs to the respective
    lender. Financing costs are presented on the balance sheet as a direct
    deduction from the carrying amount of that debt liability, consistent
    with debt discounts and amortized into interest expense on a
    straight-line basis over the term of the debt. We consider the
    amortization expense to be a component of operations if the debt was
    used to acquire properties. From time to time, we may cancel certain
    debt obligations and replace these canceled debt obligations with new
    debt at more favorable terms to us. In doing so, we are required to
    write off the remaining capitalized financing costs associated with
    the canceled debt, which we consider to be a cost, or loss, on
    extinguishing such debt. Management believes that this loss is
    considered an event not associated with our operations, and therefore,
    deems this write-off to be an exclusion from AFFO.
  • Unrealized gains (losses) on derivative instruments. These adjustments
    include unrealized gains (losses) from mark-to-market adjustments on
    interest rate swaps and losses due to hedge ineffectiveness. The
    change in the fair value of interest rate swaps not designated as a
    hedge and the change in the fair value of the ineffective portion of
    interest rate swaps are non-cash adjustments recognized directly in
    earnings and are included in interest expense. We have excluded these
    adjustments in our calculation of AFFO to more appropriately reflect
    the economic impact of our interest rate swap agreements.
  • Performance distribution allocation. Our Advisor holds a special
    limited partner interest in our operating partnership that entitles it
    to receive a special distribution from our operating partnership equal
    to 12.5% of the total return, subject to a 5.5% hurdle amount and a
    high-water mark, with a catch-up. At the election of the advisor, the
    performance distribution allocation may be paid in cash or Class I
    units in our operating partnership. We believe that the distribution,
    to the extent it is paid in cash, is appropriately included as a
    component of corporate operating expenses to affiliates and therefore
    included in FFO and AFFO. If, however, the special distribution is
    paid in Class I units, management believes the distribution would be
    excluded from AFFO to more appropriately reflect the on-going
    portfolio performance and our ability to sustain the current
    distribution level.

For all of these reasons, we believe the non-GAAP measures of FFO and
AFFO, in addition to income (loss) from operations, net income (loss)
and cash flows from operating activities, as defined by GAAP, are
helpful supplemental performance measures and useful to investors in
evaluating the performance of our real estate portfolio. However, a
material limitation associated with FFO and AFFO is that they are not
indicative of our cash available to fund distributions since other uses
of cash, such as capital expenditures at our properties and principal
payments of debt, are not deducted when calculating FFO and AFFO. The
use of AFFO as a measure of long-term operating performance on value is
also limited if we do not continue to operate under our current business
plan as noted above. AFFO is useful in assisting management and
investors in assessing our ongoing ability to generate cash flow from
operations and continue as a going concern in future operating periods,
and in particular, after the offering and acquisition stages are
complete. However, FFO and AFFO are not useful measures in evaluating
NAV because impairments are taken into account in determining NAV but
not in determining FFO and AFFO. Therefore, FFO and AFFO should not be
viewed as a more prominent measure of performance than income (loss)
from operations, net income (loss) or to cash flows from operating
activities and each should be reviewed in connection with GAAP
measurements.

Neither the SEC, NAREIT, nor any other applicable regulatory body has
opined on the acceptability of the adjustments contemplated to adjust
FFO in order to calculate AFFO and its use as a non-GAAP performance
measure.

Contacts

Griffin Capital Company, LLC
Diana Keary, 949-270-9303
dkeary@griffincapital.com
or
Finsbury
Associate Director

Ben Rosner, 646-805-2085
ben.rosner@finsbury.com

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