Griffin Capital Essential Asset REIT Reports 2019 Third Quarter Results

 Total Revenue Increased 14.5 Percent from Third Quarter 2018

Successful Execution of Multiple Capital Transactions and Robust Leasing Activity

EL SEGUNDO, Calif.–(BUSINESS WIRE)–Griffin Capital Essential Asset REIT, Inc. (the “REIT”) announced its results for the quarter ended September 30, 2019. The REIT reported a 14.5 percent increase in total revenue compared to the quarter ended September 30, 2018.

The REIT had an active third quarter successfully executing the following transactions: acquisition of a McKesson Office Campus (“McKesson II”) in Scottsdale, Arizona, sale of properties in Fort Worth, Texas, Lynwood, Washington and Denver, Colorado, and realization of occupancies from new leases totaling 211,048 square feet.

These transactions highlight the company’s continued success in acquiring attractive institutional quality real estate while maximizing property values and maintaining stabilized portfolio occupancy levels.

“We continue to leverage the expertise of our asset management team, in particular their ability to execute full-cycle transactions and actively-manage our ongoing leasing opportunities,” said Michael Escalante, Chief Executive Officer of the REIT. “These strengths are core to our investment strategy. I am extremely pleased with our results, the REIT’s performance and the consistent value that we bring to our shareholders.”

As of September 30, 2019, the REIT’s portfolio(1) consisted of 101 assets encompassing approximately 27.1 million rentable square feet of space in 25 states.

Highlights and Accomplishments in Third Quarter 2019 and Results as of September 30, 2019:

Financial Results

  • Total revenue was $97.4 million for the quarter ended September 30, 2019 compared to $85.0 million for the quarter ended September 30, 2018.
  • Net income attributable to common stockholders was $8.9 million, or $0.04 per basic and diluted share for the quarter ended September 30, 2019, compared to $2.9 million or $0.02 per basic and diluted share for the quarter ended September 30, 2018. The increase during the period was primarily due to the merger.

Non-GAAP Measures

  • Adjusted funds from operations, or AFFO, was approximately $37.2 million for the quarter ended September 30, 2019, virtually equivalent to last year’s comparative period. Funds from operations, or FFO,(2) was approximately $37.0 million and $33.8 million for the quarters ended September 30, 2019 and 2018, 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 credit facility agreement, was approximately $64.1 million for the quarter ended September 30, 2019 with a fixed charge and interest coverage ratio of 2.8X and 3.3X, respectively. Please see the financial reconciliation tables and notes at the end of this release for more information regarding adjusted EBITDA and related ratios.

Portfolio Overview

  • The enterprise value of our portfolio as of September 30, 2019 was $4.7 billion.(3)
  • Our weighted average remaining lease term was approximately 7.5 years with average annual rent increases of approximately 2.2%.
  • Approximately 61.5% of our portfolio’s net rental revenue(4) 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.(5)
  • Our portfolio as of September 30, 2019 was 91.6% leased.
  • The ratio of net debt (6) to total real estate acquisition price and net debt to enterprise value as of September 30, 2019 was 48.8% and 43.7%, respectively.(1)

Acquisition

  • On September 20, 2019, we acquired McKesson II at a purchase price of $37.7 million, which is A two-story Class “A” office building totaling 124,879 square feet located in Scottsdale, Arizona. The Property is fully leased to McKesson Corporation until May 31, 2029.

Dispositions

  • On September 5, 2019, we sold 7601 Technology Way property located in Denver, Colorado, for $48.8 million, less closing costs and credits. The carrying value of the property was recently recorded at its estimated fair value of approximately $37.6 million as a result of the merger. Upon the sale of the property, we recognized a gain of approximately $8.1 million.
  • On July 30, 2019, we sold the Lynnwood IV land parcel located in Lynnwood, WA, for $1.8 million, less closing costs and credits. The carrying value of the land parcel was approximately $1.3 million. Upon the sale, we recognized a gain of approximately $0.3 million.
  • On July 17, 2019, the Heritage Common X Ltd. joint venture sold the Heritage X property located in Fort Worth, TX. At the time of the sale, the Company had an ownership interest of approximately 45% in the joint venture.

Leasing Activity

  • During the quarter ended September 30, 2019, we executed new leases totaling 211,048 square feet, which included the execution of a new 12-year lease with a Genuine Parts Company for 79,900 square feet in Atlanta, GA, three 10-year leases with Bohler Engineering NJ, LLC, Control Point Associates, Inc., and Whitestone Associates, Inc. for 65,800 square feet in Warren, NJ and a 10-year lease with EAN Holdings, LLC dba Enterprise Rental Car for 26,600 square feet in Renton, WA.
  • Leases commencing during the quarter totaled 636,900 square feet, including 268,000 square feet of renewal and 368,900 square feet of new leases.

Subsequent Events

  • On October 14, 2019, we sold the FedEx Freight property located in West Jefferson, Ohio for $30.3 million, less closing costs and credits. The property sold for approximately the carrying value.

About Griffin Capital Essential Asset REIT

Griffin Capital Essential Asset REIT, Inc. is a self-managed, publicly registered, non-traded REIT with 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. Griffin Capital Essential Asset REIT, Inc.’s portfolio, as of September 30, 2019, consists of 101 office and industrial properties totaling 27.1 million rentable square feet, located in 25 states, representing total REIT enterprise value of approximately $4.7 billion.

Additional information is available at www.gcear.com.

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 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. Excludes the property information related to the acquisition of an 80% ownership interest in a joint venture with affiliates of Digital Realty Trust, L.P.
  2. FFO, as described by the National Association of Real Estate Investment Trusts (“NAREIT”), is adjusted for non-controlling interest and redeemable preferred distributions.
  3. Total enterprise value includes the outstanding debt balance (excluding deferred financing costs and premium/discounts), plus unconsolidated debt – pro rate share, plus preferred equity, plus total outstanding shares multiplied by the NAV, less cash and cash equivalents – excludes restricted cash. Total outstanding shares includes limited partnership units issued and shares issued pursuant to the DRP, net of redemptions.
  4. 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, 2019 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.
  5. Approximately 61.5% 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 61.5% investment grade tenant ratings, 56.8% is from a Nationally Recognized Statistical Rating Organization (NRSRO) credit rating, with the remaining 4.7% 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 an example of a non-NRSRO rating.
  6. Net debt includes $100.0 million of borrowing used to redeem investors in October and pro rata share of unconsolidated debt, net of cash and cash equivalents.

     

 

GRIFFIN CAPITAL ESSENTIAL ASSET REIT, INC.

CONSOLIDATED BALANCE SHEETS

(Unaudited, in thousands, except units and share amounts)

 

 

September 30, 2019

 

December 31, 2018

ASSETS

 

 

 

Cash and cash equivalents

$

50,262

 

 

$

48,478

 

Restricted cash

31,913

 

 

15,807

 

Real estate:

 

 

 

Land

473,709

 

 

350,470

 

Building and improvements

3,092,799

 

 

2,165,016

 

Tenant origination and absorption cost

752,012

 

 

530,181

 

Construction in progress

14,785

 

 

27,697

 

Total real estate

4,333,305

 

 

3,073,364

 

Less: accumulated depreciation and amortization

(638,464

)

 

(538,412

)

Total real estate, net

3,694,841

 

 

2,534,952

 

Real estate assets and other assets held for sale, net

29,804

 

 

 

Investments in unconsolidated entities

20,795

 

 

30,565

 

Intangible assets, net

14,199

 

 

17,099

 

Deferred rent receivable

63,565

 

 

55,163

 

Deferred leasing costs, net

50,114

 

 

29,958

 

Goodwill

229,948

 

 

229,948

 

Due from affiliates

1,523

 

 

19,685

 

Right of use asset

41,705

 

 

 

Other assets

34,127

 

 

31,120

 

Total assets

$

4,262,796

 

 

$

3,012,775

 

LIABILITIES AND EQUITY

 

 

 

Debt, net

$

1,930,141

 

 

$

1,353,531

 

Restricted reserves

16,508

 

 

8,201

 

Interest rate swap liability

29,981

 

 

6,962

 

Redemptions payable

100,361

 

 

 

Distributions payable

15,585

 

 

12,248

 

Due to affiliates

14,867

 

 

42,406

 

Intangible liabilities, net

33,554

 

 

23,115

 

Lease liability

44,867

 

 

 

Accrued expenses and other liabilities

91,370

 

 

80,616

 

Liabilities of real estate assets held for sale

184

 

 

 

Total liabilities

2,277,418

 

 

1,527,079

 

Commitments and contingencies

 

 

 

Perpetual convertible preferred shares

125,000

 

 

125,000

 

Common stock subject to redemption

15,861

 

 

11,523

 

Noncontrolling interests subject to redemption; 558,662 and 531,161 units as of September 30, 2019 and December 31, 2018, respectively

4,887

 

 

4,887

 

Stockholders’ equity:

 

 

 

Common stock, $0.001 par value; 700,000,000 shares authorized; 235,382,622 and 174,278,341 shares outstanding in the aggregate as of September 30, 2019 and December 31, 2018, respectively

236

 

 

174

 

Additional paid-in capital

2,137,112

 

 

1,556,770

 

Cumulative distributions

(676,890

)

 

(570,977

)

Accumulated earnings

157,005

 

 

128,525

 

Accumulated other comprehensive loss

(27,008

)

 

(2,409

)

Total stockholders’ equity

1,590,455

 

 

1,112,083

 

Noncontrolling interests

249,175

 

 

232,203

 

Total equity

1,839,630

 

 

1,344,286

 

Total liabilities and equity

$

4,262,796

 

 

$

3,012,775

 

 

 

GRIFFIN CAPITAL ESSENTIAL ASSET REIT, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except share and per share amounts)

 

 

Three Months Ended

September 30,

 

Nine Months Ended

September 30,

 

2019

 

2018

 

2019

 

2018

Revenue:

 

 

 

 

 

 

 

Rental income

$

97,435

 

 

$

85,041

 

 

$

277,276

 

 

$

251,431

 

Expenses:

 

 

 

 

 

 

 

Property operating expense

14,717

 

 

13,055

 

 

39,091

 

 

36,060

 

Property tax expense

10,050

 

 

11,301

 

 

27,722

 

 

33,460

 

Asset management fees to affiliates

 

 

6,015

 

 

 

 

17,670

 

Property management fees to affiliates

 

 

2,503

 

 

 

 

7,049

 

Property management fees to non-affiliates

822

 

 

 

 

2,620

 

 

 

General and administrative expenses

7,519

 

 

2,111

 

 

17,708

 

 

5,042

 

Corporate operating expenses to affiliates

729

 

 

948

 

 

1,453

 

 

2,630

 

Depreciation and amortization

41,440

 

 

30,096

 

 

112,311

 

 

89,258

 

Total expenses

75,277

 

 

66,029

 

 

200,905

 

 

191,169

 

Income before other income and (expenses)

22,158

 

 

19,012

 

 

76,371

 

 

60,262

 

Other income (expenses):

 

 

 

 

 

 

 

Interest expense

(19,560

)

 

(14,161

)

 

(53,642

)

 

(41,251

)

Management fee revenue from affiliates

 

 

 

 

6,368

 

 

 

Other (loss) income, net

(1,850

)

 

57

 

 

(370

)

 

217

 

Gain (loss) from investment in unconsolidated entities

3,027

 

 

(579

)

 

1,919

 

 

(1,617

)

Gain from disposition of assets

8,441

 

 

 

 

8,441

 

 

1,158

 

Net income

12,216

 

 

4,329

 

 

39,087

 

 

18,769

 

Distributions to redeemable preferred shareholders

(2,047

)

 

(1,228

)

 

(6,141

)

 

(1,228

)

Net income attributable to noncontrolling interests

(1,149

)

 

(157

)

 

(4,226

)

 

(671

)

Net income attributable to controlling interest

9,020

 

 

2,944

 

 

28,720

 

 

16,870

 

Distributions to redeemable noncontrolling interests attributable to common stockholders

(81

)

 

(90

)

 

(240

)

 

(266

)

Net income attributable to common stockholders

$

8,939

 

 

$

2,854

 

 

$

28,480

 

 

$

16,604

 

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

$

0.04

 

 

$

0.02

 

 

$

0.13

 

 

$

0.10

 

Weighted average number of common shares outstanding, basic and diluted

245,579,526

 

 

167,037,629

 

 

216,344,938

 

 

169,430,447

 

Cash distributions declared per common share

$

0.13

 

 

$

0.17

 

 

$

0.46

 

 

$

0.51

 

GRIFFIN CAPITAL ESSENTIAL ASSET REIT, INC.

Funds from Operations and Adjusted Funds from Operations

(in thousands)

Funds from Operations and Adjusted Funds from Operations

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

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

In order to provide a more complete understanding of the operating performance of a REIT, the National Association of Real Estate Investment Trusts (“NAREIT”) promulgated a measure known as funds from operations (“FFO”). FFO is defined as net income or loss computed in accordance with GAAP, excluding extraordinary items, as defined by GAAP, and gains and losses from sales of depreciable operating property, adding back asset impairment write-downs, plus real estate related depreciation and amortization (excluding amortization of deferred financing costs and depreciation of non-real estate assets), and after adjustment for unconsolidated partnerships, joint ventures and preferred distributions. Because FFO calculations exclude such items as depreciation and amortization of real estate assets and gains and losses from sales of operating real estate assets (which can vary among owners of identical assets in similar conditions based on historical cost accounting and useful-life estimates), they facilitate comparisons of operating performance between periods and between other REITs. As a result, we believe that the use of FFO, together with the required GAAP presentations, provides a more complete understanding of our performance relative to our competitors and a more informed and appropriate basis on which to make decisions involving operating, financing, and investing activities. It should be noted, however, that other REITs may not define FFO in accordance with the current NAREIT definition or may interpret the current NAREIT definition differently than we do, making comparisons less meaningful.

Additionally, we use Adjusted Funds from Operations (“AFFO”) as a non-GAAP financial measure to evaluate our operating performance. 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. 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. 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 stock-based compensation. We have excluded the effect of stock-based compensation expense from our AFFO calculation. Although stock-based compensation expense is calculated in accordance with current GAAP and constitutes an ongoing and recurring expense, such expense is excluded from AFFO because it is not an expense which generally requires cash settlement, and therefore is not used by us to assess the profitability of our operations. We also believe the exclusion of stock-based compensation expense provides a more useful comparison of our operating results to the operating results of our peers.

  • Deferred rent. Most of our leases provide for periodic minimum rent payment increases throughout the term of the lease. In accordance with GAAP, these periodic minimum rent payment increases during the term of a lease are recorded on a straight-line basis and create deferred rent. As deferred rent is a GAAP non-cash adjustment and is included in historical earnings, FFO is adjusted for the effect of deferred rent to arrive at AFFO as a means of determining operating results of our portfolio.

  • Amortization of in-place lease valuation. Acquired in-place leases are valued as above-market or below-market as of the date of acquisition based on the present value of the difference between (a) the contractual amounts to be paid pursuant to the in-place leases and (b) management’s estimate of fair market lease rates for the corresponding in-place leases over a period equal to the remaining non-cancelable term of the lease for above-market leases. The above-market and below-market lease values are capitalized as intangible lease assets or liabilities and amortized as an adjustment to rental income over the remaining terms of the respective leases. As this item is a non-cash adjustment and is included in historical earnings, FFO is adjusted for the effect of the amortization of in-place lease valuation to arrive at AFFO as a means of determining operating results of our portfolio.

  • Acquisition-related costs. We were organized primarily with the purpose of acquiring or investing in income-producing real property in order to generate operational income and cash flow that will allow us to provide regular cash distributions to our stockholders. In the process, we incur non-reimbursable affiliated and non-affiliated acquisition-related costs, which in accordance with GAAP are capitalized and included as part of the relative fair value when the property acquisition meets the definition of an asset acquisition or are expensed as incurred and are included in the determination of income (loss) from operations and net income (loss), for property acquisitions accounted for as a business combination. By excluding acquisition-related costs, AFFO may not provide an accurate indicator of our operating performance during periods in which acquisitions are made. However, it can provide an indication of our on-going ability to generate cash flow from operations and continue as a going concern after we cease to acquire properties on a frequent and regular basis, which can be compared to AFFO of other non-listed REITs that have completed their acquisition activity and have similar operating characteristics to ours. Management believes that excluding these costs from AFFO provides investors with supplemental performance information that is consistent with the performance models and analyses used by management.

  • Financed termination fee, net of payments received. We believe that a fee received from a tenant for terminating a lease is appropriately included as a component of rental revenue and therefore included in AFFO. If, however, the termination fee is to be paid over time, we believe the recognition of such termination fee into income should not be included in AFFO.

Contacts

Investor Services

888-926-2688

Media Contacts

Diana Keary

Senior Vice President

Griffin Capital Company

Dkeary@griffincapital.com
949-270-9303

Or

Joe Berg

Director

Finsbury

Joe.berg@finsbury.com
310-633-9446

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