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EX-32.2 - EXHIBIT 32.2 - Griffin Capital Essential Asset REIT, Inc.gcear06302016exhibit322.htm
EX-32.1 - EXHIBIT 32.1 - Griffin Capital Essential Asset REIT, Inc.gcear06302016exhibit321.htm
EX-31.2 - EXHIBIT 31.2 - Griffin Capital Essential Asset REIT, Inc.gcear06302016exhibit312.htm
EX-31.1 - EXHIBIT 31.1 - Griffin Capital Essential Asset REIT, Inc.gcear06302016exhibit311.htm
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
____________________________________________________

FORM 10-Q
____________________________________________________
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2016
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                     to                     
Commission File Number: 000-54377
_______________________________________________
Griffin Capital Essential Asset REIT, Inc.
(Exact name of Registrant as specified in its charter)
________________________________________________
Maryland
 
26-3335705
(State or other jurisdiction of
incorporation or organization)
 
(IRS Employer
Identification No.)

Griffin Capital Plaza
1520 E. Grand Ave

El Segundo, California 90245
(Address of principal executive offices)
(310) 469-6100
(Registrant’s telephone number)

__________________________________________________
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.    Yes  x     No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one)
 
Large accelerated filer
 
¨
 
Accelerated filer
 
¨
Non-accelerated filer
 
x  (Do not check if a smaller reporting company)
 
Smaller reporting company
 
¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

1


Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of August 9, 2016: 175,117,522 shares of common stock, $0.001 par value per share.

2


FORM 10-Q
GRIFFIN CAPITAL ESSENTIAL ASSET REIT, INC.
TABLE OF CONTENTS
 
 
Page No.
 
 
Item 1.
Financial Statements:
 
 
Consolidated Balance Sheets as of June 30, 2016 and December 31, 2015 (unaudited)
 
Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2016 and 2015 (unaudited)
 
Consolidated Statements of Comprehensive Loss for the Three and Six Months Ended June 30, 2016 and 2015 (unaudited)
 
Consolidated Statements of Equity for the Year Ended December 31, 2015 and the Six Months Ended June 30, 2016 (unaudited)
 
Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2016 and 2015 (unaudited)
 
Item 2.
Item 3.
Item 4.
 
Item 1.
Item 1A.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.

3


PART I. FINANCIAL INFORMATION
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements contained in this Form 10-Q of Griffin Capital Essential Asset REIT, Inc., other than historical facts, may be considered forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). We intend for all such forward-looking statements to be covered by the applicable safe harbor provisions for forward-looking statements contained in Section 27A of the Securities Act and Section 21E of the Exchange Act. Such forward-looking statements include, in particular, statements about our plans, strategies, and prospects and are subject to risks, uncertainties, and other factors. Such statements are based on a number of assumptions involving judgments with respect to, among other things, future economic, competitive, and market conditions, all of which are difficult or impossible to predict accurately. To the extent that our assumptions differ from actual results, our ability to meet such forward-looking statements, including our ability to generate positive cash flow from operations and provide distributions to stockholders, our ability to find suitable investment properties, and our ability to be in compliance with certain debt covenants, may be significantly hindered. Therefore, such statements are not intended to be a guarantee of our performance in future periods. Such forward-looking statements can generally be identified by our use of forward-looking terminology such as “may,” “will,” “expect,” “intend,” “anticipate,” “estimate,” “believe,” “continue,” or other similar words. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date this report is filed with the Securities and Exchange Commission ("SEC"). We cannot guarantee the accuracy of any such forward-looking statements contained in this Form 10-Q, and we do not intend to publicly update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise.
See the risk factors identified in the “Risk Factors” section of our Annual Report on Form 10-K for the year ended December 31, 2015 as filed with the SEC for a discussion of some, although not all, of the risks and uncertainties that could cause actual results to differ materially from those presented in our forward-looking statements.

4


GRIFFIN CAPITAL ESSENTIAL ASSET REIT, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited; in thousands, except share amounts)
 
June 30,
2016
 
December 31,
2015
ASSETS
 
 
 
Cash and cash equivalents
$
29,450

 
$
21,944

Restricted cash
16,844

 
24,187

Restricted cash - real estate funds held for exchange

 
47,031

Real estate:
 
 
 
Land
366,532

 
355,443

Building and improvements
2,051,271

 
2,020,947

Tenant origination and absorption cost
521,643

 
516,879

Construction in progress
9,559

 
4,805

Total real estate
2,949,005

 
2,898,074

Less: accumulated depreciation and amortization
(264,279
)
 
(202,048
)
Total real estate, net
2,684,726

 
2,696,026

Real estate assets and other assets held for sale, net
71,189

 
68,792

Investments in unconsolidated entities
50,152

 
56,863

Intangible assets, net
33,293

 
36,769

Deferred rent
34,930

 
26,432

Mortgage receivable from affiliate

 
24,513

Other assets, net
29,619

 
34,833

Total assets
$
2,950,203

 
$
3,037,390

LIABILITIES AND EQUITY
 
 
 
Debt:
 
 
 
Mortgages payable
$
376,001

 
$
361,746

Term Loan (July 2015)
709,849

 
634,922

Revolver Loan (July 2015)
361,542

 
476,759

Total debt
1,447,392

 
1,473,427

Restricted reserves
10,964

 
11,286

Interest rate swap liability
30,499

 
6,394

Mandatory redemption of noncontrolling interest

 
18,129

Accounts payable and other liabilities
68,762

 
68,168

Distributions payable
6,097

 
6,147

Due to affiliates
3,291

 
8,757

Below market leases, net
34,817

 
41,706

Liabilities of real estate assets held for sale
1,852

 
2,845

Total liabilities
1,603,674

 
1,636,859

Commitments and contingencies (Note 10)

 

Noncontrolling interests subject to redemption, 531,000 units eligible towards redemption as of June 30, 2016 and December 31, 2015
4,887

 
4,887

Common stock subject to redemption
89,162

 
86,557

Stockholders’ equity:
 
 
 
Preferred Stock, $0.001 par value; 200,000,000 shares authorized; no shares outstanding as of June 30, 2016 and December 31, 2015

 

Common Stock, $0.001 par value; 700,000,000 shares authorized; 176,079,637 and 175,184,519 shares outstanding, as of June 30, 2016 and December 31, 2015
176

 
175

Additional paid-in capital
1,561,506

 
1,561,499

Cumulative distributions
(272,566
)
 
(212,031
)
Accumulated deficit
(36,896
)
 
(55,035
)
Accumulated other comprehensive loss
(30,866
)
 
(6,839
)
Total stockholders’ equity
1,221,354

 
1,287,769

Noncontrolling interests
31,126

 
21,318

Total equity
1,252,480

 
1,309,087

Total liabilities and equity
$
2,950,203

 
$
3,037,390

See accompanying notes.

5


GRIFFIN CAPITAL ESSENTIAL ASSET REIT, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited; in thousands, except share and per share amounts)
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2016
 
2015
 
2016
 
2015
Revenue:
 
 
 
 
 
 
 
Rental income
$
67,536

 
$
49,633

 
$
134,386

 
$
94,348

Property expense recoveries
18,096

 
11,930

 
37,048

 
22,428

Total revenue
85,632

 
61,563

 
171,434

 
116,776

Expenses:
 
 
 
 
 
 
 
Asset management fees to affiliates
5,889

 
4,273

 
11,678

 
8,060

Property management fees to affiliates
2,421

 
1,644

 
4,791

 
3,118

Property operating expense
11,289

 
8,172

 
22,228

 
15,071

Property tax expense
11,112

 
7,857

 
22,238

 
14,735

Acquisition fees and expenses to non-affiliates
424

 
441

 
534

 
845

Acquisition fees and expenses to affiliates
1,239

 
20,291

 
1,239

 
22,271

General and administrative expenses
2,348

 
1,780

 
3,372

 
2,753

Corporate operating expenses to affiliates
588

 
154

 
853

 
305

Depreciation and amortization
31,481

 
22,418

 
62,687

 
41,883

Total expenses
66,791

 
67,030

 
129,620

 
109,041

Income (loss) from operations
18,841

 
(5,467
)
 
41,814

 
7,735

Other income (expense):
 
 
 
 
 
 
 
Interest expense
(12,815
)
 
(6,392
)
 
(24,844
)
 
(11,820
)
Interest income
243

 
558

 
2,069

 
664

Loss from investment in unconsolidated entities
(354
)
 
(354
)
 
(738
)
 
(746
)
Gain on acquisition of unconsolidated entity
666

 

 
666

 

Gain from sale of depreciable operating property

 

 

 
3,613

Net income (loss)
6,581

 
(11,655
)
 
18,967

 
(554
)
Preferred units redemption premium

 
(2,904
)
 

 
(7,591
)
Distributions to redeemable preferred unit holders

 
(7,429
)
 

 
(7,429
)
Less: Net (income) loss attributable to noncontrolling interests
(244
)
 
668

 
(650
)
 
458

Net income (loss) attributable to controlling interest
6,337

 
(21,320
)
 
18,317

 
(15,116
)
Distributions to redeemable noncontrolling interests attributable to common stockholders
(89
)
 
(89
)
 
(178
)
 
(177
)
Net income (loss) attributable to common stockholders
$
6,248

 
$
(21,409
)
 
$
18,139

 
$
(15,293
)
Net income (loss) attributable to common stockholders per share, basic and diluted
$
0.04

 
$
(0.15
)
 
$
0.10

 
$
(0.11
)
Weighted average number of common shares outstanding, basic and diluted
175,567,424

 
140,825,261

 
175,379,795

 
135,495,479

Distributions declared per common share
$
0.17

 
$
0.17

 
$
0.34

 
$
0.34

See accompanying notes.

6


GRIFFIN CAPITAL ESSENTIAL ASSET REIT, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(Unaudited; in thousands)

 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
2016
 
2015
 
2016
 
2015
Net income (loss)
$
6,581

 
$
(11,655
)
 
$
18,967

 
$
(554
)
Other comprehensive income (loss):
 
 
 
 
 
 
 
Equity in other comprehensive income (loss) of unconsolidated joint venture
(151
)
 
287

 
(783
)
 
(131
)
Change in fair value of swap agreement
(9,158
)
 

 
(24,100
)
 

Total comprehensive loss
(2,728
)
 
(11,368
)
 
(5,916
)
 
(685
)
   Distributions to redeemable preferred unit holders

 
(2,904
)
 

 
(7,591
)
Preferred units redemption premium

 
(7,429
)
 

 
(7,429
)
Distributions to redeemable noncontrolling interests attributable to common stockholders
(89
)
 
(89
)
 
(178
)
 
(177
)
Less: comprehensive loss attributable to noncontrolling interests
101

 
668

 
206

 
458

Comprehensive loss attributable to common stockholders
$
(2,716
)
 
$
(21,122
)
 
$
(5,888
)
 
$
(15,424
)
See accompanying notes.




7


+
-GRIFFIN CAPITAL ESSENTIAL ASSET REIT, INC.
CONSOLIDATED STATEMENTS OF EQUITY
(Unaudited)
(In thousands, except share data)
 
 
 
 
 
 
 
 
 
 
 
Accumulated Other Comprehensive Loss
 
 
 
 
 
 
 
Common Stock
 
Additional
Paid-In
Capital
 
Cumulative
Distributions
 
Accumulated
Deficit
 
 
Total
Stockholders’
Equity
 
Non-
controlling
Interests
 
Total
Equity
 
Shares
 
Amount
 
BALANCE December 31, 2014
129,763,016

 
$
1,326

 
$
1,128,318

 
$
(104,429
)
 
$
(51,285
)
 
$
(423
)
 
$
973,507

 
$
17,478

 
$
990,985

Issuance of shares pursuant to Signature Office REIT merger
41,764,968

 
42

 
433,625

 

 

 

 
433,667

 

 
433,667

Adjustment to par value - common stock

 
(1,217
)
 
1,217

 

 

 

 

 

 

Adjustments to redemption value of redeemable noncontrolling interests

 

 
(10,473
)
 

 

 

 
(10,473
)
 

 
(10,473
)
Stock-based compensation
667

 

 
12

 

 

 

 
12

 

 
12

Offering costs

 

 
(62
)
 

 

 

 
(62
)
 

 
(62
)
Distributions to common stockholders

 

 

 
(55,045
)
 

 

 
(55,045
)
 

 
(55,045
)
Issuance of shares for distribution reinvestment plan
5,053,669

 
28

 
52,529

 
(52,557
)
 

 

 

 
 
 

Repurchase of common stock
(1,397,801
)
 
(4
)
 
(13,815
)
 

 

 

 
(13,819
)
 

 
(13,819
)
Additions to common stock subject to redemption

 

 
(35,232
)
 

 

 

 
(35,232
)
 

 
(35,232
)
Issuance of limited partnership units

 

 

 

 

 

 

 
7,282

 
7,282

Distributions to noncontrolling interests

 

 

 

 

 

 

 
(3,150
)
 
(3,150
)
Distributions to noncontrolling interests subject to redemption

 

 

 

 

 

 

 
(10
)
 
(10
)
Write-off of offering costs on redemption of preferred units

 

 
5,380

 

 

 

 
5,380

 

 
5,380

Net loss

 

 

 

 
(3,750
)
 

 
(3,750
)
 
(138
)
 
(3,888
)
Other comprehensive loss

 

 

 

 

 
(6,416
)
 
(6,416
)
 
(144
)
 
(6,560
)
BALANCE December 31, 2015
175,184,519

 
$
175

 
$
1,561,499

 
$
(212,031
)
 
$
(55,035
)
 
$
(6,839
)
 
$
1,287,769

 
$
21,318

 
$
1,309,087

Stock-based compensation
1,333

 

 
8

 

 

 

 
8

 

 
8

Distributions to common stockholders

 

 

 
(34,354
)
 

 

 
(34,354
)
 

 
(34,354
)
Issuance of shares for distribution reinvestment plan
2,517,350

 
3

 
26,178

 
(26,181
)
 

 

 

 

 

Repurchase of common stock
(1,623,565
)
 
(2
)
 
(16,096
)
 

 

 

 
(16,098
)
 

 
(16,098
)
Additions to common stock subject to redemption

 

 
(10,083
)
 

 

 

 
(10,083
)
 

 
(10,083
)
Issuance of limited partnership units

 

 

 

 

 

 

 
11,941

 
11,941

Distributions to noncontrolling interests

 

 

 

 

 

 

 
(1,921
)
 
(1,921
)
Distributions to noncontrolling interests subject to redemption

 

 

 

 

 

 

 
(6
)
 
(6
)
Net income

 

 

 

 
18,139

 

 
18,139

 
650

 
18,789

Other comprehensive loss

 

 

 

 

 
(24,027
)
 
(24,027
)
 
(856
)
 
(24,883
)
BALANCE June 30, 2016
176,079,637

 
$
176

 
$
1,561,506

 
$
(272,566
)
 
$
(36,896
)
 
$
(30,866
)
 
$
1,221,354

 
$
31,126

 
$
1,252,480

See accompanying notes.

8


GRIFFIN CAPITAL ESSENTIAL ASSET REIT, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited; in thousands)
 
Six Months Ended
 
June 30,
 
2016
 
2015
Operating Activities:
 
 
 
Net income (loss)
$
18,967

 
$
(554
)
Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation of building and building improvements
27,006

 
17,490

Amortization of leasing costs and intangibles, including ground leasehold interests
35,681

 
24,393

Amortization of above and below market leases, net
1,573

 
(1,055
)
Amortization of deferred financing costs
1,302

 
1,142

Amortization of debt premium
(134
)
 
(157
)
Amortization of deferred revenue
(1,228
)
 

Deferred rent
(8,923
)
 
(6,436
)
Gain from sale of depreciable operating property

 
(3,613
)
Gain on acquisition of unconsolidated entity
(666
)
 

Unrealized loss on interest rate swaps
5

 

Loss from investment in unconsolidated entities
738

 
746

Stock-based compensation
8

 
5

Change in operating assets and liabilities:
 
 
 
Other assets
3,522

 
(1,549
)
Restricted cash
5,069

 
(4,486
)
Accounts payable and other liabilities
(6,753
)
 
(2,263
)
Due to affiliates, net
(5,463
)
 
3,360

Net cash provided by operating activities
70,704

 
27,023

Investing Activities:
 
 
 
Acquisition of properties, net
(7,897
)
 
(143,000
)
Cash assumed from SOR merger

 
8,557

Proceeds from disposition of properties

 
11,809

Real estate funds held for exchange
47,031

 
10,105

Reserves for tenant improvements
1,951

 
5,782

Improvements to real estate
(6,113
)
 
(4,701
)
Payments for construction in progress, net
(7,030
)
 
(1,400
)
Real estate development, net of unpaid construction costs

 
(37,921
)
Mortgage receivable from affiliate
25,741

 

Distributions of capital from investment in unconsolidated entities
3,970

 
3,760

Net cash provided by (used in) investing activities
57,653

 
(147,009
)
Financing Activities:
 
 
 
Proceeds from borrowings - Unsecured Revolver (May 2014)

 
490,100

Proceeds from borrowings - Term Loan (July 2015)
75,000

 

Proceeds from borrowings - Revolver Loan (July 2015)
23,600

 

Principal payoff of secured indebtedness - Mortgage Debt
(6,370
)
 

Principal payoff of secured indebtedness - Revolver Loan (July 2015)
(139,344
)
 

Principal payoff of secured indebtedness - Signature Office REIT Credit Facility

 
(173,000
)
Principal amortization payments on secured indebtedness
(2,260
)
 
(958
)
Deferred financing costs
(740
)
 
(660
)
Offering costs

 
(54
)
Purchase of noncontrolling interest
(18,129
)
 

Repurchase of preferred units

 
(190,894
)
Repurchase of common stock
(16,098
)
 
(3,025
)
Distributions paid on preferred units subject to redemption

 
(8,815
)
Distributions to noncontrolling interests
(2,050
)
 
(1,717
)
Distributions to common stockholders
(34,460
)
 
(18,993
)
Net cash (used in) provided by financing activities
(120,851
)
 
91,984

Net increase (decrease) in cash and cash equivalents
7,506

 
(28,002
)
Cash and cash equivalents at the beginning of the period
21,944

 
68,915

Cash and cash equivalents at the end of the period
$
29,450

 
$
40,913

Supplemental Disclosures of Cash Flow Information:
 
 
 
Cash paid for interest
$
9,876

 
$
10,817

Supplemental Disclosures of Non-cash Transactions:
 
 
 
Change in fair value of interest rate swap agreements
$
(24,100
)
 
$

Construction in progress costs - real estate development
$

 
$
(36,630
)
Unpaid construction in progress costs - real estate development
$

 
$
(1,291
)
Limited partnership units of the operating partnership issued in conjunction with the acquisition of real estate assets by affiliates
$
11,941

 
$

Mortgage debt assumed in conjunction with the contribution of real estate assets plus a discount of $535
$
22,441

 
$

Decrease in distributions payable to noncontrolling interests
$
55

 
$
(9
)
Increase in distributions payable to common stockholders
$
(105
)
 
$
1,684

Decrease in distributions payable to preferred unit holders
$

 
$
(1,224
)
Distributions to redeemable noncontrolling interests attributable to common stockholders as reflected on the consolidated statements of operations
$
89

 
$
89

Common stock issued pursuant to the distribution reinvestment plan
$
26,180

 
$
25,951

Common stock redemptions funded subsequent to period-end
$
13,813

 
$
2,482

See accompanying notes.

9

GRIFFIN CAPITAL ESSENTIAL ASSET REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2016
(Unaudited; dollars in thousands unless otherwise noted)

 
1.
Organization
Griffin Capital Essential Asset REIT, Inc., a Maryland corporation (the "Company"), was formed on August 28, 2008 under the Maryland General Corporation Law. The Company was organized primarily with the purpose of acquiring single tenant properties that are essential to the tenant’s business and used a substantial amount of the net proceeds from the Public Offerings (as defined below) to invest in these properties. The Company satisfied requisite financial and non-financial requirements and elected to be taxed as a REIT for each taxable year ended since December 31, 2010 and for each year thereafter. The Company’s year end is December 31.
Griffin Capital Corporation, a California corporation (the "Sponsor"), has sponsored the Company’s Public Offerings. The Company’s Sponsor began operations in 1995, and was incorporated in 1996, to engage principally in acquiring and developing office and industrial properties. Kevin A. Shields, the Company's Chief Executive Officer and Chairman of the Company's board of directors, controls the Sponsor as the trustee of the trust entity that is the sole shareholder of the Sponsor.
Griffin Capital Essential Asset Advisor, LLC, a Delaware limited liability company (the "Advisor"), was formed on August 27, 2008. Griffin Capital Asset Management Company, LLC ("GAMCO," formerly known as Griffin Capital REIT Holdings, LLC) is the sole member of the Advisor, and Griffin Capital, LLC ("GC") is the sole member of GAMCO. The Company has entered into an advisory agreement for the Public Offerings (as amended and restated, the "Advisory Agreement"), which states that the Advisor is responsible for managing the Company’s affairs on a day-to-day basis and identifying and making acquisitions and investments on behalf of the Company. The officers of the Advisor are also officers of the Sponsor. The Advisory Agreement has a one-year term, and it may be renewed for an unlimited number of successive one-year periods by the Company's board of directors.
From 2009 to 2014, the Company offered shares of common stock, pursuant to a private placement offering to accredited investors (the "Private Offering") and two public offerings, consisting of an initial public offering and a follow-on offering (together, the "Public Offerings"), which included shares for sale, pursuant to the distribution reinvestment plan ("DRP"). The Company issued 126,592,885 total shares of its common stock for gross proceeds of approximately $1.3 billion, pursuant to the Private Offering and Public Offerings.
On May 7, 2014, the Company filed a Registration Statement on Form S-3 with the SEC for the registration of $75.0 million in shares for sale pursuant to the DRP (the “2014 DRP Offering”). On September 22, 2015, the Company filed a Registration Statement on Form S-3 with the SEC for the registration of $100.0 million in shares for sale pursuant to the DRP (the “2015 DRP Offering” and together with the 2014 DRP Offering, the “DRP Offerings”) and terminated the 2014 DRP Offering. In connection with the DRP Offerings, the Company had issued 11,097,049 shares of the Company's common stock for gross proceeds of approximately $113.5 million through June 30, 2016. The 2015 DRP Offering may be terminated at any time upon 10 days’ prior written notice to stockholders.
As of June 30, 2016, the Company had issued 179,456,902 shares of common stock and received aggregate gross offering proceeds of approximately $1.4 billion from the sale of shares in the Private Offering, the Public Offerings, and the DRP Offerings. There were 176,079,637 shares outstanding at June 30, 2016, including shares issued pursuant to the DRP, less shares redeemed pursuant to the share redemption program. As of June 30, 2016 and December 31, 2015, the Company had issued $136.4 million and $110.2 million, respectively, in shares pursuant to the DRP, which are classified on the consolidated balance sheets as common stock subject to redemption, net of redemptions paid of $33.4 million and $17.3 million, respectively, and redemptions payable totaling approximately $13.8 million and $6.3 million, respectively, which are included in accounts payable and other liabilities on the consolidated balance sheets. See Note 8, Equity — Share Redemption Program. Since inception and through June 30, 2016, the Company had redeemed 3,377,265 shares of common stock for approximately $33.4 million pursuant to the share redemption program.
On October 22, 2015, the Company's board of directors (the "Board"), at the recommendation of the Nominating and Corporate Governance Committee of the Board (the "Nominating and Corporate Governance Committee") comprised solely of independent directors, approved an estimated value per share of the Company's common stock of $10.40 (unaudited) based on the estimated value of the Company's assets less the estimated value of the Company's liabilities, or net asset value, divided by the number of shares outstanding on a fully diluted basis (the "NAV"), calculated as of September 30, 2015. The Company is providing this estimated value per share to assist broker dealers in connection with their obligations under applicable Financial Industry Regulatory Authority rules with respect to customer account statements. This valuation was performed in accordance

10

GRIFFIN CAPITAL ESSENTIAL ASSET REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2016
(Unaudited; dollars in thousands unless otherwise noted)

with the provisions of Practice Guideline 2013-01, Valuations of Publicly Registered Non-Listed REITs, issued by the Investment Program Association ("IPA") in April 2013, in addition to guidance from the SEC. (See the Company's Current Report on Form 8-K filed with the SEC on October 28, 2015 for a description of the methodologies and assumptions used to determine, and the limitations of the estimated value per share.)
Griffin Capital Essential Asset Operating Partnership, L.P., a Delaware limited partnership (the "Operating Partnership"), was formed on August 29, 2008. The Operating Partnership owns, directly or indirectly, all of the properties that the Company has acquired. The Advisor purchased an initial 99% limited partnership interest in the Operating Partnership for $200,000, and the Company contributed the initial $1,000 capital contribution, received from the Advisor, to the Operating Partnership in exchange for a 1% general partner interest. As of June 30, 2016, the Company owned approximately 96% of the limited partnership units of the Operating Partnership, and, as a result of the contribution of five properties to the Company, the Sponsor and certain of its affiliates, including the Company’s Chief Executive Officer and Chairman, Kevin A. Shields, and certain officers of the Company, owned approximately 2% of the limited partnership units of the Operating Partnership. The remaining approximately 2% of the limited partnership units were owned by unaffiliated third parties. No limited partnership units of the Operating Partnership have been redeemed during the six months ended June 30, 2016 and year ended December 31, 2015. The Operating Partnership may conduct certain activities through the Company’s taxable REIT subsidiary, Griffin Capital Essential Asset TRS, Inc., a Delaware corporation (the "TRS") formed on September 2, 2008, which is a wholly-owned subsidiary of the Operating Partnership. The TRS had no activity as of June 30, 2016.
The Company’s property manager is Griffin Capital Essential Asset Property Management, LLC, a Delaware limited liability company (the “Property Manager”), which was formed on August 28, 2008 to manage the Company’s properties. The Property Manager derives substantially all of its income from the property management services it performs for the Company.

2.
Summary of Significant Accounting Policies and Basis of Presentation

There have been no significant changes to the Company’s accounting policies since the Company filed its audited financial statements in its Annual Report on Form 10-K for the year ended December 31, 2015. For further information about the Company’s accounting policies, refer to the Company’s consolidated financial statements and notes thereto for the year ended December 31, 2015 included in the Company’s Annual Report on Form 10-K filed with the SEC.
The accompanying unaudited consolidated financial statements of the Company are prepared by management on the accrual basis of accounting and in accordance with principles generally accepted in the United States (“GAAP”) for interim financial information as contained in the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”), and in conjunction with rules and regulations of the SEC. Certain information and footnote disclosures required for annual financial statements have been condensed or excluded pursuant to SEC rules and regulations. Accordingly, the unaudited consolidated financial statements do not include all of the information and footnotes required by GAAP for complete financial statements. The unaudited consolidated financial statements include accounts and related adjustments, which are, in the opinion of management, of a normal recurring nature and necessary for a fair presentation of the Company’s financial position, results of operations and cash flows for the interim period. Operating results for the three and six months ended June 30, 2016 are not necessarily indicative of the results that may be expected for the year ending December 31, 2016. These unaudited consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015. The unaudited consolidated financial statements include accounts and related adjustments of the Company, the Operating Partnership and the TRS, if applicable, which are, in the opinion of management, of a normal recurring nature and necessary for a fair presentation of the Company’s financial position for the interim period. All significant intercompany accounts and transactions have been eliminated in consolidation.
Use of Estimates
The preparation of the consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could materially differ from those estimates.
Change in Consolidated Financial Statements Presentation

11

GRIFFIN CAPITAL ESSENTIAL ASSET REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2016
(Unaudited; dollars in thousands unless otherwise noted)

Certain amounts in the Company's prior period consolidated financial statements have been reclassified to conform to the current period presentation. Certain assets and liabilities are presented as held for sale on the consolidated balance sheets for all periods presented. See Assets Held for Sale in Note 3, Real Estate.
Per Share Data
The Company reports earnings per share for the period as (1) basic earnings per share computed by dividing net income (loss) attributable to common stockholders by the weighted average number of common shares outstanding during the period, and (2) diluted earnings per share computed by dividing net income (loss) attributable to common stockholders by the weighted average number of common shares outstanding, including common stock equivalents. As of June 30, 2016 and December 31, 2015, there were no common stock equivalents that would have a dilutive effect on earnings (loss) per share for common stockholders.
Segment Information
ASC Topic 280, Segment Reporting, establishes standards for reporting financial and descriptive information about a public entity’s reportable segments. The Company internally evaluates all of the properties and interests therein as one reportable segment.
Recently Issued Accounting Pronouncements
In February 2016, the FASB issued ASU 2016-02, Leases ("ASU 2016-02"). ASU 2016-02 amends the existing accounting standards for lease accounting, including requiring lessees to recognize most leases on their balance sheets and making targeted changes to lessor accounting. ASU 2016-02 will be effective beginning in the first quarter of 2019. Early adoption of ASU 2016-02 as of its issuance is permitted. The new leases standard requires a modified retrospective transition approach for all leases existing at, or entered into after, the date of initial application, with an option to use certain transition relief. The Company is currently evaluating the impact of adopting the new leases standard on the consolidated financial statements.
In April 2015, the FASB issued ASU No. 2015-03, Interest - Imputation of Interest (Subtopic 835-30) (“ASU 2015-03”) to amend the accounting guidance for the presentation of debt issuance costs. The standard requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. ASU 2015-03 is effective for public business entities for fiscal years beginning after December 15, 2015 and retrospective application is required. The Company has elected to adopt ASU 2015-03, beginning with the quarter ended March 31, 2016. As a result of the adoption of ASU 2015-03, the Company reclassified approximately $13.0 million of net debt issuance costs from an asset (previously recorded in the line item “Deferred financing costs, net” in the consolidated balance sheets) to a reduction in the carrying amount of the Company's debt as of December 31, 2015. ASU 2015-03 also expands disclosure requirements to include the face amount of the debt liability and the effective interest rate in the notes to the consolidated financial statements. See Note 5, Debt.
In February 2015, the FASB issued ASU No. 2015-02, Consolidation: Amendments to the Consolidation Analysis ("ASU No. 2015-02"), which amended the existing accounting standards for consolidation under both the variable interest model and the voting model. Under ASU No. 2015-02, companies will need to re-evaluate whether an entity meets the criteria to be considered a VIE, whether companies still meet the definition of primary beneficiaries, and whether an entity needs to be consolidated under the voting model. ASU No. 2015-02 may be applied using a modified retrospective approach or retrospectively, and is effective for reporting periods beginning after December 15, 2015. Early adoption is permitted. The Company adopted ASU No. 2015-02, beginning with the quarter ended March 31, 2016. There was no change to the Company's consolidated financial statements or notes as a result of adoption.
In August 2014, the FASB issued ASU No. 2014-15, Presentation of Financial Statements (Subtopic 205-40), Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern (“ASU No. 2014-15”). The amendments in ASU No. 2014-15 require management to evaluate, for each annual and interim reporting period, whether there are conditions or events, considered in the aggregate, that raise substantial doubt about an entity’s ability to continue as a going concern within one year after the date that the financial statements are issued (or are available to be issued when applicable) and, if so, provide related disclosures. ASU No. 2014-15 is effective for annual periods ending after December 15, 2016, and interim periods within annual periods beginning after December 15, 2016. Early adoption is permitted for annual or interim reporting periods for

12

GRIFFIN CAPITAL ESSENTIAL ASSET REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2016
(Unaudited; dollars in thousands unless otherwise noted)

which the financial statements have not previously been issued. The Company does not expect the adoption of ASU No. 2014-15 to have a significant impact on its financial statements.
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606) (“ASU No. 2014-09”). ASU No. 2014-09 replaces substantially all industry-specific revenue recognition requirements and converges areas under this topic with International Financial Reporting Standards.  ASU No. 2014-09 implements a five-step process for customer contract revenue recognition that focuses on transfer of control, as opposed to transfer of risk and rewards.  ASU No. 2014-09 also requires enhanced disclosures regarding the nature, amount, timing, and uncertainty of revenues and cash flows from contracts with customers.  Other major provisions in ASU No. 2014-09 include capitalizing and amortizing certain contract costs, ensuring the time value of money is considered in the applicable transaction price, and allowing estimates of variable consideration to be recognized before contingencies are resolved in certain circumstances.  ASU No. 2014-09 was originally effective for reporting periods beginning after December 31, 2016 (for public entities). On April 1, 2015, the FASB voted to defer the effective date of ASU No. 2014-09 by one year, to annual reporting periods beginning after December 15, 2017. On July 9, 2015, the FASB affirmed its proposal to defer the effective date to annual reporting periods beginning after December 15, 2017, although entities may elect to adopt the standard as of the original effective date. The Company is currently evaluating the potential impact of the pending adoption of this new guidance on its consolidated financial statements.
In March 2016, the FASB issued ASU No. 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net). The amendments clarify how an entity should identify the unit of accounting (i.e., the specified good or service) for the principal versus agent evaluation, and how it should apply the control principle to certain types of arrangements, such as service transactions, by explaining what a principal controls before the specified good or service is transferred to the customer. The effective date and transition requirements for the amendments are the same as the effective date and transition requirements of ASU No. 2014-09. ASU No. 2014-09 was originally effective for reporting periods beginning after December 31, 2016 (for public entities). On April 1, 2015, the FASB voted to defer the effective date of ASU No. 2014-09 by one year, to annual reporting periods beginning after December 15, 2017. On July 9, 2015, the FASB affirmed its proposal to defer the effective date to annual reporting periods beginning after December 15, 2017, although entities may elect to adopt the standard as of the original effective date. The Company is currently evaluating the impact of adopting the standard on the consolidated financial statements.
3.
Real Estate
As of June 30, 2016, the Company’s real estate portfolio consisted of 75 properties in 20 states consisting substantially of office, warehouse, and manufacturing facilities and two land parcels held for future development with a combined acquisition value of approximately $3.0 billion, including the allocation of the purchase price to above and below-market lease valuation.
2016 Acquisitions
On March 17, 2016, the Company acquired two land parcels to be held for future development from an unaffiliated party. The aggregate purchase price of the acquisitions was approximately $2.8 million.
On April 27, 2016, the Company, through the Operating Partnership, acquired the remaining 90% beneficial interest of a two-building, single-story office campus located in Nashville, Tennessee (the “HealthSpring property”) for $37.2 million (total purchase price value $41.3 million). The purchase price and other acquisition items for the land parcels and properties acquired during the six months ended June 30, 2016 is shown below (see Note 4, Investments, for additional detail):

Land Parcel/Property
 
Location
 
Tenant/Major Lessee
 
Acquisition Date
 
Purchase Price
 
Square Feet
 
Acquisition Fees Paid to the Advisor (2)
 
Year of Lease Expiration
Lynnwood III
 
Lynnwood, WA
 
 
3/17/2016
 
$
1,538

 
43,000

 
$
46

 
Lynnwood IV
 
Lynnwood, WA
 
 
3/17/2016
 
$
1,244

 
34,800

 
$
37

 
HealthSpring
 
Nashville, TN
 
HealthSpring, Inc.
 
4/27/2016
 
$
41,300

(1) 
170,500

 
$
1,239

 
2022
(1)
The Company acquired a 10% beneficial interest in April 2013, which is included in the total purchase price at fair value.
(2)
The Advisor is entitled to receive acquisition fees equal to 2.5% and acquisition expense reimbursement of up to 0.5% of the contract purchase price for each property acquired.
The following summarizes the purchase price allocations of the Highway 94 and HealthSpring properties acquired during the year ended December 31, 2015 and the six months ended June 30, 2016, respectively:

13

GRIFFIN CAPITAL ESSENTIAL ASSET REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2016
(Unaudited; dollars in thousands unless otherwise noted)

Property
 
Land
 
Building and improvements
 
Tenant origination and absorption costs
 
In-place lease valuation - above/(below) market
 
Debt discount
 
Total
Highway 94 (1)
 
$
5,637

 
$
18,592

 
$
6,688

 
$
(272
)
 
$
1,295

 
$
31,940

HealthSpring
 
$
8,126

 
$
26,441

 
$
5,006

 
$
1,192

 
$
535

 
$
41,300

(1)
The purchase price allocation of the Highway 94 property was finalized during the three months ended March 31, 2016.
Pro Forma Financial Information
The following condensed pro forma operating information is presented as if the Company’s property acquired during the three and six months ended June 30, 2016, had been included in operations as of January 1, 2015. The pro forma operating information excludes certain nonrecurring adjustments, such as acquisition fees and expenses incurred, to reflect the pro forma impact the acquisition would have on earnings on a continuous basis:
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
2016
 
2015
 
2016
 
2015
Revenue
$
85,905

 
$
62,508

 
$
172,651

 
$
118,664

Net income
$
8,219

 
$
9,040

 
$
20,672

 
$
22,484

Net income (loss) attributable to noncontrolling interests
$
230

 
$
(45
)
 
$
581

 
$
269

Distributions to redeemable noncontrolling interests attributable to common stockholders
$
(89
)
 
$
(89
)
 
$
(178
)
 
$
(177
)
Net income (loss) attributable to common stockholders (1)
$
7,900

 
$
(1,337
)
 
$
19,913

 
$
7,018

Net income (loss) to common stockholders per share, basic and diluted
$
0.04

 
$
(0.01
)
 
$
0.11

 
$
0.05

(1)
Amount is net of net income (loss) attributable to noncontrolling interests and distributions to redeemable noncontrolling interests attributable to common stockholders.
Future Minimum Contractual Rent Payments
The future minimum contractual rent payments pursuant to the current lease terms are shown in the table below. The Company's current leases have expirations ranging from 2016 to 2035.
Remaining 2016
$
129,516

2017
257,137

2018
249,491

2019
218,420

2020
192,476

Thereafter
1,006,543

Total
$
2,053,583

Asset Held for Sale
As of June 30, 2016, one property, the One Century Place property located in Nashville, Tennessee, met the criteria to be classified as held for sale. Therefore, the Company classified the property as held for sale, net, on the consolidated balance sheets at the lower of its (i) carrying amount or (ii) fair value less costs to sell as of June 30, 2016. The One Century Place property is included in continuing operations in the consolidated statements of operations in accordance with ASU No. 2014-08, as it did not meet the prerequisite requirements to be classified as discontinued operations.
The following summary presents the major components of assets and liabilities related to the real estate held for sale as of June 30, 2016 and December 31, 2015:

14

GRIFFIN CAPITAL ESSENTIAL ASSET REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2016
(Unaudited; dollars in thousands unless otherwise noted)

 
Balance as of
June 30, 2016
 
Balance as of
December 31, 2015
Restricted cash
$
561

 
$
561

Real estate:
 
 
 
Land
8,025

 
8,025

Building and improvements
43,924

 
42,858

Tenant origination and absorption costs
20,003

 
20,003

Construction in progress
754

 
22

Total real estate
72,706

 
70,908

Less: accumulated depreciation and amortization
(6,885
)
 
(6,885
)
Total real estate, net
65,821

 
64,023

In-place lease valuation (above market), net
664

 
664

Deferred rent
3,141

 
2,716

Other assets
1,002

 
828

Total assets
$
71,189

 
$
68,792

 
 
 
 
Accounts payable and other liabilities
$
1,207

 
$
2,203

Due to affiliates
84

 
81

Restricted reserves
561

 
561

Total liabilities
$
1,852

 
$
2,845

The following is a summary of the income included in the Company's income from continuing operations for the three and six months ended June 30, 2016 and 2015, related to assets classified as held for sale subsequent to the Company's adoption of ASU No. 2014-08, which includes the Will Partners (for the three and six months ended June 30, 2015) and One Century Place properties:
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2016
 
2015
 
2016
 
2015
Total revenues
$
2,930

 
$
3,421

 
$
6,221

 
$
6,304

Operating expenses
(1,229
)
 
(1,714
)
 
(2,489
)
 
(3,321
)
   Total revenues less operating expenses from assets classified
     as "held for sale," not qualifying as discontinued operations
1,701

 
1,707

 
3,732

 
2,983

Depreciation and amortization expense

 
(889
)
 

 
(1,767
)
   Income from assets classified as "held for sale," not
     qualifying as discontinued operations
$
1,701

 
$
818

 
$
3,732

 
$
1,216

Intangibles
The Company allocated a portion of the acquired and contributed real estate asset value to in-place lease valuation and tenant origination and absorption cost, as discussed above and as shown below, net of the write-off of intangibles as of June 30, 2016 and December 31, 2015. In-place leases were measured against comparable leasing information and the present value of the difference between the contractual, in-place rent, and the fair market rent was calculated using, as the discount rate, the capitalization rate utilized to compute the value of the real estate at acquisition or contribution.

15

GRIFFIN CAPITAL ESSENTIAL ASSET REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2016
(Unaudited; dollars in thousands unless otherwise noted)

 
June 30, 2016
 
December 31, 2015
In-place lease valuation (above market)
$
46,605

 
$
45,413

In-place lease valuation (above market) - accumulated amortization
(15,498
)
 
(10,844
)
In-place lease valuation (above market), net
31,107

 
34,569

Ground leasehold interest (below market)
2,254

 
2,254

Ground leasehold interest (below market) - accumulated amortization
(68
)
 
(54
)
Ground leasehold interest (below market), net
2,186

 
2,200

Intangible assets, net
$
33,293

 
$
36,769

In-place lease valuation (below market)
$
(51,966
)
 
$
(55,774
)
In-place lease valuation (below market) - accumulated amortization
17,149

 
14,068

In-place lease valuation (below market), net
$
(34,817
)
 
$
(41,706
)
Tenant origination and absorption cost
$
521,643

 
$
516,879

Tenant origination and absorption cost - accumulated amortization
(154,818
)
 
(119,593
)
Tenant origination and absorption cost, net
$
366,825

 
$
397,286

The intangible assets are amortized over the remaining lease term of each property, which on a weighted-average basis, was approximately 7.5 years and 7.8 years as of June 30, 2016 and December 31, 2015, respectively. The amortization of the intangible assets and other leasing costs for the respective periods is as follows:
 
Amortization (income) expense for the six months ended June 30,
 
2016
 
2015
In-place lease valuation, net
$
1,573

 
$
(1,055
)
Tenant origination and absorption cost
$
35,225

 
$
24,267

Ground leasehold amortization (below market)
$
14

 
$
14

Other leasing costs amortization
$
442

 
$
112

The following table sets forth the estimated annual amortization (income) expense for in-place lease valuation, net, tenant origination and absorption costs, ground leasehold improvements, and other leasing costs as of June 30, 2016 for the next five years:
Year
 
In-place lease valuation, net
 
Tenant origination and absorption costs
 
Ground leasehold improvements
 
Other leasing costs
 Remaining 2016
 
$
1,392

 
$
31,372

 
$
14

 
$
416

2017
 
$
854

 
$
58,722

 
$
27

 
$
1,007

2018
 
$
148

 
$
52,757

 
$
27

 
$
1,042

2019
 
$
(1,498
)
 
$
42,599

 
$
27

 
$
1,042

2020
 
$
(763
)
 
$
33,784

 
$
27

 
$
944

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

16

GRIFFIN CAPITAL ESSENTIAL ASSET REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2016
(Unaudited; dollars in thousands unless otherwise noted)

Description
Balance as of
December 31, 2015
 
Additions
 
Deductions
 
Balance as of
June 30, 2016
Tenant improvement reserves (1)
$
12,893

 
$
283

 
$
(1,814
)
 
$
11,362

Midland Mortgage loan repairs reserves (2)
453

 

 
(370
)
 
83

Real estate tax reserve (Emporia Partners, TW Telecom, DynCorp, and Mercedes-Benz) (3)
1,891

 
1,190

 
(931
)
 
2,150

Property insurance reserve (Emporia Partners) (3)
301

 
301

 

 
602

Restricted deposits
20

 
25

 

 
45

Midland Mortgage loan restricted lockbox (4)
2,044

 
2,003

 
(2,044
)
 
2,003

Restricted rent receipts (5)
6,585

 
599

 
(6,585
)
 
599

Total
$
24,187

 
$
4,401

 
$
(11,744
)
 
$
16,844

(1)
Additions represent tenant improvement reserves funded by the tenant and held by the lender. Deductions represent tenant improvement reimbursements made to certain tenants during the current period.
(2)
Represents a deferred maintenance reserve funded by the Company as part of the refinancing that occurred on February 28, 2013, whereby certain properties became collateral for the Midland Mortgage loan.
(3)
Additions represent monthly funding of real estate taxes and insurance by the tenants during the current period. Deductions represent reimbursements to the tenant for payment of real estate taxes and insurance premiums made during the current period.
(4)
As part of the terms of the Midland Mortgage loan, rent collections from the eight properties which serve as collateral thereunder are received in a designated cash collateral account which is controlled by the lender until the designated payment date, as defined in the loan agreement, and the excess cash is transferred to the operating account.
(5)
Addition represents rent collections from the DynCorp and Mercedes-Benz properties related to July 2016, which are to be held in a designated cash collateral account which is controlled by the lender until the designated payment date, as defined in the respective loan agreements, and the excess cash is transferred to the respective operating accounts.
During January 2016, proceeds of approximately $47.0 million from the sale of the Will Partners and LTI properties were released by the qualified intermediary. The funds were held by the qualified intermediary as both properties were sold pursuant to a tax-deferred exchange.
4.
Investments
Investments in Unconsolidated Entities
HealthSpring property
On April 10, 2013, a Delaware Statutory Trust (“DST”) affiliated with the Sponsor acquired a two-building, single-story office campus located in Nashville, Tennessee for a purchase price of $36.4 million. The DST was then syndicated for $39.6 million which consisted of mortgage debt of $23.6 million and aggregate equity investment of $16.0 million. The HealthSpring property is leased in its entirety, pursuant to a triple-net lease, to HealthSpring, Inc. (“HealthSpring”), obligating HealthSpring to all costs and expenses to operate and maintain the property, including certain capital expenditures. On the acquisition date, the remaining term was approximately nine years. On April 12, 2013, the Company, through the Operating Partnership, acquired a 10% beneficial ownership interest in the DST, net of a 10% discount associated with offering expenses. Pursuant to the private placement memorandum, the Operating Partnership was provided exchange rights in which it would be able to acquire the beneficial interests of other investors of the DST at fair value.
On April 27, 2016, the Company, through its Operating Partnership, exercised its exchange right and acquired the remaining 90% beneficial ownership interest in the HealthSpring property. The total purchase price of the property was $41.3 million, including the initial 10% interest of the Company. Approximately 70% of the beneficial owners of HealthSpring interests elected to exchange their interest in the DST for operating partnership units, and the remaining 30% elected to redeem their interest for cash. The issuance of approximately $11.9 million in limited partnership units of the operating partnership is included as a component of noncontrolling interest in the Company's permanent equity. The limited partnership units of the operating partnership were based on the Company's most recent net asset valuation. The remaining balance of approximately $27.5 million consists of a mortgage loan of approximately $22.4 million, which was assumed by the Company in conjunction with the exchange, and a cash payment made to the unaffiliated third party investors of approximately $5.0 million. As a result of the acquisition of the remaining 90% interest, the Company consolidated the HealthSpring property as of the acquisition date and recognized a gain of approximately $0.7 million from the re-measurement of its initial 10% interest.

17

GRIFFIN CAPITAL ESSENTIAL ASSET REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2016
(Unaudited; dollars in thousands unless otherwise noted)

In connection with the acquisition of the HealthSpring property, the Company was assigned and assumed a leasehold estate and the rights to a payment in lieu of taxes agreement (the “PILOT Program”) with the municipalities which own the underlying leased fee estate and subsequently leased the ground to the Company. The ground lease arrangements were put in place to provide the property operator with real estate tax abatements, which are facilitated through the issuance of municipal bonds. Payments on the bonds, which are owned by the Company, are funded solely from the payments on the ground leases, of which the Company is the lessee. Since the payments due from the municipality under the bond arrangement equals the rent payments, no payments are exchanged. The bonds can only be transferred to any successor to the Company, or any affiliate, as a lessee under the lease, including but not limited to any purchaser of the Company’s leasehold interest. Upon termination of the lease, the Company has the option to purchase the land for a nominal amount, which is a bargain purchase option. The bonds, ground lease obligations and purchase options were measured at fair value at acquisition in accordance with ASC 805 and, due to their inseparability, are presented as a component of land on the accompanying consolidated balance sheets.
Digital Realty Trust, Inc.
On September 9, 2014, the Company, through a special purpose entity ("SPE"), wholly-owned by the Operating Partnership, acquired an 80% interest in a joint venture with an affiliate of Digital Realty Trust, Inc. for $68.4 million, which was funded with equity proceeds raised in the Company's Public Offerings. The gross acquisition value of the property was $187.5 million, plus closing costs, which was partially financed with debt of $102.0 million. The joint venture was created for purposes of directly or indirectly acquiring, owning, financing, operating and maintaining a data center facility located in Ashburn, Virginia (the "Property"). The Property is approximately 132,300 square feet and consists of certain data processing and communications equipment that is fully leased to a social media company and a financial services company with an average remaining lease term of approximately six years.
The joint venture currently uses an interest rate swap to manage its interest rate risk associated with its variable rate debt. The interest rate swap is designated as an interest rate hedge of its exposure to the volatility associated with interest rates. As a result of the hedge designation and in satisfying the requirement for cash flow hedge accounting, the joint venture records changes in the fair value in accumulated other comprehensive loss. In conjunction with the investment in the joint venture discussed above, the Company recognized its 80% share, or approximately $(0.8) million, of other comprehensive loss for the six months ended June 30, 2016.
The interest discussed above is deemed to be a variable interest in a VIE, and, based on an evaluation of the variable interest against the criteria for consolidation, the Company determined that it is not the primary beneficiary of the investment, as the Company does not have power to direct the activities of the entity that most significantly affect its performance. As such, the interest in the VIE is recorded using the equity method of accounting in the accompanying consolidated financial statements. Under the equity method, the investment in the unconsolidated entity is stated at cost and adjusted for the Company’s share of net earnings or losses and reduced by distributions. Equity in earnings of real estate ventures is generally recognized based on the allocation of cash distributions upon liquidation of the investment at book value in accordance with the joint venture agreements.
As of June 30, 2016, the balance of the investments are shown below:
 
 
HealthSpring DST
 
Digital Realty
Joint Venture
 
Total
Balance December 31, 2015
 
$
1,291

 
$
55,572

 
$
56,863

Other comprehensive loss
 

 
(783
)
 
(783
)
Net income (loss)
 
14

 
(752
)
 
(738
)
Distributions
 
(85
)
 
(3,885
)
 
(3,970
)
Consolidation of equity investment
 
(1,220
)
 

 
(1,220
)
Balance June 30, 2016
 
$

 
$
50,152

 
$
50,152

Investments in Consolidated Entities
Effective June 16, 2014, WRRH Patterson, LLC (an affiliate of Weeks Robinson Properties) and Griffin Capital JVII Patterson, LLC, a wholly-owned SPE of the Operating Partnership, entered into an operating agreement as Managing Member and Investor Member, respectively, for purposes of forming WR Griffin Patterson, LLC ("WR Griffin"). WR Griffin's purpose is to acquire, own, develop, construct, and otherwise invest and manage a development project located in Patterson, California

18

GRIFFIN CAPITAL ESSENTIAL ASSET REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2016
(Unaudited; dollars in thousands unless otherwise noted)

(the "Project") in which a warehouse and distribution facility consisting of approximately 1.5 million square feet was subsequently constructed (the "Restoration Hardware property").
On June 20, 2014, the Company, through WR Griffin, entered into a real estate development agreement with Weeks Robinson Development & Management, LLC ("Weeks Robinson") to develop and construct the Restoration Hardware property. On June 20, 2014, the land on which the property was to be constructed was purchased by WR Griffin for approximately $15.2 million, including closing costs.
The Restoration Hardware property is leased to Restoration Hardware, Inc. and Restoration Hardware Holdings, Inc. as co-tenants (collectively, "Restoration Hardware") pursuant to a 15-year triple-net lease, obligating Restoration Hardware to all costs and expenses to operate and maintain the property, including certain capital expenditures. The lease term commenced upon substantial completion of the project, which occurred on August 15, 2015.
During the construction of the Project, the business and affairs of WR Griffin were managed by the Managing Member. However, all major decisions, as provided in the operating agreement, were approved by both the Managing Member and Investor Member. Additionally, the Managing Member interest, pursuant to the purchase and sale agreement, has been assigned to the Investor Member in exchange for a mandatory redemption fee based on the fair value of the property at completion. The Project was deemed complete during January 2016, at which point the Company paid the $18.1 million mandatory redemption fee to the Managing Member. Upon payment and completion of the Project, the Managing Member transferred all membership interest to the Investor Member, pursuant to the operating agreement. Upon the transfer of the interest, the Managing Member had no further interest in WR Griffin or any of its assets and had no further obligations.
 

19

GRIFFIN CAPITAL ESSENTIAL ASSET REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2016
(Unaudited; dollars in thousands unless otherwise noted)

5.    Debt
As of June 30, 2016 and December 31, 2015, the Company’s debt consisted of the following:
 
June 30, 2016
 
December 31, 2015
 
 
 
 
 
 
 
Principal Amount
 
Deferred Financing Costs
 
Premiums/
(Discounts)
 
Net Balance
 
Principal Amount
 
Deferred Financing Costs
 
Premiums/
(Discounts)
 
Net Balance
 
Contractual
Interest 
Rate (1)
 
Loan
Maturity
 
Effective Interest Rate (2)
Plainfield mortgage loan
$
19,117

 
$

 
$

 
$
19,117

 
$
19,295

 
$

 
$

 
$
19,295

 
6.65%
 
Nov
2017
 
6.74%
Emporia Partners mortgage loan
3,568

 

 

 
3,568

 
3,753

 

 

 
3,753

 
5.88%
 
Sep
2023
 
5.96%
TransDigm mortgage loan

 

 

 

 
6,432

 

 
22

 
6,454

 
5.98%
 
Jun
2016
 
—%
Ace Hardware mortgage loan
23,110

 
(113
)
 
1,423

 
24,420

 
23,294

 
(120
)
 
1,508

 
24,682

 
5.59%
 
Oct
2024(5)
 
4.70%
Highway 94 mortgage loan
18,576

 

 
(1,199
)
 
17,377

 
18,968

 

 
(2,210
)
 
16,758

 
3.75%
 
Aug
2024
 
5.05%
DynCorp mortgage loan
11,005

 

 

 
11,005

 
11,162

 

 

 
11,162

 
4.70%
 
Jul
2016
 
4.77%
Mercedes-Benz mortgage loan
18,728

 

 

 
18,728

 
18,945

 

 

 
18,945

 
6.02%
 
Nov
2016
 
6.10%
Samsonite mortgage loan
24,179

 

 
1,393

 
25,572

 
24,561

 

 
1,490

 
26,051

 
6.08%
 
Sep
2023
 
4.98%
HealthSpring mortgage loan
22,368

 

 
(521
)
 
21,847

 

 

 

 

 
4.18%
 
Apr 2023
 
4.65%
Midland Mortgage loan
105,600

 
(965
)
 

 
104,635

 
105,600

 
(1,035
)
 

 
104,565

 
3.94%
 
Apr
2023
 
4.05%
AIG loan
110,640

 
(1,584
)
 

 
109,056

 
110,640

 
(1,647
)
 

 
108,993

 
4.96%
 
Feb
2029
 
5.14%
TW Telecom loan
20,783

 
(107
)
 

 
20,676

 
21,213

 
(125
)
 
 
 
21,088

 
LIBO Rate +2.45% (3)
 
Aug
2019
 
3.11%
Mortgage Loans Total
377,674

 
(2,769
)
 
1,096

 
376,001

 
363,863

 
(2,927
)
 
810

 
361,746

 
 
 
 
 
 
Term Loan
(July 2015)
715,000

 
(5,151
)
 

 
709,849

 
640,000

 
(5,078
)
 

 
634,922

 
LIBO Rate +1.55% (3)
 
Jul
2020
 
2.02%
Revolver Loan
(July 2015)
365,909

 
(4,367
)
 

 
361,542

 
481,653

 
(4,894
)
 

 
476,759

 
LIBO Rate +1.60% (3)
 
Jul
2020 (4)
 
2.23%
Total
$
1,458,583

 
$
(12,287
)
 
$
1,096

 
$
1,447,392

 
$
1,485,516

 
$
(12,899
)
 
$
810

 
$
1,473,427

 
 
 
 
 
 
(1)
Including the effect of interest rate swap agreements with a total notional amount of $725.0 million, the weighted average interest rate as of June 30, 2016 was 3.30% for the Company’s fixed-rate and variable-rate debt combined and 3.72% for the Company’s fixed-rate debt only.
(2)
Reflects the effective interest rate as of June 30, 2016 and includes the effect of amortization of discounts/premiums and deferred financing costs.
(3)
The LIBO Rate as of June 30, 2016 was 0.47%.
(4)
The Revolver Loan (July 2015) has an initial term of four years, maturing on July 20, 2019, and may be extended for a one-year period if certain conditions are met and upon payment of an extension fee. See discussion below.
(5)
The interest rate of this loan resets on April 1, 2017 to the greater of (i) 8.9% or (ii) 500 basis points + ten year swap rate.

Unsecured Credit Facility (July 2015)
On July 20, 2015, the Company, through the Operating Partnership, entered into a credit agreement (the "Unsecured Credit Agreement (July 2015)") with a syndicate of lenders, co-led by KeyBank, Bank of America, Fifth Third Bank ("Fifth Third"), and BMO Harris Bank, N.A. ("BMO Harris"), under which KeyBank serves as administrative agent and Bank of

20

GRIFFIN CAPITAL ESSENTIAL ASSET REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2016
(Unaudited; dollars in thousands unless otherwise noted)

America, Fifth Third, and BMO Harris serve as co-syndication agents, and KeyBanc Capital Markets ("KeyBank Capital markets"), Merrill Lynch, Pierce, Fenner & Smith Incorporated ("Merrill Lynch"), Fifth Third, and BMO Capital Markets serve as joint bookrunners and joint lead arrangers. Pursuant to the Unsecured Credit Agreement (July 2015), the Company was provided with a $1.14 billion senior unsecured credit facility (the "Unsecured Credit Facility (July 2015)"), consisting of a $500.0 million senior unsecured revolver (the "Revolver Loan (July 2015)") and a $640.0 million senior unsecured term loan (the "Term Loan (July 2015)"). The Unsecured Credit Facility (July 2015) may be increased up to $860.0 million, in minimum increments of $50.0 million, for a maximum of $2.0 billion by increasing either the Revolver Loan (July 2015), the Term Loan (July 2015), or both. The Revolver Loan (July 2015) has an initial term of four years, maturing on July 20, 2019, and may be extended for a one-year period if certain conditions are met and upon payment of an extension fee. The Term Loan (July 2015) has a term of five years, maturing on July 20, 2020.
The Unsecured Credit Facility (July 2015) has an interest rate calculated based on LIBO Rate plus the applicable LIBO Rate margin or Base Rate plus the applicable Base Rate margin, both as provided in the Unsecured Credit Agreement (July 2015). The applicable LIBO Rate margin and Base Rate margin are dependent on whether the interest rate is calculated prior to or after the Company has received an investment grade senior unsecured credit rating of BBB-/Baa3 from Standard & Poors, Moody's, or Fitch, and the Company has elected to utilize the investment grade pricing list, as provided in the Unsecured Credit Agreement (July 2015). Otherwise, the applicable LIBO Rate margin will be based on a leverage ratio computed in accordance with the Company's quarterly compliance package and communicated to KeyBank. The Base Rate is calculated as the greater of (i) the KeyBank Prime rate or (ii) the Federal Funds rate plus 0.50%. Payments under the Unsecured Credit Facility (July 2015) are interest only and are due on the first day of each quarter.
On March 29, 2016, the Company exercised its right to increase the total commitments, pursuant to the Unsecured Credit Agreement (July 2015). As a result, the total commitments on the Term Loan (July 2015) increased from $640.0 million to $715.0 million.
HealthSpring Mortgage Loan
As part of the acquisition of the remaining 90% beneficial interest in the HealthSpring property, the Company assumed a $22.4 million mortgage loan (the "HealthSpring mortgage loan") held with Barclays Bank PLC. The HealthSpring mortgage loan, which matures on April 6, 2023, has a fixed interest rate of 4.18% and requires monthly payments of principal and interest.
Debt Covenant Compliance
Pursuant to the terms of the Midland Mortgage loan, AIG loan, TW Telecom loan, Unsecured Credit Facility (July 2015), DynCorp mortgage loan, Mercedes-Benz mortgage loan, and HealthSpring mortgage loan, the Operating Partnership, in consolidation with the Company, is subject to certain loan compliance covenants. The Company was in compliance with all of its debt covenants as of June 30, 2016.
The following summarizes the future principal repayments of all loans as of June 30, 2016 per the loan terms discussed above:
 
June 30, 2016
 
Remaining 2016
$
31,740

(1) 
2017
25,301

(2) 
2018
7,552

 
2019
25,648

(3) 
2020
1,088,257

(4) 
Thereafter
280,085

(4) 
Total principal
1,458,583

  
Unamortized debt premium
1,096

  
Unamortized deferred loan costs
(12,287
)
 
Total
$
1,447,392

  
(1)
Amount includes payment of the balances of the DynCorp and Mercedes-Benz property mortgage loans, which mature in 2016. The DynCorp loan was paid off on July 1, 2016 with a draw from the Unsecured Credit Facility (July 2015).
(2)
Amount includes payment of the balance of the Plainfield property mortgage loan, which matures in 2017.

21

GRIFFIN CAPITAL ESSENTIAL ASSET REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2016
(Unaudited; dollars in thousands unless otherwise noted)

(3)
Amount includes payment of the balance of the TW Telecom loan, which matures in 2019.
(4)
Amount includes payment of the balances of:
the Term Loan (July 2015), which matures in 2020,
the Revolver Loan (July 2015), which matures in 2020, assuming the one-year extension is exercised,
the Midland Mortgage, Emporia Partners, Samsonite, and HealthSpring property mortgage loans, all of which mature in 2023,
the Ace Hardware and Highway 94 property mortgage loans, which mature in 2024, and
the AIG loan, which matures in 2029.
Principal repayments on the Ace Hardware, Highway 94, Samsonite, and HealthSpring property mortgage loans do not include the unamortized valuation net premium of approximately $1.1 million.

6.
Interest Rate Contracts
Risk Management Objective of Using Derivatives
The Company is exposed to certain risks arising from both business operations and economic conditions. The Company manages economic risks, including interest rate, liquidity, and credit risk primarily by managing the amount, sources, and duration of debt funding and the use of derivative financial instruments. Specifically, the Company entered into derivative financial instruments to manage exposures that arise from business activities that result in the payment of future known and uncertain cash amounts, the value of which are determined by expected cash payments principally related to borrowings and interest rates. Interest rate swaps designated as cash flow hedges involve the receipt of variable amounts from a counterparty in exchange for making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount. The Company does not use derivatives for trading or speculative purposes.
Derivative Instruments
On July 9, 2015, the Company executed three interest rate swap agreements to hedge the variable cash flows associated with certain existing or forecasted LIBO Rate-based variable-rate debt, including the Company's Unsecured Credit Facility (July 2015). Two interest rate swaps are effective for the periods from July 9, 2015 to July 1, 2020 and January 1, 2016 to July 1, 2018, and have notional amounts of $425.0 million and $300.0 million, respectively. The forward-starting interest rate swap is effective for the period from July 1, 2016 to July 1, 2018 with a notional amount of $100.0 million.
On March 24, 2016, the Company executed an interest rate swap agreement to hedge interest risk related to a future fixed-rate debt issuance. The forward-starting interest rate swap with a notional amount of $200.0 million became effective May 2016 and has a term of 10 years with a mandatory settlement date on November 30, 2016.
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 loss ("AOCL") and is subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. During 2016, such 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 fair value of the derivatives is recognized directly in earnings.
The following table sets forth a summary of the interest rate swaps at June 30, 2016 and December 31, 2015:
 
 
 
 
 
 
 
 
 
 
Fair Value (1)
 
Current Notional Amount (2)
Derivative Instrument
 
Notional Amount
 
Effective Date
 
Maturity Date
 
Interest Strike Rate
 
June 30,
2016
 
December 31,
2015
 
June 30,
2016
 
December 31,
2015
Liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest Rate Swap
 
$
425,000

 
7/9/2015
 
7/1/2020
 
1.687%
 
$
(15,777
)
 
$
(4,305
)
 
$
425,000

 
$
425,000

Interest Rate Swap
 
300,000

 
1/1/2016
 
7/1/2018
 
1.320%
 
(4,542
)
 
(1,605
)
 
300,000

 

Interest Rate Swap
 
100,000

 
7/1/2016
 
7/1/2018
 
1.495%
 
(1,862
)
 
(484
)
 

 

Interest Rate Swap
 
200,000

 
5/31/2016
 
(3) 
 
1.811%
 
(8,318
)
 

 
200,000

 

Total
 
 
 
 
 
 
 
 
 
$
(30,499
)
 
$
(6,394
)
 
$
925,000

 
$
425,000

(1)
The Company records all derivative instruments on a gross basis in the consolidated balance sheets, and accordingly, there are no offsetting amounts that
net assets against liabilities. As of June 30, 2016, all of the derivatives were in a liability position, and as such, the fair value is included in the line item "Interest rate swap liability" in the consolidated balance sheets.

22

GRIFFIN CAPITAL ESSENTIAL ASSET REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2016
(Unaudited; dollars in thousands unless otherwise noted)

(2)
Represents the notional amount of swaps that are effective as of the balance sheet date of June 30, 2016 and December 31, 2015.
(3)
This interest rate swap has a maturity date of May 31, 2026, but requires a mandatory redemption on November 30, 2016, at which time the fair value will be cash settled.
The following table sets forth the impact of the interest rate swap on the consolidated statements of operations for the periods presented: