Griffin Realty Trust, Inc. - FORM 10-Q - August 11, 2017

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EX-32.2 - EXHIBIT 32.2 - Griffin Realty Trust, Inc.gcearii06302017exhibit322.htm
EX-32.1 - EXHIBIT 32.1 - Griffin Realty Trust, Inc.gcearii06302017exhibit321.htm
EX-31.2 - EXHIBIT 31.2 - Griffin Realty Trust, Inc.gcearii06302017exhibit312.htm
EX-31.1 - EXHIBIT 31.1 - Griffin Realty Trust, Inc.gcearii06302017exhibit311.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, 2017
¨
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: 000-55605
_______________________________________________
Griffin Capital Essential Asset REIT II, Inc.
(Exact name of Registrant as specified in its charter)
________________________________________________
Maryland
 
46-4654479
(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)

Not Applicable
(Former name, former address and former fiscal year, if changed since last report)
__________________________________________________


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, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer
 
¨
 
Accelerated filer
 
¨
Non-accelerated filer
 
 x  (Do not check if a smaller reporting company)
 
Smaller reporting company
 
¨
Emerging growth company
 
x  
 
 
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  x   
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x
As of August 9, 2017, there were 25,784,173, 49,336,647, and 952,942 shares of Class A, Class T and Class I common stock, respectively, of Griffin Capital Essential Asset REIT II, Inc. outstanding.


FORM 10-Q
GRIFFIN CAPITAL ESSENTIAL ASSET REIT II, INC.
TABLE OF CONTENTS
 
 
Page No.
 
 
Item 1.
Financial Statements:
 
 
 
 
 
 
 
Item 2.
Item 3.
Item 4.
 
Item 1.
Item 1A.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.






PART I. FINANCIAL INFORMATION

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

Certain statements contained in this Form 10-Q of Griffin Capital Essential Asset REIT II, 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 may discuss, among other things, our future capital expenditures, distributions and acquisitions (including the amount and nature thereof), business strategies, the expansion and growth of our operations, our net sales, gross margin, operating expenses, operating income, net income, cash flow, financial condition, impairments, expenditures, capital structure, organizational structure, and other developments and trends of the real estate industry. 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 (the "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, except as required by applicable securities laws and regulations.
See the risk factors identified in Part II, Item 1A of this Form 10-Q and in the “Risk Factors” section of our Annual Report on Form 10-K for the year ended December 31, 2016 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 II, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(in thousands, except share amounts)
 
June 30, 2017
 
December 31, 2016
ASSETS
 
 
 
Cash and cash equivalents
$
43,647

 
$
49,340

Restricted cash
14,457

 
14,221

Real estate:
 
 
 
Land
122,482

 
117,569

Building and improvements
815,345

 
787,999

Tenant origination and absorption cost
240,364

 
227,407

Construction in progress
42

 
80

Total real estate
1,178,233

 
1,133,055

Less: accumulated depreciation and amortization
(61,429
)
 
(39,955
)
Total real estate, net
1,116,804

 
1,093,100

Intangible assets, net
3,481

 
3,528

Real estate acquisition deposits
—

 
250

Deferred rent
14,153

 
5,424

Other assets, net
13,571

 
18,612

Total assets
$
1,206,113

 
$
1,184,475

LIABILITIES AND EQUITY
 
 
 
Debt:
 
 
 
Revolving Credit Facility
$
345,044

 
$
330,272

AIG Loan
126,243

 
126,200

Total debt
471,287

 
456,472

Restricted reserves
35,550

 
55,797

Accrued expenses and other liabilities
19,593

 
21,527

Distributions payable
1,600

 
1,494

Due to affiliates
21,795

 
22,481

Below market leases, net
53,849

 
55,319

Total liabilities
603,674

 
613,090

Commitments and contingencies (Note 11)

 

Common stock subject to redemption
25,250

 
16,930

Stockholders' equity:
 
 
 
Common Stock, $0.001 par value, 700,000,000 shares authorized; 75,986,325 and 70,939,647 Class A, Class T and Class I shares outstanding in aggregate, as of June 30, 2017 and December 31, 2016, respectively.
76

 
71

   Additional paid-in capital
654,011

 
615,653

Cumulative distributions
(60,589
)
 
(38,406
)
 Accumulated deficit
(17,301
)
 
(23,788
)
 Accumulated other comprehensive loss
911

 
841

Total stockholders' equity
577,108

 
554,371

Noncontrolling interests
81

 
84

Total equity
577,189

 
554,455

Total liabilities and equity
$
1,206,113


$
1,184,475


See accompanying notes.



5


GRIFFIN CAPITAL ESSENTIAL ASSET REIT II, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(in thousands, except share and per share amounts)
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2017
 
2016
 
2017
 
2016
Revenue:
 
 
 
 
 
 
 
Rental income
$
22,677

 
$
11,024

 
$
44,285

 
$
21,298

Property expense recovery
3,869

 
2,306

 
8,233

 
4,534

Total revenue
26,546

 
13,330

 
52,518

 
25,832

Expenses:
 
 
 
 
 
 
 
Asset management fees to affiliates
2,795

 
1,362

 
5,541

 
2,632

Property management fees to affiliates
469

 
204

 
895

 
399

Property operating
1,411

 
791

 
3,084

 
1,553

Property tax
2,321

 
1,408

 
4,733

 
2,704

Acquisition fees and expenses to non-affiliates
—

 
402

 
—

 
496

Acquisition fees and expenses to affiliates
—

 
2,129

 
—

 
2,999

General and administrative
983

 
941

 
1,905

 
1,419

Corporate operating expenses to affiliates
522

 
431

 
1,113

 
991

Depreciation and amortization
10,951

 
5,985

 
21,474

 
11,611

Total expenses
19,452

 
13,653

 
38,745

 
24,804

Income (loss) before other income and (expenses)
7,094

 
(323
)
 
13,773

 
1,028

Other income (expense):
 
 
 
 
 
 
 
Other income, net
140

 
—

 
164

 
1

Interest expense
(3,869
)
 
(2,502
)
 
(7,448
)
 
(4,995
)
Net income (loss)
3,365

 
(2,825
)
 
6,489

 
(3,966
)
Less: Net (income) loss attributable to noncontrolling interests
(1
)

1


(2
)

2

Net income (loss) attributable to common stockholders
$
3,364

 
$
(2,824
)
 
$
6,487

 
$
(3,964
)
Net income (loss) attributable to common stockholders per share, basic and diluted
$
0.04

 
$
(0.06
)
 
$
0.09

 
$
(0.10
)
Weighted average number of common shares outstanding, basic and diluted
75,658,033

 
45,754,640

 
75,109,702

 
39,603,306

Distributions declared per common share
$
0.14

 
$
0.14

 
$
0.28

 
$
0.28


See accompanying notes.

6


GRIFFIN CAPITAL ESSENTIAL ASSET REIT II, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Unaudited)
(in thousands)
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2017
 
2016
 
2017
 
2016
 
Net income (loss)
$
3,365

 
$
(2,825
)
 
$
6,489

 
$
(3,966
)
 
Other comprehensive income (loss):
 
 
 
 
 
 
 
 
Change in fair value of swap agreement
(96
)
 
(314
)
 
70

 
(331
)
 
Total comprehensive income (loss)
3,269

 
(3,139
)
 
6,559

 
(4,297
)
 
Less: comprehensive (income) loss attributable to noncontrolling interests
(1
)
 
1

 
(2
)
 
2

 
Comprehensive income (loss) attributable to common stockholders
$
3,268

 
$
(3,138
)
 
$
6,557

 
$
(4,295
)
 


7


GRIFFIN CAPITAL ESSENTIAL ASSET REIT II, INC.
CONSOLIDATED STATEMENTS OF EQUITY
(in thousands, except share amounts)
(Unaudited)
 
Common Stock
 
Additional
Paid-In
Capital
 
Cumulative
Distributions
 
Accumulated
Deficit
 
Accumulated Other Comprehensive Income
 
Total
Stockholders’
Equity
 
Non-
controlling
Interests
 
Total
Equity
 
Shares
 
Amount
 
BALANCE December 31, 2015
28,556,170

 
$
29

 
$
250,757

 
$
(8,258
)
 
$
(17,684
)
 
$
—

 
$
224,844

 
$
98

 
$
224,942

Gross proceeds from issuance of common stock
40,700,406

 
40

 
406,423

 
—

 
—

 
—

 
406,463

 
—

 
406,463

Discount on issuance of common stock
—

 
—

 
(696
)
 
—

 
—

 
—

 
(696
)
 
—

 
(696
)
Offering costs including dealer manager fees to affiliates
—

 
—

 
(43,340
)
 
—

 
—

 
—

 
(43,340
)
 
—

 
(43,340
)
Distributions to common stockholders
—

 
—

 
—

 
(12,479
)
 
—

 
—

 
(12,479
)
 
—

 
(12,479
)
Issuance of shares for distribution reinvestment plan
1,599,355

 
2

 
15,157

 
(15,159
)
 
—

 
—

 
—

 
—

 
—

Repurchase of common stock
(167,442
)
 
—

 
(1,627
)
 
—

 
—

 
—

 
(1,627
)
 
—

 
(1,627
)
Additions to common stock subject to redemption
—

 
—

 
(13,531
)
 
—

 
—

 
—

 
(13,531
)
 
—

 
(13,531
)
Issuance of stock dividends
251,158

 
—

 
2,510

 
(2,510
)
 
—

 
—

 
—

 
—

 
—

Distributions to noncontrolling interest
—

 
—

 
—

 
—

 
—

 
—

 
—

 
(11
)
 
(11
)
Net loss


 
—

 
—

 
—

 
(6,104
)
 
—

 
(6,104
)
 
(3
)
 
(6,107
)
Other comprehensive income
—

 
—

 
—

 
—

 
—

 
841

 
841

 
—

 
841

BALANCE December 31, 2016
70,939,647

 
$
71

 
$
615,653

 
$
(38,406
)
 
$
(23,788
)
 
$
841

 
$
554,371

 
$
84

 
$
554,455

Gross proceeds from issuance of common stock
3,937,801

 
4

 
39,285

 
—

 
—

 
—

 
39,289

 
—

 
39,289

Discount on issuance of common stock
—

 
—

 
(16
)
 
—

 
—

 
—

 
(16
)
 
—

 
(16
)
Stock-based compensation
25,500

 
—

 
242

 
—

 
—

 
—

 
242

 
—

 
242

Offering costs including dealer manager fees and stockholder servicing fees to affiliates
—

 
—

 
(2,908
)
 
—

 
—

 
—

 
(2,908
)
 
—

 
(2,908
)
Distributions to common stockholders
—

 
—

 
—

 
(9,499
)
 
—

 
—

 
(9,499
)
 
—

 
(9,499
)
Issuance of shares for distribution reinvestment plan
1,165,683

 
1

 
10,927

 
(10,928
)
 
—

 
—

 
—

 
—

 
—

Repurchase of common stock
(267,760
)
 
—

 
(2,475
)
 
—

 
—

 
—

 
(2,475
)
 
—

 
(2,475
)
Additions to common stock subject to redemption
—

 
—

 
(8,453
)
 
—

 
—

 
—

 
(8,453
)
 
—

 
(8,453
)
Issuance of stock dividends
185,454

 
—

 
1,756

 
(1,756
)
 
—

 
—

 
—

 
—

 
—

Distributions to noncontrolling interest
—

 
—

 
—

 
—

 
—

 
—

 
—

 
(5
)
 
(5
)
Net income
—

 
—

 
—

 
—

 
6,487

 
—

 
6,487

 
2

 
6,489

Other comprehensive income
—

 
—

 
—

 
—

 
—

 
70

 
70

 
—

 
70

BALANCE June 30, 2017
75,986,325

 
$
76

 
$
654,011

 
$
(60,589
)
 
$
(17,301
)
 
$
911

 
$
577,108

 
$
81

 
$
577,189

See accompanying notes.

8


GRIFFIN CAPITAL ESSENTIAL ASSET REIT II, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
 
Six Months Ended June 30,
 
2017
 
2016
Operating Activities:
 
 
 
Net income (loss)
$
6,489

 
$
(3,966
)
Adjustments to reconcile net income (loss) to net cash provided by operations:
 
 
 
Depreciation of building and improvements
9,916

 
4,804

Amortization of tenant origination and absorption costs
11,558

 
6,806

Amortization of above and below market leases
(2,206
)
 
(1,685
)
Amortization of deferred financing costs
546

 
382

Deferred rent
(8,729
)
 
(1,564
)
Stock based compensation
242

 
—

Unrealized loss on interest rate swap
41

 
—

Change in operating assets and liabilities:
 
 
 
Other assets, net
3,535

 
270

Accrued expenses and other liabilities, net
(2,304
)
 
(973
)
Due to affiliates, net
1,102

 
784

Net cash provided by operating activities
20,190

 
4,858

Investing Activities:
 
 
 
Acquisition of properties, net
(44,234
)
 
(123,037
)
Restricted reserves
(20,247
)
 
—

Improvements to real estate
(17
)
 
—

Payments for construction in progress
(144
)
 
—

Real estate acquisition deposits
250

 
(3,050
)
Net cash (used in) investing activities
(64,392
)
 
(126,087
)
Financing Activities:
 
 
 
Principal payoff of indebtedness - Credit Facility
—

 
(55,000
)
Proceeds from borrowings - Credit Facility
14,300

 
17,900

Deferred financing costs
(30
)
 
(43
)
Issuance of common stock, net of offering costs
36,112

 
206,960

Repurchase of common stock
(2,475
)
 
(193
)
Distributions paid to common stockholders
(9,393
)
 
(4,279
)
Distributions paid to noncontrolling interests
(5
)
 
(6
)
Net cash provided by financing activities
38,509

 
165,339

Net increase (decrease) in cash and cash equivalents
(5,693
)
 
44,110

Cash and cash equivalents at the beginning of the period
49,340

 
17,610

Cash and cash equivalents at the end of the period
$
43,647

 
$
61,720

Supplemental Disclosures of Significant Non-Cash Transactions:
 
 
 
Increase (decrease) in fair value of swap agreement
$
70

 
$
(331
)
Increase in Stockholder Servicing Fee payable
$
355

 
$
10,155

Increase in distributions payable - common stock
$
106

 
$
421

Common stock issued pursuant to the distribution reinvestment plan
$
10,928

 
$
5,942


See accompanying notes.

9

GRIFFIN CAPITAL ESSENTIAL ASSET REIT II, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2017
(Unaudited; dollars in thousands unless otherwise noted)



1. Organization
Griffin Capital Essential Asset REIT II, Inc., a Maryland corporation (the “Company”), was formed on November 20, 2013 under the Maryland General Corporation Law and qualified as a real estate investment trust (“REIT”) commencing with the year ended December 31, 2015. The Company was organized primarily with the purpose of acquiring single tenant net lease properties that are considered essential to the occupying tenant, and has used a substantial amount of the net proceeds from its initial public offering to invest in these properties. The Company’s year end is December 31.
Griffin Capital Company, LLC, a Delaware limited liability company (the “Sponsor”), is the sponsor of the Company. The Sponsor, which was formerly known as Griffin Capital Corporation, began operations in 1995 to principally engage 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.
Griffin Capital Essential Asset Advisor II, LLC, a Delaware limited liability company (the “Advisor”), was formed on November 19, 2013. Griffin Capital Real Estate Company, LLC, a Delaware limited liability company ("GRECO"), is the sole member of the Advisor and Griffin Capital, LLC, a Delaware limited liability company ("GC"), is the sole member of GRECO. The Sponsor is the sole member of GC. 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 under the terms of the Advisory Agreement (as defined in Note 10, Related Party Transactions). The Company's officers are also officers of the Advisor and officers of the Sponsor.
Griffin Capital Securities, LLC (the “Dealer Manager”) is a Delaware limited liability company and is a wholly-owned subsidiary of GC. The Dealer Manager was responsible for marketing the Company’s shares offered pursuant to the Company's initial public offering.
The Company’s property manager is Griffin Capital Essential Asset Property Management II, LLC, a Delaware limited liability company (the “Property Manager”), which was formed on November 19, 2013 to manage the Company’s properties, or provide oversight of other property managers engaged by the Company or an affiliate of the Company. The Property Manager will derive substantially all of its income from the property management services it will perform for the Company.
The Company’s Articles of Incorporation initially authorized 30,000 shares of common stock. On February 11, 2014, the Advisor purchased 100 shares of common stock for one thousand dollars and became the initial stockholder. Upon the SEC declaring the Company's public offering effective on July 31, 2014, the Company’s Articles of Amendment and Restatement were filed with the State of Maryland and authorized 700,000,000 shares of common stock allocated as 350,000,000 Class A shares and 350,000,000 Class T shares with a par value of $0.001 and 200,000,000 shares of preferred stock with a par value of $0.001. On April 25, 2016, the Company reclassified (i)100,000,000 authorized but unissued shares of the Company's Class A common stock, and (ii) 50,000,000 authorized but unissued shares of the Company's Class T common stock, as 150,000,000 shares of Class I common stock.
The Company registered $2.2 billion in common shares in its initial public offering (“Offering”), consisting of $2.0 billion in common shares to be offered to the public in the primary public offering (“Primary Offering”) and $200.0 million in common shares for sale pursuant to the distribution reinvestment plan (“DRP”). (See Note 8, Equity, for additional details.)
In September 2016, the Company's board of directors approved the close of the Primary Offering effective January 20, 2017; however, the Company continued to offer shares pursuant to the DRP.  On April 6, 2017, the Company filed a Registration Statement on Form S-3 with the SEC for the registration of 3.0 million shares for sale pursuant to the DRP (the “DRP Offering”). The DRP Offering may be terminated at any time upon 10 days’ prior written notice to stockholders.
Griffin Capital Essential Asset Operating Partnership II, L.P., a Delaware limited partnership (the “Operating Partnership”), was formed on November 21, 2013. On February 11, 2014, the Advisor purchased a 99% limited partnership interest and special limited partnership interest in the Operating Partnership for $0.2 million and on February 11, 2014, the Company contributed the initial one thousand dollars capital contribution it received to the Operating Partnership in exchange for a 1% general partner interest.

10

GRIFFIN CAPITAL ESSENTIAL ASSET REIT II, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2017
(Unaudited; dollars in thousands unless otherwise noted)


The Operating Partnership owns, and will own, directly or indirectly, all of the properties acquired by the Company. The Operating Partnership will conduct certain activities through the Company’s taxable REIT subsidiary, Griffin Capital Essential Asset TRS II, Inc., a Delaware corporation (the “TRS”), formed on November 22, 2013, which is a wholly-owned subsidiary of the Operating Partnership. The TRS had no activity as of June 30, 2017.
2. Basis of Presentation and Summary of Significant Accounting Policies
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, 2016 (except as noted below). 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, 2016 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 generally accepted accounting principles 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, 2017 are not necessarily indicative of the results that may be expected for the year ending December 31, 2017. 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, 2016. 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.
Revenue Recognition
Leases associated with the acquisition and contribution of certain real estate assets (see Note 3, Real Estate) have net minimum rent payment increases during the term of the lease and are recorded to rental revenue on a straight-line basis, commencing as of the contribution or acquisition date. If a lease provides for contingent rental income, the Company will defer the recognition of contingent rental income, such as percentage rents, until the specific target that triggers the contingent rental income is achieved.
Tenant reimbursement revenue, which is comprised of additional amounts collected from tenants for the recovery of certain operating expenses, including repair and maintenance, property taxes and insurance, and capital expenditures, to the extent allowed pursuant to the lease (collectively, "Recoverable Expenses"), is recognized as revenue when the additional rent is due. Recoverable Expenses to be reimbursed by a tenant are determined based on the Company's estimate of the property's operating expenses for the year, pro rated based on leased square footage of the property, and are collected in equal installments as additional rent from the tenant, pursuant to the terms of the lease. At the end of each quarter, the Company reconciles the amount of additional rent paid by the tenant during the quarter to the actual amount of Recoverable Expenses incurred by the Company for the same period. The difference, if any, is either charged or credited to the tenant pursuant to the provisions of the lease. In certain instances, the lease may restrict the amount the Company can recover from the tenant such as a cap on certain or all property operating expenses.
Use of Estimates
The preparation of the unaudited consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the unaudited consolidated financial statements and accompanying notes. Actual results could materially differ from those estimates.

11

GRIFFIN CAPITAL ESSENTIAL ASSET REIT II, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2017
(Unaudited; dollars in thousands unless otherwise noted)


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, 2017 and December 31, 2016, there were no material common stock equivalents that would have a dilutive effect on earnings (loss) per share for common stockholders.
The Company retroactively adjusted the number of common shares outstanding in accordance with ASC 260-10, Earnings per Share. ASC 260-10 requires the computations of basic and diluted earnings per share shall be adjusted retroactively for all periods presented to reflect the change in capital structure, if the number of common shares outstanding increases as a result of a stock dividend or stock split or decreases as a result of a reverse stock split. If changes in common stock resulting from stock dividends, stock splits, or reverse stock splits occur after the close of the period but before the consolidated financial statements are issued or are available to be issued, the per-share computations for those and any prior-period consolidated financial statements presented shall be based on the new number of shares.
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 January 2017, the FASB issued ASU No. 2017-01, Business Combinations, that clarified the definition of a business. The ASU is effective for reporting periods beginning after December 15, 2017, with early adoption permitted. The Company adopted this update on October 1, 2016.
In February 2016, the FASB issued ASU No. 2016-02, Leases ("ASU No. 2016-02"). ASU No. 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 No. 2016-02 will be effective beginning in the first quarter of 2019. Early adoption of ASU No. 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 accounting applied by a lessor is largely unchanged under ASU No. 2016-02. The Company is currently conducting an evaluation of the impact of the guidance on the Company's consolidated financial statements and related disclosures. The Company currently believes that the adoption of the standard will not significantly change the accounting for operating leases on the Company's consolidated balance sheets where the Company is the lessor, and that such leases will be accounted for in a similar method to existing standards with the underlying leased asset being reported and recognized as a real estate asset. The Company currently expects that certain non-lease components will need to be accounted for separately from the lease components, with the lease components continuing to be recognized on a straight-line basis over the term of the lease and certain non-lease components (such as common area maintenance and provision of utilities) being accounted for under the new revenue recognition guidance in ASU No. 2014-09 discussed below, even when revenue for such non-lease components is not separately stipulated in the lease. The Company is evaluating whether the bifurcation of non-lease components will affect the timing or recognition of certain lease revenues.
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

12

GRIFFIN CAPITAL ESSENTIAL ASSET REIT II, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2017
(Unaudited; dollars in thousands unless otherwise noted)


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 intends to adopt the guidance using the modified retrospective approach for the fiscal year beginning January 1, 2018. The Company anticipates no impact upon adoption of the new accounting guidance on its consolidated financial statements relating to the recognition of gains and losses on the sale of real estate assets as the Company’s current accounting for such transactions is consistent with the new guidance’s core principle. Rental income from leasing arrangements is a substantial portion of the Company’s revenue, is specifically excluded from ASU No. 2014-09 and will be governed by the applicable lease codification (ASU No. 2016-02). In conjunction with the adoption of the leasing guidance, the Company is currently in the process of evaluating certain variable payment terms included in these lease arrangements which are governed by ASU No. 2014-09.
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 described above. The Company intends to adopt the guidance using the modified retrospective approach for the fiscal year beginning January 1, 2018. The Company anticipates no impact upon adoption of the new accounting guidance on its consolidated financial statements relating to the recognition of reporting revenue gross versus net on its consolidated financial statements as the Company’s current accounting for such transactions is consistent with the new guidance’s core principle.

13

GRIFFIN CAPITAL ESSENTIAL ASSET REIT II, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2017
(Unaudited; dollars in thousands unless otherwise noted)


3. Real Estate
As of June 30, 2017, the Company's real estate portfolio consisted of 27 properties (35 buildings) in 17 states consisting of office, industrial, distribution, and data center facilities with a combined acquisition value of $1.1 billion including the allocation of the purchase price to above and below-market lease valuation, encompassing approximately 7.3 million square feet.
Depreciation expense for buildings and improvements for the six months ended June 30, 2017 was $9.9 million. Amortization expense for intangibles, including but not limited to, tenant origination and absorption costs for the six months ended June 30, 2017, was $11.6 million.
The purchase price and other acquisition items for the properties acquired during the six months ended June 30, 2017 are shown below.
 
 
 
 
 
 
 
 
 
 
 
 
Paid to Advisor
 
 
Property
 
Location
 
Tenant/Major Lessee
 
Acquisition Date
 
Purchase Price
 
Approx. Square Feet
 
Acquisition Fees and Reimbursable Expenses (1)
 
Contingent Advisor Payment (2)
 
Year of Lease Expiration
Allstate
 
Lone Tree, CO
 
Allstate Insurance Co.
 
1/31/2017
 
$
14,750

(3) 
70,300

 
$
402

 
$
273

 
2026
MISO
 
Carmel, IN
 
Midcontinent Independent System Operator, Inc.
 
5/15/2017
 
$
28,600

 
133,400

 
$
696

 
$
529

 
2028
(1)
The fee consists of a 2.0% base acquisition fee and acquisition expense reimbursement for actual acquisition expenses incurred, estimated to be approximately 1% of acquisition value. (See Note 10, Related Party Transactions, for additional discussion.)
(2)
Pursuant to the Advisory Agreement, the Advisor is entitled to receive an acquisition fee in an amount up to 3.85% of the contract purchase price (as such term is defined in the Advisory Agreement) for each property the Company acquires. The acquisition fee consists of a 2.0% base acquisition fee and up to an additional 1.85% contingent advisor payment (the "Contingent Advisor Payment"); provided, however, that $5.0 million of amounts advanced by the Advisor for dealer manager fees and organizational and offering expenses (the "Contingent Advisor Payment Holdback") will be retained by the Company until the later of (a) the termination of the Offering, including any follow-on offerings, or (b) July 31, 2017, at which time such amount shall be paid to the Advisor.  In connection with a follow-on offering, the Contingent Advisor Payment Holdback may increase, based upon the maximum offering amount in such follow-on offering and the amount sold in prior offerings. (See Note 13, Subsequent Events, for additional disclosure).
(3)
The purchase price for the Allstate property was $14.8 million, plus closing costs, less a credit in the amount of $0.4 million applied at closing.
Real Estate - Valuation and Purchase Price Allocation
The Company allocates the purchase price to the fair value of the tangible assets of a property by valuing the property as if it were vacant. This “as-if vacant” value is estimated using an income, or discounted cash flow, approach that relies upon Level 3 inputs, which are unobservable inputs based on the Company's review of the assumptions a market participant would use. These Level 3 inputs include discount rates, capitalization rates, market rents and comparable sales data for similar properties. Estimates of future cash flows are based on a number of factors including historical operating results, known and anticipated trends, and market and economic conditions. In calculating the “as-if vacant” value for acquisitions completed during the six months ended June 30, 2017, the Company used discount rates ranging from 5.75% to 8.25%.

14

GRIFFIN CAPITAL ESSENTIAL ASSET REIT II, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2017
(Unaudited; dollars in thousands unless otherwise noted)


In determining the fair value of intangible lease assets or liabilities, the Company also considers Level 3 inputs. Acquired above and below-market leases are valued based on the present value of the difference between prevailing market rates and the in-place rates measured over a period equal to the remaining term of the lease for above-market leases and the initial term plus the term of any below-market fixed rate renewal options for below-market leases, if applicable. The estimated fair value of acquired in-place at-market tenant leases are the costs that would have been incurred to lease the property to the occupancy level of the property at the date of acquisition. Such estimates include the value associated with leasing commissions, legal and other costs, as well as the estimated period necessary to lease such property that would be incurred to lease the property to its occupancy level at the time of its acquisition. Acquisition costs associated with asset acquisitions are capitalized in the period they are incurred.
The following summarizes the purchase price allocations for the properties acquired during the six months ended June 30, 2017:
Property(1)
 
Land
 
Building and Improvements
 
Tenant Origination and Absorption Cost
 
In-Place Lease Valuation Above Market
 
In-Place Lease Valuation (Below) Market
 
Total
 
Allstate
 
$
1,808

 
$
9,071

 
$
5,019

 
$
—

 
$
(1,001
)
 
$
14,897

 
MISO
 
$
3,104

 
$
18,077

 
$
7,937

 
$
218

 
$
—

 
$
29,336

 
(1)
The Company evaluated the transactions above under the clarified framework for determining whether an integrated set of assets and activities meets the definition of a business, pursuant to ASU No. 2017-01, Business Combinations, issued in January 2017, which the Company early-adopted effective October 1, 2016. Acquisitions that do not meet the definition of a business are accounted for as asset acquisitions. Since the transactions above lacked a substantive process, the transactions did not meet the definition of a business and consequently were accounted for as asset acquisitions. The Company allocated the total consideration (including acquisition costs of approximately $1.2 million) to the individual assets and liabilities acquired on a relative fair value basis.




15

GRIFFIN CAPITAL ESSENTIAL ASSET REIT II, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2017
(Unaudited; dollars in thousands unless otherwise noted)


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 2020 to 2044.
 
As of June 30, 2017
Remaining 2017
$
33,050

2018
71,707

2019
78,887

2020
80,492

2021
72,677

Thereafter
602,341

Total
$
939,154

Intangibles
The Company allocated a portion of the acquired real estate asset value to in-place lease valuation and tenant origination and absorption cost. The in-place lease was 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. The intangible assets are amortized over the remaining lease terms of the respective properties, which on a weighted-average basis, was approximately 10.9 and 11.4 years as of June 30, 2017 and December 31, 2016, respectively.
 
June 30, 2017
 
December 31, 2016
In-place lease valuation (above market)
$
4,046

 
$
3,828

In-place lease valuation (above market), accumulated amortization
(565
)
 
(300
)
Intangible assets, net
$
3,481

 
$
3,528

In-place lease valuation (below market)
$
(62,070
)
 
$
(61,069
)
In-place lease valuation (below market) - accumulated amortization
8,221

 
5,750

In-place lease valuation (below market), net
$
(53,849
)
 
$
(55,319
)
Tenant origination and absorption cost
$
240,364

 
$
227,407

Tenant origination and absorption cost - accumulated amortization
(34,966
)
 
(23,409
)
Tenant origination and absorption cost, net
$
205,398

 
$
203,998

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,
 
2017
 
2016
In-place lease valuation
$
(2,206
)
 
$
(1,685
)
Tenant origination and absorption cost
$
5,926

 
$
6,806

The following table sets forth the estimated annual amortization (income) expense for in-place lease valuation, and tenant origination and absorption costs as of June 30, 2017 for the next five years:
Year
 
In-Place Lease Valuation
 
Tenant Origination and Absorption Costs
Remaining 2017
 
$
(2,347
)
 
$
12,099

2018
 
$
(4,695
)
 
$
24,199

2019
 
$
(4,695
)
 
$
24,199

2020
 
$
(4,695
)
 
$
24,199

2021
 
$
(3,799
)
 
$
19,715



16

GRIFFIN CAPITAL ESSENTIAL ASSET REIT II, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2017
(Unaudited; dollars in thousands unless otherwise noted)


4. Debt
As of June 30, 2017 and December 31, 2016, the Company's debt and related deferred financing costs consisted of the following:
 
As of June 30, 2017
 
As of December 31, 2016
 
Contractual
Interest Rate (1)
 
Payment Type
 
Loan Maturity
 
Effective Interest Rate (4)
Revolving Credit Facility
$
347,758

 
$
333,458

 
2.66%
 
Interest Only
 
December 2019 (2)
 
3.09%
AIG Loan
126,970

 
126,970

 
4.15%
 
Interest Only (3)
 
November 2025
 
4.22%
Total Debt
474,728

 
460,428

 
 
 
 
 
 
 
 
Unamortized deferred financing costs
(3,441
)
 
(3,956
)
 
 
 
 
 
 
 
 
Total Debt, net
$
471,287

 
$
456,472

 
 
 
 
 
 
 
 
(1)
The 2.66% contractual interest rate is based on a 360-day year, pursuant to the Revolving Credit Facility, whereas the 2.70% weighted-average interest rate is based on a 365-day year. As discussed below, the interest rate on the Revolving Credit Facility (as defined below) is a one-month LIBO Rate + 1.60%. As of June 30, 2017, the LIBO Rate was 1.06%. Including the effect of an interest rate swap agreement with a notional amount of $100.0 million, the weighted average interest rate as of June 30, 2017 was approximately 3.02% for the Company's fixed-rate and variable-rate debt combined.
(2)
The Revolving Credit Facility has an initial term of four years, maturing on December 12, 2018, and may be extended for a one-year period if certain conditions are met and upon payment of an extension fee. See discussion below.
(3)
The AIG Loan (as defined below) requires monthly payments of interest only, at a fixed rate, for the first five years and fixed monthly payments of principal and interest thereafter.
(4)
Reflects the effective interest rate at June 30, 2017 and includes the effect of amortization of deferred financing costs.
Revolving Credit Facility
On December 12, 2014, the Company, through the Operating Partnership, entered into a revolving credit agreement (the “Revolving Credit Facility”), co-led by KeyBank, N.A. ("KeyBank") and JPMorgan Chase Bank, N.A. with KeyBank as administrative agent, JPMorgan Chase Bank, N.A. as syndication agent, and a syndicate of lenders. Pursuant to the Revolving Credit Facility, the Company was provided with an initial commitment of $250.0 million, which commitment may be increased under certain circumstances up to a maximum total commitment of $1.25 billion. On August 11, 2015, the Company exercised its right under the credit agreement to increase the total commitments from $250.0 million to $410.0 million.
On November 22, 2016, the Company, through the Operating Partnership, entered into an amendment (the "Increase Agreement") to the Revolving Credit Facility with KeyBank as administrative agent; Bank of America, N.A., SunTrust Bank, Capital One, National Association ("Capital One"), and Wells Fargo Bank, National Association, as co-syndication agents; and KeyBanc Capital Markets, Merrill Lynch, Pierce, Fenner and Smith Incorporated, SunTrust Robinson Humphrey, Inc., Capital One, and Wells Fargo Securities, LLC as joint lead arrangers and joint bookrunners to exercise its right under the Revolving Credit Facility to increase the total commitments from $410.0 million to $550.0 million. In connection with the Increase Agreement, the Company, through the Operating Partnership, also entered into a Joinder Agreement with KeyBank and U.S. Bank National Association ("U.S. Bank"), for the admission of U.S. Bank as a lender with a commitment of $50.0 million under the Revolving Credit Facility (the "Joinder Agreement"). With the admission of U.S. Bank, JPMorgan Chase Bank, N.A. terminated its commitment under the Revolving Credit Facility and no longer serves as a lender, syndication agent, joint bookrunner, or joint lead arranger under the Revolving Credit Facility.  
AIG Loan
On October 22, 2015, six special purpose entities that are wholly-owned by the Operating Partnership entered into promissory notes with The Variable Annuity Life Insurance Company, American General Life Insurance Company, and the United States Life Insurance Company (collectively, the "Lenders"), pursuant to which the Lenders provided such special purpose entities with a loan in the aggregate amount of approximately $127.0 million (the "AIG Loan").

17

GRIFFIN CAPITAL ESSENTIAL ASSET REIT II, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2017
(Unaudited; dollars in thousands unless otherwise noted)


Debt Covenant Compliance
Pursuant to the terms of the Revolving Credit Facility and AIG Loan, the Company is subject to certain loan compliance covenants. The Company was in compliance with all applicable covenants as of June 30, 2017.
5. 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 Instrument
On February 25, 2016, the Company entered into an interest rate swap agreement to hedge the variable cash flows associated with the LIBO Rate-based variable-rate debt, on the Company's Revolving Credit Facility. The interest rate swap is effective for the period from April 1, 2016 to December 12, 2018 with a notional amount of $100.0 million.
The effective portion of the change in fair value of derivatives designated and qualifying as cash flow hedges is initially recorded in accumulated other comprehensive income ("AOCI") and is subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. Amounts reported in accumulated other comprehensive income related to derivatives will be reclassified to interest expense as interest payments are made on our variable-rate debt.
The following table sets forth a summary of the interest rate swap at June 30, 2017 and December 31, 2016:
 
 
 
 
 
 
 
 
Fair value (1)
Derivative Instrument
 
Effective Date
 
Maturity Date
 
Interest Strike Rate
 
June 30, 2017
 
December 31, 2016
Assets:
 
 
 
 
 
 
 
 
 
 
Interest Rate Swap
 
4/1/2016
 
12/12/2018
 
0.74%
 
$
1,025

 
$
996

(1)
The Company records all derivative instruments on a gross basis on the consolidated balance sheets, and accordingly, there are no offsetting amounts that net assets against liabilities. As of June 30, 2017, the Company's derivative was in an asset position, and as such, the fair value is included in the line item "Other Assets, net" on the consolidated balance sheet.
The following table sets forth the impact of the interest rate swap on the consolidated statements of operations for the six months ended June 30, 2017:
 
 
Six Months Ended June 30, 2017
Interest Rate Swap in Cash Flow Hedging Relationship:
 
 
Amount of (loss) gain recognized in AOCI on derivative (effective portion)
 
$
150

Amount of (loss) gain reclassified from AOCI into earnings under “Interest expense” (effective portion)
 
$
(80
)
Amount of (loss) gain recognized in earnings under “Interest expense” (ineffective portion and amount excluded from effectiveness testing)
 
$
(41
)
During the twelve months subsequent to June 30, 2017 , the Company estimates that an additional $0.6 million of income will be recognized from AOCI into earnings.

18

GRIFFIN CAPITAL ESSENTIAL ASSET REIT II, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2017
(Unaudited; dollars in thousands unless otherwise noted)


Our agreement with the derivative counterparty contains a provision where if the Company defaults on any of the Company's indebtedness, including default where repayment of the indebtedness has not been accelerated by the lender within a specified time period, then the Company could also be declared in default on its derivative obligation.
As of June 30, 2017, the fair value of interest rate swap was in an asset position excluding any adjustment for nonperformance risk related to our derivative counterparty agreement, which was approximately $1.0 million. As of June 30, 2017, the Company had not posted any collateral related to our derivative counterparty agreement.
6. Fair Value Measurements
The Company is required to disclose fair value information about all financial instruments, whether or not recognized in the consolidated balance sheets, for which it is practicable to estimate fair value. The Company measures and discloses the estimated fair value of financial assets and liabilities utilizing a fair value hierarchy that distinguishes between data obtained from sources independent of the reporting entity and the reporting entity’s own assumptions about market participant assumptions. This hierarchy consists of three broad levels, as follows: (i) quoted prices in active markets for identical assets or liabilities, (ii) "significant other observable inputs," and (iii) "significant unobservable inputs." "Significant other observable inputs" can include quoted prices for similar assets or liabilities in active markets, as well as inputs that are observable for the asset or liability, such as interest rates, foreign exchange rates, and yield curves that are observable at commonly quoted intervals. "Significant unobservable inputs" are typically based on an entity’s own assumptions, since there is little, if any, related market activity. In instances in which the determination of the fair value measurement is based on inputs from different levels of the fair value hierarchy, the level in the fair value hierarchy within which the entire fair value measurement falls is based on the lowest level of input that is significant to the fair value measurement in its entirety. The Company's assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability. There were no transfers between the levels in the fair value hierarchy during the six months ended June 30, 2017.
The following table sets forth the assets/(liabilities) that the Company measures at fair value on a recurring basis by level within the fair value hierarchy as of June 30, 2017:
 
Total Fair Value
Quoted Prices in Active Markets for Identical Assets and Liabilities
Significant Other Observable Inputs
Significant Unobservable Inputs
Interest Rate Swap at:
 
 
 
 
June 30, 2017
$
1,025

$
—

$
1,025

$
—

December 31, 2016
$
996

$
—

$
996

$
—

Financial instruments as of June 30, 2017 consisted of cash and cash equivalents, accounts receivable, accounts payable, other accrued expenses, and borrowings. With the exception of the mortgage loan in the table below, the amounts of the financial instruments presented in the consolidated financial statements substantially approximate their fair value as of June 30, 2017. The fair value of the mortgage loan is estimated by discounting the loan’s principal balance over the remaining term of the mortgage using current borrowing rates available to the Company for debt instruments with similar terms and maturities. The Company determined that the mortgage loan valuation in its entirety is classified in Level 2 of the fair value hierarchy, as the fair value is based on current pricing for debt with similar terms as the in-place debt, and there were no transfers into and out of fair value measurement levels during the six months ended June 30, 2017 and for the year ended December 31, 2016.
 
June 30, 2017
 
December 31, 2016
 
Fair Value
 
Carrying Value (1)
 
Fair Value
 
Carrying Value (1)
AIG Loan
$
121,875

 
$
126,970

 
$
120,322

 
$
126,970

(1)
The carrying value of the AIG Loan does not include deferred financing costs as of June 30, 2017 and December 31, 2016. See Note 4, Debt, for details.

19

GRIFFIN CAPITAL ESSENTIAL ASSET REIT II, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2017
(Unaudited; dollars in thousands unless otherwise noted)


7. Accrued Expenses and Other Liabilities
Accrued expenses and other liabilities consisted of the following as of June 30, 2017 and December 31, 2016:
 
 
June 30, 2017
 
December 31, 2016
Prepaid rent
 
$
6,587

 
$
9,484

Leasing commission payable
 
3,783

 
3,783

Other liabilities
 
9,223

 
8,260

Total
 
$
19,593

 
$
21,527


8. Equity
Status of Offering
In September 2016, the Company's board of directors approved the close of the Primary Offering effective January 20, 2017; however, the Company continued to offer shares pursuant to the DRP.  On April 6, 2017, the Company filed a Registration Statement on Form S-3 with the SEC for the registration of 3.0 million shares for sale pursuant to the DRP. The DRP Offering may be terminated at any time upon 10 days’ prior written notice to stockholders.
Share Classes
Class A shares, Class T shares and Class I shares vote together as a single class, and each share is entitled to one vote on each matter submitted to a vote at meetings of the Company's stockholders; provided that with respect to any matter that would only have a material adverse effect on the rights of a particular class of common stock, only the holders of such affected class are entitled to vote. Each class of common stock is entitled to the same distributions as other classes, and the net asset value, or NAV, per share is the same across share classes.
The following table summarizes shares issued and gross proceeds for each share class as of June 30, 2017:
 
 
Class A
 
Class T
 
Class I
 
Total
Gross proceeds from Primary Offering
 
$
240,780

 
$
474,859

 
$
8,381

 
$
724,020

Gross proceeds from DRP
 
$
15,944

 
$
14,542

 
$
188

 
$
30,674

Shares issued in Primary Offering
 
24,199,760

 
47,562,870

 
901,225

 
72,663,855

DRP shares issued
 
1,684,990

 
1,543,066

 
19,953

 
3,248,009

Stock distribution shares issued
 
235,074

 
245,470

 
3,619

 
484,163

Restricted stock units issued
 
—

 
—

 
25,500

 
25,500

Total shares issued prior to redemptions
 
26,119,824

 
49,351,406

 
950,297

 
76,421,527


20

GRIFFIN CAPITAL ESSENTIAL ASSET REIT II, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2017
(Unaudited; dollars in thousands unless otherwise noted)


Offering and Organizational Costs
Pursuant to the Advisory Agreement, in no event will the Company be obligated to reimburse the Advisor for organizational and offering costs (effective November 2, 2015, only to the extent such costs exceed 1.0% of gross offering proceeds from the Company's public offering) incurred in connection with the Offering totaling in excess of (i) 3.5% (excluding sales commissions, dealer manager fees and stockholder servicing fees) of the gross proceeds raised in the Offering (excluding gross proceeds from the distribution reinvestment plan), and (ii) 15% (including selling commissions, dealer manager fees, stockholder servicing fees and non-accountable due diligence expense allowance but excluding acquisition fees and expenses) of the gross proceeds raised in the Offering (excluding gross proceeds from the DRP). If the organization and offering costs exceeded such limits discussed above, within 60 days after the end of the month in which the Offering terminated or was completed, the Advisor would have been obligated to reimburse the Company for any excess amounts. As long as the Company is subject to the Statement of Policy Regarding Real Estate Investment Trusts published by the North American Securities Administrators Association (“NASAA REIT Guidelines”), such limitations discussed above will also apply to any future public offerings. As of June 30, 2017 and December 31, 2016, organizational and offering costs were 0.8% of gross offering proceeds, for both periods presented, excluding selling commissions, dealer manager fees and stockholder servicing fees, and 10.5% and 10.6% of gross offering proceeds, respectively, including selling commissions, dealer manager fees and stockholder servicing fees. As of June 30, 2017 and December 31, 2016, organizational and offering costs did not exceed the limitations.
Organizational and offering costs incurred as of June 30, 2017 and December 31, 2016, including those incurred by the Company and due to the Advisor, for the Offering are as follows:
 
June 30, 2017

 
December 31, 2016
Cumulative offering costs
$
74,917

 
$
72,009

Cumulative organizational costs
$
717

 
$
717

Organizational and offering costs advanced by the Advisor, excluding Contingent Advisor Payment Holdback
$
4,074

 
$
4,074

    Less payments
(4,074
)
 
(4,074
)
Net organizational and offering costs advanced by the Advisor, excluding Contingent Advisor Payment Holdback(1)
$
—

 
$
—

Advisor Advances:
 
 
 
    Organizational and offering costs advanced by the Advisor
$
2,675

 
$
2,477

    Dealer Manager fees advanced by the Advisor
2,916

 
2,932

Net organizational and offering costs and Dealer Manager fees advanced by the Advisor
$
5,591

 
$
5,409

(1)
See Note 10, Related Party Transactions, for discussion on Contingent Advisor Payment Holdback.
As of June 30, 2017, organizational and offering costs incurred by the Company related to a proposed offering exceeded the limitations set forth above by approximately $1.0 million. Therefore, if the proposed offering was terminated on June 30, 2017, the Advisor would be liable for organizational and offering costs incurred by the Company by approximately $1.0 million. Approximately $0.7 million of organizational and offering costs the Advisor is liable for as of June 30, 2017 is deducted from "Due to Affiliates" and the remaining $0.3 million is included in "Other Assets, net" on the consolidated balance sheet.
Distribution Reinvestment Plan
The Company adopted a DRP that allows stockholders to have distributions otherwise distributable to them invested in additional shares of common stock. The plan became effective on July 31, 2014, and was amended and restated effective as of May 9, 2016. No selling commission, dealer manager fee or stockholder servicing fee are paid on shares sold through the DRP.
Amendment and Restatement of Distribution Reinvestment Plan
On November 15, 2016, the Company's board of directors amended and restated the Company's DRP to state that, effective as of November 28, 2016, until the Company announces an estimated net asset value ("NAV") per share, the purchase price per share under the DRP will be $9.40 per share. The Company announced the estimated NAV per share on February 16, 2017; consequently, the purchase price per share under the DRP equals the published NAV per share, which is $9.37 per share.

21

GRIFFIN CAPITAL ESSENTIAL ASSET REIT II, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2017
(Unaudited; dollars in thousands unless otherwise noted)


Share Redemption Program
The Company adopted a share redemption program that will enable stockholders to sell their stock to the Company in limited circumstances. As long as the common stock is not listed on a national securities exchange or over-the-counter market, stockholders who have held their stock for at least one year may be able to have all or a portion consisting of at least 25% of their shares of stock redeemed by the Company. During any calendar year, the Company will not redeem more than 5.0% of the weighted average number of shares outstanding during the prior calendar year. The cash available for redemption will be limited to the proceeds from the sale of shares pursuant to the Company’s DRP. Share redemption requests must be received by the Company no later than the last business day of the calendar quarter, and shares generally will be redeemed on the last business day of the month following such calendar quarter. The redemption price per share is expected to be the redemption rate set forth in the following table which is based upon the number of years the stock is held:
Number Years Held
 
Redemption Price per Share
Less than 1 year
 
No Redemption Allowed
After one year from the purchase date
 
90.0% of the Redemption Amount (as defined below)
After two years from the purchase date
 
95.0% of the Redemption Amount
After three years from the purchase date
 
97.5% of the Redemption Amount
After four years from the purchase date
 
100.0% of the Redemption Amount
The Redemption Amount for shares purchased under the Company's share redemption program shall be the lesser of (i) the amount the stockholder paid for their shares or (ii) the NAV of the shares. The redemption price per share will be reduced by the aggregate amount of net proceeds per share, if any, distributed to the stockholders prior to the repurchase date as a result of a “special distribution.” While the board of directors does not have specific criteria for determining a special distribution, the Company expects that a special distribution will only occur upon the sale of a property and the subsequent distribution of the net sale proceeds. The redemption price per share is subject to adjustment as determined from time to time by the board of directors.
As the use of the proceeds from the DRP for redemptions is outside the Company’s control, the net proceeds from the DRP are considered to be temporary equity and are presented as common stock subject to redemption on the accompanying consolidated balance sheets. The cumulative proceeds from the DRP, net of any redemptions, will be computed at each reporting date and will be classified as temporary equity on the Company’s consolidated balance sheets. As noted above, the redemption is limited to proceeds from new permanent equity from the sale of shares pursuant to the Company’s DRP. As of June 30, 2017, $25.3 million of common stock was available for redemption and $1.3 million of common stock was reclassified from redeemable common stock to accrued expenses and other liabilities in the consolidated balance sheet as of June 30, 2017.
Share-Based Compensation
The Company’s board of directors adopted a long-term incentive plan (“Plan”), which provides for the grant of awards to the Company's directors and full-time employees (should the Company ever have employees), directors and full-time employees of the Advisor and affiliate entities that provide services to the Company, and certain consultants that provide services to the Company, the Advisor, or affiliate entities. Awards granted under the Plan may consist of stock options, restricted stock, stock appreciation rights, distribution equivalent rights and other equity-based awards. The stock-based payment will be measured at fair value and recognized as compensation expense over the vesting period. The term of the Plan is ten years and the total number of shares of common stock reserved for issuance under the Plan will be equal to 10% of the outstanding shares of stock at any time, not to exceed 10,000,000 shares in the aggregate. During the first quarter of 2017, the Company issued an aggregate of 15,000 shares of restricted stock to the Company's independent directors. These restricted shares fully vested upon issuance.
On June 14, 2017, the Company issued 7,000 shares of restricted stock to each of the Company's independent directors, subject to the independent director's continued service as a director of the Company. Half of the restricted shares vested upon issuance, and the remaining half will vest over a one year period. The Company measured and began recognizing director compensation expense for the 36,000 shares of restricted stock granted during 2017, subject to the vesting period.

22

GRIFFIN CAPITAL ESSENTIAL ASSET REIT II, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2017
(Unaudited; dollars in thousands unless otherwise noted)


9. Noncontrolling Interests
Noncontrolling interests represent limited partnership interests in the Operating Partnership. The Operating Partnership issued 20,000 limited partnership units for $10.00 per unit on February 11, 2014, to the Advisor in exchange for the initial capitalization of the Operating Partnership. As of June 30, 2017, noncontrolling interests were approximately 0.03% of total shares and of weighted average shares outstanding (both measures assuming limited partnership units were converted to common stock).     
The Company evaluates individual noncontrolling interests for the ability to recognize the noncontrolling interest as permanent equity on the consolidated balance sheets at the time such interests are issued and on a continual basis. Any noncontrolling interest that fails to qualify as permanent equity will be reclassified as temporary equity and adjusted to the greater of (a) the carrying amount, or (b) its redemption value as of the end of the period in which the determination is made.
The limited partners of the Operating Partnership will have the right to cause the Operating Partnership to redeem their limited partnership units for cash equal to the value of an equivalent number of shares, or, at the Company’s option, the Company may purchase such limited partners' limited partnership units by issuing one share of common stock for each limited partnership unit redeemed. These rights may not be exercised under certain circumstances which could cause the Company to lose its REIT election. Furthermore, limited partners may exercise their redemption rights only after their limited partnership units have been outstanding for one year. The limited partnership units are reported on the consolidated balance sheets as noncontrolling interests.
The following summarizes the activity for noncontrolling interests for the six months ended June 30, 2017 and the year ended December 31, 2016:
 
Six Months Ended June 30, 2017
 
Year Ended December 31, 2016
Beginning balance
$
84

 
$
98

Distributions to noncontrolling interests
(5
)
 
(11
)
Net income (loss)
2

 
(3
)
Other comprehensive income (loss)
—

 
—

Ending balance
$
81

 
$
84


23

GRIFFIN CAPITAL ESSENTIAL ASSET REIT II, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2017
(Unaudited; dollars in thousands unless otherwise noted)


10. Related Party Transactions
The following table summarizes due to affiliates as of December 31, 2016 and the related party costs and fees incurred, paid and due to affiliates as of and for the six months ended June 30, 2017:
 
Year Ended December 31, 2016
 
Six Months Ended June 30, 2017
 
Payable
 
Incurred
 
Paid
 
Payable
Advisor and Property Manager fees
 
 
 
 
 
 
 
  Acquisition fees and expenses
$
—


$
1,099

 
$
1,099


$
—

  Operating expenses
18


1,113

 
609


522

  Asset management fees
807


5,541

 
5,405


943

  Property management fees
143


895

 
818


220

Other costs advanced by the Advisor
12


439

 
222


229

Selling commissions
54


1,127

 
1,181


—

Dealer Manager fees
18


393

 
411


—

Stockholder servicing fee(1) 
16,020


355

 
2,085


14,290

Advisor Advances:(2)


 
 



  Organization and offering expenses (3)
2,477


198

 
—


2,675

  Dealer Manager fees (4)
2,932


791

 
807


2,916

Total
$
22,481

 
$
11,951

 
$
12,637

 
$
21,795

(1)
The Dealer Manager is entitled to receive a stockholder servicing fee with respect to Class T shares that will be payable quarterly and will accrue daily in an amount equal to 1/365th of 1.0% of the purchase price per share (or, once reported, the amount of the estimated NAV) of Class T shares sold in the Primary Offering up to a maximum of 4% of gross proceeds of Class T shares sold.
(2)
Pursuant to the Advisory Agreement, commencing November 2, 2015, the Company remains obligated to reimburse the Advisor for organizational and offering costs incurred after such date, but only to the extent that such costs exceed 1.0% of the gross offering proceeds of the Company’s Offering (subject to the limits discussed in Note 8, Equity). In addition, the Advisor is entitled to receive an acquisition fee in an amount up to 3.85% of the contract purchase price (as such term is defined in the Advisory Agreement) for each property the Company acquires. The acquisition fee consists of a 2.0% base acquisition fee and up to an additional 1.85% Contingent Advisor Payment; provided, however, the Contingent Advisor Payment Holdback will be retained by the Company until the later of (a) the termination of the Offering, including any follow-on offerings, or (b) July 31, 2017, at which time such amount shall be paid to the Advisor.  In connection with a follow-on offering, the Contingent Advisor Payment Holdback may increase, based upon the maximum offering amount in such follow-on offering and the amount sold in prior offerings. See Note 13, Subsequent Events, for a discussion on the current status of the Company's Contingent Advisor Payment Holdback.
(3)
Organizational and offering expenses incurred by the Company exclude approximately $1.0 million related to a proposed offering. See Note 8, Equity, for additional discussion.
(4)
The Dealer Manager Agreement (as defined below and commencing on April 25, 2016 to incorporate Class I shares) provided that the Dealer Manager is entitled to receive a selling commission up to 3.0% of gross proceeds from Class T shares sold in the Primary Offering and a dealer manager fee equal to 3.0% of gross proceeds from Class T shares or Class I shares sold in the Primary Offering. Pursuant to the Dealer Manager Agreement, of the 3.0% dealer manager fee for Class T and Class I shares, 1.0% was funded by the Company and 2.0% was funded by the Advisor.
Amendment No. 5 to the Advisory Agreement
On June 14, 2017, the Company entered into Amendment No. 5 to the advisory agreement ("Amendment No. 5"). Pursuant to Amendment No. 5, the term "Follow-On Offering" means an offering of stock that is registered with the SEC subsequent to the initial public offering that includes provision for the Advisor to fund all or a portion of up-front fees of such offering. See Note 13, Subsequent Events, for additional disclosure regarding the Advisory Agreement.

24

GRIFFIN CAPITAL ESSENTIAL ASSET REIT II, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2017
(Unaudited; dollars in thousands unless otherwise noted)


Advisory Agreement
The Company entered into the advisory agreement with the Advisor and the Operating Partnership on July 31, 2014, as amended by Amendment No. 1 to the Advisory Agreement dated March 18, 2015, Amendment No. 2 to the Advisory Agreement dated November 2, 2015, Amendment No. 3 to the Advisory Agreement dated December 16, 2015, Amendment No. 4 to the Advisory Agreement dated February 9, 2016 and Amendment No. 5 to the Advisory Agreement dated June 14, 2017 (together with such amendments, the “Advisory Agreement”). The Advisor manages the Company’s day-to-day activities pursuant to the Advisory Agreement. Pursuant to the Advisory Agreement, the Company is obligated to reimburse the Advisor for certain services and payments, including payments made by the Advisor to third parties, including in connection with potential acquisitions.
The Advisory Agreement requires, upon termination of the Offering, that any organizational and offering costs, including selling commissions, dealer manager fees, and stockholder servicing fees, incurred above 15% of gross equity raised in the Company’s Offering and that any organizational and offering costs not including selling commissions, dealer manager fees, and stockholder servicing fees, incurred above 3.5% of gross equity raised in the Company’s Offering shall be reimbursed to the Company.
The Advisory Agreement provides that the Company shall reimburse the Advisor for organizational and offering costs, subject to the limitations described above. In conjunction with subsequent amendments to the Advisory Agreement, commencing November 2, 2015, the Company remains obligated to reimburse the Advisor for organizational and offering costs incurred after such date, but only to the extent that such costs exceed 1.0% of the gross offering proceeds of the Company’s Offering.
Acquisition Fees
Commencing November 2, 2015, the Advisor is entitled to receive a fee in an amount up to 3.85% of the contract purchase price (as such term is defined in the Advisory Agreement) of each property the Company acquires. The fee consists of a 2.0% base acquisition fee and up to an additional 1.85% Contingent Advisor Payment; provided, however, that $5.0 million Contingent Advisor Payment Holdback will be retained by the Company until the later of (a) the termination of the Offering, including any follow-on offerings, or (b) July 31, 2017, at which time such amount shall be paid to the Advisor.  In connection with a follow-on offering, the Contingent Advisor Payment Holdback may increase, based upon the maximum offering amount in such follow-on offering and the amount sold in prior offerings. The amount of the Contingent Advisor Payment paid upon the closing of an acquisition will be reviewed on an acquisition by acquisition basis and such payment shall not exceed the then outstanding amounts paid by the Advisor for dealer manager fees and organizational and offering expenses at the time of such closing after taking into account the amount of the Contingent Advisor Payment Holdback described above. For these purposes, the amounts paid by the Advisor and considered as "outstanding" will be reduced by the amount of the Contingent Advisor Payment previously paid. The Advisor may waive or defer all or a portion of the acquisition fee or the Contingent Advisor Payment at any time and from time to time, in the Advisor's sole discretion. See Note 13, Subsequent Events, for a discussion on the current status of the Company's Contingent Advisor Payment Holdback.
Asset Management Fee
The Advisor receives an annual asset management fee for managing the Company’s assets equal to 1.0% of the Average Invested Assets, defined as the aggregate carrying value of the assets invested before reserves for depreciation. The fee will be computed based on the average of these values at the end of each month. The asset management fees are earned monthly.
Operating Expenses
The Advisor and its affiliates are entitled to reimbursement for certain expenses incurred on behalf of the Company in connection with providing administrative services, including related personnel costs; provided, however, the Advisor must reimburse the Company for the amount, if any, by which total operating expenses (as defined), including advisory fees, paid during the previous 12 months then ended exceeded the greater of: (i) 2% of the Company’s average invested assets for that 12 months then ended; or (ii) 25% of the Company’s net income, before any additions to reserves for depreciation, bad debts or other expenses connected with the acquisition and disposition of real estate interests and before any gain from the sale of the

25

GRIFFIN CAPITAL ESSENTIAL ASSET REIT II, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2017
(Unaudited; dollars in thousands unless otherwise noted)


Company’s assets, for that fiscal year, unless the Company’s board of directors has determined that such excess expenses were justified based on unusual and non-recurring factors.
The Company reimbursed the Advisor and its affiliates a portion of the compensation paid by the Advisor and its affiliates for the Company's principal financial officer, Javier F. Bitar, executive vice president, David C. Rupert, and vice president and general counsel, Mary P. Higgins of approximately $0.2 million, which is included in offering costs as of June 30, 2017, for services provided to the Company, for which the Company does not pay the Advisor a fee.
In addition, the Company incurred approximately $0.1 million in reimbursable expenses to the Advisor for services provided to the Company by certain of its other executive officers for each of the six months ended June 30, 2017 and 2016. The reimbursable expenses include components of salaries, bonuses, benefits and other overhead charges and are based on the percentage of time each executive officer spends on the Company's affairs.
Dealer Manager Agreement
The Company entered into a dealer manager agreement with the Dealer Manager on June 20, 2014, as amended by Amendment No. 1 to the Dealer Manager Agreement dated November 25, 2014, as amended by Amendment No. 2 to the Dealer Manager Agreement dated October 9, 2015, and Amendment No. 3 to the Dealer Manager Agreement dated April 25, 2016 and entered into participating dealer agreements with various broker-dealers authorizing them to sell shares of the Company’s stock in the Primary Offering (together with the dealer manager agreement and all amendments, the “Dealer Manager Agreement”).
Through October 30, 2015, the Dealer Manager Agreement provided that the Dealer Manager was entitled to receive a selling commission and dealer manager fee equal to 7.0% and 3.0%, respectively, of gross proceeds from Class A shares sold in the Primary Offering. Commencing November 2, 2015, the Dealer Manager Agreement provided that the Dealer Manager was entitled to receive a selling commission equal to up to 3.0% of gross proceeds from Class T shares sold in the Primary Offering and a dealer manager fee equal to 3.0% of gross proceeds from Class T shares sold in the Primary Offering. Commencing April 25, 2016, the Dealer Manager Agreement provides that the Dealer Manager is entitled to receive a selling commission equal to up to 3.0% of gross proceeds from Class T shares sold in the Primary Offering and an aggregate dealer manager fee equal to 3.0% of gross proceeds from Class T shares and Class I shares sold in the Primary Offering. Pursuant to the Dealer Manager Agreement, of the 3.0% dealer manager fee, 1.0% will be funded by the Company and 2.0% will be funded by the Advisor. In addition, the Dealer Manager is entitled to receive an ongoing stockholder servicing fee with respect to Class T shares that will be payable quarterly and will accrue daily in an amount equal to 1/365th of 1.0% of the purchase price per share (or, once reported, the amount of the estimated NAV) of Class T shares sold in the Primary Offering up to a maximum of 4% of gross proceeds of Class T shares sold. The Company will cease paying the stockholder servicing fee with respect to the Class T shares sold in the Offering at the earlier of (i) the date at which the aggregate underwriting compensation from all sources equals 10% of the gross proceeds from the sale of shares in the Primary Offering (i.e., excluding proceeds from sales pursuant to the DRP); (ii) the fourth anniversary of the last day of the fiscal quarter in which the Offering (excluding the DRP offering) terminates; (iii) the date that such Class T share is redeemed or is no longer outstanding; and (iv) the occurrence of a merger, listing on a national securities exchange, or an extraordinary transaction. 
Upon the sale of shares by participating broker-dealers, the Dealer Manager re-allowed all of the selling commissions paid in connection with sales made by these participating broker-dealers and may, in the Dealer Manager’s discretion, re-allow all of the stockholder servicing fees paid in connection with sales of Class T shares made by these participating broker-dealers for providing ongoing or regular account or portfolio maintenance for the stockholder, assisting with recordkeeping, assisting and processing distribution payments, assisting with share repurchase requests, offering to meet with the stockholder periodically to provide overall guidance on the stockholder’s investment in the Company or to answer questions about the account statement or valuations, or providing other similar services as the stockholder may reasonably require in connection with such stockholder’s investment in Class T Shares; provided, however, that with respect to any individual investment, the Dealer Manager will not re-allow the related stockholder servicing fee to any broker-dealer if such broker-dealer ceases to hold the account related to such investment or fails to provide the aforementioned services. In any instance in which the Dealer Manager does not re-allow the stockholder servicing fee to a participating broker-dealer, the Dealer Manager will return such fee to the Company. The Dealer Manager also generally re-allowed to participating broker-dealers a portion of the 3.0% dealer manager fee earned on the proceeds raised by the participating broker-dealers as marketing fees, reimbursement of the costs and expenses of attending training and education meetings sponsored by the Dealer Manager, payment of attendance fees required for employees of the

26

GRIFFIN CAPITAL ESSENTIAL ASSET REIT II, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2017
(Unaudited; dollars in thousands unless otherwise noted)


Dealer Manager or other affiliates to attend retail seminars sponsored by participating broker-dealers, or to defray other distribution-related expenses.
Property Management Agreement
In the event that the Company contracts directly with non-affiliated third party property managers with respect to its individual properties, the Company pays the Property Manager an oversight fee equal to 1.0% of the gross revenues of the property managed, plus reimbursable costs as applicable. Reimbursable costs and expenses include wages and salaries and other expenses of employees engaged in operating, managing and maintaining the Company's properties, as well as certain allocations of office, administrative, and supply costs. In the event that the Company contracts directly with the Property Manager with respect to a particular property, the Company pays the Property Manager aggregate property management fees of up to 3.0%, or greater if the lease so allows, of gross revenues received for management of the Company's properties, plus reimbursable costs as applicable. These property management fees may be paid or re-allowed to third party property managers if the Property Manager contracts with a third party. In no event will the Company pay both a property management fee to the Property Manager and an oversight fee to the Property Manager with respect to a particular property.
In addition, the Company may pay the Property Manager or its designees a leasing fee in an amount equal to the fee customarily charged by others rendering similar services in the same geographic area. The Company may also pay the Property Manager or its designees a construction management fee for planning and coordinating the construction of any tenant directed improvements for which the Company is responsible to perform pursuant to lease concessions, including tenant-paid finish-out or improvements. The Property Manager shall also be entitled to a construction management fee of 5.0% of the cost of improvements. In the event that the Property Manager assists with the development or redevelopment of a property, the Company may pay a separate market-based fee for such services.
Conflicts of Interest
The Sponsor, Advisor, Property Manager and their officers and certain of their key personnel and their respective affiliates currently serve as key personnel, advisors, managers and sponsors or co-sponsors to some or all of 13 other programs affiliated with the Sponsor, including Griffin Capital Essential Asset REIT, Inc. ("GCEAR"), Griffin-American Healthcare REIT III, Inc. ("GAHR III"), and Griffin-American Healthcare REIT IV, Inc. ("GAHR IV"), all of which are publicly-registered, non-traded real estate investment trusts, Griffin-Benefit Street Partners BDC Corp. ("GB-BDC"), a non-traded business development company regulated under the Investment Company Act of 1940 (the "1940 Act"), and Griffin Institutional Access Real Estate Fund ("GIA Real Estate Fund") and Griffin Institutional Access Credit Fund ("GIA Credit Fund"), both of which are non-diversified, closed-end management investment companies that are operated as interval funds under the 1940 Act. Because these persons have competing demands on their time and resources, they may have conflicts of interest in allocating their time between the Company’s business and these other activities.
Some of the material conflicts that the Advisor, the Dealer Manager or its affiliates will face are (1) competing demand for time of the Advisor’s executive officers and other key personnel from the Sponsor and other affiliated entities; (2) determining if certain investment opportunities should be recommended to the Company or another program sponsored or co-sponsored by the Sponsor; and (3) influence of the fee structure under the Advisory Agreement and distribution structure of the operating partnership agreement that could result in actions not necessarily in the long-term best interest of the stockholders. The board of directors has adopted the Sponsor’s acquisition allocation policy as to the allocation of acquisition opportunities among the Company and GCEAR, which is as follows:
The Sponsor will allocate potential investment opportunities to GCEAR and the Company based on the following factors:
•
the investment objectives of each program;
•
the amount of funds available to each program;
•
the financial impact of the acquisition on each program, including each program’s earnings and distribution ratios;
•
various strategic considerations that may impact the value of the investment to each program;
•
the effect of the acquisition on concentration/diversification of each program’s investments; and
•
the income tax effects of the purchase to each program.

27

GRIFFIN CAPITAL ESSENTIAL ASSET REIT II, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2017
(Unaudited; dollars in thousands unless otherwise noted)


In the event all acquisition allocation factors have been exhausted and an investment opportunity remains equally suitable for GCEAR and the Company, the Sponsor will offer the investment opportunity to the REIT that has had the longest period of time elapse since it was offered an investment opportunity.
If the Sponsor no longer sponsors GCEAR, then, in the event that an investment opportunity becomes available that is suitable, under all of the factors considered by the Advisor, for both the Company and one or more other entities affiliated with the Sponsor, the Sponsor has agreed to present such investment opportunities to the Company first, prior to presenting such opportunities to any other programs sponsored by or affiliated with the Sponsor. In determining whether or not an investment opportunity is suitable for more than one program, the Advisor, subject to approval by the board of directors, shall examine, among others, the following factors:
•
anticipated cash flow of the property to be acquired and the cash requirements of each program;
•
effect of the acquisition on diversification of each program’s investments;
•
policy of each program relating to leverage of properties;
•
income tax effects of the purchase to each program;
•
size of the investment; and
•
amount of funds available to each program and the length of time such funds have been available for investment.
Economic Dependency
The Company will be dependent on the Advisor for certain services that are essential to the Company, including the identification, evaluation, negotiation, purchase and disposition of properties and other investments, management of the daily operations of the Company’s real estate portfolio, and other general and administrative responsibilities. In the event that the Advisor is unable to provide these services, the Company will be required to obtain such services from other resources.
11. Commitments and Contingencies
Litigation
From time to time, the Company may become subject to legal proceedings, claims and litigation arising in the ordinary course of business. The Company is not a party to any material legal proceedings, nor is the Company aware of any pending or threatened litigation that would have a material adverse effect on the Company’s business, operating results, cash flows or financial condition should such litigation be resolved unfavorably.
12. Declaration of Distributions
During the quarter ended June 30, 2017, the Company paid cash distributions in the amount of $0.0015068493 per day per share per Class A share, Class T share and Class I share on the outstanding shares of common stock and stock distributions in the amount of 0.000013699 Class A shares, Class T shares or Class I shares per day per share payable to stockholders of record at the close of business on each day during the period from April 1, 2017 through June 30, 2017. Such distributions were paid on a monthly basis, on or about the first day of the month, for the month then-ended.
On June 14, 2017, the Company's board of directors declared cash distributions in the amount of $0.0015068493 per day per share per Class A share, Class T share and Class I share on the outstanding shares of common stock and stock distributions in the amount of 0.000013699 Class A shares, Class T shares or Class I shares of stock per day per share payable to stockholders of record at the close of business on each day during the period from July 1, 2017 through July 31, 2017. Such distributions payable to each stockholder of record will be paid on such date after the end of such period as the Company's Chief Executive Officer may determine.

28

GRIFFIN CAPITAL ESSENTIAL ASSET REIT II, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2017
(Unaudited; dollars in thousands unless otherwise noted)


13. Subsequent Events
Offering Status
As of August 9, 2017, the Company had issued 3,449,339 of the Company’s common stock pursuant to the DRP for approximately $32.6 million.
Payment of Contingent Advisor Payment Holdback
Pursuant to the terms of the Advisory Agreement, on July 31, 2017, the Company paid to the Advisor the Contingent Advisor Payment Holdback of $5.0 million, which consisted of amounts previously advanced by the Advisor for dealer manager fees and organizational and offering expenses. 

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following “Management’s Discussion and Analysis of Financial Condition and Results of Operations” should be read in conjunction with the Company’s unaudited consolidated financial statements and the notes thereto contained in Part I of this Quarterly Report on Form 10-Q.
Overview
Griffin Capital Essential Asset REIT II, Inc., a Maryland corporation (the "Company," "we," "us," "our"), was formed on November 20, 2013 under the Maryland General Corporation Law and qualified as a real estate investment trust ("REIT") commencing with the year ended December 31, 2015. We were organized primarily with the purpose of acquiring single tenant net lease properties that are considered essential to the occupying tenant, and expect to use a substantial amount of the net proceeds from our initial public offering to invest in these properties. We have no employees and are externally advised and managed by an affiliate, Griffin Capital Essential Asset Advisor II, LLC, our Advisor. Our year end is December 31.
In September 2016, our board of directors approved the close of our Primary Offering effective January 20, 2017; however, we continued to offer shares pursuant to our DRP.  On April 6, 2017, we filed a Registration Statement on Form S-3 with the SEC for the registration of 3.0 million shares for sale pursuant to the DRP. The DRP Offering may be terminated at any time upon 10 days’ prior written notice to stockholders.
As of June 30, 2017, our real estate portfolio consisted of 27 properties (35 buildings) consisting substantially of office, industrial, distribution, and data center facilities with a combined acquisition value of $1.1 billion, including the allocation of the purchase price to above and below-market lease valuation, encompassing approximately 7.3 million square feet. Our annualized net rent for the 12-month period subsequent to June 30, 2017 was approximately $76.0 million with approximately 79.7% generated by properties leased to tenants and/or guarantors or whose non-guarantor parent companies have investment grade or equivalent ratings. Our rentable square feet under lease as of June 30, 2017 was 100%, with a weighted average remaining lease term of 10.9 years with average annual rent increases of approximately 2.4%, and a debt to total real estate acquisition value of 42.3%.

29


The purchase price and other lease information of properties acquired during the six months ended June 30, 2017 are shown below (dollars in thousands):
Property
 
Location
 
Tenant/Major Lessee
 
Acquisition Date
 
Purchase Price
 
Approx. Square
Feet
 
% Leased
 
Property Type
 
Year of Lease Expiration (for Major Lessee)
 
Annualized Net Rent (1)
Allstate
 
Lone Tree, CO
 
Allstate Insurance Co.
 
1/31/2017
 
$
14,750

(2) 
70,300

 
100
%
 
Office
 
2026
 
$
1,048

MISO
 
Carmel, IN
 
Midcontinent Independent System Operator, Inc.
 
5/15/2017
 
$
28,600

 
133,400

 
100
%
 
Office
 
2028
 
$
1,900

(1)
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 June 30, 2017 and includes assumptions that may not be indicative of the actual future performance of a property, including the assumption that the tenant will perform its obligations under its lease agreement during the next 12 months.
(2)
The purchase price for the Allstate property was $14.8 million, plus closing costs, less a credit in the amount of $0.4 million applied at closing.
Revenue Concentration
The percentage of annualized net rent for the 12-month period subsequent to June 30, 2017, by state, based on the respective in-place leases, is as follows (dollars in thousands):
State
 
Annualized
Net Rent
(unaudited)
 
Number of
Properties
 
Percentage of
Annualized
Net Rent
Ohio
 
$
9,723

 
4

 
12.8
%
Illinois
 
8,558

 
2

 
11.3

California
 
8,399

 
3

 
11.0

Alabama (1)
 
8,352

 
1

 
11.0

New Jersey
 
8,055

 
2

 
10.6

Arizona
 
7,454

 
2

 
9.8

Nevada
 
6,727

 
2

 
8.8

Texas
 
4,024

 
1

 
5.3

Oregon
 
3,051

 
1

 
4.0

North Carolina
 
2,643

 
2

 
3.5

All Others (2)
 
9,059

 
7

 
11.9

Total
 
$
76,045

 
27

 
100.0
%
(1)
Includes escrow proceeds of approximately $6.2 million to be received during the 12 month period subsequent to June 30, 2017.
(2)
All others represent 3.0% or less of total annualized net rent on an individual basis.



30



The percentage of annualized net rent for the 12-month period subsequent to June 30, 2017, by industry, based on the respective in-place leases, is as follows (dollars in thousands):
Industry (1)
 
Annualized
Net Rent
(unaudited)
 
Number of
Lessees
 
Percentage of
Annualized
Net Rent
Consumer Services
 
$
11,985

 
3

 
15.7
%
Utilities (2)
 
10,252

 
2

 
13.5

Capital Goods
 
10,128

 
6

 
13.3

Technology Hardware & Equipment
 
9,418

 
3

 
12.4

Diversified Financials
 
5,863

 
1

 
7.7

Retailing
 
5,625

 
1

 
7.4

Banks
 
5,402

 
2

 
7.1

Energy
 
4,024

 
1

 
5.3

Consumer Durables and Apparel
 
3,051

 
1

 
4.0

Transportation
 
3,031

 
2

 
4.0

Pharmaceuticals, Biotechnology & Life Sciences
 
2,797

 
1

 
3.7

All Others (3)
 
4,469

 
4

 
5.9

Total
 
$
76,045

 
$
27

 
100.0
%
(1)
Industry classification based on the Global Industry Classification Standards.
(2)
Includes escrow proceeds of approximately $6.2 million to be received during the 12 month period subsequent to June 30, 2017.
(3)
All others represent 3.0% or less of total annualized net rent on an individual basis.

31


The percentage of annualized net rent for the 12-month period subsequent to June 30, 2017, by tenant, based on the respective in-place leases, is as follows (dollars in thousands):
Tenant
 
Annualized
Net Rent
(unaudited)
 
Percentage of
Annualized
Net Rent
Southern Company Services, Inc.(1)
 
$
8,352

 
11.0
%
American Express Travel Related Services Company, Inc.
 
5,863

 
7.7

Amazon.com.dedc, LLC
 
5,625

 
7.4

Bank of America, N.A.
 
5,402

 
7.1

Wyndham Worldwide Operations
 
5,258

 
6.9

IGT
 
4,654

 
6.1

3M Company
 
4,411

 
5.8

Zebra Technologies Corporation
 
4,147

 
5.5

Wood Group Mustang, Inc.
 
4,024

 
5.3

Other (2)
 
28,309

 
37.2

Total
 
$
76,045

 
100.0
%
(1)
Includes escrow proceeds of approximately $6.2 million to be received during the 12 month period subsequent to June 30, 2017.
(2)
All others account for less than 4% of total annualized net rent on an individual basis.

The tenant lease expirations by year based on annualized net rent for the 12-month period subsequent to June 30, 2017 are as follows (dollars in thousands):
Year of Lease Expiration
 
Annualized
Net Rent
(unaudited)
 
Number of
Lessees
 
Approx. Square
Feet
 
Percentage of
Annualized
Net Rent
2020
 
$
8,453

 
3

 
746,900

 
11.1
%
2022
 
1,170

 
1

 
312,000

 
1.5

2023
 
6,882

 
2

 
658,600

 
9.0

2024
 
9,090

 
5

 
632,800

 
12.0

2025 and beyond (1)
 
50,450

 
16

 
4,989,100

 
66.4

Total
 
$
76,045

 
27

 
7,339,400

 
100.0
%
(1)
Includes escrow proceeds of approximately $6.2 million to be received during the 12 month period subsequent to June 30, 2017.


32


Critical Accounting Policies
We have established accounting policies which conform to GAAP as contained in the FASB ASC. The preparation of our consolidated financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses. If our judgment or interpretation of the facts and circumstances relating to the various transactions had been different, it is possible that different estimates would have been applied, thus resulting in a different presentation of the financial statements. Additionally, other companies may use different estimates and assumptions that may impact the comparability of our financial condition and results of operations to those companies.
For further information about our critical accounting policies, refer to our consolidated financial statements and notes thereto for the year ended December 31, 2016 included in our Annual Report on Form 10-K filed with the SEC. There have been no significant changes to our policies during the six months ended June 30, 2017 (except as noted in Note 2, Basis of Presentation and Summary of Significant Accounting Policies).
Recently Issued Accounting Pronouncements
See Note 2, Basis of Presentation and Summary of Significant Accounting Policies, to the consolidated financial statements.
Results of Operations
Overview
We are not aware of any material trends or uncertainties, other than national economic conditions affecting real estate in general, that may reasonably be expected to have a material impact, favorable or unfavorable, on revenues or income from the acquisition, management and operations of properties other than those listed in Part I, Item 1A. Risk Factors, of our Annual Report on Form 10-K for the year ended December 31, 2016.
Same Store Analysis
Comparison of the Three Months Ended June 30, 2017 and 2016
For the quarter ended June 30, 2017, our "Same Store" portfolio consisted of 16 properties with an acquisition value of $515.0 million. Our "Same Store" portfolio includes properties which were held for a full period for all periods presented. The following table provides a comparative summary of the results of operations for 16 properties for the three months ended June 30, 2017 and 2016 (dollars in thousands):
 
Three Months Ended 
 June 30,
 
Increase/(Decrease)
 
Percentage
Change
 
2017
 
2016
 
Rental income
$
10,420


$
10,426

 
$
(6
)
 
0
 %
Property expense recoveries
2,283


2,172

 
111

 
5
 %
Asset and property management fees to affiliates
1,490


1,484

 
6

 
0
 %
Property operating expenses
725

 
777

 
(52
)
 
(7
)%
Property tax expense
1,580


1,333

 
247

 
19
 %
Depreciation and amortization
5,703

 
5,701

 
2

 
0
 %
Interest expense
1,321

 
1,321

 
—

 
0
 %
Property Tax Expense
The increase in property tax expense for the three months ended June 30, 2017 primarily related to a property tax reassessment.
Comparison of the Six Months Ended June 30, 2017 and 2016
For the six months ended June 30, 2017 our "Same Store" portfolio consisted of 15 properties with an acquisition value of $479.2 million. Our "Same Store" portfolio includes properties which were held for a full period for all periods presented. The following table provides a comparative summary of the results of operations for 15 properties for the six months ended June 30, 2017 and 2016 (dollars in thousands):
 
Six Months Ended 
 June 30,
 
Increase/(Decrease)
 
Percentage
Change
 
2017
 
2016
 
Rental income
$
19,427


$
19,446

 
$
(19
)
 
0
 %
Property expense recoveries
4,414


4,225

 
189

 
4
 %
Asset and property management fees to affiliates
2,790


2,786

 
4

 
0
 %
Property operating expenses
1,586


1,536

 
50

 
3
 %
Property tax expense
2,873

 
2,454

 
419

 
17
 %
Depreciation and amortization
10,659

 
10,714

 
(55
)
 
(1
)%
Interest expense
2,642

 
2,642

 
—

 
0
 %
Property Tax Expense
The increase in property tax expense for the six months ended June 30, 2017 primarily related to a property tax reassessment.
Portfolio Analysis
As of June 30, 2016, we owned 18 properties and as of June 30, 2017, we owned 27 properties. We have terminated our Primary Offering, and continue to deploy capital raised in our Primary Offering, along with draws from our Revolving Credit Facility, to acquire assets that adhere to our investment criteria. Therefore, our results of operations for our entire portfolio for the three and six months ended June 30, 2017 are not directly comparable to those for the same periods in the prior year as the variances are substantially the result of portfolio growth, specifically in rental income, property expense recoveries, asset and property management fees to affiliates, operating expenses, and depreciation and amortization expenses. See "Same Store Analysis" above for properties held for the same period of time.
Comparison of the Three and Six Months Ended June 30, 2017 and 2016
We own 27 properties as of June 30, 2017. The variance differences from our results of operations for the three and six months ended June 30, 2017 compared to the same periods in the prior year, is primarily a result of current year activity including a full year of revenues and expenses for prior year acquisitions and activity for acquisitions subsequent to June 30, 2016.

33


The following tables provide summary information about our results of operations for the three and six months ended June 30, 2017 and 2016 (dollars in thousands):
 
Three Months Ended June 30,
 
Increase/(Decrease)
 
Percentage
Change
 
2017
 
2016
 
Rental income
$
22,677


$
11,024

 
$
11,653

 
106
 %
Property expense recoveries
3,869


2,306

 
1,563

 
68
 %
Asset management fees to affiliates
2,795


1,362

 
1,433

 
105
 %
Property management fees to affiliates
469


204

 
265

 
130
 %
Property operating expense
1,411


791

 
620

 
78
 %
Property tax expense
2,321


1,408

 
913

 
65
 %
Acquisition fees and expenses to non-affiliates
—


402

 
(402
)
 
(100
)%
Acquisition fees and expenses to affiliates
—


2,129

 
(2,129
)
 
(100
)%
General and administrative expenses
983


941

 
42

 
4
 %
Corporate operating expenses to affiliates
522


431

 
91

 
21
 %
Depreciation and amortization
10,951


5,985

 
4,966

 
83
 %
Interest expense
3,869

 
2,502

 
1,367

 
55
 %
Acquisition Fees and Expenses to Non-Affiliates and Affiliates
The total decrease in acquisition fees and expenses to non-affiliates and affiliates for the three months ended June 30, 2017 compared to the same period a year ago was approximately $2.5 million. The decrease was a result of an accounting standard, which clarified the definition of a business combination. Under the clarified definition, our one acquisition in the second quarter of 2017 did not qualify as a business combination; consequently, we accounted for it as an asset acquisition. Thus, approximately $0.7 million of acquisition expense was capitalized as part of the asset acquisition and allocated on a relative fair value basis.
Corporate Operating Expenses to Affiliates
The total increase in corporate operating expenses to affiliates for the three months ended June 30, 2017 compared to the same period a year ago was approximately $0.1 million. The increase is a result of an increase in personnel and rent costs incurred by our Advisor, which are allocated to us.
Interest Expense
The increase in interest expense for the three months ended June 30, 2017 primarily related to draws that totaled $246.3 million from our Revolving Credit Facility to fund five acquisitions subsequent to June 30, 2016.



34


 
Six Months Ended June 30,
 
Increase/(Decrease)
 
Percentage
Change
 
2017
 
2016
 
Rental income
$
44,285


$
21,298

 
$
22,987

 
108
 %
Property expense recoveries
8,233


4,534

 
3,699

 
82
 %
Asset management fees to affiliates
5,541


2,632

 
2,909

 
111
 %
Property management fees to affiliates
895


399

 
496

 
124
 %
Property operating expense
3,084


1,553

 
1,531

 
99
 %
Property tax expense
4,733


2,704

 
2,029

 
75
 %
Acquisition fees and expenses to non-affiliates
—


496

 
(496
)
 
(100
)%
Acquisition fees and expenses to affiliates
—


2,999

 
(2,999
)
 
(100
)%
General and administrative expenses
1,905


1,419

 
486

 
34
 %
Corporate operating expenses to affiliates
1,113


991

 
122

 
12
 %
Depreciation and amortization
21,474


11,611

 
9,863

 
85
 %
Interest expense
7,448

 
4,995

 
2,453

 
49
 %
Acquisition Fees and Expenses to Non-Affiliates and Affiliates
The total decrease in acquisition fees and expenses to non-affiliates and affiliates for the six months ended June 30, 2017 compared to the same period a year ago was approximately $3.5 million. The decrease was a result of an accounting standard, which clarified the definition of a business combination. Under the clarified definition, our two acquisitions through the six months ended June 30, 2017 did not qualify as a business combination; consequently, we accounted for each transaction as an asset acquisition. Thus, approximately $1.2 million of acquisition expense was capitalized as part of the asset acquisition and allocated on a relative fair value basis.
General and Administrative Expenses and Corporate Operating Expenses to Affiliates
The total increase in general and administrative expenses and corporate operating expenses to affiliates for the six months ended June 30, 2017 compared to the same period a year ago was approximately $0.6 million. The increase related to (1) the issuance of restricted stock to our independent directors, which contributed approximately $0.2 million; and (2) approximately $0.3 million of professional fees.
Interest Expense
The increase in interest expense for the six months ended June 30, 2017 primarily related to draws that totaled $264.2 million from our Revolving Credit Facility to fund six acquisitions subsequent to January 1, 2016.
Funds from Operations and Modified 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.
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

35


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.
The Investment Program Association (“IPA”) issued Practice Guideline 2010-01 (the “IPA MFFO Guideline”) on November 2, 2010, which extended financial measures to include modified funds from operations (“MFFO”). In computing MFFO, FFO is adjusted for certain non-operating cash items such as acquisition fees and expenses and certain non-cash items such as straight-line rent, amortization of in-place lease valuations, amortization of discounts and premiums on debt investments, nonrecurring impairments of real estate-related investments, mark-to-market adjustments included in net income (loss), and nonrecurring gains or losses included in net income (loss) from the extinguishment or sale of debt, hedges, foreign exchange, derivatives or securities holdings where trading of such holdings is not a fundamental attribute of the business plan, unrealized gains or losses resulting from consolidation from, or deconsolidation to, equity accounting, and after adjustments for consolidated and unconsolidated partnerships and joint ventures, with such adjustments calculated to reflect MFFO on the same basis.
Management is responsible for managing interest rate, hedge and foreign exchange risk. 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 on-going operations and are therefore typically adjusted for when assessing operating performance.
We adopted the IPA MFFO Guideline as management believes that MFFO is a beneficial indicator of our on-going portfolio performance and ability to sustain our current distribution level. More specifically, MFFO isolates the financial results of the REIT’s operations. MFFO, 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, MFFO for the period presented may not be indicative of future results or our future ability to pay our dividends. By providing FFO and MFFO, we present information that assists investors in aligning their analysis with management’s analysis of long-term operating activities. MFFO also allows for a comparison of the performance of our portfolio with other REITs that are not currently engaging in acquisitions, as well as a comparison of our performance with that of other non-traded REITs, as MFFO, or an equivalent measure, is routinely reported by non-traded REITs, and we believe often used by analysts and investors for comparison purposes. As explained below, management’s evaluation of our operating performance excludes items considered in the calculation of MFFO 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 MFFO as a means of determining operating results of our portfolio. In addition, when applicable, in conjunction with certain acquisitions, we may enter into a master escrow or lease agreement with a seller, whereby the seller is obligated to pay us rent pertaining to certain spaces impacted by existing rental abatements. In accordance with GAAP, these proceeds are recorded as an adjustment to the allocation of real estate assets at the time of acquisition, and, accordingly, are not included in revenues, net income, or FFO. This application results in income recognition that can differ significantly from current contract terms. By adjusting for this item, we believe MFFO is reflective of the realized economic impact of our leases (including master agreements) that is useful in assessing the sustainability of our operating performance.
•
Amortization of in-place lease valuation. Acquired in-place leases are valued as above-market or below-market as of the date of acquisition based on the present value of the difference between (a) the contractual amounts to be paid pursuant

36


to the in-place leases and (b) management's estimate of fair market lease rates for the corresponding in-place leases over a period equal to the remaining non-cancelable term of the lease for above-market leases. The above-market and below-market lease values are capitalized as intangible lease assets or liabilities and amortized as an adjustment to rental income over the remaining terms of the respective leases. As amortization of in-place lease valuation is a non-cash adjustment and is included in historical earnings, FFO is adjusted for the effect of the amortization to arrive at MFFO 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 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. These costs have been funded with cash proceeds from our Primary Offering or included as a component of the amount borrowed to acquire such real estate. If we acquire a property after all offering proceeds from our Primary Offering have been invested, there will not be any offering proceeds to pay the corresponding acquisition-related costs. Accordingly, unless our Advisor determines to waive the payment of any then-outstanding acquisition-related costs otherwise payable to our Advisor, such costs will be paid from additional debt, operational earnings or cash flow, net proceeds from the sale of properties, or ancillary cash flows. In evaluating the performance of our portfolio over time, management employs business models and analyses that differentiate the costs to acquire investments from the investments’ revenues and expenses. Acquisition-related costs may negatively affect our operating results, cash flows from operating activities and cash available to fund distributions during periods in which properties are acquired, as the proceeds to fund these costs would otherwise be invested in other real estate related assets. By excluding acquisition-related costs, MFFO may not provide an accurate indicator of our operating performance during periods in which acquisitions are made. However, it can provide an indication of our on-going ability to generate cash flow from operations and continue as a going concern after we cease to acquire properties on a frequent and regular basis, which can be compared to the MFFO 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 MFFO provides investors with supplemental performance information that is consistent with the performance models and analysis used by management.
•
Gain or loss from the extinguishment of debt. We use debt as a partial source of capital to acquire properties in our portfolio. As a term of obtaining this debt, we will pay financing costs to the respective lender. Financing costs are presented on the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts and amortized into interest expense on a straight-line basis over the term of the debt. We consider the amortization expense to be a component of operations if the debt was used to acquire properties. From time to time, we may cancel certain debt obligations and replace these canceled debt obligations with new debt at more favorable terms to us. In doing so, we are required to write off the remaining capitalized financing costs associated with the canceled debt, which we consider to be a cost, or loss, on extinguishing such debt. Management believes that this loss is considered an event not associated with our operations, and therefore, deems this write off to be an exclusion from MFFO.
•
Unrealized gains (losses) on derivative instruments. These adjustments include unrealized gains (losses) from mark-to-market adjustments on interest rate swaps and losses due to hedge ineffectiveness.  The change in fair value of interest rate swaps not designated as a hedge and the change in fair value of the ineffective portion of interest rate swaps are non-cash adjustments recognized directly in earnings and are included in interest expense.  We have excluded these adjustments in our calculation of MFFO to more appropriately reflect the economic impact of our interest rate swap agreements.
For all of these reasons, we believe the non-GAAP measures of FFO and MFFO, in addition to income (loss) from operations, net income (loss) and cash flows from operating activities, as defined by GAAP, are helpful supplemental performance measures and useful to investors in evaluating the performance of our real estate portfolio. However, a material limitation associated with FFO and MFFO is that they are not indicative of our cash available to fund distributions since other uses of cash, such as capital expenditures at our properties and principal payments of debt, are not deducted when calculating

37


FFO and MFFO. The use of MFFO as a measure of long-term operating performance on value is also limited if we do not continue to operate under our current business plan as noted above. MFFO is useful in assisting management and investors in assessing our on-going ability to generate cash flow from operations and continue as a going concern in future operating periods, and in particular, after the offering and acquisition stages are complete. However, FFO and MFFO are not useful measures in evaluating NAV because impairments are taken into account in determining NAV but not in determining FFO and MFFO. Therefore, FFO and MFFO should not be viewed as a more prominent measure of performance than income (loss) from operations, net income (loss) or to cash flows from operating activities and each should be reviewed in connection with GAAP measurements.
Neither the SEC, NAREIT, nor any other applicable regulatory body has opined on the acceptability of the adjustments contemplated to adjust FFO in order to calculate MFFO and its use as a non-GAAP performance measure. In the future, the SEC or NAREIT may decide to standardize the allowable exclusions across the REIT industry, and we may have to adjust the calculation and characterization of this non-GAAP measure.
Our calculation of FFO and MFFO is presented in the following table for the three and six months ended June 30, 2017 and 2016 (dollars in thousands):
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2017
 
2016
 
2017
 
2016
Net income (loss)
$
3,365

 
$
(2,825
)
 
$
6,489

 
$
(3,966
)
Adjustments:
 
 
 
 
 
 
 
Depreciation of building and improvements
5,024

 
2,466

 
9,916

 
4,804

Amortization of leasing costs and intangibles
5,927

 
3,518

 
11,558

 
6,806

FFO
$
14,316

 
$
3,159

 
$
27,963

 
$
7,644

Distributions to noncontrolling interests
(2
)
 
(3
)
 
(5
)
 
(6
)
FFO, adjusted for noncontrolling interest distributions
$
14,314

 
$
3,156

 
$
27,958

 
$
7,638

Reconciliation of FFO to MFFO:
 
 
 
 
 
 
 
Adjusted FFO
$
14,314

 
$
3,156

 
$
27,958

 
7,638

Adjustments:
 
 
 
 
 
 
 
Acquisition fees and expenses to non-affiliates
—

 
402

 
—

 
496

Acquisition fees and expenses to affiliates
—

 
2,129

 
—

 
2,999

Revenues in excess of cash received, net
(4,556
)
 
(812
)
 
(8,729
)
 
(1,564
)
Amortization of below market rent, net
(1,173
)
 
(879
)
 
(2,206
)
 
(1,685
)
Unrealized loss (gain) on derivatives
18

 
96

 
41

 
—

Cash received from Southern Company Master Lease Escrow Agreement
1,626

 
—

 
3,580

 
—

MFFO
$
10,229

 
$
4,092

 
$
20,644

 
$
7,884

Liquidity and Capital Resources
Long-Term Liquidity and Capital Resources
On a long-term basis, our principal demands for funds will be for property acquisitions, either directly or through entity interests, for the payment of operating expenses and distributions, and for the payment of interest on our outstanding indebtedness and other investments. Generally, cash needs for items, other than property acquisitions, will be met from operations and proceeds received from offerings. However, there may be a delay between the sale of our shares and our purchase of properties that could result in a delay in the benefits to our stockholders, if any, of returns generated from our investment operations. Our Advisor will evaluate potential property acquisitions and engage in negotiations with sellers on our behalf. After a purchase contract is executed that contains specific terms, the property will not be purchased until the successful completion of due diligence, which includes review of the title insurance commitment, an appraisal and an environmental analysis. In some instances, the proposed acquisition will require the negotiation of final binding agreements, which may include financing documents. During this period, we may decide to temporarily invest any unused proceeds from the offering in certain investments that could yield lower returns than the properties. These lower returns may affect our ability to make distributions.
Offering
Our registration statement was declared effective on July 31, 2014, pursuant to which we registered $2.2 billion in shares of common stock in our Offering, consisting of $2.0 billion in shares to be offered to our public in the Primary Offering and $200.0 million in shares for sale pursuant to our DRP. On April 25, 2016, we filed with the State Department of Assessments and Taxation of Maryland (the "Department") Articles Supplementary to our First Articles of Amendment and Restatement (i) reclassifying 100,000,000 authorized but unissued shares of our Class A common stock, and (ii) 50,000,000 authorized but unissued shares of our Class T common stock, as 150,000,000 shares of Class I common stock. The Articles Supplementary were effective upon filing with the Department.
In September 2016, our board of directors approved the close of our Primary Offering effective January 20, 2017; however, we continued to offer shares pursuant to our DRP.  On April 6, 2017, we filed a Registration Statement on Form S-3 with the SEC for the registration of 3.0 million shares for sale pursuant to the DRP. The DRP Offering may be terminated at any time upon 10 days’ prior written notice to stockholders.
The following table summarizes shares issued and gross proceeds for each share class as of June 30, 2017 (dollars in thousands):
 
 
Class A
 
Class T
 
Class I
 
Total
Gross proceeds from Primary Offering
 
$
240,780

 
$
474,859

 
$
8,381

 
$
724,020

Gross proceeds from DRP
 
$
15,944

 
$
14,542

 
$
188

 
$
30,674

Shares issued in Primary Offering
 
24,199,760

 
47,562,870

 
901,225

 
72,663,855

DRP shares issued
 
1,684,990

 
1,543,066

 
19,953

 
3,248,009

Stock distribution shares issued
 
235,074

 
245,470

 
3,619

 
484,163

Restricted stock units issued
 
—

 
—

 
25,500

 
25,500

Total shares issued prior to redemptions
 
26,119,824

 
49,351,406

 
950,297

 
76,421,527

Revolving Credit Facility
On December 12, 2014, we, through our operating partnership, entered into the Revolving Credit Facility co-led by KeyBank, N.A. ("Keybank") as administrative agent, and JPMorgan Chase Bank, N.A., as syndication agent, along with a syndicate of lenders. Pursuant to the Revolving Credit Facility, we were provided with an initial commitment of $250.0 million, which commitment may be increased under certain circumstances up to a maximum total commitment of $1.25 billion. On August 11, 2015, we exercised our right under the credit agreement to increase the total commitments from $250.0 million to $410.0 million.

38


On November 22, 2016, we, through our Operating Partnership, entered into an amendment (the "Increase Agreement") to the Revolving Credit Facility with KeyBank as administrative agent; Bank of America, N.A., SunTrust Bank, Capital One, National Association ("Capital One"), and Wells Fargo Bank, National Association, as co-syndication agents; and KeyBanc Capital Markets, Merrill Lynch, Pierce, Fenner and Smith Incorporated, SunTrust Robinson Humphrey, Inc., Capital One, and Wells Fargo Securities, LLC as joint lead arrangers and joint bookrunners to exercise our right under the Revolving Credit Facility to increase the total commitments from $410.0 million to $550.0 million. In connection with the Increase Agreement, we, through our Operating Partnership, also entered into a Joinder Agreement with KeyBank and U.S. Bank National Association ("U.S. Bank"), for the admission of U.S. Bank as a lender with a commitment of $50 million under the Revolving Credit Facility (the "Joinder Agreement"). With the admission of U.S. Bank, JPMorgan Chase Bank, N.A. terminated its commitment under the Revolving Credit Facility and no longer serves as a lender, syndication agent, joint bookrunner, or joint lead arranger under the Revolving Credit Facility.
As of June 30, 2017, the remaining capacity pursuant to the Revolving Credit Facility was $202.2 million.
AIG Loan
On October 22, 2015, six special purpose entities that are wholly-owned by our operating partnership entered into promissory notes with The Variable Annuity Life Insurance Company, American General Life Insurance Company, and the United States Life Insurance Company (collectively, the "Lenders"), pursuant to which the Lenders provided such special purpose entities with a loan in the aggregate amount of approximately $127.0 million (the "AIG Loan").
Derivative Instrument
As discussed in Note 5, Interest Rate Contracts, to the consolidated financial statements, on February 25, 2016, we entered into an interest rate swap agreement to hedge the variable cash flows associated with the existing LIBO Rate-based variable-rate debt on our Revolving Credit Facility. The interest rate swap is effective for the period from April 1, 2016 to December 12, 2018 with a notional amount of $100.0 million.
The effective portion of the change in fair value of derivatives designated and qualifying as cash flow hedges is initially recorded in accumulated other comprehensive income (loss) and is subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. Amounts reported in accumulated other comprehensive income (loss) related to derivatives will be reclassified to interest expense as interest payments and accruals are made on our variable-rate debt.
The following table sets forth a summary of the interest rate swap at June 30, 2017 and December 31, 2016 (dollars in thousands):
 
 
 
 
 
 
 
 
Fair value (1)
Derivative Instrument
 
Effective Date
 
Maturity Date
 
Interest Strike Rate
 
June 30, 2017
 
December 31, 2016
Assets:
 
 
 
 
 
 
 
 
 
 
Interest Rate Swap
 
4/1/2016
 
12/12/2018
 
0.74%
 
$
1,025

 
$
996

(1)
We record all derivative instruments on a gross basis on the consolidated balance sheets, and accordingly, there are no offsetting amounts that net assets against liabilities. As of June 30, 2017, our derivative was in an asset position, and as such, the fair value is included in the line item "Other Assets, net" on the consolidated balance sheet.
Other Potential Future Sources of Capital    
Potential future sources of capital include proceeds from public offerings, proceeds from secured or unsecured financings from banks or other lenders, proceeds from the sale of properties and undistributed funds from operations. If necessary, we may use financings or other sources of capital in the event of unforeseen significant capital expenditures. To the extent we are not able to secure additional financing in the form of a credit facility or other third party source of liquidity, we will be heavily dependent upon the proceeds of public offerings and income from operations in order to meet our long-term liquidity requirements and to fund our distributions.    



39


Short-Term Liquidity and Capital Resources
We expect to meet our short-term operating liquidity requirements from advances from our Advisor and its affiliates, proceeds received in the Offering, and operating cash flows generated from our properties and other properties we acquire in the future. Any advances from our Advisor will be repaid, without interest, as funds are available after meeting our current liquidity requirements, subject to the limitations on reimbursement set forth in the “Management Compensation” section of our prospectus.
Our cash and cash equivalent balances decreased by approximately $5.7 million during the six months ended June 30, 2017 and were used in or provided by the following:
Operating Activities. Cash flows provided by operating activities are primarily dependent on the occupancy level,     the rental rates of our leases, the collectability of rent and recovery of operating expenses from our tenants, and the timing of acquisitions. Net cash provided by operating activities for the six months ended June 30, 2017 increased to $20.2 million compared to cash provided by operating activities of approximately $4.9 million for the six months ended June 30, 2016. Net cash provided by/(used) in operating activities before changes in operating assets and liabilities for the six months ended June 30, 2017 increased by $13.1 million to $17.9 million, compared to approximately $4.8 million for the six months ended June 30, 2016. The increase is primarily due to the operating results of recently acquired properties.
Investing Activities. During the six months ended June 30, 2017, we used $64.4 million in cash for investing activities compared to $126.1 million used during the same period in 2016. The $61.7 million decrease in cash utilization in investing activities is primarily related to the following:
•
$78.8 million decrease in cash used to acquire properties for the six months ended June 30, 2017 compared to the same period in 2016; and
•
$3.3 million decrease in real estate acquisition deposits; offset by
•
$20.2 million used to fund tenant improvements;
Financing Activities. During the six months ended June 30, 2017, we generated $38.5 million in financing activities compared to $165.3 million generated during the same period in 2016, a decrease in cash provided by financing activities of $126.8 million which is comprised primarily of the following:
•
$3.6 million decrease in cash provided from borrowings from the Revolving Credit Facility;
•
$170.8 million decrease in cash provided by the issuance of common stock, net of discounts and offering costs due to the closing of our Primary Offering during the first quarter of 2017; and
•
$7.4 million increase in cash used for payment for distributions and repurchases of common stock due to an increase in number of shareholders; offset by
•
$55.0 million decrease in principal repayments of the Revolving Credit Facility.
Distributions and Our Distribution Policy
Distributions will be paid to our stockholders as of the record date selected by our board of directors. We expect to continue to pay distributions monthly based on daily declaration and record dates so that investors may be entitled to distributions immediately upon purchasing our shares. We expect to regularly pay distributions unless our results of operations, our general financial condition, general economic conditions, or other factors inhibit us from doing so. Distributions will be authorized at the discretion of our board of directors, which will be directed, in substantial part, by its obligation to cause us to comply with the REIT requirements of the Code. The funds we receive from operations that are available for distribution may be affected by a number of factors, including the following:
•
the amount of time required for us to invest the funds received in the Offering;
•
our operating and interest expenses;
•
the amount of distributions or dividends received by us from our indirect real estate investments, if applicable;

40


•
our ability to keep our properties occupied;
•
our ability to maintain or increase rental rates;
•
tenant improvements, capital expenditures and reserves for such expenditures;
•
the issuance of additional shares; and
•
financings and refinancings.
Distributions may be funded with operating cash flow, offering proceeds raised in our public offering, or a combination thereof. From inception and through June 30, 2017, we funded 90% of our cash distributions from cash flow provided by operating activities and 10% from offering proceeds. To the extent that we do not have taxable income, distributions paid will be considered a return of capital to stockholders. The following table shows distributions declared, distributions paid, and cash flows provided by operating activities during the six months ended June 30, 2017 and year ended December 31, 2016, excluding stock distributions (dollars in thousands):
 
Six Months Ended June 30, 2017
 
 
 
Year Ended December 31, 2016
 
 
Distributions paid in cash — noncontrolling interests
$
5

  
 
 
$
11

 
 
Distributions paid in cash — common stockholders
9,393

  
 
 
11,541

 
 
Distributions of DRP
10,928

  
 
 
15,158

 
 
Total distributions
$
20,326

(1) 
 
 
$
26,710

 
 
Source of distributions (2)
 
 
 
 
 
 
 
Cash flows provided by operations
$
9,398

  
46
%
 
$
11,301

 
42
%
Offering proceeds from issuance of common stock
—

 
0
%
 
251

 
1
%
Offering proceeds from issuance of common stock pursuant to the DRP
10,928

  
54
%
 
15,158

 
57
%
Total sources
$
20,326

(3) 
100
%
 
$
26,710

 
100
%
(1)
Distributions are paid on a monthly basis in arrears. Distributions for all record dates of a given month are paid on or about the first business day of the following month. Total distributions declared but not paid as of June 30, 2017 were approximately $1.6 million for common stockholders and noncontrolling interests.
(2)
Percentages were calculated by dividing the respective source amount by the total sources of distributions.
(3)
Allocation of total sources are calculated on a quarterly basis.
Contractual Commitments and Contingencies
The following is a summary of our contractual obligations as of June 30, 2017 (dollars in thousands):
 
Payments Due During the Years Ending December 31,
 
Total
 
2017
 
2018-2019
 
2020-2021
 
Thereafter
Outstanding debt obligations (1) (2)
$
474,728

 
$
—

 
$
347,758

 
$
2,364

 
$
124,606

Interest on outstanding debt obligations (3)
71,218

 
8,279

 
32,491

 
10,497

 
19,951

Total
$
545,946


$
8,279


$
380,249


$
12,861


$
144,557

(1)
Amount relates to principal payments for the outstanding balance on the Revolving Credit Facility and AIG Loan at June 30, 2017. The Revolving Credit Facility is due on December 12, 2019, assuming the one-year extension is exercised.
(2)
Deferred financing costs are excluded from total contractual obligations above.
(3)
Projected interest payments are based on the outstanding principal amounts under the Revolving Credit Facility and AIG Loan at June 30, 2017. Projected interest payments are based on the interest rate in effect at June 30, 2017.

Off-Balance Sheet Arrangements
As of June 30, 2017, we had no off-balance sheet transactions, nor do we currently have any such arrangements or obligations.

41



Subsequent Events
See Note 13, Subsequent Events, to the consolidated financial statements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Market risks include risks that arise from changes in interest rates, foreign currency exchange rates, commodity prices, equity prices and other market changes that affect market-sensitive instruments. In pursuing our business plan, we expect that the primary market risk to which we will be exposed is interest rate risk.
In order to modify and manage the interest rate characteristics of our outstanding debt and to limit the effects of interest rate risks on our operations, we may utilize a variety of financial instruments, including interest rate swap agreements, caps, floors, and other interest rate exchange contracts. The use of these types of instruments to hedge a portion of our exposure to changes in interest rates carries additional risks, such as counterparty credit risk and the legal enforceability of hedging contracts.
On February 25, 2016, the Company executed one interest rate swap agreement to hedge the variable cash flows associated with certain existing LIBO Rate-based variable-rate debt, including the Company's Revolving Credit Facility. The interest rate swap is effective for the period from April 1, 2016 to December 12, 2018 with a notional amount of $100.0 million.
Our future earnings and fair values relating to financial instruments are primarily dependent upon prevalent market rates of interest, such as LIBO Rate. However, our interest rate swap agreements are intended to reduce the effects of interest rate changes. The effect of a 1% increase in interest rates, assuming a LIBO Rate floor of 0%, on our variable-rate debt, including our unsecured credit facility and our mortgage loan, after considering the effect of our interest rate swap agreement would decrease our future earnings and cash flows by approximately $3.5 million annually.
In addition to changes in interest rates, the value of our future investments is subject to fluctuations based on changes in local and regional economic conditions and changes in the creditworthiness of tenants, which may affect our ability to refinance our debt if necessary, when such debt is incurred.
ITEM 4. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
As of the end of the period covered by this report, management, with the participation of our principal executive and principal financial officers, including our chief executive officer and chief financial officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures. Based upon, and as of the date of, the evaluation, our chief executive officer and chief financial officer concluded that the disclosure controls and procedures were effective as of the end of the period covered by this report to ensure that information required to be disclosed in the reports we file and submit under the Exchange Act is recorded, processed, summarized and reported as and when required. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports we file and submit under the Exchange Act is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate to allow timely decisions regarding required disclosure.
Internal Control Over Financial Reporting
There have been no changes in our internal control over financial reporting that occurred during the quarter ended June 30, 2017 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

42


PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 1A. RISK FACTORS
In addition to the other information set forth in this Quarterly Report on Form 10-Q, you should carefully consider the risk factors discussed in Part I, Item 1A, "Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2016 as filed with the SEC on March 15, 2017, which could materially affect our business, financial condition or future results. There have been no material changes from the risk factors set forth in such Annual Report. However, the risks and uncertainties that the Company faces are not limited to those set forth in such Annual Report.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
In September 2016, our board of directors approved the close of our Primary Offering effective January 20, 2017; however, we continued to offer shares pursuant to our DRP.  On April 6, 2017, we filed a Registration Statement on Form S-3 with the SEC for the registration of 3.0 million shares for sale pursuant to the DRP. The DRP Offering may be terminated at any time upon 10 days’ prior written notice to stockholders.
As of June 30, 2017, we had received aggregate gross proceeds from our Offering of $724.0 million from the sale of 72,663,855 shares and approximately $30.7 million from the issuance of 3,248,009 shares of our common stock pursuant to the DRP. Our equity raise as of June 30, 2017 resulted in the following (dollars in thousands):
Common shares issued in our Offering
 
72,663,855

Common shares issued in our Offering pursuant to the DRP
 
3,248,009

Total common shares
 
75,911,864

Gross proceeds from our Offering
 
$
724,020

Gross proceeds from our Offering from shares issued pursuant to our DRP
 
30,674

Total gross proceeds from our Offering
 
$
754,694

Selling commissions and Dealer Manager fees incurred
 
(50,940
)
Reimbursement of O&O costs paid to our Advisor
 
(4,074
)
Net proceeds from our Offering
 
$
699,680

Reimbursement of O&O costs owed to our Advisor
 
(2,675
)
Net proceeds from our Offering, adjusted for O&O costs owed to our Advisor
 
$
697,005

The net offering proceeds raised in the Offering were primarily used to fund:
•
Acquisitions of real property and tenant improvements of approximately $466.9 million;
•
Repayment of debt and redemptions of preferred units of approximately $150.3 million;
•
Acquisition fees paid and expenses reimbursed to the Advisor of approximately $26.5 million;
•
Payment of stockholder servicing fees of approximately $3.5 million; and
•
Other business obligations, including, but not limited to, the payment of a portion of cash distributions to the stockholders of approximately $24.0 million and deferred financing cost of approximately $5.7 million.
The balance of the net offering proceeds are held in cash for future real estate acquisitions and other obligations we incur. (See Note 2, Basis of Presentation and Summary of Significant Accounting Policies to the consolidated financial statements contained in this report.)
Share Redemption Program
As noted in Note 8, Equity – Share Redemption Program, we adopted a share redemption program that will enable stockholders to sell their stock to us in limited circumstances. As long as the common stock is not listed on a national securities exchange or over-the-counter market, stockholders who have held their stock for at least one year may be able to have all or a

43


portion consisting of at least 25% of their shares of stock redeemed by us. During any calendar year, we will not redeem more than 5.0% of the weighted average number of shares outstanding during the prior calendar year. The cash available for redemption will be limited to the proceeds from the sale of shares pursuant to our DRP. Share redemption requests must be received by us no later than the last business day of the calendar quarter, and shares generally will be redeemed on the last business day of the month following such calendar quarter.
As of June 30, 2017, $25.3 million of common stock was available for redemption and $1.3 million of common stock was reclassified from redeemable common stock to accrued expenses and other liabilities in the consolidated balance sheet as of June 30, 2017.
During the three months ended June 30, 2017, we redeemed shares as follows:
For the Month Ended
 
Total
Number of
Shares
Redeemed
 
Average
Price Paid
per Share
 
Total Number of
Shares Redeemed as
Part of Publicly
Announced Plans or
Programs
 
Maximum Number (or
Approximate Dollar Value)
of Shares (or Units) that May
 Yet Be Purchased Under the Plans or Programs
April 30, 2017
 
119,084
 
$8.94
 
119,084

 
(1) 
May 31, 2017
 
—

 
N/A
 
—

 
(1) 
June 30, 2017
 
—

 
N/A
 
—

 
(1) 
(1)
A description of the maximum number of shares that may be purchased under our share redemption program is included in the narrative preceding this table.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5. OTHER INFORMATION
None.

44


ITEM 6. EXHIBITS
The exhibits required to be filed with this report are set forth on the Exhibit Index hereto and incorporated by reference herein.
EXHIBIT INDEX
The following exhibits are included in this Quarterly Report on Form 10-Q for the period ended June 30, 2017 (and are numbered in accordance with Item 601 of Regulation S-K).
Exhibit
No.
 
Description
3.1
 
First Articles of Amendment and Restatement of Griffin Capital Essential Asset REIT II, Inc., incorporated by reference to Exhibit 3.1 to Pre-Effective Amendment No. 4 to the Registrant’s Registration Statement on Form S-11, filed on July 30, 2014, SEC File No. 333-194280
3.2
 
Bylaws of Griffin Capital Essential Asset REIT II, Inc., incorporated by reference to Exhibit 3.2 to the Registrant’s Registration Statement on Form S-11, filed on March 3, 2014, SEC File No. 333-194280
3.3
 
Articles Supplementary to First Articles of Amendment and Restatement of Griffin Capital Essential Asset REIT II, Inc., incorporated by reference to Exhibit 3.1 to the Registrant's Current Report on Form 8-K, filed on April 29, 2016, SEC File No. 000-55605
4.1
 
Griffin Capital Essential Asset REIT II, Inc. Amended and Restated Distribution Reinvestment Plan, incorporated by reference to Exhibit 4.1 to the Registrant's Current Report on Form 8-K, filed on November 18, 2016, SEC File No. 000-55605

4.2
 
Enrollment Form for Distribution Reinvestment Plan, incorporated by reference to Appendix A to the prospectus contained in the Registrant's Registration Statement on Form S-3D, filed on April 6, 2017, SEC File No. 333-217178
10.1
 
Amendment No. 5 to Advisory Agreement dated June 14, 2017, incorporated by reference to Exhibit 99.1 to the Registrant’s Current Report on Form 8-K, filed on June 15, 2017, SEC File No. 000-55605


31.1*
 
Certification of Principal Executive Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2*
 
Certification of Principal Financial Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1**
 
Certification of Principal Executive Officer, pursuant to 18 U.S.C. Section 1350, as created by Section 906 of the Sarbanes-Oxley Act of 2002
32.2**
 
Certification of Principal Executive Officer, pursuant to 18 U.S.C. Section 1350, as created by Section 906 of the Sarbanes-Oxley Act of 2002
101*
 
The following Griffin Capital Essential Asset REIT II, Inc. financial information for the period ended June 30, 2017 formatted in XBRL: (i) Consolidated Balance Sheets (unaudited), (ii) Consolidated Statements of Operations (unaudited), (iii) Consolidated Statements of Equity (unaudited), (iv) Consolidated Statements of Cash Flows (unaudited) and (v) Notes to Consolidated Financial Statements (unaudited).
*
Filed herewith.
**
Furnished herewith.


45


SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
GRIFFIN CAPITAL ESSENTIAL ASSET REIT II, INC.
(Registrant)

Dated:
August 11, 2017
By:
 
/s/ Javier F. Bitar
 
 
 
 
Javier F. Bitar
 
 
 
 
On behalf of the Registrant and as Chief Financial Officer and Treasurer (Principal Financial and Accounting Officer)


46

Griffin Realty Trust, Inc. Reports