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EX-32.2 - EXHIBIT 32.2 - Griffin Capital Essential Asset REIT, Inc.gcear06302017ex322.htm
EX-32.1 - EXHIBIT 32.1 - Griffin Capital Essential Asset REIT, Inc.gcear06302017ex321.htm
EX-31.2 - EXHIBIT 31.2 - Griffin Capital Essential Asset REIT, Inc.gcear06302017ex312.htm
EX-31.1 - EXHIBIT 31.1 - Griffin Capital Essential Asset REIT, Inc.gcear06302017ex311.htm
EX-3.2 - EXHIBIT 3.2 - Griffin Capital Essential Asset REIT, Inc.gcear06302017ex32.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: 000-54377
_______________________________________________
Griffin Capital Essential Asset REIT, Inc.
(Exact name of Registrant as specified in its charter)
________________________________________________
Maryland
 
26-3335705
(State or other jurisdiction of
incorporation or organization)
 
(IRS Employer
Identification No.)

Griffin Capital Plaza
1520 E. Grand Ave

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

__________________________________________________
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.    Yes  x     No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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
 
¨
 
 
 
 
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. ¨ 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of August 9, 2017: 172,692,879 shares of common stock, $0.001 par value per share.

1


FORM 10-Q
GRIFFIN CAPITAL ESSENTIAL ASSET REIT, 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.

2


PART I. FINANCIAL INFORMATION
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

Certain statements contained in this Form 10-Q of Griffin Capital Essential Asset REIT, Inc., other than historical facts, may be considered forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). We intend for all such forward-looking statements to be covered by the applicable safe harbor provisions for forward-looking statements contained in Section 27A of the Securities Act and Section 21E of the Exchange Act. Such forward-looking statements 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 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.

3


GRIFFIN CAPITAL ESSENTIAL ASSET REIT, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited; in thousands, except share amounts)
 
June 30, 2017
 
December 31, 2016
ASSETS
 
 
 
Cash and cash equivalents
$
53,935

 
$
43,442

Restricted cash
14,830

 
13,420

Real estate:
 
 
 
Land
371,137

 
374,557

Building and improvements
2,106,465

 
2,102,785

Tenant origination and absorption cost
538,150

 
541,646

Construction in progress
5,808

 
5,401

Total real estate
3,021,560

 
3,024,389

Less: accumulated depreciation and amortization
(396,823
)
 
(338,552
)
Total real estate, net
2,624,737

 
2,685,837

Investments in unconsolidated entities
41,696

 
46,313

Intangible assets, net
22,375

 
29,048

Deferred rent
48,467

 
43,900

Deferred leasing costs, net
16,234

 
14,139

Other assets
22,304

 
18,704

Total assets
$
2,844,578

 
$
2,894,803

LIABILITIES AND EQUITY
 
 
 
Debt:
 
 
 
Mortgages payable
$
316,997

 
$
343,461

Term Loan
711,045

 
710,489

Revolver Loan
417,193

 
393,585

Total debt
1,445,235

 
1,447,535

Restricted reserves
9,745

 
9,437

Interest rate swap liability
542

 
3,101

Accrued expenses and other liabilities
91,090

 
73,469

Distributions payable
6,249

 
6,377

Due to affiliates
3,664

 
2,719

Below market leases, net
28,523

 
31,636

Total liabilities
1,585,048

 
1,574,274

Commitments and contingencies (Note 11)

 

Noncontrolling interests subject to redemption, 531,000 units eligible towards redemption as of June 30, 2017 and December 31, 2016
4,887

 
4,887

Common stock subject to redemption
67,256

 
92,058

Stockholders’ equity:
 
 
 
Common Stock, $0.001 par value; 700,000,000 shares authorized; 175,228,093 and 176,032,871 shares outstanding, as of June 30, 2017 and December 31, 2016
175

 
176

Additional paid-in capital
1,561,650

 
1,561,516

Cumulative distributions
(394,177
)
 
(333,829
)
Accumulated deficit
(7,268
)
 
(29,750
)
Accumulated other comprehensive loss
(1,841
)
 
(4,643
)
Total stockholders’ equity
1,158,539

 
1,193,470

Noncontrolling interests
28,848

 
30,114

Total equity
1,187,387

 
1,223,584

Total liabilities and equity
$
2,844,578

 
$
2,894,803

See accompanying notes.

4


GRIFFIN CAPITAL ESSENTIAL ASSET REIT, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited; in thousands, except share and per share amounts)
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2017
 
2016
 
2017
 
2016
Revenue:
 
 
 
 
 
 
 
Rental income
$
65,111

 
$
67,536

 
$
131,210

 
$
134,170

Lease termination income

 

 
12,845

 
216

Property expense recoveries
17,661

 
19,052

 
35,425

 
38,934

Total revenue
82,772

 
86,588

 
179,480

 
173,320

Expenses:
 
 
 
 
 
 
 
Asset management fees to affiliates
5,932

 
5,889

 
11,865

 
11,678

Property management fees to affiliates
2,538

 
2,421

 
5,066

 
4,791

Property operating expense
11,750

 
12,245

 
23,754

 
24,114

Property tax expense
11,536

 
11,112

 
22,549

 
22,238

Acquisition fees and expenses to non-affiliates

 
424

 

 
534

Acquisition fees and expenses to affiliates

 
1,239

 

 
1,239

General and administrative expenses
2,700

 
2,348

 
4,244

 
3,372

Corporate operating expenses to affiliates
679

 
588

 
1,307

 
853

Depreciation and amortization
29,952

 
31,481

 
60,548

 
62,687

Impairment provision

 

 
5,675

 

Total expenses
65,087

 
67,747

 
135,008

 
131,506

Income before other income and (expenses)
17,685

 
18,841

 
44,472

 
41,814

Other income (expenses):
 
 
 
 
 
 
 
Interest expense
(12,472
)
 
(12,815
)
 
(24,540
)
 
(24,844
)
Other income
136

 
243

 
235

 
2,069

Loss from investment in unconsolidated entities
(482
)
 
(354
)
 
(994
)
 
(738
)
Gain on acquisition of unconsolidated entity

 
666

 

 
666

Gain from disposition of assets
4,293

 

 
4,293

 

Net income
9,160

 
6,581

 
23,466

 
18,967

Less: Net (income) attributable to noncontrolling interests
(316
)
 
(244
)
 
(808
)
 
(650
)
Net income attributable to controlling interest
8,844

 
6,337

 
22,658

 
18,317

Distributions to redeemable noncontrolling interests attributable to common stockholders
(88
)
 
(89
)
 
(176
)
 
(178
)
Net income attributable to common stockholders
$
8,756

 
$
6,248

 
$
22,482

 
$
18,139

Net income attributable to common stockholders per share, basic and diluted
$
0.05

 
$
0.04

 
$
0.13

 
$
0.10

Weighted average number of common shares outstanding, basic and diluted
175,048,607

 
175,567,424

 
175,359,706

 
175,379,795

Distributions declared per common share
$
0.17

 
$
0.17

 
$
0.34

 
$
0.34

See accompanying notes.

5


GRIFFIN CAPITAL ESSENTIAL ASSET REIT, 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
$
9,160

 
$
6,581

 
$
23,466

 
$
18,967

Other comprehensive income (loss):

 
 
 
 
 
 
Equity in other comprehensive income (loss) of unconsolidated joint venture
6

 
(151
)
 
178

 
(783
)
Change in fair value of swap agreements
(202
)
 
(9,158
)
 
2,723

 
(24,100
)
Total comprehensive income (loss)
8,964

 
(2,728
)
 
26,367

 
(5,916
)
Distributions to redeemable noncontrolling interests attributable to common stockholders
(88
)
 
(89
)
 
(176
)
 
(178
)
Less: comprehensive (income) loss attributable to noncontrolling interests
(309
)
 
101

 
(907
)
 
206

Comprehensive income (loss) attributable to common stockholders
$
8,567

 
$
(2,716
)
 
$
25,284

 
$
(5,888
)
See accompanying notes.




6



GRIFFIN CAPITAL ESSENTIAL ASSET REIT, INC.
CONSOLIDATED STATEMENTS OF EQUITY
(Unaudited)
(In thousands, except share data)
 
 
 
 
 
 
 
 
 
 
 
Accumulated Other Comprehensive Loss
 
 
 
 
 
 
 
Common Stock
 
Additional
Paid-In
Capital
 
Cumulative
Distributions
 
Accumulated
Deficit
 
 
Total
Stockholders’
Equity
 
Non-
controlling
Interests
 
Total
Equity
 
Shares
 
Amount
 
BALANCE December 31, 2015
175,184,519

 
$
175

 
$
1,561,499

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

 
$
21,318

 
$
1,309,087

Stock-based compensation
1,333

 

 
18

 

 

 

 
18

 

 
18

Distributions to common stockholders

 

 

 
(69,624
)
 

 

 
(69,624
)
 

 
(69,624
)
Issuance of shares for distribution reinvestment plan
5,011,974

 
5

 
52,169

 
(52,174
)
 

 

 

 

 

Repurchase of common stock
(4,164,955
)
 
(4
)
 
(41,439
)
 

 

 

 
(41,443
)
 

 
(41,443
)
Additions to common stock subject to redemption

 

 
(10,731
)
 

 

 

 
(10,731
)
 

 
(10,731
)
Issuance of limited partnership units

 

 

 

 

 

 

 
11,941

 
11,941

Distributions to noncontrolling interests

 

 

 

 

 

 

 
(4,124
)
 
(4,124
)
Distributions to noncontrolling interests subject to redemption

 

 

 

 

 

 

 
(11
)
 
(11
)
Net income

 

 

 

 
25,285

 

 
25,285

 
912

 
26,197

Other comprehensive income

 

 

 

 

 
2,196

 
2,196

 
78

 
2,274

BALANCE December 31, 2016
176,032,871

 
$
176

 
$
1,561,516

 
$
(333,829
)
 
$
(29,750
)
 
$
(4,643
)
 
$
1,193,470

 
$
30,114

 
$
1,223,584

Stock-based compensation
13,000

 

 
133

 

 

 

 
133

 

 
133

Distributions to common stockholders

 

 

 
(35,278
)
 

 

 
(35,278
)
 

 
(35,278
)
Issuance of shares for distribution reinvestment plan
2,401,362

 
2

 
25,068

 
(25,070
)
 

 

 

 

 

Repurchase of common stock
(3,219,140
)
 
(3
)
 
(32,143
)
 

 

 

 
(32,146
)
 

 
(32,146
)
Additions to common stock subject to redemption

 

 
7,076

 

 

 

 
7,076

 

 
7,076

Issuance of limited partnership units

 

 

 

 

 

 

 

 

Distributions to noncontrolling interests

 

 

 

 

 

 

 
(2,167
)
 
(2,167
)
Distributions to noncontrolling interests subject to redemption

 

 

 

 

 

 

 
(6
)
 
(6
)
Net income

 

 

 

 
22,482

 

 
22,482

 
808

 
23,290

Other comprehensive income

 

 

 

 

 
2,802

 
2,802

 
99

 
2,901

BALANCE June 30, 2017
175,228,093

 
$
175

 
$
1,561,650

 
$
(394,177
)
 
$
(7,268
)
 
$
(1,841
)
 
$
1,158,539

 
$
28,848

 
$
1,187,387

See accompanying notes.

7


GRIFFIN CAPITAL ESSENTIAL ASSET REIT, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited; in thousands)
 
Six Months Ended
 
June 30,
 
2017
 
2016
Operating Activities:
 
 
 
Net income
$
23,466

 
$
18,967

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation of building and building improvements
28,296

 
27,006

Amortization of leasing costs and intangibles, including ground leasehold interests
32,252

 
35,681

Amortization of above and below market leases
721

 
1,573

Amortization of deferred financing costs
1,426

 
1,302

Amortization of debt premium
(430
)
 
(134
)
Amortization of deferred revenue

 
(1,228
)
Deferred rent
(5,065
)
 
(8,923
)
Termination fee revenue - receivable from tenant
(12,845
)
 

Gain from acquisition of unconsolidated entity

 
(666
)
Gain from sale of depreciable operating property
(4,293
)
 

Unrealized loss on interest rate swaps
27

 
5

Loss from investment in unconsolidated entities
994

 
738

Impairment provision
5,675

 

Stock-based compensation
133

 
8

Change in operating assets and liabilities:
 
 
 
Deferred leasing costs and other assets
7,091

 
3,522

Restricted cash
(412
)
 
5,069

Accrued expenses and other liabilities
(1,318
)
 
(6,753
)
Due to affiliates, net
945

 
(5,463
)
Net cash provided by operating activities
76,663

 
70,704

Investing Activities:
 
 
 
Acquisition of properties, net

 
(7,897
)
Proceeds from disposition of properties
10,245

 

Real estate funds held for exchange

 
47,031

Reserves for tenant improvements
(689
)
 
1,951

Improvements to real estate
(558
)
 
(6,113
)
Payments for construction-in-progress, net
(5,774
)
 
(7,030
)
Mortgage receivable from affiliate

 
25,741

Distributions of capital from investment in unconsolidated entities
3,801

 
3,970

Net cash provided by investing activities
7,025

 
57,653

Financing Activities:
 
 
 
Proceeds from borrowings - Term Loan

 
75,000

Proceeds from borrowings - Revolver Loan
23,000

 
23,600

Principal payoff of secured indebtedness - Mortgage Debt
(22,820
)
 
(6,370
)
Principal payoff of secured indebtedness - Revolver Loan

 
(139,344
)
Partial principal payoff of secured indebtedness - TW Telecom mortgage loan
(324
)
 

Principal amortization payments on secured indebtedness
(2,965
)
 
(2,260
)
Deferred financing costs
(185
)
 
(740
)
Purchase of noncontrolling interest

 
(18,129
)
Repurchase of common stock
(32,146
)
 
(16,098
)
Distributions to noncontrolling interests
(2,362
)
 
(2,050
)
Distributions to common stockholders
(35,393
)
 
(34,460
)
Net cash used in financing activities
(73,195
)
 
(120,851
)
Net increase in cash and cash equivalents
10,493

 
7,506

Cash and cash equivalents at the beginning of the period
43,442

 
21,944

Cash and cash equivalents at the end of the period
$
53,935

 
$
29,450

Supplemental Disclosures of Significant Non-cash Transactions:
 
 
 
Increase/(decrease) in fair value of interest rate swap agreement
$
2,696

 
$
(24,100
)
Limited partnership units of the operating partnership issued in conjunction with the acquisition of real estate assets by affiliates
$

 
$
11,941

Mortgage debt assumed in conjunction with the contribution of real estate assets
$

 
$
22,441

Distributions to redeemable noncontrolling interests attributable to common stockholders as reflected on the consolidated statements of operations
$
177

 
$
89

Common stock issued pursuant to the distribution reinvestment plan
$
25,070

 
$
26,180

Common stock redemptions funded subsequent to period-end
$
29,292

 
$
13,813

See accompanying notes.

8

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


1.
Organization
Griffin Capital Essential Asset REIT, Inc., a Maryland corporation (the "Company"), was formed on August 28, 2008 under the Maryland General Corporation Law and qualified as a real estate investment trust ("REIT") commencing with the year ended December 31, 2010. The Company was organized primarily with the purpose of acquiring single tenant properties that are essential to the tenant’s business and used a substantial amount of the net proceeds from the Public Offerings (as defined below) to invest in these properties. The Company’s year end is December 31.
Griffin Capital Company, LLC, a Delaware limited liability company (the "Sponsor"), has sponsored the Company’s Public Offerings. The Sponsor, which was formerly known as Griffin Capital Corporation, began operations in 1995 to engage principally in acquiring and developing office and industrial properties. Kevin A. Shields, the Company's Chief Executive Officer and Chairman of the Company's board of directors, controls the Sponsor.
Griffin Capital Essential Asset Advisor, LLC, a Delaware limited liability company (the "Advisor"), was formed on August 27, 2008. Griffin Capital Real Estate Company, LLC ("GRECO"), is the sole member of the Advisor, and Griffin Capital, LLC ("GC") is the sole member of GRECO. The Company has entered into an advisory agreement for the Public Offerings (as amended and restated, the "Advisory Agreement"), which states that the Advisor is responsible for managing the Company’s affairs on a day-to-day basis and identifying and making acquisitions and investments on behalf of the Company. The officers of the Advisor are also officers of the Sponsor. The Advisory Agreement has a one-year term, and it may be renewed for an unlimited number of successive one-year periods by the Company's board of directors.
From 2009 to 2014, the Company offered shares of common stock pursuant to a private placement offering to accredited investors (the "Private Offering") and two public offerings, consisting of an initial public offering and a follow-on offering (together, the "Public Offerings"), which included shares for sale pursuant to the distribution reinvestment plan ("DRP"). The Company issued 126,592,885 total shares of its common stock for gross proceeds of approximately $1.3 billion pursuant to the Private Offering and Public Offerings.
On May 7, 2014, the Company filed a Registration Statement on Form S-3 with the SEC for the registration of $75.0 million in shares for sale pursuant to the DRP (the “2014 DRP Offering”). On September 22, 2015, the Company filed a Registration Statement on Form S-3 with the SEC for the registration of $100.0 million in shares for sale pursuant to the DRP (the “2015 DRP Offering”). On June 9, 2017, the Company filed a Registration Statement on Form S-3 with the SEC for the registration of $104.4 million in shares for sale pursuant to the DRP (the "2017 DRP Offering," and together with the 2014 DRP Offering and 2015 DRP Offering, the "DRP Offerings"). The 2017 DRP Offering may be terminated at any time upon 10 days’ prior written notice to stockholders.
As of June 30, 2017, the Company had issued 184,365,887 shares of common stock and received aggregate gross offering proceeds of approximately $1.5 billion from the sale of shares in the Private Offering, the Public Offerings, and the DRP Offerings. There were 175,228,093 shares outstanding at June 30, 2017, including shares issued pursuant to the DRP, less shares redeemed pursuant to the share redemption program. As of June 30, 2017 and December 31, 2016, the Company had issued approximately $187.5 million and $162.4 million, respectively, in shares pursuant to the DRP, which are classified on the consolidated balance sheets as common stock subject to redemption, net of redemptions paid of approximately $90.9 million and $58.8 million, respectively, and redemptions payable totaling approximately $29.3 million and $11.6 million, respectively, which are included in accrued expenses and other liabilities on the consolidated balance sheets. Since inception and through June 30, 2017, the Company had redeemed 9,137,794 shares of common stock for approximately $90.9 million pursuant to the share redemption program.
Griffin Capital Essential Asset Operating Partnership, L.P., a Delaware limited partnership (the "Operating Partnership"), was formed on August 29, 2008. The Operating Partnership owns, directly or indirectly, all of the properties that the Company has acquired. The Advisor purchased an initial 99% limited partnership interest in the Operating Partnership for $0.2 million, and the Company contributed the initial one thousand dollars capital contribution, received from the Advisor, to the Operating Partnership in exchange for a 1% general partner interest. As of June 30, 2017, the Company owned approximately 96% of the limited partnership units of the Operating Partnership, and, as a result of the contribution of five properties to the Company, the Sponsor and certain of its affiliates, including certain officers of the Company, owned approximately 2% of the limited partnership units of the Operating Partnership. Approximately 2.1 million units are owned by the Company’s Chief Executive

9

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

Officer and Chairman, Kevin A. Shields. The remaining approximately 2% of the limited partnership units are owned by unaffiliated third parties. No limited partnership units of the Operating Partnership have been redeemed during the six months ended June 30, 2017 and year ended December 31, 2016. The Operating Partnership may conduct certain activities through the Company’s taxable REIT subsidiary, Griffin Capital Essential Asset TRS, Inc., a Delaware corporation (the "TRS"), formed on September 2, 2008, which is a wholly-owned subsidiary of the Operating Partnership. The TRS had no activity as of June 30, 2017.
The Company’s property manager is Griffin Capital Essential Asset Property Management, LLC, a Delaware limited liability company (the “Property Manager”), which was formed on August 28, 2008 to manage the Company’s properties. The Property Manager derives substantially all of its income from the property management services it performs for the Company.
2.
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.
Real Estate Purchase Price Allocation
In January 2017, the FASB issued Accounting Standards Update ("ASU") 2017-01, Business Combinations, (see “Recently Issued Accounting Pronouncements” below) that clarifies the framework for determining whether an integrated set of assets and activities meets the definition of a business. The revised framework establishes a screen for determining whether an integrated set of assets and activities is a business and narrows the definition of a business, which is expected to result in fewer transactions being accounted for as business combinations. Acquisitions of integrated sets of assets and activities that do not meet the definition of a business are accounted for as asset acquisitions. This update is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2017, with early adoption permitted for transactions that have not been reported in previously issued (or available to be issued) financial statements.
The Company adopted this accounting standard early effective January 1, 2017. As a result of the Company's adoption of ASU 2017-01, Business Combinations, the Company anticipates that many of its future acquisitions (if any) will be treated as asset acquisitions, which will result in a lower amount of acquisition-related costs being expensed on the Company's consolidated statement of operations, as the majority of those costs will be capitalized and included as part of the relative fair value allocation of the purchase price. However, since the Company's acquisition activity at this stage is substantially reduced, the impact of ASU 2017-01, Business Combinations, will be insignificant to its financial statements.

10

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

Revenue Recognition
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.
Depreciation and Amortization
The purchase price of real estate acquired and costs related to development, construction, and property improvements are capitalized. Repairs and maintenance costs include all costs that do not extend the useful life of the real estate asset and are expensed as incurred. The Company considers the period of future benefit of an asset to determine the appropriate useful life. The Company anticipates the estimated useful lives of its assets by class to be generally as follows:
Buildings
25-40 years
Building Improvements
5-20 years
Land Improvements
15-25 years
Tenant Improvements
Shorter of estimated useful life or remaining contractual lease term
Tenant origination and absorption cost
Remaining contractual lease term
In-place lease valuation
Remaining contractual lease term with consideration as to below-market extension options for below-market leases
If a lease is terminated or amended prior to its scheduled expiration, the Company will accelerate the remaining useful life of the unamortized lease-related costs.
Use of Estimates
The preparation of the consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could materially differ from those estimates.
Change in Consolidated Financial Statements Presentation
Certain amounts in the Company's prior period consolidated financial statements have been reclassified to conform to the current period presentation. Property expense recovery reimbursements are presented gross on the statement of operations for all periods presented.
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.

11

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

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 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 January 1, 2017. Refer to “Real Estate Purchase Price Allocation” above for a discussion of this accounting pronouncement.
In February 2016, the FASB issued ASU 2016-02, Leases ("ASU 2016-02"). ASU 2016-02 amends the existing accounting standards for lease accounting, including requiring lessees to recognize most leases on their balance sheets and making targeted changes to lessor accounting. ASU 2016-02 will be effective beginning in the first quarter of 2019. Early adoption of ASU 2016-02 as of its issuance is permitted. The new leases standard requires a modified retrospective transition approach for all leases existing at, or entered into after, the date of initial application, with an option to use certain transition relief. The Company is currently 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 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. Additionally, the Company is analyzing its current ground lease obligation under ASU 2016-02. The Company has done a preliminary assessment and continues to evaluate the potential impact the guidance may have on its condensed consolidated financial statements and related disclosures and will adopt ASU 2016-02 as of January 1, 2019.

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606) (“ASU 2014-09”). ASU 2014-09 replaces substantially all industry-specific revenue recognition requirements and converges areas under this topic with International Financial Reporting Standards. ASU 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 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 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 2014-09 was originally effective for reporting periods beginning after December 31, 2016 (for public entities). On April 1, 2015, the FASB voted to defer the effective date of ASU 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 2014-09 and will be governed by the applicable lease codification (ASU 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 2014-09.
In March 2016, the FASB issued ASU 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

12

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

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 2014-09. 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.
3.
Real Estate
As of June 30, 2017, the Company’s real estate portfolio consisted of 74 properties in 20 states consisting substantially of office, warehouse, and manufacturing facilities and 2 land parcels held for future development with a combined acquisition value of approximately $3.0 billion, including the allocation of the purchase price to above and below-market lease valuation.
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 2017 to 2036.
Remaining 2017
$
124,056

2018
250,152

2019
224,936

2020
199,698

2021
182,695

Thereafter
867,185

Total
$
1,848,722

Intangibles
The Company allocated a portion of the acquired and contributed real estate asset value to in-place lease valuation and tenant origination and absorption cost as of June 30, 2017 and December 31, 2016:
 
June 30, 2017
 
December 31, 2016
In-place lease valuation (above market)
$
44,257

 
$
47,419

In-place lease valuation (above market) - accumulated amortization
(24,040
)
 
(20,543
)
In-place lease valuation (above market), net
20,217

 
26,876

Ground leasehold interest (below market)
2,254

 
2,254

Ground leasehold interest (below market) - accumulated amortization
(96
)
 
(82
)
Ground leasehold interest (below market), net
2,158

 
2,172

Intangible assets, net
$
22,375

 
$
29,048

In-place lease valuation (below market)
$
(51,965
)
 
$
(51,966
)
In-place lease valuation (below market) - accumulated amortization
23,442

 
20,330

In-place lease valuation (below market), net
$
(28,523
)
 
$
(31,636
)
Tenant origination and absorption cost
$
538,150

 
$
541,646

Tenant origination and absorption cost - accumulated amortization
(227,668
)
 
(197,173
)
Tenant origination and absorption cost, net
$
310,482

 
$
344,473


13

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

The following table sets forth the estimated annual amortization (income) expense for in-place lease valuation, net, tenant origination and absorption costs, ground leasehold improvements, and other leasing costs as of June 30, 2017 for the next five years:
Year
 
In-place lease valuation, net
 
Tenant origination and absorption costs
 
Ground leasehold improvements
 
Other leasing costs
 Remaining 2017
 
$
461

 
$
28,999

 
$
20

 
$
747

2018
 
$
(640
)
 
$
53,136

 
$
27

 
$
1,871

2019
 
$
(1,815
)
 
$
44,773

 
$
27

 
$
1,901

2020
 
$
(815
)
 
$
35,631

 
$
27

 
$
1,878

2021
 
$
(677
)
 
$
31,091

 
$
27

 
$
1,802

Tenant and Portfolio Risk
The Company monitors the credit of all tenants to stay abreast of any material changes in credit quality. The Company monitors tenant credit by (1) reviewing the credit ratings of tenants (or their parent companies) that are rated by nationally recognized rating agencies; (2) reviewing financial statements and related metrics and information that are publicly available or that are required to be provided pursuant to the lease; (3) monitoring news reports and press releases regarding the tenants and their underlying business and industry; and (4) monitoring the timeliness of rent collections.
2500 Windy Ridge Parkway
In January 2017, Coca-Cola Refreshments USA, Inc. terminated their lease at the 2500 Windy Ridge Parkway property located in Atlanta, Georgia (an office facility); consequently, the Company released Coca-Cola Refreshments USA, Inc. from any and all obligations under the lease in-place effective December 31, 2016. In exchange, the Company agreed to a fee of $12.8 million, which is included in rental income on the consolidated statements of operations for the six months ended June 30, 2017. The fee is being paid in quarterly installments over a two year period equal to $1.6 million. The Company received the first payment on January 31, 2017. During the year ended December 31, 2016, and as a result of the lease termination, the Company accelerated approximately $3.4 million of unamortized in-place lease intangible assets that were recorded as part of the purchase price allocation when the property was acquired and approximately$0.4 million of deferred rent.
400 Bertha Lamme Drive
During the six months ended June 30, 2017, as a result of Westinghouse Electric Company, LLC filing for bankruptcy, the Company recorded an impairment provision of approximately $5.7 million related to the lease intangibles as it was determined that the carrying value of these assets would not be recoverable. In determining the fair value of intangible lease assets, the Company considered Level 3 inputs. 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.
Sale of Property
12669 Encinitas Avenue
On June 30, 2017, the Company sold the ITT property located in Los Angeles, California for total proceeds of $10.0 million, less closing costs and other closing credits. The carrying value of the property on the closing date was approximately $5.4 million. Upon the sale of the property, the Company recognized a gain of approximately $4.0 million.

14

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

4.
Investments
Investment in Unconsolidated Entities
Digital Realty Trust, Inc.
On September 9, 2014, the Company, through a special purpose entity ("SPE"), wholly-owned by the Operating Partnership, acquired an 80% interest in a joint venture with an affiliate of Digital Realty Trust, Inc. for $68.4 million, which was funded with equity proceeds raised in the Company's Public Offerings. The gross acquisition value of the property was $187.5 million, plus closing costs, which was partially financed with debt of $102.0 million. The joint venture was created for purposes of directly or indirectly acquiring, owning, financing, operating and maintaining a data center facility located in Ashburn, Virginia (the "Property"). The Property is approximately 132,300 square feet and consists of certain data processing and communications equipment that is fully leased to a social media company and a financial services company with an average remaining lease term of approximately five years.
The joint venture currently uses an interest rate swap to manage its interest rate risk associated with its variable rate debt. The interest rate swap is designated as an interest rate hedge of its exposure to the volatility associated with interest rates. As a result of the hedge designation and in satisfying the requirement for cash flow hedge accounting, the joint venture records changes in the fair value in accumulated other comprehensive loss. In conjunction with the investment in the joint venture discussed above, the Company recognized its 80% share, or approximately $0.2 million of other comprehensive income for the six months ended June 30, 2017.
The interest discussed above is deemed to be a variable interest in a variable interest entity ("VIE"), and, based on an evaluation of the variable interest against the criteria for consolidation, the Company determined that it is not the primary beneficiary of the investment, as the Company does not have power to direct the activities of the entity that most significantly affect its performance. As such, the interest in the VIE is recorded using the equity method of accounting in the accompanying consolidated financial statements. Under the equity method, the investment in the unconsolidated entity is stated at cost and adjusted for the Company’s share of net earnings or losses and reduced by distributions. Equity in earnings of real estate ventures is generally recognized based on the allocation of cash distributions upon liquidation of the investment at book value in accordance with the operating agreements.
As of June 30, 2017, the balance of the investment is shown below:
 
 
Digital Realty
Joint Venture
Balance December 31, 2016
 
$
46,313

Other comprehensive income
 
178

Net loss
 
(994
)
Distributions
 
(3,801
)
Balance June 30, 2017
 
$
41,696


15

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

5.
Debt
As of June 30, 2017 and December 31, 2016, the Company’s debt consisted of the following:
 
 
Balance as of
 
 
 
 
 
 
 
 
June 30, 2017
 
December 31, 2016
 
Contractual
Interest 
Rate (1)
 
Loan
Maturity
 
Effective Interest Rate (2)
Plainfield loan
 
$
18,738

 
$
18,932

 
6.65%
 
September 2017
 
6.74%
Emporia Partners loan
 
3,180

 
3,377

 
5.88%
 
September 2023
 
5.96%
Ace Hardware loan
 

 
22,922

 
 
 
Highway 94 loan
 
17,767

 
18,175

 
3.75%
 
August 2024
 
5.04%
Samsonite loan
 
23,380

 
23,786

 
6.08%
 
September 2023
 
5.24%
HealthSpring loan
 
21,922

 
22,149

 
4.18%
 
April 2023
 
4.59%
Midland loan
 
105,137

 
105,600

 
3.94%
 
April 2023
 
4.04%
AIG loan
 
110,101

 
110,640

 
4.96%
 
February 2029
 
5.07%
TW Telecom loan
 
19,599

 
20,353

 
LIBO Rate +2.45% (3)
 
August 2019
 
3.73%
Total Mortgage Debt
 
319,824

 
345,934

 
 
 
 
 
 
Term Loan
 
715,000

 
715,000

 
LIBO Rate +1.40% (3)
 
July 2020
 
2.84%
Revolver Loan
 
420,409

 
397,409

 
LIBO Rate +1.45% (3)
 
July 2020 (4)
 
2.97%
Total Debt
 
1,455,233

 
1,458,343

 
 
 
 
 
 
Unamortized Deferred Financing
Costs and Discounts, net
 
(9,998
)
 
(10,808
)
 
 
 
 
 
 
Total Debt, net
 
$
1,445,235

 
$
1,447,535

 
 
 
 
 
 
(1)
Including the effect of interest rate swap agreements with a total notional amount of $825.0 million, the weighted average interest rate as of June 30, 2017 was 3.25% for the Company’s fixed-rate and variable-rate debt combined and 3.45% for the Company’s fixed-rate debt only.
(2)
Reflects the effective interest rate as of June 30, 2017 and includes the effect of amortization of discounts/premiums and deferred financing costs.
(3)
The LIBO Rate as of June 30, 2017 was 1.23%.
(4)
The Revolver Loan has an initial term of four years, maturing on July 20, 2019, and may be extended for a one-year period if certain conditions are met and upon payment of an extension fee. See discussion below.
Unsecured Credit Facility
On July 20, 2015, the Company, through the Operating Partnership, entered into a credit agreement (the "Unsecured Credit Agreement ") with a syndicate of lenders, co-led by KeyBank National Association ("KeyBank"), Bank of America, N.A. ("Bank of America"), Fifth Third Bank ("Fifth Third"), and BMO Harris Bank, N.A. ("BMO Harris"), under which KeyBank serves as administrative agent and Bank of America, Fifth Third, and BMO Harris serve as co-syndication agents, and KeyBanc Capital Markets, Merrill Lynch, Pierce, Fenner & Smith Incorporated ("Merrill Lynch"), Fifth Third, and BMO Capital Markets serve as joint bookrunners and joint lead arrangers. Pursuant to the Unsecured Credit Agreement, the Company was provided with a $1.14 billion senior unsecured credit facility (the "Unsecured Credit Facility"), consisting of a $500.0 million senior unsecured revolver (the "Revolver Loan") and a $640.0 million senior unsecured term loan (the "Term Loan"). The Unsecured Credit Facility may be increased up to $860.0 million, in minimum increments of $50.0 million, for a maximum of $2.0 billion by increasing either the Revolver Loan, the Term Loan, or both. The Revolver Loan has an initial term of four years, maturing on July 20, 2019, and may be extended for a one-year period if certain conditions are met and upon payment of an extension fee. The Term Loan has a term of five years, maturing on July 20, 2020.
On March 29, 2016, the Company exercised its right to increase the total commitments, pursuant to the Unsecured Credit Agreement. As a result, the total commitments on the Term Loan increased from $640.0 million to $715.0 million.
In March 2017, the Company, through the Operating Partnership, drew an additional $23.0 million to pay off the remaining balance of the Ace Hardware loan.

16

GRIFFIN CAPITAL ESSENTIAL ASSET REIT, 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 Company's mortgage loans and Unsecured Credit Facility, the Operating Partnership, in consolidation with the Company, is subject to certain loan compliance covenants. The Company was in compliance with all of its debt covenants as of June 30, 2017.
6.
Interest Rate Contracts
Risk Management Objective of Using Derivatives
The Company is exposed to certain risks arising from both business operations and economic conditions. The Company manages economic risks, including interest rate, liquidity, and credit risk primarily by managing the amount, sources, and duration of debt funding and the use of derivative financial instruments. Specifically, the Company entered into derivative financial instruments to manage exposures that arise from business activities that result in the payment of future known and uncertain cash amounts, the value of which are determined by expected cash payments principally related to borrowings and interest rates. Interest rate swaps designated as cash flow hedges involve the receipt of variable amounts from a counterparty in exchange for making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount. The Company does not use derivatives for trading or speculative purposes.
Derivative Instruments
On July 9, 2015, the Company executed three interest rate swap agreements to hedge the variable cash flows associated with certain existing or forecasted LIBO Rate-based variable-rate debt, including the Company's Unsecured Credit Facility. Three interest rate swaps are effective for the periods from July 9, 2015 to July 1, 2020, January 1, 2016 to July 1, 2018, and July 1, 2016 to July 1, 2018, and have notional amounts of $425.0 million, $300.0 million, and $100.0 million, respectively.
The effective portion of changes in the fair value of derivatives designated and that qualify as cash flow hedges is recorded in accumulated other comprehensive loss ("AOCL") and is subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. The Company's derivatives were used to hedge the variable cash flows associated with existing variable-rate debt and forecasted issuances of debt. The ineffective portion of the change in fair value of the derivatives is recognized directly in earnings.
The following table sets forth a summary of the interest rate swaps at June 30, 2017 and December 31, 2016:
 
 
 
 
 
 
 
 
Fair Value (1)
Derivative Instrument
 
Effective Date
 
Maturity Date
 
Interest Strike Rate
 
June 30, 2017

December 31, 2016
Assets/(Liabilities):
 
 
 
 
 
 
 
 
 
 
Interest Rate Swap
 
7/9/2015
 
7/1/2020
 
1.69%
 
$
(412
)
 
$
(1,630
)
Interest Rate Swap
 
1/1/2016
 
7/1/2018
 
1.32%
 
138

 
(907
)
Interest Rate Swap
 
7/1/2016
 
7/1/2018
 
1.50%
 
(130
)
 
(564
)
Total
 
 
 
 
 
 
 
$
(404
)
 
$
(3,101
)
(1)
The Company records all derivative instruments on a gross basis in the consolidated balance sheets, and accordingly, there are no offsetting amounts that net assets against liabilities. As of June 30, 2017, derivatives in a liability/asset position are included in the line item "Interest rate swap liability/Other assets," respectively, in the consolidated balance sheets at fair value.

17

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

The following table sets forth the impact of the interest rate swaps on the consolidated statements of operations for the periods presented:
 
Six Months Ended
 
June 30, 2017
Interest Rate Swap in Cash Flow Hedging Relationship:
 
Amount of gain recognized in AOCL on derivatives (effective portion)
$
54

Amount of gain reclassified from AOCL into earnings under “Interest expense” (effective portion)
$
2,637

Amount of loss recognized in earnings under “Interest expense” (ineffective portion and amount excluded from effectiveness testing)
$
(27
)
During the 12 months subsequent to June 30, 2017, the Company estimates that an additional $1.4 million of expense will be recognized from AOCL into earnings.
Certain agreements with the derivative counterparties contain 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 obligations.
As of June 30, 2017 and December 31, 2016, the fair value of interest rate swaps in a net liability position, which excludes any adjustment for nonperformance risk related to these agreements, was approximately $0.4 million and $3.1 million, respectively. As of June 30, 2017 and December 31, 2016, the Company had not posted any collateral related to these agreements.
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
Redemptions payable
 
$
29,292

 
$
11,565

Prepaid rent
 
18,993

 
16,799

Real estate taxes payable
 
18,596

 
24,585

Interest payable
 
8,524

 
7,606

Other liabilities
 
15,685

 
12,914

Total
 
$
91,090

 
$
73,469

8.
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 and year ended December 31, 2016.

18

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

The following tables set forth the assets and liabilities that the Company measures at fair value on a recurring basis by level within the fair value hierarchy as of June 30, 2017 and December 31, 2016:
Assets/(Liabilities)
 
Total Fair Value
 
Quoted Prices in Active Markets for Identical Assets and Liabilities
 
Significant Other Observable Inputs
 
Significant Unobservable Inputs
June 30, 2017
 
 
 
 
 
 
 
 
Interest Rate Swap Asset
 
$
138

 
$

 
$
138

 
$

Interest Rate Swap Liability
 
$
(542
)
 
$

 
$
(542
)
 
$

December 31, 2016
 

 
 
 

 
 
Interest Rate Swap Liability
 
$
(3,101
)
 
$

 
$
(3,101
)
 
$

Financial Instruments Disclosed at Fair Value
Financial instruments as of June 30, 2017 and December 31, 2016 consisted of cash and cash equivalents, restricted cash, accounts receivable, accrued expenses and other liabilities, and mortgage payable and other borrowings, as defined in Note 5, Debt. With the exception of the mortgage loans 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 and December 31, 2016. The fair value of the three mortgage loans in the table below is estimated by discounting each 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 debt 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.
 
June 30, 2017
 
December 31, 2016
 
Fair Value
 
Carrying Value (1)
 
Fair Value
 
Carrying Value (1)
AIG loan
$
116,124

 
$
110,101

 
$
113,052

 
$
110,640

Highway 94 loan
16,786

 
17,767

 
17,073

 
18,175

Samsonite loan
24,404

 
23,380

 
24,349

 
23,786

(1)
The carrying values do not include the debt premium/(discount) or deferred financing costs as of June 30, 2017 and December 31, 2016. See Note 5, Debt, for details.
9.
Equity
Common Equity
As of June 30, 2017, the Company had received aggregate gross offering proceeds of approximately $1.5 billion from the sale of shares in the Private Offering, the Public Offerings, and the DRP Offerings, as discussed in Note 1, Organization. There were 175,228,093 shares outstanding at June 30, 2017, including shares issued pursuant to the DRP, less shares redeemed pursuant to the share redemption program discussed below.
Distribution Reinvestment Plan (DRP)
The Company has adopted the DRP, which allows stockholders to have distributions otherwise distributable to them invested in additional shares of common stock. No sales commissions or dealer manager fee will be paid on shares sold through the DRP. The Company may amend or terminate the DRP for any reason at any time upon 10 days' prior written notice to stockholders.
As of June 30, 2017 and December 31, 2016, the Company had issued approximately $187.5 million and $162.4 million in shares of common stock, respectively, under the DRP, pursuant to the Private Offering, the Public Offerings, and the DRP Offerings.

19

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

Share Redemption Program
The Company has adopted a share redemption program ("SRP") that enables 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, under certain circumstances, be able to have all or any portion 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 DRP.
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 SRP is limited to proceeds from new permanent equity from the sale of shares pursuant to the DRP.
Pursuant to the SRP, the redemption price per share shall be the lesser of (i) the amount paid for the shares or (ii) 95% of the NAV of the shares. Shares redeemed in connection with the death or qualifying disability of a stockholder may be repurchased at 100% of the NAV of the shares.
Redemption requests will be honored on or about the last business day of the month following the end of each quarter. Requests for redemption must be received on or prior to the end of the quarter in order for the Company to repurchase the shares as of the end of the following month. Since inception and through June 30, 2017, the Company had redeemed 9,137,794 shares of common stock for approximately $90.9 million at a weighted average price per share of $9.95 pursuant to the SRP. As of June 30, 2017, there were 2,937,077 shares totaling approximately $29.3 million subject to redemption requests. The Company’s board of directors may choose to amend, suspend, or terminate the SRP upon 30 days' written notice at any time.
Noncontrolling Interests
Noncontrolling interests represent limited partnership interests in the Operating Partnership in which the Company is the general partner. General partnership units and limited partnership units of the Operating Partnership were issued as part of the initial capitalization of the Operating Partnership, and limited partnership units were issued in conjunction with management's contribution of certain assets, as well as other contributions, as discussed in Note 1, Organization.
As of June 30, 2017, noncontrolling interests were approximately 3% of total shares and weighted average shares outstanding (both measures assuming limited partnership units were converted to common stock). The Company has evaluated the terms of the limited partnership interests in the Operating Partnership and as a result, has classified limited partnership interests issued in the initial capitalization and in conjunction with the contributed assets as noncontrolling interests, which are presented as a component of permanent equity, except as discussed below.
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 has been 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 Operating Partnership issued 6.6 million limited partnership units to affiliated parties and unaffiliated third parties in exchange for certain properties and 0.1 million limited partnership units to unaffiliated third parties unrelated to property contributions. To the extent the contributors should elect to redeem all or a portion of their Operating Partnership units, pursuant to the terms of the respective contribution agreement, such redemption shall be at a per unit value equivalent to the price at which the contributor acquired its limited partnership units in the respective transaction.
The limited partners of the Operating Partnership, other than those related to the Will Partners REIT, LLC ("Will Partners" property) contribution, will have the right to cause the general partner of the Operating Partnership, the Company, to redeem their limited partnership units for cash equal to the value of an equivalent number of shares, or, at the Company’s option, purchase their limited partnership units by issuing one share of the Company’s common stock for the original redemption value of each limited partnership unit redeemed. These rights may not be exercised under certain circumstances which could cause

20

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

the Company to lose its REIT election. There were no redemption requests during the six months ended June 30, 2017 and year ended December 31, 2016. 
The following summarizes the activity for noncontrolling interests recorded as equity for the six months ended June 30, 2017 and year ended December 31, 2016:
 
Six Months Ended June 30, 2017

Year Ended December 31, 2016
Beginning balance
$
30,114

 
$
21,318

Contribution/issuance of noncontrolling interests

 
11,941

Distributions to noncontrolling interests
(2,167
)
 
(4,124
)
Allocated distributions to noncontrolling interests subject to redemption
(6
)
 
(11
)
Net income
808

 
912

Other comprehensive income
99

 
78

Ending balance
$
28,848

 
$
30,114

Noncontrolling interests subject to redemption
Operating partnership units issued pursuant to the Will Partners property contribution are not included in permanent equity on the consolidated balance sheets. The partners holding these units can cause the general partner to redeem the units for the cash value, as defined in the operating partnership agreement. As the general partner does not control these redemptions, these units are presented on the consolidated balance sheets as noncontrolling interest subject to redemption at their redeemable value. The net income (loss) and distributions attributed to these limited partners is allocated proportionately between common stockholders and other noncontrolling interests that are not considered redeemable.
10.
Related Party Transactions
The following table summarizes the related party costs and fees incurred, paid and due to affiliates as of June 30, 2017 and due to affiliates as of December 31, 2016:
 
As of December 31, 2016

Six Months Ended June 30, 2017
 
Payable
 
Incurred
 
Paid
 
Payable
Advisor and Property Manager fees
 
 
 
 
 
 
 
Operating expenses
$

 
$
1,307

 
$
628

 
$
679

Asset management fees
1,982

 
11,865

 
11,871

 
1,976

Property management fees
737

 
5,066

 
5,008

 
795

Leasing commissions


2,220

 
2,220

 

Costs advanced by the Advisor

 
510

 
296

 
214

Total
$
2,719

 
$
20,968

 
$
20,023

 
$
3,664

Advisory Agreement
The Company currently does not have nor does it expect to have any employees. The Advisor will be primarily responsible for managing the business affairs and carrying out the directives of the Company’s board of directors. The Company entered into an advisory agreement with the Advisor. The Advisory Agreement entitles the Advisor to specified fees and expense reimbursements upon the provision of certain services with regard to the Public Offerings and investment of funds in real estate properties, among other services, including as reimbursement for organizational and offering costs incurred by the Advisor on the Company’s behalf and reimbursement of certain costs and expenses incurred by the Advisor in providing services to the Company.

21

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

Management Compensation
The following table summarizes the compensation and fees the Company has paid or may pay to the Advisor, the Property Manager, and the Sponsor and other affiliates, including amounts to reimburse costs for providing services.
Type of Compensation
(Recipient)
  
Determination of Amount
Acquisition Fees and Expenses
(Advisor)
  
Under the Advisory Agreement, the Advisor receives acquisition fees equal to 2.5%, and reimbursement for actual acquisition related expenses incurred by the Advisor of up to 0.50% of the contract purchase price, as defined therein, of each property acquired by the Company, and reimbursement for actual acquisition expenses incurred on the Company's behalf, including certain payroll costs for acquisition-related efforts by the Advisor's personnel, as defined in the agreements. In addition, the Company pays acquisition expenses to unaffiliated third parties equal to approximately 0.60% of the purchase price of the Company's properties. The acquisition fee and acquisition expenses paid by the Company shall be reasonable and in no event exceed an amount equal to 6% of the contract purchase price, unless approved by a majority of the independent directors.
Disposition Fee
(Advisor)
 
In the event that the Company sells any or all of its properties (or a portion thereof), or all or substantially all of the business or securities of the Company are transferred or otherwise disposed of by way of a merger or other similar transaction, the Advisor will be entitled to receive a disposition fee if the Advisor or an affiliate provides a substantial amount of the services (as determined by a majority of the Company's directors, including a majority of the independent directors) in connection with such transaction. The disposition fee the Advisor or such affiliate shall be entitled to receive at closing will be equal to the lesser of: (1) 3% of the Contract Sales Price, as defined in the Advisory Agreement or (2) 50% of the Competitive Commission, as defined in the Advisory Agreement; provided, however, that in connection with certain types of transactions described further in the Advisory Agreement, the disposition fee shall be subordinated to Invested Capital (as defined in the operating partnership agreement). The disposition fee may be paid in addition to real estate commissions or other commissions paid to non-affiliates, provided that the total real estate commissions or other commissions (including the disposition fee) paid to all persons by the Company or the operating partnership shall not exceed an amount equal to the lesser of (i) 6% of the aggregate Contract Sales Price or (ii) the Competitive Commission.
Asset Management Fee
(Advisor)
  
The Advisor receives an annual asset management fee for managing the Company’s assets equal to 0.75% 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
(Advisor)
  
The Advisor and its affiliates are entitled to reimbursement, at cost, for actual expenses incurred by them on behalf of the Company in connection with their provision of 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 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.
Operating expenses for the three and six months ended June 30, 2017 included approximately $0.2 million and $0.3 million, respectively, to reimburse 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, 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 and $0.1 million, respectively, for reimbursable expenses to the Advisor for services provided to the Company by certain of its other executive officers during the three and six months ended June 30, 2017. The reimbursable expenses include components of salaries, bonuses, benefits and other overhead charges and are based on the percentage of time each such executive officer spends on the Company's affairs.

22

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

Property Management Fees
(Property Manager)
  
The Property Manager is entitled to receive a fee for its services in managing the Company’s properties up to 3% of the gross monthly revenues from the properties plus reimbursement of the costs of managing the properties. The Property Manager, in its sole and absolute discretion, can waive all or a part of any fee earned. 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. In the event that the Company contracts directly with a non-affiliated third-party property manager with respect to a particular property, the Company will pay the Property Manager an oversight fee equal to 1% of the gross revenues of the property managed. 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% of the cost of improvements.
Subordinated Share of Net Sale Proceeds (Advisor) (1)
 
Payable to the Advisor in cash upon the sale of a property after the Company's stockholders receive a return of capital plus a 6% cumulative, non-compounded return. The share of net proceeds from the sale of property is 5% if stockholders are paid a return of capital plus 6% to 8% annual cumulative non-compounding return, 10% if stockholders are paid a return of capital plus 8% to 10% annual cumulative non-compounding return, or 15% if stockholders are paid a return of capital plus 10% or more annual cumulative non-compounding return.
Subordinated Incentive Listing Distribution (Advisor) (1)
 
Payable to the Advisor no earlier than 7 months and no later than 19 months following a listing of the shares on a national securities exchange, based upon the market value of the Company's shares during a period of 30 trading days commencing after the first day of the 6th month, but no later than the last day of the 18th month following a listing, the commencement date of which shall be chosen by the Advisor in its sole discretion, and after the Company's stockholders receive a return of capital plus a 6% cumulative, non-compounded return. The distribution share is 5% if stockholders are paid a return of capital plus 6% to 8% annual cumulative non-compounding return, 10% if stockholders are paid a return of capital plus 8% to 10% annual cumulative non-compounding return, or 15% if stockholders are paid a return of capital plus 10% or more annual cumulative non-compounding return, and is payable in cash, shares of the Company's stock, units of limited partnership interest in the Operating Partnership, or a combination thereof.
Subordinated Distribution Due Upon Termination
(Advisor)

 
Payable to the Advisor (in cash, shares of the Company's stock, units of limited partnership interest in the Operating Partnership, or a combination thereof), 1/3rd within 30 days of the date of involuntary termination of the Advisory Agreement, 1/3rd upon the one year anniversary of such date, and 1/3rd upon the two year anniversary of such date. Calculated based upon appraised value of properties less the fair value of the underlying debt, and plus or minus net current assets or net current liabilities, respectively, and payable after the Company's stockholders receive a return of capital plus a 6% cumulative, non-compounded return. The distribution share is 5% if stockholders are paid a return of capital plus 6% to 8% annual cumulative non-compounding return, 10% if stockholders are paid a return of capital plus 8% to 10% annual cumulative non-compounding return, or 15% if stockholders are paid a return of capital plus 10% or more annual cumulative non-compounding return.
Upon a voluntary termination of the Advisory Agreement, the Advisor will not be entitled to receive the Subordinated Distribution Due Upon Termination but instead will be entitled to receive at the time of the applicable liquidity event a distribution equal to the applicable Subordinated Share of Net Sale Proceeds, Subordinated Incentive Listing Distribution, or Subordinated Distribution Due Upon Extraordinary Transaction.
Subordinated Distribution Due Upon Extraordinary Transaction
(Advisor) (1)

 
Payable to the Advisor upon the closing date of an Extraordinary Transaction (as defined in the Operating Partnership Agreement); payable in cash, shares of the Company's stock, units of limited partnership in the Operating Partnership, or a combination thereof after the Company's stockholders receive a return of capital plus a 6% cumulative, non-compounded return. The distribution share is 5% if stockholders are paid a return of capital plus 6% to 8% annual cumulative non-compounding return, 10% if stockholders are paid a return of capital plus 8% to 10% annual cumulative non-compounding return, or 15% if stockholders are paid a return of capital plus 10% or more annual cumulative non-compounding return.

23

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

Sponsor Break-Even Amount
(Sponsor)

 
In the event of a merger of the Advisor into the Company or one of its affiliates in anticipation of listing or a merger with an already-listed entity, any merger consideration paid to the Company's sponsor or its affiliates in excess of unreturned and unreimbursed capital invested by the Company's sponsor and its affiliates into the Company, the Advisor, the Company's dealer manager, or affiliates, relating in any way to the business organization of the Company, the Operating Partnership, or any offering of the Company, shall be subordinated to the return of stockholders' invested capital. Such excess merger consideration shall be paid in stock that may not be traded for one year from the date of receipt, and such stock shall be held in escrow pending the occurrence of certain conditions outlined further in the Operating Partnership Agreement.

(1)
The Advisor cannot earn more than one incentive distribution. Any receipt by the Advisor of subordinated share of net sale proceeds (for anything other than a sale of the entire portfolio) will reduce the amount of the subordinated distribution due upon termination, the subordinated incentive listing distribution and the subordinated distribution due upon extraordinary transaction.
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 II, Inc. ("GCEAR II"), Griffin-American Healthcare REIT III, Inc. ("GAHR III"), and Griffin-American Healthcare REIT IV, Inc. ("GAHR IV"), each 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 Sponsor, Advisor, and Property Manager and their key personnel and their respective 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 the distribution structure under the Operating Partnership Agreement that could result in actions not necessarily in the long-term best interest of the Company’s 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 II, which is 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.
In the event all acquisition allocation factors have been exhausted and an investment opportunity remains equally suitable for the Company and GCEAR II, 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.

24

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

If the Sponsor no longer sponsors the Company, then, in the event that an investment opportunity becomes available that is suitable, under all of the factors considered by the Advisor, for both GCEAR II and one or more other entities affiliated with the Sponsor, the Sponsor has agreed to present such investment opportunities to GCEAR II 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 the services, the Company will be required to obtain such services from other resources.
11.
Commitments and Contingencies
Ground Lease Obligations
The Company acquired a property on January 16, 2014 that is subject to a ground lease with an expiration date of December 31, 2095. The Company incurred rent expense of approximately $0.2 million for the six months ended June 30, 2017 and 2016, related to the ground lease. As of June 30, 2017, the remaining required payments under the terms of the ground lease are as follows:
 
June 30, 2017
Remaining 2017
$
99

2018
198

2019
198

2020
198

2021
198

Thereafter
33,850

Total
$
34,741

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.

25

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

12.
Declaration of Distributions
During the quarter ended June 30, 2017, the Company paid distributions in the amount of $0.001901096 per day per share on the outstanding shares of common stock 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 distributions in the amount of $0.001901096 per day per share on the outstanding shares of common stock payable to stockholders of record at the close of business on each day during the period from July 1, 2017 through September 30, 2017. Such distributions payable to each stockholder of record during a month will be paid on such date of the following month as the Company’s Chief Executive Officer may determine.
13.
Subsequent Events
Offering Status
As of August 9, 2017, the Company had issued 16,392,229 shares of the Company’s common stock pursuant to the DRP Offerings for approximately $168.7 million.
Fourth Articles of Amendment and Restatement
On July 14, 2017, the Company’s stockholders approved the amendment and restatement of the Company’s charter (the "Fourth Amended and Restated Charter") to remove or revise the provisions included from the North American Securities Administrators Association’s Statement of Policy Regarding Real Estate Investment Trusts and to enable the declaration and payment of a dividend of one class of stock to the holders of another class of stock, so that the resulting charter would be more similar to those of publicly-traded REITs incorporated in Maryland. The Fourth Amended and Restated Charter was filed with the Maryland State Department of Assessments and Taxation and became effective on July 14, 2017.
Amended and Restated Bylaws
On August 10, 2017, the Company’s board of directors approved the amendment and restatement of the Company’s bylaws (the “Amended and Restated Bylaws”), which became effective upon approval. The general intent of the Amended and Restated Bylaws is to conform the Company’s bylaws to the provisions of the Fourth Amended and Restated Charter. Additionally, the Amended and Restated Bylaws reflect recent updates and developments in Maryland law and public company governance.



26


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 consolidated financial statements and the notes thereto contained in Part I of this Quarterly Report on Form 10-Q, as well as Management’s Discussion and Analysis of Financial Condition and Results of Operations, Consolidated Financial Statements, and the notes thereto contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016. See also “Cautionary Note Regarding Forward Looking Statements” preceding Part I. As used herein, “we,” “us,” and “our” refer to Griffin Capital Essential Asset REIT, Inc.
Overview
We are a public, non-traded REIT that invests primarily in business essential properties significantly occupied by a single tenant, diversified by corporate credit, physical geography, product type and lease duration. We have no employees and are externally advised and managed by an affiliate, Griffin Capital Essential Asset Advisor, LLC, our Advisor.
On August 28, 2008, our Advisor purchased 100 shares of common stock for $1,000 and became our initial stockholder. From 2009 to 2014, we offered shares of common stock pursuant to a private placement offering to accredited investors (the "Private Offering") and two public offerings, consisting of an initial public offering and a follow-on offering (together, the "Public Offerings"), which included shares for sale pursuant to the distribution reinvestment plan ("DRP"). We issued 126,592,885 total shares of our common stock for gross proceeds of approximately $1.3 billion pursuant to the Private Offering and Public Offerings.
On May 7, 2014, we filed a Registration Statement on Form S-3 with the SEC for the registration of $75.0 million in shares for sale pursuant to the DRP (the “2014 DRP Offering”). On September 22, 2015, we filed a Registration Statement on Form S-3 with the SEC for the registration of $100.0 million in shares for sale pursuant to the DRP (the “2015 DRP Offering”). On June 9, 2017, we filed a Registration Statement on Form S-3 with the SEC for the registration of $104.4 million in shares for sale pursuant to the DRP (the "2017 DRP Offering," and together with the 2014 DRP Offering and 2015 DRP Offering, the "DRP Offerings"). In connection with the DRP Offerings, we had issued 15,993,034 shares of our common stock for gross proceeds of approximately $164.5 million through June 30, 2017. The 2017 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 74 properties in 20 states and 92 lessees consisting substantially of office, warehouse, and manufacturing facilities and two land parcels held for future development with a combined acquisition value of approximately $3.0 billion, including the allocation of the purchase price to above and below-market lease valuation. Our annualized net rent for the 12-month period subsequent to June 30, 2017 was approximately $228.0 million with approximately 72.0% generated by properties leased to tenants and/or guarantors or whose non-guarantor parent companies have investment grade or equivalent ratings. Our portfolio, based on square footage, is approximately 96.7% leased as of June 30, 2017, with a weighted average remaining lease term of 6.9 years, average annual rent increases of approximately 2.0%, and a debt to total real estate acquisition value of 48.7%.

27


Revenue Concentration
No lessee or property, based on annualized net rent for the 12-month period subsequent to June 30, 2017, pursuant to the respective in-place leases, was greater than 7% as of June 30, 2017.
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
California

$
35,961


6


15.9
%
Texas

31,630


10


13.9

Illinois

22,172


8


9.7

Ohio

21,750


8


9.5

Georgia

16,704


4


7.3

Colorado

16,383


6


7.2

Arizona

12,155


4


5.3

New Jersey

11,161


3


4.9

Tennessee

10,328


2


4.5

North Carolina

8,065


3


3.5

Missouri

7,351


4


3.2

Virginia

7,310


1


3.2

All others (1)

27,033


15


11.9

Total
 
$
228,003

 
74

 
100.0
%
(1)
All others account for less than 3% of total annualized net rent on an individual basis.

28


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
Capital Goods
 
$
41,399

 
14


18.1
%
Insurance
 
25,162

 
12


11.0

Media
 
24,554

 
4


10.8

Telecommunication Services
 
22,178

 
7


9.7

Health Care Equipment & Services
 
18,946

 
9


8.3

Software & Services
 
15,513

 
5


6.8

Energy
 
11,078

 
4


4.9

Diversified Financials
 
10,572

 
4


4.6

Retailing
 
9,549

 
2


4.2

Consumer Durables & Apparel
 
7,945

 
3


3.5

Consumer Services
 
7,880

 
4


3.5

Technology, Hardware & Equipment
 
7,680

 
4


3.4

All others (2)
 
25,547

 
20


11.2

Total
 
$
228,003

 
92

 
100.0
%
(1)
Industry classification based on the Global Industry Classification Standard.
(2)
All others account for less than 3% 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
2017

$
267

(1) 
1

 
124,900

 
0.1
%
2018

15,068

 
10

 
1,948,300

 
6.6

2019

28,064

 
9

 
1,472,800

 
12.3

2020

22,359

 
11

 
1,782,800

 
9.8

2021

11,472

 
7

 
1,106,500

 
5.0

2022

21,629

 
10

 
1,504,800

 
9.5

2023

17,980

 
7

 
1,162,200

 
7.9

Thereafter

111,164

 
37

 
9,097,800

 
48.8

Vacant
 

 

 
575,000

 
0.0

Total
 
$
228,003

 
92

 
18,775,100

 
100.0
%
(1)
Included in the annualized net rent amount is approximately 54,800 square feet related to a lease expiring in 2017 with the remaining square footage expiring in 2019. The Company included the lessee in the number of lessees in 2019.

29


Critical Accounting Policies
We have established accounting policies which conform to generally accepted accounting principles in the United States (“GAAP”) as contained in the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification. 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.
Recently Issued Accounting Pronouncements
See Note 2, Summary of Significant Accounting Policies and Basis of Presentation, to the consolidated financial statements for the impact of new accounting standards.
Results of Operations
Our ability to re-lease space subject to expiring leases will impact our results of operations and is affected by economic and competitive conditions in our markets. Leases that comprise approximately 7.0% of our annualized base rental revenue will expire during the period from July 1, 2017 to December 31, 2018. We assume, based upon internal renewal probability estimates, that some of our tenants will renew and others will vacate and the associated space will be re-let subject to market leasing assumptions. Using the aforementioned assumptions, we expect that the rental rates on the respective new leases may vary from the rates under existing leases expiring during the period July 1, 2017 to December 31, 2018, thereby resulting in revenue that may differ from the current in-place rents.
We are not aware of any other material trends or uncertainties, other than 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
For the three months ended June 30, 2017, our "Same Store" portfolio consisted of 73 properties, encompassing approximately 18.6 million square feet, with an acquisition value of $2.9 billion. Our "Same Store" portfolio includes properties which were held for a full period for all periods presented. The following table provides a comparative summary of the results of operations for the 73 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
$
64,463

 
$
66,849

 
$
(2,386
)
 
(4
)%
Property expense recoveries
17,060

 
18,848

 
(1,788
)
 
(9
)%
Asset management fees to affiliates
5,556

 
5,537

 
19

 
0
 %
Property management fees to affiliates
2,400

 
2,383

 
17

 
1
 %
Property operating expense
11,405

 
12,091

 
(686
)
 
(6
)%
Property tax expense
11,122

 
11,077

 
45

 
0
 %
Depreciation and amortization
29,568

 
31,137

 
(1,569
)
 
(5
)%
Interest expense
2,452

 
3,229

 
(777
)
 
(24
)%
Rental Income
Rental income for the three months ended June 30, 2017 is comprised of base rent and adjustments to straight-line contractual rent, offset by in-place lease valuation amortization. Rental income for the three months ended June 30, 2017 decreased by approximately $2.4 million compared to the same period in the prior year primarily as a result of (1)

30


approximately $1.2 million in a lease termination and a tenant bankruptcy; and (2) approximately $0.8 million in higher vacancies and concessions in the current year.
Property Expense Recoveries
Also included as a component of revenue is the recovery of property operating expenses, including repairs and maintenance, property taxes and insurance, and certain capital expenses (collectively, "Recoverable Expenses"), which decreased by approximately $1.8 million compared to the same period in the prior year primarily as a result of (1) approximately $0.7 million related to a lease termination during the first quarter of 2017; (2) approximately $1.4 million related to lower anticipated recoveries and prior year tax appeals won in the current year owed to tenants; offset by (3) additional recoveries of approximately $0.5 million related to increases in property value assessments.
Property Operating Expenses
Property operating expenses include insurance, repairs and maintenance, security, janitorial, landscaping, and other administrative expenses incurred to operate our properties. The total decrease of approximately $0.7 million compared to the same period a year ago is primarily a result of timing on expenses incurred of approximately $0.7 million; offset by an increase in vacancy at two properties, which increased operating expenses by approximately $0.2 million.
Depreciation and Amortization
The decrease of approximately $1.6 million as compared to the same period in the prior year is primarily the result of (1) approximately $2.7 million additional amortization of intangibles as a result of early lease terminations in the prior year and assets fully depreciated in the current year; offset by (2) $0.8 million related to a property reclassified from held for sale as of June 30, 2016 and no depreciation expense recorded; and (3) $0.3 million related to intangibles placed in service subsequent to June 30, 2016.
Interest Expense
The decrease of approximately $0.8 million as compared to the same period in the prior year is primarily the result of three mortgage loan payoffs subsequent to June 30, 2016.
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 73 properties, encompassing approximately 18.6 million square feet, with an acquisition value of $2.9 billion. The following table provides a comparative summary of the results of operations for the 73 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
$
129,825

 
$
133,322

 
$
(3,497
)
 
(3
)%
Lease termination income
12,845

 
216

 
12,629

 
5,847
 %
Property expense recoveries
34,599

 
38,705

 
(4,106
)
 
(11
)%
Asset management fees to affiliates
11,115

 
11,033

 
82

 
1
 %
Property management fees to affiliates
4,885

 
4,737

 
148

 
3
 %
Property operating expense
23,157

 
23,956

 
(799
)
 
(3
)%
Property tax expense
22,125

 
22,175

 
(50
)
 
0
 %