Le Lézard
Classified in: Business
Subject: EARNINGS

Griffin Capital Essential Asset REIT II Reports Fourth Quarter and Full Year 2018 Results


Griffin Capital Essential Asset REIT II, Inc. (the "REIT") announced its operating results for the quarter ended December 31, 2018 and full year 2018.

"We ended 2018 with a fully leased and occupied portfolio and are excited about the pending merger with Griffin Capital Essential Asset REIT, once approved by their stockholders," said Michael Escalante, President and Director of the REIT. "Looking ahead, we are excited to combine two highly complementary property portfolios with similar construction and investment mandates, having significantly increased size, scale, and diversification, and a management team focused solely on the REIT and having eliminated conflicts which, when combined, we believe will bring long term benefits to our stockholders."

As of December 31, 2018, our portfolio consisted of 27 properties (35 buildings) encompassing approximately 7.3 million square feet of space in 17 states.

Results as of December 31, 2018 - Highlights and Accomplishments:

Portfolio Overview

Financial Results

Non-GAAP Measures

Merger Transaction

About Griffin Capital Essential Asset REIT, Inc.

Griffin Capital Essential Asset REIT, Inc. is a self-managed publicly registered, non-traded REIT with a portfolio consisting primarily of single tenant business essential properties throughout the United States, diversified by corporate credit, physical geography, product type, and lease duration. Griffin Capital Essential Asset REIT, Inc.'s portfolio, as of December 31, 2018, consists of 74 office and industrial properties totaling 19.9 million rentable square feet, located in 20 states, representing total REIT capitalization of approximately $3.5 billion.

About Griffin Capital Essential Asset REIT II, Inc.

Griffin Capital Essential Asset REIT II, Inc. is a publicly registered, non-traded REIT focused on acquiring a portfolio consisting primarily of single tenant business essential properties throughout the United States, diversified by corporate credit, physical geography, product type, and lease duration. As of December 31, 2018, Griffin Capital Essential Asset REIT II, Inc. has acquired 35 office and industrial buildings totaling approximately 7.3 million rentable square feet and asset acquisition price of approximately $1.3 billion. Griffin Capital Essential Asset REIT II, Inc. is sponsored by Griffin Capital Essential Asset REIT, Inc.

Additional information is available at www.griffincapital.com.

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

______________________________
1 Total capitalization includes the outstanding debt balance, plus total equity raised in our public offerings, net of redemptions.
2 There is no guarantee that our properties will remain 100% leased and occupied.
3 Net rent is based on (a) the contractual base rental payments assuming the lease requires the tenant to reimburse us for certain operating expenses or the property is self-managed by the tenant and the tenant is responsible for all, or substantially all, of the operating expenses; or (b) contractual rent payments less certain operating expenses that are our responsibility for the 12-month period subsequent to December 31, 2018, and includes assumptions that may not be indicative of the actual future performance of a property, including the assumption that the tenant will perform its obligations under its lease agreement during the next 12 months.
4 Approximately 75.8% of our portfolio's net rental revenue was generated by properties leased to tenants and/or guarantors with investment grade credit ratings or whose non-guarantor parent companies have investment grade ratings or what management believes are generally equivalent ratings. Of the 75.8% investment grade tenant ratings, 64.0% is from Nationally Recognized Statistical Rating Organization ("NRSRO") credit rating, with the remaining 11.8% being from a non-NRSRO, but having a rating that we believe is generally equivalent to an NRSRO investment grade rating. Bloomberg's default risk rating is one example of a non-NRSRO rating.
5 FFO, as described by National Association of Real Estate Investment Trusts ("NAREIT"), is adjusted for non-controlling interest distributions.

         

GRIFFIN CAPITAL ESSENTIAL ASSET REIT II, INC.

CONSOLIDATED BALANCE SHEETS

(in thousands, except share amounts)

 
December 31, 2018 December 31, 2017
ASSETS
Cash and cash equivalents $ 28,623 $ 33,164
Restricted cash 12,904 12,886
Real estate:
Land 122,482 122,482
Building 819,224 815,721
Tenant origination and absorption cost 240,364 240,364
Construction in progress 144   299  
Total real estate 1,182,214 1,178,866
Less: accumulated depreciation and amortization (128,570 ) (83,905 )
Total real estate, net 1,053,644 1,094,961
Intangible assets, net 2,923 3,294
Due from affiliates 1,202 686
Deferred rent 31,189 22,733
Other assets, net 6,850   12,224  
Total assets $ 1,137,335   $ 1,179,948  
LIABILITIES AND EQUITY
Total debt $ 481,955 $ 481,848
Restricted reserves 11,565 13,368
Accrued expenses and other liabilities 21,023 19,903
Distributions payable 3,650 1,689
Due to affiliates 19,048 16,896
Below market leases, net 46,229   51,295  
Total liabilities 583,470   584,999  
 
Common stock subject to redemption 37,357 32,405
Stockholders' equity:

Common Stock, $0.001 par value - Authorized: 800,000,000; 77,525,973 and 77,175,283 shares
outstanding in the aggregate, as of December 31, 2018 and December 31, 2017, respectively

76 76
Additional paid-in capital 656,500 656,705
Cumulative distributions (125,297 ) (82,590 )
Accumulated deficit (15,953 ) (12,672 )
Accumulated other comprehensive income ?   949  
Total stockholders' equity 515,326 562,468
Noncontrolling interests 1,182   76  
Total equity 516,508   562,544  
Total liabilities and equity $ 1,137,335   $ 1,179,948  
 
     

GRIFFIN CAPITAL ESSENTIAL ASSET REIT II, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except share and per share amounts)

 
Year Ended December 31,
2018     2017     2016
Revenue:
Rental income $ 87,789 $ 89,797 $ 51,403
Property expense recovery 18,605   17,584   11,409  
Total revenue 106,394 107,381 62,812
Expenses:
Property operating 7,382 6,724 4,428
Property tax 10,120 10,049 7,046
Property management fees to affiliates 1,832 1,799 1,052
Asset management fees to affiliates ? 8,027 6,413
Advisory fees to affiliates 9,316 2,550 ?
Performance distribution allocation to affiliates 7,783 2,394 ?
Acquisition fees and expenses to affiliates ? ? 6,176
Acquisition fees and expenses to non-affiliates 1,938 ? 1,113
General and administrative 3,471 3,445 2,804
Corporate operating expenses to affiliates 3,011 2,336 1,622
Depreciation and amortization 44,665   43,950   27,894  
Total expenses 89,518   81,274   58,548  
Income before other income and (expenses) 16,876 26,107 4,264
Other income (expenses):
Interest expense (20,375 ) (15,519 ) (10,384 )
Other income, net 212   531   13  
Net (loss) income (3,287 ) 11,119   (6,107 )
Net loss (income) attributable to noncontrolling interests 6   (3 ) 3  
Net (loss) income attributable to common stockholders $ (3,281 ) $ 11,116   $ (6,104 )

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

$ (0.04 ) $ 0.15   $ (0.12 )

Weighted average number of common shares outstanding, basic
and diluted

77,657,627   75,799,415   50,712,589  
 

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

Funds from Operations and Adjusted Funds from Operations

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

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

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

Additionally, we use AFFO as a non-GAAP financial measure to evaluate our operating performance. We previously used Modified Funds from Operations (as defined by the Institute for Portfolio Alternatives) as a non-GAAP measure of operating performance. Management elected to replace the Modified Funds from Operations measure with AFFO as management believes AFFO provides investors with an operating performance measure that is consistent with the performance models and analysis used by management, including the addition of non-cash performance distributions not defined in the calculation of MFFO. In addition, AFFO is a measure used among our peer group, which includes daily NAV REITs. We also believe that AFFO is a recognized measure of sustainable operating performance by the REIT industry. Further, we believe AFFO is useful in comparing the sustainability of our operating performance with the sustainability of the operating performance of other real estate companies.

Management believes that AFFO is a beneficial indicator of our ongoing portfolio performance and ability to sustain our current distribution level. More specifically, AFFO isolates the financial results of the Company's operations. AFFO, however, is not considered an appropriate measure of historical earnings as it excludes certain significant costs that are otherwise included in reported earnings. Further, since the measure is based on historical financial information, AFFO for the period presented may not be indicative of future results or our future ability to pay our dividends. By providing FFO and AFFO, we present information that assists investors in aligning their analysis with management's analysis of long-term operating activities. As explained below, management's evaluation of our operating performance excludes items considered in the calculation of AFFO based on the following economic considerations:

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

Neither the SEC, NAREIT, nor any other applicable regulatory body has opined on the acceptability of the adjustments contemplated to adjust FFO in order to calculate AFFO and its use as a non-GAAP performance measure. In the future, the SEC or NAREIT may decide to standardize the allowable exclusions across the REIT industry, and we may have to adjust the calculation and characterization of this non-GAAP measure.

Our calculation of FFO and AFFO is presented in the following table for the years ended December 31, 2018, 2017 and 2016 (dollars in thousands):

     
Year Ended December 31,
2018     2017     2016
Net (loss) income $ (3,287 ) $ 11,119 $ (6,107 )
Adjustments:
Depreciation of building and improvements 20,466 20,194 11,630
Amortization of leasing costs and intangibles 24,199   23,756   16,264  
FFO $ 41,378 $ 55,069 $ 21,787
Distributions to noncontrolling interests (70 ) (11 ) (11 )
FFO, net of noncontrolling interest distributions $ 41,308   $ 55,058   $ 21,776  
Reconciliation of FFO to AFFO
FFO, net of noncontrolling interest distributions $ 41,308 $ 55,058 $ 21,776
Adjustments:
Acquisition fees and expenses to non-affiliates 1,938 ? 1,113
Acquisition fees and expenses to affiliates ? ? 6,176
Revenues in excess of cash received, net (5,882 ) (10,528 ) (3,699 )
Amortization of below market rent, net (4,695 ) (4,573 ) (3,592 )
Unrealized loss (gain) on derivatives 77 83 (155 )
Loss on extinguishment of debt - write-off of deferred financing costs ? ? 377
Performance distribution adjustment 3,904 1,197 ?
Dead deal costs 316   ?   ?  
AFFO $ 36,966   $ 41,237   $ 21,996  
 
         

GRIFFIN CAPITAL ESSENTIAL ASSET REIT II, INC.

Adjusted EBITDA

(Unaudited)

(dollars in thousands)

 
Three Months Ended December 31, Year Ended December 31,
2018     2017 2018     2017
ADJUSTED EBITDA(1):
Net (loss) income $ (2,856 ) $ 1,531 $ (3,287 ) $ 11,119
Depreciation and amortization 11,282 11,240 44,665 43,950
Interest expense 4,790 3,694 17,936 14,015
Unused commitment fee 407 77 1,055 315
Unrealized loss (gain) on swap ? 23 77 83
Amortization - Deferred financing costs 403 280 1,384 1,106
Amortization - In-place lease (1,184 ) (1,184 ) (4,695 ) (4,573 )
Income taxes 17 49 193 149
Asset management fees 2,346 2,278 9,316 10,577
Performance distribution 1,583 2,181 7,783 2,394
Property management fees 475 460 1,862 1,829
Acquisition fees and expenses 1,938 ? 1,938 ?
Deferred rent (1,338 ) (4,081 ) (8,456 ) (17,308 )
17,863 16,548 69,771 63,656
Less: Capital reserves (334 ) (333 ) (1,336 ) (1,322 )
Adjusted EBITDA (per credit facility) $ 17,529   $ 16,215   $ 68,435   $ 62,334  
       
Interest expense (excluding unused commitment fee) $ 4,790   $ 3,694   $ 17,936   $ 14,015  
 
Interest Coverage Ratio(2) 3.66   4.39   3.82   4.45  
Fixed Charge Coverage Ratio(3) 3.66   4.39   3.82   4.45  
 
(1)   Adjusted EBITDA, as defined in our amended and restated credit agreement, is calculated as net income before interest, taxes, depreciation and amortization (EBITDA), plus acquisition fees and expenses, asset and property management fees, straight-line rents and in-place lease amortization for the period, further adjusted for acquisitions that have closed during the quarter and certain reserves for capital expenditures.
(2) Interest coverage is the ratio of interest expense as if the corresponding debt was in place at the beginning of the period to adjusted EBITDA.
(3) Fixed charge coverage is the ratio of principal amortization for the period plus interest expense as if the corresponding debt were in place at the beginning of the period plus preferred unit distributions as if in place at the beginning of the period over adjusted EBITDA.
 


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